A Historically Unique Event

We keep watching what is happening in Cyprus with morbid fascination. As a reminder, the unhappy island was the first major “haircut” victim in Europe. Its bankers, who had flagrantly over-traded their capital and won prizes for running “the best banks in Europe” along the way, erroneously believed the repeated promises of assorted EU commissars that Greece would never – never! – be allowed to go bankrupt. Consequently they stuffed their balance sheets to the gills with supposedly risk-free Greek government bonds, only to eventually see them get “haircut” twice in a row.

 

Laiki-Bank_People-smDesperate depositors queuing in front of Laiki Bank, the second largest Cypriot bank,

which was eventually wound up

 Photo credit: Yorgos Karahalis / Reuters

 

With their capital thus depleted, the banks became dependent on “ELA” funding from the ECB in order to pay depositors who wished to withdraw their money. So as to avoid a panic, the Cypriot government and the EU lied for months to the customers of these banks, assuring them that their deposits were perfectly safe. This inter alia gave the friends and families of well-connected politicians and oligarchs (including close family members of the then president of Cyprus) the opportunity to get all their money out before the curtain came down.

Citizens of Cyprus would have done well to inform themselves about the fraudulent nature of fractional reserve banking. Many might perhaps have been able to avoid what happened next: they were expropriated overnight in an act of confiscatory deflation.

Note here that we are not saying bank depositors should not bear risks, nor are we saying that they should be bailed out by taxpayers. In fact, we cannot offer an alternative to what happened, except perhaps to state that if any bank-related bailouts are implemented (such as the ongoing ECB QE program), depositors should ideally be first in line to partake of the central bank’s largesse. We mainly want to point to the fact that depositors were lied to about these risks all along, which vastly reduced their chances to save their hard-earned money while it was still possible to do so.

We have kept a close eye on the stock market of Cyprus, and lo and behold, it made a new all time low in late 2015:

 

1-CyprusThe Cyprus stock market has declined by 99.986% – of every 100 euro invested at the peak, a mere 0.014 euro are left. In other words, 100 euro have been transformed into just 1.4 cents – click to enlarge.

 

In order to fully grasp the extent of this devastation, consider the following: had you bought the market after it had declined by 90%, you would quickly have lost another 90%. Had you bought after it had declined by 90% twice, you would just as quickly have lost almost another 90%. So since 2007, this market has seen three consecutive declines of 90%. As far as we know this is unparalleled. If there had been a stock market in the Roman Empire, it might have done something similar around AD 400 – AD 500.

 

Boom, Bust and the Money Supply

As we have frequently pointed out, euro-area wide money supply is growing at an astonishing pace thanks to the ECB printing money 24/7 of late. The most recent annual change rate of the narrow money supply M1, which is the aggregate that most closely resembles money TMS (true money supply) stands at around 14% (a few items are missing from this measure to make it fully comparable to TMS, such as deposits owned by non-residents. However, adding them would probably have little effect on the rate of change).

 

2-Euro area TMSEuro area M1 (demand deposits and currency) – roughly equal to TMS. Thank God the central bank provides such admirable “stability” (as indicated by the line in blue, which looks a bit like the EKG of a heart attack victim). Since 2012 money supply growth has gone “parabolic”. This isn’t going to end well – click to enlarge.

 

However, this aggregate statistic actually masks the extremely uneven distribution of money supply growth across the euro area. For instance, Germany’s money supply has increased by approximately 125% since 2008. Countries that have been hit by severe banking and economic crises – particularly Greece and Cyprus, in both of which the commercial banking system has essentially collapsed – have seen their money supply nosedive in the same span.

In order to illustrate this, we have charted the amount of deposit money extant in the Cypriot banking system since 2008. After the initial crisis in 2008, Cyprus “benefited” from the inflationary push the ECB implemented in 2009-2010 in the form of LTROs. When these LTROs began to be paid back and euro area-wide money supply growth screeched to a halt in 2011, the Greek and Cypriot crises not surprisingly went into overdrive. All the losses that had been masked by monetary inflation up to that point suddenly became obvious.

After the decision in favor of a depositor haircut in Cyprus had been made, the country’s deposit money supply collapsed by about 44% over the ensuing two years, with the bulk of the decline occurring in 2012. Since then, it has essentially flat-lined:

 

3-Cyprus, deposit moneyDeposit money in the banking system of Cyprus: total (in red), the portion owned solely by residents in black. Total deposit money is still down more than 40% from the 2011 peak – click to enlarge.

 

However, prior to the bust, the money supply of Cyprus was growing immensely – which explains the unhealthy artificial boom that ruined the island’s economy. The responsibility for this is equally shared between the country’s reckless banks and their new “lender of last resort”, the ECB. The central planners had suppressed interest rates to a level they thought appropriate for Germany, which was long held to be Europe’s “sick man”. These rates were however highly inappropriate for Europe’s periphery.

 

4-cyprus-money-supply-m1Cyprus, M1 during the boom years – going gangbusters – click to enlarge.

 

In case you’re wondering: M1 is no longer reported separately by the Central Bank of Cyprus, so we had to make do with piecing together extant deposit money as a reasonable proxy for the Cypriot money supply.

 

Cyprus Shows us Why the Fiat Money System is Doomed

This brings us to our point: what this inter alia shows us, is how strongly asset prices depend on monetary inflation. The stock market of Cyprus rose nearly six-fold from 2003 to 2007 – exactly the time when money supply growth started to go “parabolic”. This was not the result of business getting “six times better” in any sense. It was simply a reflection of money printing.

Now consider what a roughly 44% decline in the money supply has led to: a 99.986% collapse in stocks prices. Given that stock prices can be used as a proxy for the trend in asset prices in general, a lot of the collateral backing loans in Cyprus is likely worth far less than the outstanding debt it supposedly covers. Indeed, house prices in Cyprus have declined with nary an interruption since 2008 as well (recently a small bounce could be detected) – albeit to a far smaller extent than stocks. Still, the housing bubble that was a notable feature of the boom years has essentially been wiped out as well.

 

5-cyprus-housing-indexCyprus house price index: declining for almost seven years, which has wiped out nearly all the price gains made in the “parabolic” stage of the bubble – click to enlarge.

 

In fact, the events in Cyprus, Greece and more recently Puerto Rico reveal a harsh truth: nearly all the socialist regulatory welfare/warfare states of the West are in reality bankrupt. The only thing holding up the charade is the fact that central banks are able to create nigh unlimited amounts of money from thin air. As soon as a country or a self-governing region no longer enjoys a central bank backstop, it is game over.

This leaves only very little by way of choices. Look again at the chart of the euro area money supply above, or a recent chart of US money TMS-2. What would happen if these money supply measures were to deflate, or merely stop growing?

Just as in Cyprus, asset prices would decline to reflect such a deflation – and these price declines would have to be expected to be very pronounced, given the extent of monetary inflation that has already occurred and the degree to which asset prices have been disproportionately affected. Stocks are titles to capital, and these price distortions have also affected capital goods.

This would in turn lower the value of much of the collateral supporting outstanding bank loans. The monetary system would likely suffer a deflationary implosion. This wouldn’t be a bad thing per se, even though it would be quite disruptive. After all, the existing real capital would continue to exist. Not a single factory would cease to exist if the money supply somehow declined. Only prices would change, and ownership of real capital would in many cases change as well.

Moreover, the essential insolvency of the system, including the insolvency of the governments running today’s welfare/warfare states would be revealed, and a lot of unproductive and wasteful activity would cease by necessity. Unfortunately, just as has happened in Cyprus, many innocent and hitherto prudent bystanders would become victims of this economic disruption as well.

Our guess is that the powers-that-be simply won’t let that happen, so they will be “forced” to take option two: they will keep inflating, and very likely at an ever more accelerating pace. In the end this will be even more destructive, although it will keep buying time for a while, just as it has since 2008.

Government and central bank officials will naturally choose the “buying time” option, hoping that the really big problems won’t materialize on their watch, but rather on that of their successors. In that sense, Ben Bernanke has timed his exit from the Fed exceedingly well.

 

Conclusion

The modern debt money system has a limited life span and it cannot stand still. The problem is that with every iteration of the boom-bust cycle, more real wealth is destroyed and more obstacles to the creation of real wealth are erected.

Hapless governments desperately try to squeeze blood out of a turnip by taxing and regulating the private sector to death, while central banks keep promoting monetary inflation. At some point the limit to this game will be reached – and the longer it takes to get to that point, the more devastating the eventual denouement will be.

We don’t see it as our task to offer a solution – with respect to that, we can only reiterate that a return to an unhampered free market system is the only way out, painful as it may initially prove to be. We know however that modern-day governments will simply not go down this path, as it would involve a vast loss of power for them.

All we can do is point out the risks, so that people can at least prepare on an individual level. A major lesson everybody should take to heart from the Cyprus experience is this: when the next crisis strikes, do not believe any of the promises uttered by government or central bank officials. You will be lied to in the critical moments, and you could stand to lose a lot if you believe the lies.

You don’t have to take our word for it: just ask anyone in Greece or Cyprus what they got for believing their deposits were safe.

 

Charts by bigcharts, ECB, tradingeconomics, acting-man.com

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “Revisiting the Greatest Crash in History”

  • rodney:

    You don’t have to take our word for it: just ask anyone in Greece or Cyprus what they got for believing their deposits were safe.

    You forgot to mention that EU citizens can now expect to lose their deposits without anyone lying to them: the EU “Bank Recovery and Resolution Directive” is officially being implemented, bail-ins and all, from 1st January, 2016, i.e. a few days ago. Deposits are last in line for a bail-in, but banks have such little reserves and capital nowadays that you can expect the worst.

    This is now the law of the land and it is in full force and operation. No need for lying, they just take them

    Gentlemen, if you live in Europe, it is now your responsibility to perform some due dilligence on banks and to diversify your deposits. Especially if you live in peripheral Europe, do not think twice before diversifying some of your deposits in either German or Swiss Banks.

  • Kreditanstalt:

    “Hapless governments desperately try to squeeze blood out of a turnip by taxing and regulating the private sector to death, while central banks keep promoting monetary inflation. At some point the limit to this game will be reached – and the longer it takes to get to that point, the more devastating the eventual denouement will be.”

    Of course…such an outcome is a “lead pipe cinch”, as they used to say back in, I think, the 1920s.

    Unfortunately, I think most pundits and observers missing something: these things move like glaciers. Exceedingly slowly. And they don’t affect an entire economy or population evenly: things change at the margin, and move towards the centre.

    As we are seeing, some economic actors suffer more than others. Some jurisdictions. Some entities. Some jobs, some incomes, some business models. So people, obsessed with short-term statistics, miss the epochal OVERALL decline in the standard of living. The disappearance of breadwinner jobs and that stubborn and (to the mainstream) inexplicable statistic “those not in the labour force” are dismissed or footnoted, but not taken as the harbingers of permanent social change that they are.

    LIVING STANDARDS ARE PERNICIOUSLY, INCREMENTALLY FALLING…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector: Positioning and Sentiment
      A Case of Botched Timing, But... When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January...
  • India: The next Pakistan?
      India’s Rapid Degradation This is Part XI of a series of articles (the most recent of which is linked here) in which I have provided regular updates on what started as the demonetization of 86% of India's currency. The story of demonetization and the ensuing developments were merely a vehicle for me to explore Indian institutions, culture and society.   The Modimobile is making the rounds amid a flower shower. [PT] Photo credit: PTI Photo   Tribal cultures face...
  • The Long Run Economics of Debt Based Stimulus
      Onward vs. Upward Something both unwanted and unexpected has tormented western economies in the 21st century.  Gross domestic product (GDP) has moderated onward while government debt has spiked upward.  Orthodox economists continue to be flummoxed by what has transpired.   What happened to the miracle? The Keynesian wet dream of an unfettered fiat debt money system has been realized, and debt has been duly expanded at every opportunity.  Although the fat lady has so far only...
  • Welcome to Totalitarian America, President Trump!
      Trump vs. the Deep State If there had been any doubt that the land of the free and home of the brave is now a totalitarian society, the revelations that its Chief Executive Officer has been spied upon while campaigning for that office and during his brief tenure as president should now be allayed.   Image adapted from the cover of “Deep State #5” - depicting an assassin from the future   President Trump joins the very crowded list of opponents of the American...
  • March to Default
      Style Over Substance “May you live in interesting times,” says the ancient Chinese curse.  No doubt about it, we live in interesting times.  Hardly a day goes by that we’re not aghast and astounded by a series of grotesque caricatures of the world as at devolves towards vulgarity. Just this week, for instance, U.S. Representative Maxine Waters tweeted, “Get ready for impeachment.”   Well, Maxine Waters is obviously right – impeaching the president is an urgent...
  • Boosting Stock Market Returns With A Simple Trick
      Systematic Trading Based on Statistics Trading methods based on statistics represent an unusual approach for many investors. Evaluation of a security's fundamental merits is not of concern, even though it can of course be done additionally. Rather, the only important criterion consists of typical price patterns determined by statistical examination of past trends.   Fundamental considerations such as the valuation of stocks are not really relevant to the statistics-based trading...
  • Searching for Truth
      Heresy or Truth? RANCHO SANTANA, NICARAGUA – In the fifth century, Christian scholars counted 88 different heresies. Arianism. Eutychianism. Nestorianism. If there was a way to “offend” God, they had a name for it. One group of “heretics” argued that there was no such thing as “original sin.” Another denied the trinity. And another claimed Jesus was not divine. Which one had the truth?   Depiction of the first Council of Ephesus in 431 AD, convened by Emperor...
  • Why the 21st Century Sucks - Turtles All the Way Down
      A Truly Sucky Century BALTIMORE – What an awful century! Worst we’ve ever seen. Household incomes are down. Employment is down, with 7 million people in the U.S. of working age without jobs. Productivity growth is down. GDP growth is down – to only about 0.5% per capita last year. Even life expectancies are down. Drug overdoses are up. Suicides are up. One out of every eight children lives in a family getting food stamps. One of out every eight adults takes psychoactive drugs...
  • Gold and the Fed's Looming Rate Hike in March
      Long Term Technical Backdrop Constructive After a challenging Q4 in 2016 in the context of rising bond yields and a stronger US dollar, gold seems to be getting its shine back in Q1. The technical picture is beginning to look a little more constructive and the “reflation trade”, spurred on further by expectations of higher infrastructure spending and tax cuts in the US, has thus far also benefited gold. From a technical perspective, there are indications that the low at $1045.40,...
  • The Unstable Empire – A Campfire Tale
      Campfire Tale   Caesar: The Ides of March are come. Soothsayer: Ay, Caesar, but not gone. — Julius Caesar, Shakespeare   GRANADA, NICARAGUA – Today, we stop the horses and circle the wagons. For 19 years, we have been rolling along, exploring, discovering. We began with the assumption that we didn’t “know” anything - so we kept our eyes open. Now we know even less.   Famous people who knew nothing and were not shy to admit it: Sergeant Schultz...
  • Off the Beaten Path in Mesoamerica
      Greeted by Rooster There’s an endearing quality to a steadfast rooster call at the crack of dawn when overheard from a warm country farmhouse.  There’s a reassuring charm that comes with the committed gallinaceous greeting of daybreak that’s particularly suited to a rural ambiance.  The allure of a morning cock-a-doodle-doo somehow falls flat in all other settings.   Good morning everyone! Before meteorological forecasts were available on TV and smart phones, people...
  • Why Silver Went Down – Precious Metals Supply and Demand
      Rumor-Mongering vs. Data The question on the lips of everyone who plans to exchange his metal for dollars—widely thought to be money—is why did silver go down? The price of silver in dollar terms dropped from about 18 bucks to about 17, or about 5 percent.   Reportedly silver was already assassinated in the late 19th century... so last week they must have assassinated its corpse. [PT] Illustration taken from 'Coin's Financial School'   The facile answer is...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com