Thursday, March 21, 2013

A Quarrel in a Far-Away Country between People of Whom We Know Nothing

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

            Even for those living on a distant continent, the confiscation of state-guaranteed bank deposits in Cyprus is a reminder. (At this stage, it is not clear the Eurocrats will succeed.) Governments and central-banks blew their capital to save a financial Ouija board - not system - in 2008. Former Federal Reserve Chairman Paul Volcker reminded an audience last week there is no financial system: "And what I'm talking about is the international monetary system.  Of course you know it's hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress.  That's hardly a description of the international monetary system.  And as many people have said, 'international non-system.'"

            The arbitrary decisions made by Americrats and Eurocrats in 2008, of what to save and what to sink, must veer towards sinking more and saving less in 2013. It has been noted the decision to confiscate bank deposits in Cyprus was a stupid move instituted by the acronyms (ECB, EU, IMF, G-somethings). This should remind residents in other countries that, first, what is theirs isn't, and second, relying on logic (e.g., "the government wouldn't do that, it would be shooting itself in the foot") is not a wise path to self-preservation.

            First, and foremost, the capital on which the bureaucrats can draw is low. That is financial, political, and psychological capital. In 2008, the central banks and governments stood behind the public's bank deposits and panic subsided. The veneer is much thinner now. Again, logic is not the path to estimating when the public recognizes its exposure, since that should have happened so long ago. These are states whose authority only exists as long as their paper-currency bills are trusted. (Yes, buy gold and silver).

All that is left is central-bank, money-printing and assurances of future money-printing - sometimes in the form of guarantees. The guarantees have been recklessly awarded. Revenues are harder to come by. Apparently - at least this is the current story - there was no other source of funds to back the failing Cypriot banks. The Eurocrats had drawn a line in the sand. They would only award X euros to save the banks. Cyprus had to supply the rest. The Euros would not accept debt issued by the Cypriot government as good collateral. (This is farce, given what is permitted.) Where to turn? The bond holdings in the banks were insufficient to make up the difference. Tax receipts are also insufficient, but the arbitrariness of what can be taxed and what constitutes a tax is constantly redefined in the western so-called democracies. So, the Cypriot government announced that bank deposits are hereby taxed - confiscated - to fund the deficiency. What value should bank customers place on deposit insurance in other countries?

Resourceful is spreading - reading a new interpretation by the minister of finance and administration in Spain. From El Pais, on March 19, 2013: bank deposits can be taxed since this would standardize taxes across regions. I have no idea what that means, not speaking Spanish only being one problem. Its importance though, should it be imposed, to the average Spaniard, is not the clumsy legal route to confiscation, but: "the government is taking my money."

Looking to the day of reckoning in the U.S., there are two other potential sources: private or public investment. Cyprus and Russia are negotiating now; Russia potentially supplying the missing capital. Foreign investors made the mistake of supplying U.S. financial institutions with capital in 2008. For the most part, that did not work out well for the investors. Cyprus is much smaller, though. Could Cyprus and Greece join a new ruble block?

Those with assets in the U.S. are well aware of resourceful money grabs by the government in recent years. Theft from General Motors bondholders is an example. When the Federal Reserve is buying 100% of the U.S. Treasury issues and bond yields are rising, the U.S. government will probably apply new confiscatory taxes on savings, investments, and assets. (U.S. Treasury gold holdings will become a point of contention, to express this vaguely, at some point.)

To look optimistically, the discrediting of the power brokers can not come too soon. These awful people are now so bereft of tolerable choices they write the script for their original sin when they speak. On March 19, 2013, German Finance Minister Wolfgang Schaeuble told "lawmakers" the current problem is the result of "a failed business model over decades." Schaeuble is acknowledging the euro was always a fa├žade, a means to a different end than a functioning currency. If those who launched the euro wanted to establish a currency, a currency that required trust across borders in an experiment never before attempted, they would not have plagued it with bubonic pathologies.

Their intention was command and control, as the most prescient critic, Bernard Connolly wrote in his 1995 book, The Rotten Heart of Europe (a new edition was published in 2012): "My central thesis is that the ERM [Exchange Rate Mechanism] and EMU [Economic and Monetary Unit] are not only inefficient but undemocratic: a danger not only to our wealth but also our freedoms, and ultimately, our peace. The villains of the story... are bureaucrats and self-aggrandizing politicians." Monetary union "is a mechanism for subordinating the economic welfare, democratic rights, and national freedom of the European countries to the political and bureaucratic elites whose power-lust, cynicism, and delusions underlie the actions of the vast majority of those who now strive to create a European superstate. The ERM has been their chosen instrument and they have used it cleverly."