Submitted by Jeff Thomas via Doug Casey's International Man blog, [3]
Recently, we’ve witnessed the bank holiday in Greece [4], the limitation as to how much the Greek people can withdraw from their accounts each day.
Not surprisingly, the mainstream press have focused on images such as the one above - a queue at an ATM - and discussed the difficulty of the Greek people in trying to run their lives on the €50-€60 that they’re allowed to withdraw each day.
The press then comment poignantly that “Something needs to be done.” The implication is that “someone”, either the banks or the government, need to find a way to deliver these people more money, so that they can continue to function economically.
Of course, the problem, and the very reason for the bank holiday in the first place, is that the money simply doesn’t exist.
For many years, governments have been attempting to expand the economy by encouraging debt. Governments (most notably the EU and US) have borrowed far more than they ever have in history, to the point that they’re now facing insolvency.
Further, the average citizen has been programmed to think that he can get ahead through increased debt. As a result, personal debt has risen to an unprecedented level.
But in order for someone to borrow, someone must offer to lend, and, of course, the banks have been the lenders. Banks typically make their profits by taking in deposits, then loaning out that money to others, making their profits on the interest.
This is a system that began in Europe hundreds of years ago and, although it has repeatedly resulted in disaster, continues to be the standard by which banks operate.
Theoretically, it’s a workable idea.
The banks maintain, say, 10% of the deposits in order to service daily transactions by depositors, and they loan out the rest. As long as depositors do not lose faith in the system and arrive in droves to take out their deposits, the system continues to work.
But today, when a bank provides a loan, it doesn’t hand over stacks of paper bills to the borrower. It simply processes a credit to his account. This allows the bank to offer far more loans and far larger loans.
If a bank holds, say, $10 million in deposits, it could conceivably offer $100 million in loans. That money, of course, does not exist, except as an electronic credit, but it allows the bankers to increase their profits tenfold.
Quite a temptation.
And it’s a temptation that has, at this point, become the norm in much of the world. What we’re witnessing is the greatest credit bubble/debt bubble that mankind has ever seen. What we’re seeing in Greece is not merely a country of socialistically inclined people behaving very foolishly. We’re seeing a small pin pricking a very large balloon.
(Editor's Note: Doug Casey recently wrote a very relevant article on this topic. Click here to read Unsound Banking: Why Most of the World’s Banks Are Headed for Collapse [5].)
As Goes Greece, So Goes the World
The tedious drama that we’ve been observing in Greece in recent years is far from over. Greek debt is tied to EU debt. EU debt is tied to world debt. The coming debacle may unfold in this manner:
- Greeks try to adjust to subsistence living, on what little the banks allow them daily.
- They make no payments on their own debt, as even mere subsistence is difficult.
- Companies do the same, as they’re having a hard time just paying wages and other overheads and can’t afford to pay interest on their loans.
- Greek banks continue to provide depositors with an “allowance”, whilst their income source (interest on loans) dries up.
- Banks become insolvent and cease paying “allowances” altogether. (And remember, this is the depositors’ own money that will be denied them.)
But, as stated above, Greece is not alone. Other EU countries that are on a similar precipice will be similarly affected. Each country, each “domino”, will fall more quickly than the one before it, as its people, having observed the pattern in other countries, lose faith in the system.
Meanwhile, governments will side with the banks, giving them free rein to do whatever they wish to save themselves, at the expense of depositors. Cashtration has begun in Greece but will spread to every country where banks have overstepped the mark and gone on a loan-provision spree in recent decades.
Further, a country such as Canada [6], which has not been so cavalier as the EU and US, is so inextricably linked with the US through banking and commerce, it will find itself equally impacted, even though they themselves tried to take a more responsible approach to loans.
In the midst of this, the populations of all affected countries will cry out for their governments to “Do something!”
Governments will respond by trying to cover their own responsibility in this debacle, as they have, for decades, been, not only the enablers of the bank debt spree, but have additionally run the governments themselves into debt beyond what can be repaid.
There will be no “solution”, as such. There will be an economic collapse and a Greater Depression.
At this point the reader may say to himself, “So, that’s it; we’re all toast. If this analysis is correct, there’s no hope for anybody.”
Not so. For anyone who has ever been a guest at a really great party, where the food and wine were seemingly endless and the mood infectiously jubilant, the outside world seemed not to exist. At a great party, the world outside appears unimportant.
Still, there are those who were either not invited, or chose not to go. They continued their lives soberly. In the aftermath of the party, they watch as the hung-over revellers leave. Although they may look upon the partygoers with disdain, they get on with their lives, relatively unaffected.
It’s the same with an “economic party”. Not everyone attends. Which is to say that there are presently countries where it is, and has always been, difficult to get a loan, either to buy a car or house, or to start a business.
Presently, these countries are looked upon as “backward”, as they are not charging ahead, as the more “prosperous” countries are. However, in the aftermath of The Great Economic Party, these countries will continue, relatively unaffected.
It’s left to the reader to determine to what degree his own country is involved in the party and to what degree his country will be impacted as the balloon pops. His assessment will suggest to what degree he will personally be “cashtrated”: forced by emergency conditions to be placed on an “allowance” by his bank and, eventually, to have that allowance end altogether as funds run out.
Sorry to say, it’s likely that the great majority who live in such jurisdictions will, as suggested above, be “toast”.
But there will be some who observe Greece and realize that the condition will spread and that there will be no solution by governments. They will take advantage of the brief time available and internationalise themselves as much as they are able.
It’s not the end, except for those who choose to remain at the party too long.
