When it comes to global currency warfare, one can read countless books (all of which professing to be the definitive reference guide for a process that started in the... 1930s), or one can fast forward, save lots of time, skip all the repetitive verbiage and simply observe the following charts which summarize the key things "one needs to know" about the dead-end that the globalized monetary system has found itself in since 2008, when the entire world decided that the only way to "fix" all of the world's problems is simply to print a countless amount of paper money.
Which means that if (and we are not saying it will) a Cyprus-style fiasco were to occur in the US, and those $9.3 trillion in total deposits seek to obtain
"physical representation" in the form of actual currency (i.e., a systemic bank run), just as all those lining up in front of Cypriot ATMs are desperate to do each and every day when they have a €300 limit on physical cash withdrawals, there will be a roughly 88% haircut for every single dollar that US savers believe is "safe" in the bank.
Most publications talk about the 10B or 17B Cyprus bailout. Let’s take a pop quiz on the right answer:
(a) 17B Euros (89% of GDP)
(b) 10B Euros (52% of GDP)
(c) 2.5B Euros (13% of GDP)
(d) -3.0B Euros (-15% of GDP)
(e) -7.5B Euros (-39% of GDP)
Now let’s work through the answers... (hint: we don’t see any version of the numbers where Cyprus is not a net creditor to the EU bailout regime, as opposed to a net beneficiary.)
From a European perspective, the list of broken taboos and assumptions continues to grow. The euro’s core founding principles, based on the Maastricht Treaty’s “irrevocable” fixing of currency rates, and of the free movement of capital, have been violated. The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.
Everything the Fed does ultimately leads to less economic activity, less savings and more debt resulting in poverty for Americans, not prosperity. Debt is not prosperity. Debt is poverty and economic slavery. As long as the money printing continues things will continue to get worse, not better. Americans are now economically worse off than they were in 2008. This leads us to one curious question: if the Fed knows reality is deteriorating and it’s monetary policies are causing this deterioration to accelerate, what is the endgame the government and the Fed have in store for Americans?
This system distorts the market and turns appropriate risk-taking into recklessness. The result is a more concentrated and powerful financial sector — and a more fragile economy. The way to return the financial services industry to the free market is by separating trading from commercial banks and by reforming the so-called shadow banking sector. Government guarantees should be limited primarily to those commercial banking activities that need it to function: the payments system and the intermediation process between short-term lenders and long-term borrowers.... It is time to return our financial system to one in which success is no longer achieved through government protections but, rather, through innovation and competition. While trading and investment activities are vital parts of the financial services industry, there is no economic or social rationale for protecting and subsidizing them. Financial services firms are in the business of taking risks. Our country shouldn’t attempt to take the risk out of the system. But we should absolutely stop subsidizing it.
It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not 'safe' places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, 'hide-the-truth'-like statement on Monte dei Paschi's website, the CEO admits to, "the withdrawal of several billion in deposits." Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on "reputational damage" from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank's third bailout, and that the prior two bailouts did not result in such an outflow of unsecured liabilities (at least not to the public's knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March. Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013; no wonder given the bank just doubled its expectations for bad loans and the 'Cypriot Solution' dangling over uninsured depositor hordes.
Thanks, World Reserve Currency, But No Thanks: Australia And China To Enable Direct Currency ConvertibilitySubmitted by Tyler Durden on 03/31/2013 12:46 -0400
A month ago we pointed out that as a result of Australia's unprecedented reliance on China as a target export market, accounting for nearly 30% of all Australian exports (with the flipside being just as true, as Australia now is the fifth-biggest source of Chinese imports), the two countries may as well be joined at the hip. Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world's "reserve currency" in its trade dealings with the world's biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process "slashing costs for thousands of business" and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar's reserve currency status until one day it no longer is.
By manipulating the price of money through sustained and historically low interest rates, Greenspan and Bernanke created an era of asset mis-pricing that inevitably would need to correct. And when market forces attempted to do so in 2008, Paulson et al hoodwinked the world into believing the repercussions would be so calamitous for all that the institutions responsible for the bad actions that instigated the problem needed to be rescued -- in full -- at all costs. David Stockman, former director of the OMB under President Reagan, lays out how we have devolved from a free market economy into a managed one that operates for the benefit of a privileged few.
Human Action was published in 1949. The problems which von Mises so brilliantly dissected then are incomparably worse now. But the main failing remains the same. Those who refuse to gain the knowledge necessary to stand for something will fall for anything. The result in Cyprus is the latest in a long line of similar cases. To give one example, how many of the “Occupy Wall Street” crowd could give a cogent explanation of what they were protesting against? The specific instances may differ, but the reaction remains the same: “But ... BUT ... YOU TOLD US IT WAS ‘SAFE’!!” What makes it worse is that most knew that it was NOT ‘safe’ - but they refused to admit it to themselves.
We have shown the endless hockey-stick-like charts of hope that are the coming margin expansion, dramatic earnings growth, and revenue increases (all juxtaposed against the reality of a labor-destroying cost-cutting and growth-disabled global economy) but perhaps nowhere is the 'hope' in the US more evident when compared to the rest of the world. Around the world, analysts and strategists are comfortable marking down expectations for British, European, Asian, and Emerging Market nations but not the good ol' USofA. We cannot help but believe that while momentum in US equity markets dominates all sense and rationality, it would appear the US will struggle to realize these 'hopeful' expectations if the rest of the world is collapsing... unless of course, Mars does indeed start importing Fords and GMs.
"The world is a very risky place right now for an investor," is the cautious manner in which Grant Williams (of Things That Make You Go Hhmm infamy) begins this excellent presentation, even though he notes that "the general perception is that there is very little risk," as all markets from equities to bonds (and even risk itself) are priced as though 2007/8 never happened. It appears, Williams notes, given the market's perceptions that, "all the problems are behind us." He chides, "Nothing could be further from the truth." Williams focuses on the corruption of traditional price signals by Central Banks' ZIRP (and LSAP) policies, financial repression, and the possibility that the gold leasing market is about to fall apart - because one of these days, someone is going to ask for their gold back and be told they can't have it.
Germany, it seems, has had enough with its taxpayers implicitly bearing the burden of the rest of Europe's profligacy as the final solution chosen for Cyprus clearly shows (especially in light of pending German elections). But with all that 'stabilitee' based on one nation's shoulders, the following chart suggests Europe's Atlas is about to shrug. For the last six months, non-German Europe has seen its economies collapse with PMI New Orders pushing new lows now - after some brief episode of hope at the start of the year. Germany, in the meantime has been surging back as expectations of recovery have led sentiment higher and hopes for a European green shoot renaissance. That is until recently. In the last month, Germany's economic momentum has faltered; the green shoots are wilting; and combining real economic weakness with the Europe-wide deposit outflows (hurting the 'financial' economy), Europe is back in the crosshairs.
There are many lessons and implications from the Cypriot crisis (we list 25 here). Among the most important is that conditionality is back, energetically, which is very important when considering the circumstances under which other, bigger, countries might access ESM or OMT. We believe, like BNP's James Mortimer-Lee, that the market has been too complacent, seeing OMT and “whatever it takes” as unconditional – that’s wrong. A second lesson is that a harsher line is being taken by the core. This partly reflects more effective firewalls, so that core countries are more willing to “burn” the private sector, where doing so does not represent a serious systemic risk. Cyprus may not be a template, but we have seen enough to glimpse what the new pan eurozone bank resolution system could look like. Risk for certain classes of stakeholders in banks has risen. We are a long way from seeing the eurozone crisis resolved.