The holders of those bank accounts are the ones deriving the benefit of the bailout. Without the bailout, those banks would go under, and in that situation the depositors would see a lot less than 90%.
It's still a silly idea from a practical viewpoint - the article is absolutely right about the loss of confidence - but I don't think it's immoral. The root cause here is that the depositors put their money in a bank which lent it to someone that isn't paying it back. Frankly those depositors should be counting their lucky stars that they're seeing anything - plenty in the same situation in the past haven't.
There are pan-European laws that if a bank goes under you get the funds up to €100.000 you had in the bank reimbursed by the state.
The reason for this is that is that banks are the financial glue of society, and for better or worse we can't live without them. Bankruns can bankrupt a bank in a day, thus it's incredibly important that people feel secure in knowing that the money they have in the bank is secure no matter what.
This trust has just been put to the test with this incredibly stupid move.
Put to test? I would say that it has been totally voided. The people, by the people I mean the little guy, just got rolled.
Considering how well politicians like to play the class warfare card I am surprised even they went for it. Are those in Brussels just tone deaf? I am quite sure no politician here in America would have the guts to pull this, but I do not know how answerable those in Brussels are to the common man.
> I am quite sure no politician here in America would have the guts to pull this
I'm European and just after this was announced I was thinking what would happen if something similar would be enforced in the States. My conclusion was that that this would be one of the few acts by the US Government that would cause civil unrest.
That guarantee is clearly a dead letter in the case of Cyprus anyway, because there's no way that their government can make good on that promise in the face of multiple large bank collapses.
I already said that I agree it was a bad move due to the effect on confidence.
That guarantee is clearly a dead letter in the case of Cyprus anyway, because there's no way that their government can make good on that promise in the face of multiple large bank collapses.
That's where the EU steps in, or rather: was supposed to step in.
We were promised that our small savings accounts (<100k) are safe under all circumstances.
This came with the implied assumption that when shit hits the fan, they will shave what they need from the big accounts (>100k). Because those did either benefit from the gambling or can at least afford a lawsuit to recover some of their funds.
That promise was broken today. Many people will be very, very unhappy.
It's a good point, so I did a quick google search and it appears that in most countries the insurance is paid out by a seperate insurance fund that all banks pay in to over time. Presumably the fund is reinsured with lloyds, Berkshire Hathaway or something similar. So it's independent of the banks and the state.
I couldn't find anything specifically for Cyprus, so I'm not sure what the situation is there, but it's probably not much different from other countries.
"7) Will Deposit Guarantee Schemes have enough funds to pay out in case banks fail?
There have been shortcomings in some countries in the past. It is not feasible or necessary to provide schemes with an amount of money equivalent to all deposits. But banks will have to pay on a regular basis to the schemes, in advance, so a pot of money can be built up, and not only after a bank failure. Such 'ex-ante funds' will make up 75% of the overall funds in DGS.
If it becomes necessary, banks will have to pay additional contributions, which will contribute a further 25% of the target funds. If this is still insufficient, Deposit Guarantee Schemes could borrow from each other ("mutual borrowing facility") up to a certain limit (again 25% of target funds) or use additional funding sources such as borrowing on the financial market, e.g. by issuing bonds.
The new financing requirements will ensure that each scheme has enough funds in place to deal with a medium-size bank failure. This level is comparable to the existing well-financed schemes in the EU. These levels of funding will have to be achieved in all Member States by 2020.
Banks having a riskier business model than others will pay higher contributions to Deposit Guarantee Schemes - up to about 3 times more."
Indeed and most countries don't have medium sized banks, they tend to have big ("too big to fail") and small ones. When a bank failed in the Netherlands (SNS Reaal) the other week the government said that it would have cost EUR 30bn to the fund which would have crippled the 3 remaining large banks. Iceland had a similar system where the deposit insurance fund could not cover any of the banks failing, as they were all too big. The two big banks in Cyprus are huge.
Wealthy Russians take a 10% cut on their deposits. Cyprus is a tax haven. Or the government has to bail out the banks via debt. Only the US can do that since the world buys oil in dollars and if we devalue our currency we can spread the pain. Cyprus cannot make decisions about their currency unilaterally.
Lets call a spade a spade -- they cannot make decisions about their currency because they are using the euro and thus do not really have control over their currency.
- Undervalued company that owns all your stuff and you own the company (put that one in there, since it's a usual and practical way of owning real estate and more)
No, let me think. Let's just stick with people pensions. So much better.
My understanding is that securities (stocks, bonds, derivatives) are under your name so you maintain ownership of the securities even if the ibank that acted as your broker goes down. (This is why money management companies maintain separate accounts for each of their clients rather than have an aggregate pool)
So the Cypress banks going bankrupt wouldn't have affected these securities. The deposits on the other hand would have potentially lost a huge fraction of their value.
(Though I still don't think this was a wise move...)
edit: I wonder what warranted a downvote in this comment of mine?
Your understand is wrong in practice. In fact a recent example in the US is the MF Global fraud. That is why there is the SIPC http://www.sipc.org/How/Brochure.aspx it's like the FDIC except for losses related to fraud surrounding the failure of a brokerage firm.
This makes me extremely uncomfortable and I don't understand how anyone could think this was a good idea.
We have high unemployment across Europe, Catalunya is attempting to become independent and there is open talk in the press about a military coup if that goes through. Meanwhile, Greece elected a bunch of fascist mps, and now this?
Imagine if you woke up tomorrow and 10% of your savings were gone. What would you do? Take your money out of the bank, sure, but also immediately attempt to remove your government.
The traditional answer in this situation would have been to devalue the currency. Cyprus is not capable of doing this because they do not control the Euro.
It's important to note that 10% haircut is much, much less than what would have happened if Cyprus was not under the Euro and had devalued. Just a few years ago, everyone in Iceland lost more than 50%.
Some of them. Don't think that Iceland's problems are all resolved. It's still unsure if the new constitution will pass, lots of people in power do not want change.
At the end of the day you have two camps: debtors and savers.
You can't force a tractor factory to make a factory once it has closed down ie: you can't force a debtor to pay debt they want to default on.
The only way to rebalance the system is to screw the savers. It was always going to happen, the question is whether by stealth via inflation or overtly. It looks like they are taking the overt path.
The problem is the savers saving in the instrument of debt: currency.
I'd like to add one thing, that those people weren't just hoarding that money. What happens now is that Cyrpus is losing out on some badly needed investment.
On German TV someone joked, that Merkel found a way to have tough reforms without hurting voters. So it makes really a lot of sense, it is just not aimed at helping Cyprus.
To quote the article: "This is why The IMF and the ECB has stepped in and bailed out the banks. Rumor has it that without the bailout Cyprus two largest banks would be bankrupt in a matter of days. A situation no economy can survive, especially not one with a disproportionally large banking sector."
I don't see the problem to be honest. We (I live in the Netherlands) are paying a lot of money to help them out, which is okay. But yeah we're asking the inhabitants of Cyprus for a sacrifice too. The 10% tax is a very crude way to implement this, but dire times need dire actions.
I wish you won't ever see the consequence of dire actions against you or your family. You have no idea how it feels like. You have no idea how unfair it is.
In case that you have not realized it, you are not paying any money. You are loaning with loan-shark rates. Have you ever heard of a loan-shark losing money?
Things are much more complicated than black or white.
Greece and Cyprus are not independent countries. Their very existence was built on loan. Loan with a purpose. And this purpose fulfills as we speak.
These countries' sovereignty is more than a joke, more than a century old.
You feel cheated. Greeks (people living in Cyprus are also Greeks) feel cheated. Every single person feels cheated.
Sadly, we live in the dystopian future where international mega-corporations (a.k.a banks) have more power than some countries.
You can however blame the rotten democratic system that we live by. You can blame human kind's greedy nature.
But you can't blame people of being stupid. The society can only be evaluated by the way it treats its weakest members. You can't blame stupid. You must protect them. This is what makes a society virtuous. Protecting its weakest links. Everything else is pure low-level greediness instinct that has driven us from living into caves to the modern world.
If thinking that poor nations had it coming helps you keep your conscious clean, so be it.
But it has always been about survival of the fittest and not survival of everybody and apparently it will keep being this way. Until human kind becomes one. Above races, religions, borders and whatever.
I can't agree with your last sentence. We've all had the profits of having banks providing liquidity (common, all that Russian money into the Cyprian economy has been great for all of Cyprus). Now that system has failed and the big guys aka the banks are just as clueless as the little guys.
Do we need to rethink how our economy works? Yes.
Do we need to help Cyprus, Italy, Spain? Yes. Partially because it is in out best (Dutch) interests, but also because they are European brethren.
Is it okay to ask the locals for a sacrifice themselves? Yes.
I know I'm living in one of the richest countries in the world. I don't mind helping another country. I understand that losing 6.75% of your savings hurts.
Nobody blamed you for being consistent, organized, eager to work more and getting rightfully rewarded for it.
This is the way it's supposed to be.
Also the problem is not losing 6.75 of ours savings. For most Greek people it's 0 * 6.75 anyway.
The problem is that I am poor. My country is poor. My country was born poor. My country was funded from the beginning of its existence because of being born poor. My country has always been and will always be poor.
But now somebody decided that we are not poor enough. And there is nothing that we can do about it.
And while at it, that same somebody is trying to make your life less comfortable and blame me for it.
This is a scheme over personal economics. It escalates at country level. Further above what some countries or even coalitions of countries can cope with.
And let's not get started with black market money in Swiss or wherever banks. Everything is plain pretense.
They were selfish imperialists that built their legacy with wars and slaves.
Even if we could do it again in the present day, personally I wouldn't want it. But there is no other way, is there?
And let's just think about it:
We could build today a monument that it would still be there in 3,000 years. But it would take the lives of 10,000 slaves. Should we do it? Shamelessly exploit people that will die anyway some day, so that we can show off in 3,000 years?
I vote for no.
And by "my country" I refer to the modern version created in the mid 19th century. There is no continuity with the ancient times (at least in political terms). And there was no country in the ancient times to begin with. Only city-states. A few rich and many poor :)
Therefore, I think that my country is definitely poor. Forever and ever.
Good old libertarians - everything is about money and force.
The money isn't being taken by force. Money is a social construct, and the people in charge of taking care of that social construct are fiddling with the numbers. There are no jackbooted thugs going into people's homes and relieving them of physical property, which is what you're alluding to.
Whethere it's morally right or not (or somewhere in-between) is a wholly different question, which isn't helped by hyperbole like you're presenting here.
Well, the euro zone doesn't have to help Cyprus put and just let them collapse. Maybe Greece could sell the other half of Cyprus to turkey to get some extra needed cash...what is a better option?
I'm sure the Cypriots don't want to rot, so why not take the EU bail out? Yes, they lose 6-10%, but that is much better than 100%. And the Russia mafia won't be that angry.
So what was the right solution? Kick Cyprus out of the
EU and let them scavenge for themselves? Letting the banks fail might attract an invasion from Russia, and then it becomes a NATO problem....such a mess.
I hope that country is not Austria (which ran to the the EU like a little girl when shit starting hitting the fan in early 2009, asking for help for Eastern Europe countries so that the latter won't go belly-up, that would have meant Austria going belly-up), the Netherlands or Belgium (both countries with a very high level of private-sector debt, approaching Cyprus, pls see this: https://media.economist.com/sites/default/files/imagecache/2...), to say nothing of France.
The only European country still standing on its feet without any outside help is Germany, but that could end very quickly end once every other country around her begins the slide into depression. For better or worse, we're all in this together.
Much of the money you have in the fiscally responsible countries is the debt of the less fiscally responsible countries. If they default you will see your bank account haircut too. One bank went under in the Netherlands so far this year, but the state bailed it out (so taxes will go up). Many German banks are not well capitalised, same with Danish banks and so on.
During the boom so much credit aka money was created from what is now nothing but people assume they will get to keep this "wealth".
I don't see the problem to be honest. We (I live in the Netherlands) are paying a lot of money to help them out, which is okay. But yeah we're asking the inhabitants of Cyprus for a sacrifice too. The 10% tax is a very crude way to implement this, but dire times need dire actions.
I don't think it's hyperbole to suggest that this sort of action could lead to pan-european war in the next decade.
It radically undermines trust in the banking system, in the social contract, and in democratic government. If you undermine the social contract and rule by fiat, as the EU has in Greece and Cyprus, it leads to extremism, break down of social order, an ever more polarised political situation, and ultimately revolution and/or dictatorship (see France late 1780s, Russia 1900-1917, Germany 1920-30s). That's not a Europe I want to see and this can happen quite quickly even in an apparently stable society when the foundations are weakened progressively.
The EU was founded to avoid precisely this sort of escalation of conflict and blaming of others by sharing the wealth of nations and promoting ever closer union. They could easily afford to support Cyprus through these hard times against the banks, in fact they're a big enough trading block to simply default wholesale against their creditors and start again, but they have chosen instead the road of muddy compromise, where they end up defaulting piecemeal (as in Greece, which effectively defaulted), but by stealth and in secret and with draconian conditions attached, and which hurts the poorer people of the EU disproportionately by forcing through massive cuts which don't actually solve the problem. Is Greece doing better than Iceland at the moment, is the austerity working? How will paying this bill help Cyprus?
They're undermining trust in the entire EU and EUR project, and there may come a time when governments are overthrown and countries leave the union because of it, and even (and I sincerely hope not) where countries go to war over it. It's fascinating and a little sad to see the same mistakes being made all over again.
> If you undermine the social contract and rule by fiat, as the EU has in Greece and Cyprus, it leads to extremism, break down of social order, an ever more polarised political situation, and ultimately revolution and/or dictatorship
Mostly unrelated and that kid was really stupid, but just the other day a 20-year old Greek footballer used the Nazi salute after scoring a goal for his team (http://www.bbc.co.uk/news/world-europe-21822165). Like I said, that kid is beyond stupid, but I think it shows that some sort of extremism (right-wing, left-wing) is slowly making its way onto the front scene.
> If you undermine the social contract and rule by fiat, as the EU has in Greece and Cyprus, it leads to extremism, break down of social order, an ever more polarised political situation, and ultimately revolution and/or dictatorship (see France late 1780s, Russia 1900-1917, Germany 1920-30s).
Hopefully irrelevant factoid: Cyprus is the 6th country in the world in number of guns per capita [1].
You have it the wrong way. You are paying exactly nothing to "help them out". Money is being borrowed through the EFSF and EFSM and being lent to Ireland et al. This money goes directly to the bondholders of the defunct banks. These bondholders are the major German, Dutch and French banks. Deutsche Bank would have defaulted if the Irish or Spanish banking system went under.
In essence, The Irish have bailed out Germany and the rest of Europe. In the case of Ireland, they are now sitting on 80+ billions of Euros of debt that they have to pay back.
And remember: There was no haircut for the bondholders.
"Funny" how nearly everybody from each Euro country seems to think that _they_ are bearing the major burden. I hear it from the Germans, the English, the French, the Greek, the Irish...
The blaming and hating is growing. The EU received the Nobel peace prize just in time, could be too late some years later.
The thing is, your country signed an agreement to help them if they need it. You don't get to punish them for the fact that you are upset to have to meet your obligations.
We're helping them and meeting our obligations. In what way are we punishing them? Yeah, it's not nice to lose 6.75% of what you have in savings (the 9.9% is only for those who have more than 100.000 euro in their bank account), but the alternative would be much worse for the Cyprians.
[edit]
And yeah, this is a very crude way to raise the money. Given more time, a better way is probably possible. But I think time is at a premium now.
They could have made the bank bond holders (rich foreign banks) take losses without affecting the normal depositors.
How can you think getting a bigger loan to pay current loan is a good strategy. It will work only if the economy improves. If the economy tanks, it is not going to work. It is only going to increase the losses for the lenders ultimately.
There were no foreign rich bond holders to punish. Cyprus took more money in then it could possibly ever use (as haven like Iceland), and then bought Greek bonds with it. The only creditors here are depositors. So...
"They" signed an agreement to be honest in reporting their situation and meeting their obligations.
Instead, "they" lied and cheated, and effectively nullified any mutual agreement. The only reason why they're still getting the help is because the alternative would be much worse.
The bank run was an entirely predictable result. And one which the courts may soon have to untangle.
I too expect that capital will move from weaker banks into stronger ones and that will result in a liquidity crisis.
Along one path the European Union dissolves, and along another path nation-state sovereignty dissolves. Either way it seems pretty clear that countries with larger economies don't seem to be particularly willing to continue to let poorly run smaller economies drain them of resources.
Why would the EU dissolve if the Euro collapsed? Only 17/27 countries in the EU are in the Eurozone. It would be significantly more complicated to dissolve the whole European Union and dealing with a political and legal mess that would ensue. Dissolving the Eurozone would be comparatively easy.
Also the concept that somehow "poorly run smaller economies" were draining the resources of the "larger economies" has no basis in reality. It doesn't take a lot of research to find out who benefited the most from the Euro. Hint: not any the "poorly run smaller economies".
I was born and raised in Cyprus and my entire family still lives there. I spoke to a few of them this morning and whether the measures pass or not (parliament still needs to approve) they all plan on making a run to the bank asap.
Ah, OK. Yes I agree. In fact, I think this action will be viewed very seriously across the whole of Europe and not just Cyprus. I expect to start seeing bank runs starting next week in the PIIGS countries.
Expect this to happen all over Europe. In particular England.
It has happened before and will happen again, until the fuckers in charge understand and learn.
But no one would vote on the guy calling for budget cuts. Everyone likes the guy with the hand outs.
"England" isn't in the euro, it has a central bank that can and will print money if required. If anything chances are the UK will be on the receiving end of any money transferred out of Greece, Portugal, Spain e.t.c. because it's within the EU (and therefore other EU citizens can easily open bank accounts) but not inside the eurozone (the UK has not funded any of the EU bailouts except via contributions to the IMF)
Jeez, this was -forced- from europe, the Greeks didn't vote it in. My point is, no politician that's paycheck depends on votes will ever force this in. It has to come from the outside - EU.
My understanding is that banks in Cyprus are heavily invested in Greek bonds (makes sense given the shared language/culture/etc) and that the Greek bailout resulted in the bondholders taking a 50% "haircut" which set off the current banking crisis in Cyprus. And now the "solution" to the problem in Cyprus is likely to set off bank runs in other troubled Eurozone economies. One domino knocks over the next ...
Edit: half of this is in the article which I didn't read before commenting ;-)
The article is a lot of fear mongering.
It ignores the fact that before the EURO the Southern European countries had high inflation rates and hence didn't need bail outs. These high inflation rates devalued savings in the local currencies and often created similar runs on banks. Since the smaller economies have a low impact on the EURO inflation this is an alternative adjustment.
They knew it would cause this Tuesday which is why it is done now so that the peasants have to wait several days to be able to do anything. In the mean time the elite have days and resources to do what they need to do.
These are acts of war on citizens by corporations and should be treated as such.
If you feel a need to invoke Godwin you should at least try to be intellectually honest.
The citizens in the tumbling EU-nations are paying what they perceive as unfair reparations already (Justification: "You lived beyond your means" - most citizens most certainly didn't). The radicalization is already happening (cf. elections in Greece and Italy).
You make it sound like taking 6.75% out of the small guy's savings account would somehow be better than stretching out the pain or (god forbid!) claiming the wealth back from those who extracted it in the first place.
Do you just wait around for people to mention Germany so you can talk about this stuff? Godwin's Law is about Hitler. So, in essence, you have invoked Godwin's Law.
Can I not talk about Germany in the historical context of WWI?
The parent comment said that these countries have resources in the ground, we can take those resources, hence these countries will always be able to pay their bills. I said that didn't work very well when we tried to force Germans to "pay the bill" after WWI; they simply inflated the currency away.
But thanks for your arrogance and lesson on intellectual honesty.
Well, Godwin's Law is about "someone inevitably makes a comparison to Hitler or the Nazis" (see Wikipedia). If mentioning WWI/WWII does not qualify for you then we must have quite a different interpretation.
The argument in this thread was that there must be alternatives to the current move, such as making some of the creditors wait or default, rather than taking it out of the small guy's pocket. Discarding such alternatives for the fear of consequences that are already happening just makes no sense.
Cyprus is effectively inflating the Euro for their citizens right now, that's the whole purpose of this stunt.
They'd won a fair banking system with emphasis on commercial operations rather than endless rigged schemes on the investment market that are advantageous to few and destructive for many.
It's not just the banks. Cyprus has a huge public debt[1].
The measure is also not the first of its kind in the EU - Italy did it in 1992 to cover a financial emergency. They took "only" 0.6% from all bank accounts back then.
Cyprus' public debt took off after they were downgraded by Moody's and friends last year (meaning they were no longer able to borrow). This happened because the EU--in their infinite wisdom--wrote off a €4b loan (in bonds) Greece owed to Laiki (a Cypriot bank). So that's €4b the government lost overnight, and round about €10b it's "lost" since 'cos they can't trade.
Public debt for 2011 was 71.1 of the country's GDP.[1]
When a sovereign fails, its banks fail, and private sector losses are virtually assured. The question is who bears the burden. Roughly half the deposits in Cypriot banks, with assets five times its GDP, are of Russian, Greek, or British origin [1]. They were attracted by high deposit rates (roughly double EMU average) and a system tolerant of likely tax evaders.
>"This whole thing is entirely unfair for the people living in Cyprus. The average citizen had nothing to do with the banking sector stocking up on Greek debt, but now they have to pay for it."
Foreign deposits are flighty. The loan-for-austerity solution is too slow. The Cypriot financial minister has already noted "substantial outflows" from banks over the past few weeks [2]. Announcing a future tax would leave the burden exclusively on ordinary Cypriot depositors. This measure was intended to help the Cypriots, not burn them.
Further, the mark-downs on Greek debt is a proximal, but not the root, cause of the problem. The IMF warned Cyprus in 2011 to raise capital levels, potentially by slashing deposit rates - it did not. Ratings agencies chimed in, in 2012, that private sector losses would result if Cyprus did not increase contributions to bank capital. Complicating the situation is that 15-20 percent of Russian bank capital and nearly 10 percent of Russian corporate deposits sit in Cyprus - there was probably external pressure to keep the banks leveraged.
Pre-crisis, Cyprus stood out for its high growth (almost 4%) and low unemployment (low of 3.6% in 2008), despite a falling savings rate, rising labour costs, and a red hot real estate market following its accession into the eurozone in 2004 [3]. Today, we have a zero growth economy with a banking crisis that would have tipped its debt/GDP from 87% to 145%.
Cyprus needs a capital injection equal to half of GDP. This was never going to be painless.
>"So what do investors, businesses, and savvy savers do? They pull their money from banks in the troubled euro countries. No need to take the risk, even if it’s small."
This is unlikely - the EU banking environment is already highly re-patrimonialised. Non-financial corporate and high net worth deposits have already fled to the degree that they can. Domestic depositors are, for better or worse, less flighty (and savvy) than senior bank debt investors - hence the logic for preserving their latter at the expense of the former. Also Cypriot banks have very little senior bank debt (0.3% of assets for Laiki [4]). This is cruel, yes, and I sound with The Economist's criticism of the tax levied on minor accounts (those holding less than €100 000). But forced de-leveraging will be cruel.
Given the political constraints from Deutschland limiting the ability of the European Central Bank to launch into Fed-style monetary base expansion and its Landesbanks preventing euro-wide deposit insurance, the bank regulatory constraints imposed by a country relying on flighty deposits for financial stability, and the economic constraints of a highly-indebted nation in the middle of a geopolitical brouhaha between Greece, Turkey, and Russia slated for near zero growth in the near future, this is not a terrible deal. Note that Iceland, which was in a similar position in 2007, saw its economy crater by nearly 1/3 from 2007 to 2011, or about 9% annually. Peak (2007) to trough (2009), 3/5.
Nonsense. The EU just made the depositors junior to the bondholders of the bank! On what planet does that not have permanent implications for trust in the banking system?
Every EU depositor (esp in Greece, Spain and Italy) should start thinking about where to store their money besides the "insured" banks. Hell, with 0% interest in US banks, the FDIC should at least make some high-profile statement saying this would never happen in the US.
Depositor insurance replaces the bank's credit with the state's. That happened here. It's just that the state's credit is trash. If you are in a country with trashy credit it would be highly advisable to move your funds to the closest Switzerland, Germany, or United States.
Why is the EU promoting such fragmentation? Again, remember there are a lot of political and financial flows constraints here that are unique. Pragmatism must trump principle. The choices to the bailout team were let the Cypriot economy crater by refusing funds, grant funds and watch foreign depositors leave the islanders with 145 percent debt to current GDP, or take rapid measures.
My hope is that this prompts the EMU to finally implement a pooled depositor insurance scheme. The present scheme is akin to each state in the U.S. providing its own depositor insurance.
There are almost no bondholders. The junior bondholders have probably been wiped out, it is unclear. The senior bondholders there are (very few) are secured (covered bonds) which are senior to depositors.
Not for any definition of "depositor insurance" that I'm familiar with. The whole point was that the investors of the bank would lose their money first, then a gov't agency would make good on the deposits.
Anything less is a return to the days of unstable swings banking and deflationary depressions. Or perhaps the wizards at the EU thought/didn't care that Cyprus would join Greece in their deflationary depression: But the signal to Spain and Italy is abundantly clear: Anyone who leaves their money in a bank in those countries is not paying attention.
I'm sure people across the EU are paying close attention, especially with many financial pundits holding a view that Cyprus is just a guinea pig.
If the people there roll over without too much fuss, stealing directly from deposit holders will become the template for future banking bail-outs.
Bondholders and shareholders of Spanish and Italian banks could then avoid losses on their bad investments by pointing to Cyprus as a shining example of things done right.
Depositor insurance is not about legal seniority in debt, it is about an insurance scheme that is made available (usually funded by a levy on banks). Covered bonds own a specific pool of assets. But the issue now is that there is legal restructuring, or taxes like this, without any bankruptcy, so it is a bit random what happens...
> Depositor insurance is not about legal seniority in debt
It absolutely is. When a bank fails, the regulating institution steps in and performs the capital restructuring. The statement of depositor insurance is that they are to be made whole, even if the regulatory institution must dip into the depositor insurance fund.
The EU restructured the Cyprus banks, but they did not haircut the bondholders for the difference, as has been done in every other bank failure since the Great Depression.
I wholeheartedly agree. And this in my mind is what the whole story comes down to. I've written about it here: http://bit.ly/1103Gkq.
But to summarize, when both the banking system and the government is insolvent it's relatively obvious to me that loses should be imposed in this order:
1. First bank shareholders should be wiped out(!),
2. then junior bondholders,
3. then senior bondholders and uninsured depositors,
4. then government bond holders,
5. and finally, only if the above doesn't cover it, insured deposit holders will have to take a haircut.
What we're seeing now is more or less a jump straight to 5.
It should be less arbitrary that the current scheme, where senior bondholders and the ECB are not being touched.
If you look at the balance sheet of Cyprus Laiki half way down http://ftalphaville.ft.com/2013/03/16/1425732/a-stupid-idea-... then you see that debt is almost nothing. There is a lot of central bank (ECB indirectly) money which has not been haircut. The decision to haircut the "insured" depositors was a political one, allegedly made by Cyprus itself.
I can well imagine that Cyprus made the controversial decision (to haircut the "insured" depositors) themselves, for political reasons. It's exactly the decision I'd make in Mr Anastasiades' place if I was being strong-armed by a German delegation. The simple reasoning (for me) would be to increase the risk of contagion above and beyond what Germany can accept, so as to maximize the likelihood of Berlin folding and offering better terms.
"On the activation of the DPS, an announcement is made in the Official Gazette of the Republic of Cyprus and in the local press stating that the member bank is unable to repay its deposits and specifying the manner in which claims could be submitted and the necessary documentary evidence that accompany each claim."
This is not related to the restructuring and payment of creditors (which usually takes years, while deposit insurance pays out quickly). The deposit fund it is true then becomes a creditor and might get some money back later. This happened with eg insured UK depositors in Iceland.
The ECB has not restructured the Cyprus Banks. Cyprus is going to inject equity into them as a going concern, the equity paid for from this tax (and then the equity will be distributed to the taxpayers). This not really restructuring and other models where banks are left as going concerns with arbitrary appropriation of various bonds (somewhat at random it is true) is becoming normal in Europe (eg see SNS Reaal).
No doubt you know your trade. The problem is that it's more of a witchcraft and the way you smoothly lay things out here in the complex intricacies of the financial sector evades people from the simple fact that the banks fucked up. And the question of who bears the burden is only a question for the banking industry, in how to leverage public funds to cover their losses.
The banks are run by citizens and funded by citizens. So when the banks "fuck up", it's going to end up on those same citizens. There is no way to isolate losses to some "bank" entity.
Er, I'd be rather surprised if some of the banking entities were not established by foreigners and monies not actually coming from their country of operation.
Hell, Harris Bank in Chicago is owned by Bank of Montreal--so, unless I'm grossly misunderstanding the situation, it would be entirely possible for Canadian executives to set policies that could affect clients in the US. That's not those citizens' faults.
> Given the political constraints from Deutschland limiting the ability of the European Central Bank to launch into Fed-style monetary base expansion
This is not so. The Bundesbank gets regularly overthrown by the majority in the ECB panel when it comes to decision about this. Respectable Bundes-Bankers have already resigned, because of that.
Thats why the ECB holds billions (i.e. american billions = 1e9) of greek, italian, spain, portugese state debt.
And this despite the fact that the ECB is not allowed to engage in financing states by the treaties. And all this despite the no bailout rule in the treaties. The treaties are not worth more as a piece of used toilet paper, but the politicians cannot understand why the hell people get more and more anti EUR.
This was an EU country with a bank deposit guarantee similar to the FDIC guarantee. The guarantee is being voided. How many more EU bank deposit guarantees are untrustworthy? How many depositors will choose to no longer trust them? How many banks will be run?
Personally, I don't have a clue as to the answers to those questions, and I doubt that those who are imposing this tax have a clue, either.
Deposit guarantees were designed for one off failures of smallish banks, not systemic debt crises where large proportions of the total debt in a country is worthless. None are trustworthy in this sense, but some countries are worse off than others. Cyprus has a bankrupt government with no access to debt.
This is absolutely true - the deposit guarantee schemes are not a bottomless pit of money, and are nowhere near able to absorb the losses of a widespread series of cascading bank failures.
It seems extremely unwise to publicise this fact, however - which is what this measure does.
The people were also consulted to an extent in Greece, though you might say the results were inconclusive. The series of 2012 elections were de-facto a referendum on whether to accept the bailout/austerity or not, since it was the main issue in the campaigns. There were also pro- and anti- parties on both the right and left, allowing people to make that choice independently of their usual political alignment (left voters could choose between PASOK and SYRIZA; right voters could choose between New Democracy and Independent Greeks). If you go by popular vote, the pro-bailout/austerity parties narrowly lost the May election (48-52%) and narrowly won the June election (51-49%).
There's a little bit of subjectivity in assigning those numbers, because a number of pro-bailout/austerity parties were trying as hard as possible to take up tough-sounding, qualified positions, e.g. in the first round Democratic Left was "less" pro- than the others, even though it eventually joined a coalition government that implemented the demanded conditions. So one could argue that Greek sentiment was more anti-bailout/austerity than the results implied, since some people voted for what they thought were moderate anti- parties who turned out to be grudgingly pro- in practice.
During the 2009 elections party A said: "Oops! We're screwed! No more money!". Party B said: "No! Party A is lying! There are lots of money!".
Guess who won? That's right: Party B.
0.0000001 seconds later
Party B: "After all there is no money as we thought... But hey! We're in charge now! We'll save you! It's what we do best!". Nobody said that what they do best isn't very nice...
Forward to 2012.
Party B: "Vote us, so that we'll keep saving you with our great plan and our great banker friends!"
Party A: "Noooo!!! Don't vote for Party B! Their plan and their banker friends are baaaaaaaad!!! We have a better solution! A magic solution!"
Guess again who won? That's right: Party A.
0.0000001 seconds later
Party A: "Shit! Actually Party B's plan is the only real plan... But we are in charge now! Why bother to bring back Party B to keep going with their plan? We can do it as well! Probably even better!"
The End.
Desperate people? Yes.
Retarded voters? Yes.
Incompetent government? Not really.
Corrupted government? Most likely.
This is exactly how things work here in Cyprus and Greece for many years now! These very same people now are responsible to handle the bailout money. But we voted for them. They know better...
What I would like to see is transparency as how the funds of the bailout would be distributed and how they would be utilized at least for my forced percentage contribution. I am pissed off and at least in my case your assumption that money will not be pulled out of the banks is wrong.
The rich are getting richer for each year that goes,
Middleclass are therefore relatively getting poorer compared to the rich. Yet we bail out the banks that supports the debt money of the super-rich. Thus we save the rich and put austerity packages on the poor.
There is not money for the principal in the current economic system.
Almost all money is debt. Less than 5% of banks assets are cash, the rest is debt.
The current economic system is a gigantic Ponzi scheme, were wealth is transferred from the working class to rich. Since there is not money for the principal the system will crash by itself since its inherently instable, but no we keep saving the debts the rich has created.
If central banks did not create at least 2% inflation
new money in its goals, since there is not money to pay the interest principal in the system, all banks would eventually go bankrupt.
We should create a new economic system with debt free money.
Though no more a bad idea than the US dollar from the perspective of the federalists who most strongly supported it. The problem is the union is too weak to force it to work in the way it can in the US.
They tried it before with the Latin Monetary Union. It collapsed for a few reasons, mostly due to the fact that it was a gold and silver standard. I suppose the people who created the Euro thought that the problems with the LMU would be avoided with fiat currency.
The Cypriot savings didn't lose value, they lost a part. It's not the same thing at all. The proof is that Bitcoin returned to its previous value (and then some) rather quickly, while the savings will never return.
Say you have 100 dollars. And with 100 dollars you can buy 100 beans:
* The dollar loses 10% value. Now you can only buy 90 beans.
* You lose 10% of your 100 dollars. Now you only have 90 dollars. You can only buy 90 beans.
Compare that with:
* Cyprus banks go bankrupt, the euro loses 10% value - never mind that people actually lose 100% of their money.
* Cyprus savings take a 10% cut, Euro keeps 100% of its value.
Sure it's a simplification but I think it's a valid point.
The Euro losing 10% of value in relation to what? USD? Yen?
And even if the dollar loses 10% of the value vs every other currency, it's not true that you can only buy 90 beans, because you're not the only one with dollars: there are farmers who sell in dollars, and buy their stuff in dollars, and so will probably keep their prices.
When everyone you trade with uses the same currency as you, there's no value to be lost or gained relative to them, and since Cyprus trades in Euros, a loss of 10% versus say, the dollar, wouldn't automatically make everything 10% more expensive.
Currency depreciation by increasing the supply is not the same as losing value relative to other currencies, which was what happened to BItcoins (since the supply is constant).
And while both depreciations lead to price inflation, an loss of X% in the latter doesn't lead to an increase of the same amount in price inflation, because not all products completely depend on imports from other economic zones.
They seem like exactly the same thing. Maybe the reason they don't seem that way to you is that you've decided a priori that Bitcoin will inevitably regain its 30% in value, while Cypriot assets will never gain 6% of value. That seems a little silly. If you bought gold in 1980, you'd still be waiting, 33 years later, for it to recover its value. Gold, silver, currency, and truncated SHA2 hashes can lose value and never fully regain it.
What Cypriot assets? They lost Euros, which happens to be the same currency that their trading partners use, so there's no value to be gained relative to them.
And no, I haven't assumed that Bitcoin will regain in its 30% in value - it already has. But that it can gain (or lose!) so much value relative to the common currency is a big difference, since the common currency can't gain or lose value against itself.
If you believe that, and are given a choice between (a) an asset which is going to lose 30% of its value but then gain it back and (b) a confiscatory 6% tax on cash, you still prefer (b); you eat the tax, wait for the devaluation of bitcoin, buy bitcoin, and enjoy the appreciation.
Of course, that's a silly hypothetical, because the reality is that bitcoin (or gold) is just as likely to stay devalued longer than you can remain illiquid.
Your logic is based on the idea that Bitcoin must at some point return to some predictable equilibrium valuation, or even that it must appreciate. The point upthread was, no, obviously that's not true. Next week it be worth pennies, or nothing, and stay that way forever. Which is why moving all your money into Bitcoin is not a rational risk management reaction to confiscatory 6% taxes.
At this point, probably... But on Tuesday it may change. It may be the usual cycle of: some event brings new bitcoin buyers; BTC goes up; media and people who want to ride the wave join in; if it happens too fast people will get nervous, sell at current high and cause another dip. Not sure how many people in Cyprus are interested in bitcoin, but after their transfers are possible again, I wouldn't touch BTC for a couple of days just in case. </speculation>
Even if you keep your cash in fiat currency cash (i.e. euro notes) you would be safe from this.
Keeping your money in some form of cash (whether bank notes or Bitcoin) generally puts you in a worse position than low risk (i.e. diversified) investing. An investment bank which kept accounts in Bitcoin and paid out in Bitcoin would still be at risk of government seizures (unless they operated illegally and hid their identities and location, like Silk Road - but they would then have difficulties enforcing loans, and their depositors would have very little recourse if the bank decided to default and steal all the assets).
You don't need a bank for your bitcoins. You can keep them in your laptop or smartphone and the Government wouldn't even know you have it there. And even if they did they cannot force you to decrypt your hard drive.
You can even keep you bitcoins in your brain. No joke. You can just memorize a passphrase that would recreate an encrypted bitcoin wallet:
As I said in my comment, keeping Bitcoins is like keeping cash - you can keep either and hide them. Yes, you can secure Bitcoins better than cash if you want to, but that is irrelevant to my point.
My point was that you can generally earn interest from a bank at better than inflation rates, and if Bitcoin becomes more mainstream, people will do exactly the same thing Bitcoin they do with cash - give control of it over to a bank, and get an account denominated in that currency (i.e. Bitcoin). Once you give the cash or Bitcoin, as applicable, to the bank, you no longer have it in your wallet / Bitcoin address, but instead, the bank promises that it will give you back that amount of Bitcoins, plus interest.
The bank promises to give you back a certain number of Bitcoins, but you don't have any physical way of enforcing that - it is the bank's Bitcoin address that holds them, not yours.
Other people borrow Bitcoins from the bank and have to pay back interest at a higher rate than the bank borrows it. Because of interest, banks collectively are owed more than actually exists in circulation at any one time, so Bitcoin becomes fractional reserve system.
Under this scenario, the government can still tell banks to reduce your balance (which is a number on your servers, and not physically enforced by the Bitcoin protocol). It doesn't affect BitCoins you hold in your own addresses (just like the Cypriot tax doesn't take a cut of money held as cash by individuals in Cyprus), but that might be only a small fraction of the Bitcoin economy in a future under a fractional reserve system.
> My point was that you can generally earn interest from a bank at better than inflation rates
That isn't true today in the US or most of the EU.
I see your point on people trusting their bitcoin wallet to a bank or another service. True, but with bitcoin you don't need your bitcoin wallet service to be in your country, and using an online wallet isn't that much easier than using a desktop client so a lot of people will use it. The power of Government to seize assets will be almost null.
That's basically end of banking on Cyprus. Who will keep money at the place that arbitrarily decides to steal 6.75% of it (or 9.9% if you are rich)?
Also if I lived in Portugal or Spain I'd be on my way to the bank right now. Well actually I'd just transfer almost all of my money to mtgox (or some european market) and buy bitcoins.
I think for people living in Europe it makes more sense to use Bitcoin Central, since they accept SEPA transfers in euros without needing to convert them to dollars before buying bitcoins:
The problem is worse as far as it concerns loans here in Cyprus. Let's say I have a loan for 100k to buy a new house. Now I have 90k, I still owe 100k to the bank and I cannot afford to buy the house without a new loan. The same goes for startup fudings, student loands and who knows what else. there is no control over special cases and most of the wealthy ones have already moved their money to foreign banks a few weeks ago. Jobs and salaries are still safe and people will not be on the street. Even I as a student not currently in Cyprus had my account frozen and lost some 100s of euros. I hope the country is now in a way saved but this is still a disaster for some of us. However I don't feel the same for the eurozone and don't see how it is possible to keep Italian banks from drying out during the next few weeks.
What about if the alternative is no bailout, the bank goes under, and you get almost nothing back at all?
Like it or not, when you deposit 100 euros in a bank, you don't have 100 euros anymore - you instead now have an unsecured bank debt with a face value of 100 euros.
I'm not sure what kind of scenario you're imagining here. If 10% of all deposits and 0% of all bonds (which generally take haircuts before deposits) are sufficient to keep the bank afloat, the alternative is not 100% of all deposits and 100% of all bonds. The alternative is a larger portion of bonds and a smaller portion of deposits.
All banks (at least in Poland) are backed up by kind of guarantees fund, which allows to return some money to clients in case of bankruptcy. (WRONG INFO: It's 100% for amounts < 1000 EUR, 90% for amounts between 22'500 EUR and 0% (no guarantees) above that.) EDIT: actually it's 100% up to 100k EUR and 0% above.
But it's kind of risk you should be aware of when keeping money in bank. Simple taking money from accounts under risk of bankruptcy isn't.
And what good did that 100% up to 100k EUR do people with bank accounts in Cyprus? That's the whole point. They broke the deposit guarantee. Now you really do have an unsecured bank debt.
If you have 100k EUR in a bank account in Cyprus today, you're going to get 93.250k EUR on Tuesday. If instead the bank went bankrupt you'd have 100k EUR in your bank account on Tuesday too thanks to the deposit insurance. You'd be better off if the bank actually went bankrupt!
The typical pro-bailout argument at this point is that if Cyprus lets the banks go bankrupt the deposit insurance scheme (in other words, the government) won't be able to make everyone whole. That argument is a tacit admission that bank accounts really are unsecured.
This is 100% contagion for depositors in all shaky countries. If they can do it in Cyprus they can do it anywhere. I would expect huge inflows into Germany to continue matching outflows from everywhere else in southern Europe. Insanity.
Bitcoins are better for that matter since you don't have to worry so much about storage. You can easily cross a border with them. Or you can create a brainwallet (basically a passphrase that recreates a wallet), delete any data of the bitcoin wallet from your electronics, cross the border, then recreate the wallet from the passphrase.
Why is anyone talking about bitcoins? You can put your money into bitcoins but you can't actually take any reasonable amount of money "out".
It is a simple Ponzi scheme created by anonymous hackers to take people's money.
Look at the largest "exchange". How much do they let you convert into actual money? The main one limits you to $1K per day or $10K per month.
But you know what? They don't have to convert anything for you if they don't want to. There are no laws, nothing. One day, your bitcoins will be completely and totally worthless. There is no government to back it up as a store of value.
There are a bunch of anonymous hackers who manipulate the price to get more people to give them actual money while they give them worthless virtual numbers.
And everyone thinks they are making money as the price goes up and up. But try and take any of that money out. Guess what, it won't be there.
The exchanges will close and poof, you have nothing.
That is incorrect. It does not require an exchange for me to move money in and out of Bitcoins. All I have to do is find another human who is willing to trade Bitcoins for another currency, and vice-versa. For example, I could do this on eBay or a forum.
The large "exchanges" merely make this process more expedient. At the core of this concept is that people are willing to trade one good for another good, and in this case, it's Bitcoins for another currency.
I've been thinking about this lately, and, at the risk of sounding like a doomsday kook, this seems to make sense to me (perhaps in a milder sense) no matter where one lives. My plan is, if I ever get over $X in my account, where X is some reasonable buffer to pay bills, etc., that I'll just buy gold with the overage[1]. Back in the day you'd at least get reasonable interest by keeping money in a bank, but nowadays it's really only the convenience of direct deposit and online bill pay that draws me. Even then, all these charges and penalties and sales pitches every time I enter a bank are really turning me off.
[1] I acknowledge some logistical challenges with my plan if I become a millionaire.
I didn't mean to imply that I would expect to make money from buying gold (if that's what you mean). Even if gold prices were expected to drop, I'd still be interested in buying it as an insurance policy. No matter how severe a crisis, once the dust settles, gold will always be worth something, for reasons I don't understand.
It has also been claimed there is a ponzi scheme in paper gold, i.e. instruments may not actually be physically backed, so when things go pear-shaped and you ask for physical delivery, you will have to fight other investors over legal ownership. http://www.businessweek.com/news/2011-12-12/hsbc-sues-mf-glo...
Given recent banking scandals, anything is possible. Caveat emptor!
Central banks are known buyers at the highs and sellers at the lows. Part of their mandate is "financial stability", and up to and including backstopping out-of-favour assets (like, say, mortgages). I see central banks buying gold as a way to stop a precipitous decline in gold as money rotates sectors.
Then again, this theory happened before this Cyrprus thing, so who knows for sure. Guess we'll see what kind of carnage happens next week.
No matter how severe a crisis, once the dust settles, gold will always be worth something, for reasons I don't understand.
The reasons is simple: gold has specific physical characteristics which many people for a very long time have regarded as suitable for use as physical money: principally, it's durable, rare but not too rare, recognizable, and easily divisible. That widespread subjective assessment is unlikely to change.
My point is that there's nothing you can do with your money to ensure that it always has value, regardless of the magnitude of the crisis. There's always some risk. You can store your money in insured bank accounts, but we can see how well that's working out in Cyprus. You can store cash under your mattress, but high inflation will destroy its real value. You can buy gold and hoard it in your home, but there's no guarantee gold will be worth much, or that you'll even be allowed to keep it (see Executive Order 6102). You can buy land and if the state fails and thugs with bigger guns decide they want it more you're screwed. There's nothing you can do to eliminate all risk, and we're seeing now that risks we though were minimal (failures of deposit insurance schemes in the western world) aren't so minimal after all.
'fiat' metal = metal by government decree??
fiat currency is intrinsically overvalued as it is valued by decree - by the threat of legal violence if you don't use it. There are no fiat metals.
Your pessimist view is at the extreme end of the spectrum. Individual fiat currencies have eventually failed ever since they were invented. Each time a currency dies there are winners and there are losers, but it doesn't go all Mad Max - a new transactional currency is used (Zimbabwe) or they lop a few zeros off and keep going.... Well maybe the dog food eating bit of Mad Max is true for the losers whose wealth was stored in the currency that failed.
Gold has little intrinsic value (well, you can make pretty things with it), its value is what people assign to it for the purposes of trade. So it most definitely is a fiat metal. If it was something like copper, there would be some intrinsic worth, but it isn't convenient to carry around while there is only so much intrinsic demand for copper!
Gold has failed just as often as fiat currencies have. When the Spanish conquered the Americas, the natives were amused that the invaders saw value in such a useless metal, but the amount of new gold that was discovered caused significant inflation back in the old world because Spain was just sitting back, buying everything it needed with its gold, and producing little of value.
Similar things happened when Africa came online as a significant source of gold, it got to the point that gold was no longer a stable representative of value, because anybody could just mine more! So you see lots of movement away from gold throughout the 20th century to something...more stable...fiat currency believe it or not. Countries now have control over their monetary policies, for better or worse, and are not beholden to some arbitrary metal.
Stockpile the BEST fiat currency at the moment. Over 6000 years of recorded history, which has the better record, paper money or gold?
There have been limited areas and limited times where even gold has been temporarily worthless. The Venn diagram of those times/places has always been within a much larger time/place where paper money has also been useless.
This smacks of digital archiving arguments. No consumer level digital media format has ever been popular for more than a couple decades, therefore some will tell you that any digital storage is literally useless. Folks who know what they're doing just replicate/transfer into the new format every couple years. You need to do that with your fiat currency. Right now a bank account in Cyprus is looking like a pretty stupid idea. I am sure we'll be able to bracket that with times in the past / future where gold was a dumb idea... it just won't be today. Minimization of transaction/conversion cost is crucial.
Gold has some pretty serious storage costs that shouldn't be overlooked. Apparently a lot of people want this supposedly "worthless" metal. Its fairly common to see anti-gold people trying to fight both sides of the argument simultaneously, which never turns out well.
Gold standards are horrible to base your country's economy on, while you are free to invest in gold yourself, its not like there isn't lots of risk involved. Mining increases gold supplies by about 2% a year anyways (you could also invest in gold mining companies if you want to speculate).
This has nothing to do with the digital archiving argument. This has to do with whether one arbitrary store of value is more sound than another arbitrary store of value. Money has only been around for 2500 years. Before that, gold was useful because of its rarity, but we might just as well have used large rocks to store/exchange wealth (and...there was an island that did that). The mezoamericans used beads. Heck, we can even start using bitcoin, which is based on the same rarity principle of gold.
And in this case, since Cyprus was on the Euro anyways, they couldn't deprecate their currency and were stuck giving everyone a haircut. They might as well have been storing gold in those banks.
ok I get what you're saying but your use of 'fiat' to describe gold is not the right word to use. fiat means by government decree. gold is valued by people as a wealth asset - and I agree it's value only comes from the knowledge that other people will trade something in the future for it - but the mona lisa is just a bit of cloth with some paint. pretty useless yet priceless - because there are many in line would would gladly exchange their vast excess of fiat currency for it.
I'm not arguing fiat currency will disappear, it obviously won't. It's just not the correct vehicle for saving. You must not save in the same instrument of the debtors. It leads to you being wiped out when the debtors default as the credit system grows beyond the ability for it to be paid back (eg: see China's trillions of US Treasuries - those are claims that the US economy cannot and will not service).
re: Spain: It was silver that was debased not gold I think.
re: gold failed: Physical gold didn't fail. Gold backed currency failed. Governments always print more tickets to gold than they own. The last big paper gold failure was Nixon in 1974 after they overspent on the Vietnam war.
I wouldn't recommend getting into paper gold to escape a currency collapse. Physical, unambiguously owned metal is the insurance, the vehicle that will transition you through to the otherside.
> China's trillions of US Treasuries - those are claims that the US economy cannot and will not service
The biggest holder of US debt is...the US. But ok, what choice did China have? If they kept the money at home, it would have collapsed the economy, investing in US treasuries at an effective -3% was the best they could achieve and have some degree of safety. Whatever you think of the US economy, foreigners still have a lot of faith in it. Only libertarians and republicans running for office think this faith is misplaced.
Now, who gets wiped out in a US default? We do the most, actually, but maybe the Chinese and Japanese hurt a bit also. No one is expecting that to happen, and US debt levels are not particularly high compared to the rest of the world.
> Physical, unambiguously owned metal is the insurance, the vehicle that will transition you through to the otherside.
You can't take gold with you to heaven. Ah, you meant the otherside of a collapse. If the economy completely collapses, no one is producing anything of value that they can spare for trade; your metals are still worthless. The law of supply and demand remains, and you just get screwed on supply.
If you really believe in metals, however, I strongly recommend that you move to Australia if you aren't there already. They have the largest reserves, take whatever we have out of the ground now and multiply it by 10. You can just become a miner and become rich, because of course, we can eat gold can't we?
ok - won't get into US default / debt argument as we are too far apart on that. I'll just say that it is a lot more than 'no one' expecting and preparing for a failure there. It is not a mainstream view - though mainstream didn't predict the GFC either.
Yes I meant the otherside of a currency failure. They are not as rare as you imply.
If the economy collapses completely then a lot of people will die...likely me included...as I am not a farmer. So I am assuming the economy will not collapse completely. Things will muddle through. Some will fair better than others depending on their understanding of the real nature of money, trade and its history.
We can't eat gold no...but I presume most of your assets are non edible too?
PS: It wasn't me that downvoted your last comment.
If I bought land, I could develop it and make it productive, I could also invest in science to grow more food, or whatever. If we want to hedge against economic collapse, I could invest in assets that are likely to survive the collapse, or better yet, are useful in helping a recovery along. So machinery, tools, a factory, a bakery? Or just upgrade my skills a bit.
But gold just sits there and does nothing, you are at the mercy of how others value it, since it doesn't have any productive value otherwise. Just like money actually.
The fact that gold is so useless is what makes it so perfect as a sink for deferred wealth.
Savers do not infringe on anyone else. If savers decided to hoard farm land...then farm produce would go up. Bakeries...same effect. Note I'm not arguing against investment but there is a difference between investment and saving. Saving is trying to maintain purchasing power that you have earned today and want to spend in the future. Investment is the deployment of your capital at some risk in order to possibly earn a return. Your prescriptions are all investments. I'm not a skilled businessman/investor - I'm a coder that just wants to defer my purchasing power that I earned today
.
What the savers currently do is hoard currency. The thirst for currency encourages and enables large amounts of debt to be written (as debt is the largest producer of currency via bank loans) which leads to cheap credit which leads to malinvestment.
In my comment history you will see a rather long entry I reposted from ZeroHedge. It's worth a read if you want to understand this argument some more.
> The fact that gold is so useless is what makes it so perfect as a sink for deferred wealth. Savers do not infringe on anyone else. If savers decided to hoard farm land...then farm produce would go up.
True, this is also why the Chinese continue to lend to us at basically a negative interest rate. Turns out gold doesn't really work that well for sovereigns (though China is #1 or #2 in gold mining).
> What the savers currently do is hoard currency.
Or they buy treasury notes, which is a bit better on returns (but not much).
> which leads to cheap credit which leads to malinvestment.
Definitely that's what we've seen so far. In that case, we are only arguing about the validity of gold as a store of value vs. other investments (including straight currency holds). There is nothing particularly special about gold, the only difference is that mining companies can decide the rate of inflation vs. governments (but Australia...).
BitCoin is much more fair in this case as the rate of mining is basically fixed by complexity. There is not much difference between accepting someone's bitcoin vs. their gold, in either case its about trust that you can exchange the currency down the line for something else.
Diversification and multiple pots seems like the best reasonable option. At the very least, one's investment portfolio should be internationally diversified. If you were really concerned, actually holding a portion of those assets in an offshore account might make sense. Regardless, rather than trying to protect all assets, the goal would be to maximize the chances that you would always be left with at least a sufficient amount.
when credit collapses (which is what this is) then the price of things bought on credit will collapse. Real estate will not be a good store of value in the short term. Long term it is an excellent asset but don't think it will hold value though this.
Bitcoin....you have seen the volatility on it lately? And the other week the miners were all asked to rollback a recent build because the crypto broke? Bitcoin is for speculation, not wealth preservation.
> when credit collapses (which is what this is) then the price of things bought on credit will collapse. Real estate will not be a good store of value in the short term.
I agree.
> Long term it is an excellent asset but don't think it will hold value though this.
Do you expect people will stop needing roofs over their heads?
I agree that real estate seems silly. But I don't mean swapping houses. I mean buying few properties over course of your life, renting them and passing them to your children. That never was a bad strategy and fortunes of few most wealthy families come from that.
You don't care how much property costs if you never intend to sell it. You just have to find poor bloke to live there and give you better part of his pay whatever it is.
> Bitcoin....you have seen the volatility on it lately?
Sure I bought bitcoin near its peak 2 years ago just before it crashed. Guess what. Today, I'm still having a profit on them because I never sold them.
> And the other week the miners were all asked to rollback a recent build because the crypto broke?
Oh my! That surely must have cause the price to plummet! No? Huh. I guess it's not such a fragile eggshell.
> Bitcoin is for speculation, not wealth preservation.
Trading bitcoin is for speculation. Buying and holding bitcoin is wealth preservation. Bitcoin is as durable as useful p2p network. Which have pretty decent track record.
Given the young age of bitcoin then I would still suggest that buying and holding is still speculation. Good luck to you. Keep in mind though that the scale of your savings compared to others. What if Bill Gates wanted to sink some of his savings into Bitcoin? It would be a market moving event. What happens when he wants to exit?
Buying a few properties over your life at this point in time - presumably via credit is a risky proposition. People need roofs over their heads but they need food more. For an interesting perspective on property during a currency event - read Gonzalo Lira's description on Chile
>"Back in the day you'd at least get reasonable interest by keeping money in a bank, but nowadays it's really only the convenience of direct deposit and online bill pay that draws me."
Back in what day? You mean, like, 5 years ago? We're still amidst one of the worst recessions ever and rates are at all time lows. No, you don't get riskless real returns right now. But you can also borrow at exceptionally low rates. That will change in the future.
Hording physical gold outside of diversification is a bad idea. You have storage costs, pay a premium over spot when you buy it and eat a spread when you sell it. And, as another commenter said, look at its real returns; not spectacular.
Want to know what was a good buy? The stock market, 4 years ago. When everyone was screaming about the world imploding and it was at irrationally low levels. But that's just the thing: you have to be willing to zig when others are zagging.
As I said below, it would be more of an insurance policy than an investment, but I'm still willing to believe it's a bad idea for that reason as well. I don't plan on buying enough gold that it becomes a logistical challenge to store though...basically just as a buffer if things go south. Something disturbs me, especially as a hacker, knowing that the physical manifestation of a good chunk of my life's work is just bits on a bank's computer.
This does depend on where you live. In some places, mortgages are offered with "offset accounts", where your positive balance in the account offsets your outstanding debt on the mortgage, and in doing so reduces the interest accruing on the loan. This means that your excess funds effectively earn the mortgage rate of interest (and since interest avoided isn't "income", this isn't taxed as deposit interest would be either), so it's an attractive option if you have a mortgage.
This only works if you physically have the gold. Having a note stating how much gold you own, which is housed someplace beyond your reach isn't security. You are still relying on the market/bank.
And even if you did have the gold, this presents a slew of other problems; security and storage are two that come to mind.
Where else would you put your money? Keeping large sums of cash in your home is stupid and dangerous, commodities are volatile (bitcoin behaves like a commodity in this regard), real estate has high associated costs, stocks can go down as well as up.
But if everybody keeps thinking like that, in a few years time in the place of "Greece, Italy, Spain, or Ireland" you will read "Germany, France and UK".
It's just a worldwide poker game, the banks are winning and the small guys are being forced out of the table.
>If the Bitcoin crypto currency were more developed and widespread, this event could the silver bullet that would trigger the beginning of the end of the traditional banking system.
Like 90% of the past 5 years, this isn't a banking problem, it's a government problem. The IMF can suggest ways to fund a bail out, but the government has to accept it. Confiscating your citizens money is a horrible precedent.
Goverments steal purchasing power already via targeted 2% inflation. There is a precedent already - this is just a different way to skin the cat (or more to shear the sheep!)
Not really. Unexpected inflation hurts. Central banks don't hide the fact that they target positive inflation figures. If you stuff your money in a mattress, you will lose PP. Not if you put it in practically ANY investment vehicle, throughout history. Though, I get your point.
Nobody guarantees the value of your dollar earned over any period of time, nor that it won't diminish in value with the production of more dollars.
The news broke out today. All banks are closed on Saturdays except Co-operative Banks. However, even those were essentially closed today as people gathered to minimize their losses (ie, withdraw all their money from the bank).
Nobody could withdraw or transfer any money today to any account, period. No matter how much money you had.
A friend of mine, a banker, said that (he hopes that) these news are just a fear mongering attempt and that it will never pass through the parliament (scheduled for an emergency meeting on Sunday).
What I'm saying is that in theory there is nothing preventing you from "just putting their savings in bitcoin" but in practice, when you don't have cash and all your money is just numbers in a bank screen, you don't really have any savings.
The fact that the state can at any time take any percentage of your money is theft, plain and simple. It's not about being politically right or left, it's just theft and unlawful and absolutely unconstitutional. I really don't know how something like this can pass through the parliament but, at the same, I have zero trust on our politicians to act like rational human beings.
Personally, I wouldn't mind paying high taxes if I saw a real social, public, shared benefit for doing so. But paying high taxes, getting lower wages, and being ripped off so easily and without consent or even a warning is just too much.
More and more educated and skilled Cypriots are not even considering of going back to Cyprus, if they are abroad, and those who are in Cyprus are eager to figure out a way to escape.
In addition to this recent economic crisis, there's also a ton of political bullshit, fighting, and wars since the early 1900's and even before that. Unfortunately Cypriots, although a strong and proud people, were never able to grow a pair, agree on something, and fight for it.
You could avoid the risks associated with holding BTC by putting it in your mattress. Generally people say that this is a stupid idea, but it's doing 7-11% better than leaving it in a bank today.
By which I mean: Holy shit, if this isn't targeted directly at middle class and lower households and small businesses, I don't know what would be.
Also, these guys have all got to be huffing paint if they think a run on the banks won't be a direct result EVEN AFTER THE MONEY IS GONE.