10 Lessons of Cyprus

10 Lessons Cyprus Is Teaching Us

3/26/13   http://www.silverdoctors.com/10-lessons-cyprus-is-teaching-the-world-about-money-gold/

The Cypriot case is all over the place, in all types of media. However, it is amazing how the following simple facts remain underexposed. It is one thing to look at the news; it is another thing to look at the learning that comes out of the news. For those who are willing to see, here is what Cyprus is teaching the whole world about money, the debt crisis and gold:

1. The counter-party risk has never been that high in history. Keeping your money in your savings account not only has no yield, but also has a risk of  losing  (part of)  it to the bank itself.

 One important message from this banking and public relations disaster is that, per the ECB, the money you put into the bank (for your checking or savings account) becomes a  liability  of the bank, and not a  deposit  placed there for safe keeping. In other words, a bank failure means some of the bank’s liabilities will not be repaid – such as some or all of your bank account.

2. Money in your bank is NOT safe. It appears incredibly difficult for people to understand this truth.  In people’s mind, safety and banks go hand in hand, just like yin and yang or day and night.

Fractional reserve banking  (fiat money) allows deposits to be loaned out many times. This increases bank   profits.  When an extraordinary number of individuals attempt to  withdraw  their   deposits, a  bank run  occurs. The IMF-ECB demand that depositor money be partially confiscated   suggests that many more people may want to withdraw funds from banks across Europe. This will discourage confidence in banking systems.

3. How is it possible that banks need their depositors’ money to survive when they borrow at  0% and lend at rates between 4% and 8%?  It shows the whole banking system is truly ailing.

 Since banks buy the   bonds of insolvent countries,   some defaults are to be expected.   Adding leverage and derivatives increases the risk of default and bank failure.   It appears that the world’s   largest banks   are heavily leveraged and holding a large quantity of   “dodgy” assets that might better be described as toxic waste.   The system survives on   “extend  and  pretend”  confidence and bailouts. Yes, the banking system is dangerously   overextended   and dependent upon central banks “printing money” to keep them alive.

4. Governments are truly desperate. Still they keep on pretending nothing major is going on.  They have a plan for everything. But time and time again, they surprise us with unexpected major problems.   The bankruptcies of major Spanish and Italians banks earlier this year are recent examples;   the Cypriot thing is unimaginable.

Governments are heavily in debt and don’t control spending. They must maintain the cozy relationship with banks and central banks so they can borrow ever larger amounts from the banking system.  The banking system is teetering near insolvency and must receive  bailouts and the  support o  f governments (example: allowing confiscation)  to   “extend and pretend”  bad assets are actually good assets. Currently,  governments  are effectively  taking assets  from citizens via price inflation  while paying low interest rates on deposits.   It could escalate to Cyprus-style confiscation and pension plan nationalization.

5. Didn’t we learn only half a year ago from our European leaders that the debt crisis was solved?   Didn’t we hear that they would do whatever it takes to get the economy rolling again?   Either they truly don’t know what they are doing and talking about, either they are   liars   of the highest degree … or both.

 “Extend and pretend”  in both Europe and the United States will work until some “black-swan event”  causes a   loss of confidence  in the banking system and creates a chain of bank failures and derivative destruction across Europe, Japan, and the United States.   Think the assassination of Archduke Ferdinand in   1914   or the failure of   Credit Anstalt Bank   in Austria in 1931.

6. Cyprus is telling that the debt crisis is not over; it is only worsening.

Yes, indeed! If the 2008 financial crisis was the first wave of the debt and derivative crisis, perhaps the IMF-ECB-Cyprus fiasco marks the emergence of the world financial system from the “eye” of the debt hurricane and the reemergence of the destructive winds of insolvency and financial chaos.

7. The  whole  scenario  was  planned  and organized.   The central bank  blocked  the electronic payment traffic in and out of Cyprus during the weekend.   Cypriots feel betrayed. But who knows what other surprises our leaders are cooking for not-Cypriots?

 If something like this happens in banking and politics, it was probably planned. What may not have been planned were the  collateral damages  and the unintended consequences.   What the middle-class should expect is that their interests will be considered  too little  and too late to save most of them.

8. What did the financial and monetary system solve since the big crash in 2008? Indeed, nothing. The symptoms of the crisis are becoming worse. It means  the true crash is yet to come.

National debt in the countries of the EU, Japan, and the United States is rising far more rapidly than economic activity can support.  This can continue for a long time (it already has) but   not  forever.   It seems likely that it will end with bang, not a whimper.   Possibilities include a new monetary system, a devastating  crash, another world war,  confiscation of private assets,  destruction of unbacked paper money, or various other unpleasant changes.

9. The key take-away in our humble opinion is that Cypriots holding physical gold and silver (or other tangible assets that preserve purchasing power) are not being touched by any means.   Although we are 100% convinced of our point, we do not see this message appearing, nor do we hear people talking about it. Consider it a privilege if you have this insight or if you understood this learning.

The   priority   of the financial and political elite, banks, governments, and the media is to maintain the  status quo  –  unbacked paper money.   Don’t expect major media attention upon  gold until it is too late for most people to preserve their assets and purchasing power with gold and silver.

10. Trust is what is touched much more than the bank accounts. The next crisis will be driven by trust.   As our money system is only backed by trust (hence “fiat money”), you can be sure that   our  current  money  system  can  (will be) potentially  be  destroyed.

 No unbacked paper money system has survived more than a few decades in the history of the world.   Currently, not one currency is backed by anything more substantial than   faith,  credit, and  trust in  sovereign  governments.  Trust is weakening and that bodes poorly for a banking system based merely on trust, but not supported by real assets such as gold, silver, oil, or something substantial and real.

These lessons are there for anyone who is willing and open to see, whether they remain underexposed is not important. Ignoring them is at one’s own peril.

As Ayn Rand said,   “You can ignore   reality,   but you cannot ignore the consequences of ignoring reality.”   Haven’t the banking and political powers-that-be ignored for far too long the reality that money must be backed by something substantial, such as gold?   The consequences of ignoring that simple reality are: massive and un-payable debts, increasing instability in banking and political institutions, monetary failures, insolvent governments, evaporation of individual savings and retirement assets, and bankrupt citizens and businesses. The IMF-ECB-Cyprus fiasco just accelerated the pace at which those destructive consequences will impact our lives.