Of course, everybody should have been worried a lot sooner than last week because the basic operating system of global banking is accounting fraud, and has become that stealthily, insidiously, for about fifteen years now. Nothing is what it appears to be anymore. Compound interest has not really been working since 2008 because the world can’t increase its energy production enough to generate the additional surplus wealth needed to cover the aggregate interest due all around the world.
What remains are games of musical chairs, Ponzi schemes, frauds, swindles, stonewalls, ruses, ploys, scams, dodges, bluffs, subterfuges, QE martingales, interventions, rehypothecations, pretenses and other modes of evading or disguising reality. The reality is that there is not enough real wealth to go around, certainly not enough to cover the giant web of obligations that masquerades as “money.”
So, now whenever somebody or some company or government or entity is called upon to put up or shut up, the danger arises that the whole web will disintegrate, since all the participants are broke. You want “your” money? Wait three days. Make that four days. Check that, let’s say next week. How about two months from now? Oh, forget about it….
No wonder folks are spooked.
This is really getting out of hand. That’s why the ills of the poor, untoward, tiny crypto-nation of Cyprus have got everyone’s knickers in a twist. Cyprus is everybody writ small. Cyprus ran out of pretense. It’s banks are toast. It can’t take care of itself. It is too poor to be a “modern” economy. It failed trying to be a money laundromat for the brigands of Russia and the dope merchants of the Eastern Mediterranean. The tourists and retirees may even have to pack up and leave now because there will be no access to ready cash for day-to-day living.
The terms of the latest bailout announced Sunday night are curious. The New York Times reports that, “the deal would scrap the highly controversial idea of a tax on bank deposits, although it would still require forced losses for depositors and bondholders.” Say, what? In fact, there is no material difference between the so-called “tax” and the “forced losses.” That was just semantics. The word tax had been bandied about two weeks ago when the EU first proposed that the Cyprus government might pass a legislative act skinning its bank depositors. That didn’t go down, of course, so now its just an EU mandated haircut on deposits over E-100,000 and bank bondholders.
As for the deposits under E-100,000… you’re welcome to them, the catch being that the banks aren’t open for business… and the EU bailout money will not arrive in Cyprus until May. They are sending it by packet boat from Antwerp and hoping for fair winds. Cyprus has to become somebody’s ward again.
Cyprus was either Turkey’s or Great Britain’s ward for most of the past 400 years. The population is ethnically split about 60 / 40 Greek / Turkish making for chronically uncomfortable governance. The island remains physically divided into two separate and hostile north-south zones. If you look at it on the map, it is nowhere near Greece, but rather tucked right up under Turkey’s bosom. It is strategically a naval hub of the Middle East and is occupied both by NATO troops and by two remaining British military bases – a convenience given the ongoing deterioration in Middle East geopolitics, as nation after nation melts down, and threatens to impinge on much of the world’s oil supply. My guess is that Turkey will eventually recover administration of Cyprus by dint of sheer geographical proximity. It is said to possess considerable offshore gas, but the politics there are so problematic that the stuff may not be logistically recoverable, especially with the rest of the Middle East in flames.
The current bailout deal with its confiscations and haircuts is the first time in the multi-year melodrama of the wobbling EU that big-shot EU officials had voiced the idea that they had any authority to snatch private property (money) of a member’s citizens. So, instantly the notion reverberated around Europe that they could easily do the same thing in Italy, Spain, Portugal, Ireland, Greece – the usual broke suspects – if the EU was pushed too hard. And a few nervous nellies stateside began to wonder out loud when the US government might try some confiscational monkey business, such as the much-blogged-about notion of forcing retirees to put all their money in US Treasury instruments.
More to the point perhaps was the additional notion that the money was not there in the first place. Or anywhere. It was not snatchable. The banks were insolvent. They had pissed their meager reserves away on bad paper – like every other financial enterprise around the world – and the collateral was a joke. Depositors in Cyprus banks might indeed lose their money, but the EU would not collect any theoretical plunder either, so the whole bailout exercise was just another empty bluster. Even more to the point was the additional notion that no money in any bank in any sovereign EU member would be plunderable because there is no money in any of them, and the fiasco in Cyprus was leading to the recognition of the utter bankruptcy of the system.
In other words, this charade is far from over. There will be more bank runs. They may or may not take the form of disgruntled depositors physically standing in line along the pleasant blocks of Europe’s cities as the street trees burst into lovely spring bud and flower. In the first flush of activity post-Cyprus, a lot of hypothetical cash will probably just end up shifting out of Europe altogether and into the clutches of Jamie Dimon and his fellow miracle workers, primed for grand new acts of rehypothication with the inflow.
The chatter around this crisis has not included any consideration of the dark forces roiling in the alternate universe of rackets known as derivatives — which should now be primed to detonate whatever remains of financial legitimacy even while governments and central banks rally with new sets of excuses and “ring-fence” strategies for the floundering banks. All the ruling parties this whole world round won’t face the fact that absolutely nobody can cover his losses, and the losses just keep mounting with every central bank keystroke. Welcome to the age of phantom money.
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