Posts
Bangs
and Whimpers
Dmitry
Orlov
26
March, 2013
Quite
a few people wrote to me over the past week asking about all the
noise coming out of Cyprus. If you haven't heard, there is a
financial collapse that is unfolding there: banks are closed and
people can't get at their money. The Cypriot banks are insolvent.
This is no surprise: all banks everywhere are insolvent, and would
fail immediately were the various types of ongoing bailouts to
suddenly stop. These bailouts include an ever-longer list of annoying
financial jargon—liquidity injections, quantitative easing,
toxic-asset-purchasing by central banks, accounting tricks such as
“mark-to-fantasy,” which allows them to make bogus claims as to
the value of their assets, yadda-yadda. The point is, the financial
system failed in 2008, and stayed that way. The faulty formula behind
all modern finance is debt raised to the power of time, and only
works when there is exponential growth in economic activity and
energy. Energy's exponential growth stopped in 2005 due to resource
depletion; three years later finance collapsed. Permanently. Since
then we have been witnessing a global game of “extend and pretend,”
which cannot be played indefinitely. If something can't go on
forever, it doesn't.
Perhaps
you have also heard about the nasty Russian oligarchs who used Cyprus
as an offshore to launder their ill-gotten gains. Russian interests
stand to lose tens of billions of dollars on the Cyprus fiasco. They
were going to use that money to put their young idiots through
Harvard, snap up Miami real estate, cruise the Mediterranean in
megayachts and so on, and they probably still will. But they are not
at all happy, still sore from what happened in that other EU
offshore, Iceland, and thinking of something to do about it—something
painful, embarrassing, or both. By the way, the money-laundering
charge is just anti-Russian bigotry, which is a hold-over from the
Cold War. You see, when Apple Computer parks its cash offshore,
that's called “minimizing international tax exposure.” But when a
Russian company does it, it's called “international
money-laundering.” Cheating and stealing are the last two
competencies left in modern finance, yet when Russians do it it's
somehow considered bad? That is just hypocrisy pure and simple.
In
case anyone wants a solution to the Cyprus crisis, I have a modest
proposal. Take Cyprus out of the Eurozone and make it part of the
Ruble Zone. Pay depositors in full, in Russian Rubles. Now reprice
and sell Russia's natural gas exports to Europe in Rubles. Eurozone
would still be insolvent, but Cyprus would be fine and the Russian
depositors would be happy. Of course, Germany et al. would have to
start exporting products to Russia at a steep discount to earn the
Rubles to pay for the gas. Failing that, they could buy Rubles using
Euros, and then Russia would turn around and use them to buy gold.
What
the Cyprus crisis exposes is just the tip of the financial collapse
iceberg. Cyprus is small, far away, and by itself unlikely to crash
the entire system, but you never know—icebergs are known to flip
and crumble unexpectedly. But taking a slightly longer view, the
experience the Cypriots are going through exposes the risk of having
all of your eggs in the one basket labeled “finance.” If you want
to maximize your stupidity, keep your money in a bank or any other
financial institution. A slightly less stupid strategy is to hold
wastebaskets full of physical Dollars or Euros (which will eventually
be worth their weight in recycled paper). Less stupid still is the
strategy of holding precious metals (which will probably be
confiscated once governments become sufficiently desperate). There
are some non-stupid options as well, but if you want to learn about
those you will have to read my book (which is going to press this
week).
Speaking
of which, here is this week's excerpt:
A
likely endgame
Here
is a likely endgame for the finance and import-driven global economy.
Supposing global finance suffers another “whoopsie” à la 2008: a
“credit event,” money markets lock up and so on... This scenario
has been rehearsed once already, and nothing has been done to prevent
it from happening again except for some temporary stopgaps consisting
of national governments sopping up all the bad debt. What is
different now is that all the governments have already shot all of
their magic bailout bullets. The guilty parties are still at large,
richer than they were before this crisis and probably thinking that
the next crisis will make them even richer. The last time it
happened, President Bush the younger famously declared: “If money
isn’t loosened up, this sucker could go down,” and money was
indeed loosened up, and is getting looser all the time. But how loose
is too loose? At some point we are bound to hear, from across two
oceans, the shocking words “Your money is no good here.”
Fast
forward to a week later: banks are closed, ATMs are out of cash,
supermarket shelves are bare and gas stations are starting to run out
of fuel. Nothing useful happens when people swipe their credit cards
at the few stores that remain open (not that anyone is shopping,
except for food and ammo). And then something happens: the government
announces that they have formed a crisis task force, and will
nationalize, recapitalize and reopen the banks, restoring confidence.
In short, the government will attempt to single-handedly operate
their corner of the global economy by other means. The banks reopen,
under heavy guard, and thousands of people get arrested for
attempting to withdraw their savings. Banks close, riots begin. Next,
the government decides that, to jump-start commerce, it will honor
deposit guarantees and simply hand out cash. They print and arrange
for the cash to be handed out. Now everyone has plenty of cash, but
there is still no food in the supermarkets or gasoline at the gas
stations because by now the international supply chains have broken
down and the delivery pipelines are empty. Restarting them requires
international credit, which requires commercial banks to start
operating normally, and that in turn requires functioning supply
chains and retail.
