Revisiting The Greatest Crash In History
Submitted by Pater Tenebrarum via Acting-Man.com,
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.

Desperate depositors queuing in front of Laiki Bank, the second largest Cypriot bank, which was eventually wound up
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:
The 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).
Euro 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:
Deposit 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.
Cyprus, 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.
Cyprus 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.
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What this really shows is that holders of CASH (Note: NOT digital 1's & 0's in a bank account; but real Euros/Dollars in your fist) have done astonishingly well throughout the crises in Cyprus and Greece.
If you held your currency under your mattress throughout the crisis, you now find that it buys FAR more than it did before; more house, more stocks, more services, more everything.
This is what the Inflationistas fail to grasp; we're not in Weimar Germany anymore. The world is awash in DEBT; and that debt is denominated heavily in US Dollars. In order to service that debt, companies, consumers, governments and everyone else needs to get their greasy-little sausage-like fingers on US Dollars.
In a recent survey, it was discovered that more than half of Americans have less than $1,000 in savings. But they all have MASSIVE amounts of DEBT.
Stop and think for a moment: If 1 in 5 Americans lose their jobs in the next recession/depression (a very likely occurrence) how will they raise the Dollars they need to service that debt? Suddenly, a "Hunt for Liquidity" occurs and the US Dollar soars in value (just like it did during the last crisis) and leveraged assets (i.e., stocks) collapse.
First rule of investing: Buy what will be most in demand.
When the next crisis hits; US Dollars will be most in demand since they will be needed to service debt and buy necessities; and they are incredibly scarce.
Yes, you read that right; US Dollars are incredibly scarce.
The US has a $18.2 trillion economy, the US Government is nearly $19 trillion in debt and will spend nearly $4 trillion this year.
How many FRN's are actually in existence? Only about $1.39 trillion:
http://www.federalreserve.gov/faqs/currency_12773.htm
And, nearly half of that currency is outside of the country.
When credit becomes unavailable and you can't get your $1,000 worth of digital 1's and 0's out of your bank account (like Cyprus & Greece) what will you use to pay your bills, buy food, gas and clothing?
Yes, gold and barter will occur, but there will be a huge scramble for cold, hard, Cash.
Given that stocks, real estate (and most leveraged assets) are likely to lose over the coming decade, and bonds are yielding near zero; physical cash becomes a much more practical store of wealth. (Not to mention it is essentially untraceable).
Yes, I am a big believer in precious metals, but when the big squeeze occurs, physical cash will be king once more.
[Cash, Bonds, Gold...]
This. Sad but true: the fucking system isn't going anywhere. The present power structures aren't either. The dolar system is going to remain in place because there are no alternatives. The comparisons to germany and Zimbabwe are retarded; those countries did not print the world's reserve currencies. This situation is different.
Well, we print the reserve currency because of the Petrodollar. Once the Petrodollar regime ends, so does the universal need to transact in USD.
As to USD denominated debt incurred by entities outside the US, what stops them from saying, "Meh. I'm not going to pay it, with USD, gold, bitcoin or used toilet paper"? What will a US that's suddenly lost its reserve currency status do about it? From what I can see, not a damn thing.
The situation with Saudi Arabia vs. Iran is a good one to keep tabs on. And to me, the jury is still out as to whether Putin is actually trying to pull the rug out from under Rothschild & Pals, or is merely pretending to do so. I really don't think we have enough info to decide that either way and unfortunately, it's probably going to be a SHTF event that gives us that info, one way or another.
May you live in interesting times, indeed.
The only counterparty risk to digital US money(not cash)
is the solvency or exisitence of US Guvt. If
the Guvt fails physical cash is also useless.
Digital money can service debt.
HH, I love you for posting this! I'd lost it.
Why'd ya have to post this. Now we gonna get a ramp. SMH
Tyler wanted to point out that there were 3 (THREE) opportunities to BTFD in Cyprus! Please believe the official narrative you stupid slaves and just BTFD!
You can bet your life that when things fall apart...TPTB will lie to try to save themselves....and they will steal to keep what they had....
I'm not even sure I will be safe even with my policy of living in one country, working in another, having my bank account in yet another and having had an unfortunate (ahem) boating accident in which not only my boat sank at an unrecoverable depth but all my gold, silver and bitcoin went down with it.
Lyin' and stealin' OPM is all they know how to do.
What more do you expect if you do business with them.
Boy, they sure are desperate to keep silver under $14.
I was just going to post the same thing...it's incredible.
Yeah...while gold has crashed through the glass ceiling $1077/oz 'paper' price for 2 days in a row, now, after weeks of beat-downs. A lot of water behind the dam this week, and the facade may finally be cracking from the strain. When it does, Ag might just take off like a shot.
Which tells me that when they're done holding down silver - the fucking lid is going to blow off and we'll see silver prices shoot into the stratosphere. Gold is the threat to the dollar not silver.
What about the crash in value of the dollar from 1913? I know it has been longer, but the results more devistating than the crash of a small island market index.
"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."
We dont have to wait for a crisis to get lied to. They lie to our faces all day every day.
"when things fall appart"
translation....
savers need staying power to see to frutition their prudent strategy...
mot opposed to it.... just clarifying
Near the end of his reign, it was evident that the Bernank really wanted to get out.
He knew exactly what has and what will happen.
He needed to get out and make some money on WS to help himself prepare for the upcoming Financial Winter.
A handle of Jim Beam at Binnys just jumped from $19.99 to $23.99. Glad I bought another 10 cases to barter with when the SHTF. Silver objects sell for .99-$2.99 an ounce at Goodwill so I buy as much as I can but I think whiskey will be easier to trade. Silver jewelry, trinkets and other vintage silver items aren't valued as much by common folk, otherwise the silver would all be sold by the time I got there.
take a look at the plummeting Canadian Dollar...if you want a crisis in the making!
So the only way is up? Remember there is still someone out there holding it at the 2007 highs. They are just waiting and waiting ....
Please give me your spare Bitcoins ....15nut3xGxhkE8Urc4KXwCsNbi72dWPn1cQ
So the only way is up? Remember there is still someone out there holding it at the 2007 highs. They are just waiting and waiting ....
Please give me your spare Bitcoins ....15nut3xGxhkE8Urc4KXwCsNbi72dWPn1cQ
On November 9, 1989, as crowds surged through the Berlin Wall in one direction only, the communist prison state died. Not just the particular state of East Germany, but the entire CPS concept lost all legitimacy and relevance.
The democratic social welfare state model is much more popular than the CPS ever was (free stuff paid for by someone else is always popular), but it's no more sustainable.
So what comes next? Does the West split up into thousands of little fiefdoms all fighting for land and resources? Do we become one big empire where each emperor reigns for a few months before being assassinated?