Revisiting The Greatest Crash In History

Submitted by Tyler Durden on 01/06/2016 09:50 -0500
http://www.zerohedge.com/news/2016-01-06/revisiting-greatest-crash-history
Submitted by Pater Tenebrarum via Acting-Man.com,

A Historically Unique Event

We keep watching what is happening in Cyprus with morbid fascination. As a reminder, the unhappy island was the first major “haircut” victim in Europe. Its bankers, who had flagrantly over-traded their capital and won prizes for running “the best banks in Europe” along the way, erroneously believed the repeated promises of assorted EU commissars that Greece would never – never! – be allowed to go bankrupt. Consequently they stuffed their balance sheets to the gills with supposedly risk-free Greek government bonds, only to eventually see them get “haircut” twice in a row.

Desperate depositors queuing in front of Laiki Bank, the second largest Cypriot bank, which was eventually wound up

With their capital thus depleted, the banks became dependent on “ELA” funding from the ECB in order to pay depositors who wished to withdraw their money. So as to avoid a panic, the Cypriot government and the EU lied for months to the customers of these banks, assuring them that their deposits were perfectly safe. This inter alia gave the friends and families of well-connected politicians and oligarchs (including close family members of the then president of Cyprus) the opportunity to get all their money out before the curtain came down.
Citizens of Cyprus would have done well to inform themselves about the fraudulent nature of fractional reserve banking. Many might perhaps have been able to avoid what happened next: they were expropriated overnight in an act of confiscatory deflation.
Note here that we are not saying bank depositors should not bear risks, nor are we saying that they should be bailed out by taxpayers. In fact, we cannot offer an alternative to what happened, except perhaps to state that if any bank-related bailouts are implemented (such as the ongoing ECB QE program), depositors should ideally be first in line to partake of the central bank’s largesse. We mainly want to point to the fact that depositors were lied to about these risks all along, which vastly reduced their chances to save their hard-earned money while it was still possible to do so.
We have kept a close eye on the stock market of Cyprus, and lo and behold, it made a new all time low in late 2015:

The Cyprus stock market has declined by 99.986% – of every 100 euro invested at the peak, a mere 0.014 euro are left. In other words, 100 euro have been transformed into just 1.4 cents – click to enlarge.

In order to fully grasp the extent of this devastation, consider the following: had you bought the market after it had declined by 90%, you would quickly have lost another 90%. Had you bought after it had declined by 90% twice, you would just as quickly have lost almost another 90%. So since 2007, this market has seen three consecutive declines of 90%. As far as we know this is unparalleled. If there had been a stock market in the Roman Empire, it might have done something similar around AD 400 – AD 500.

Boom, Bust and the Money Supply

As we have frequently pointed out, euro-area wide money supply is growing at an astonishing pace thanks to the ECB printing money 24/7 of late. The most recent annual change rate of the narrow money supply M1, which is the aggregate that most closely resembles money TMS (true money supply) stands at around 14% (a few items are missing from this measure to make it fully comparable to TMS, such as deposits owned by non-residents. However, adding them would probably have little effect on the rate of change).

Euro area M1 (demand deposits and currency) – roughly equal to TMS. Thank God the central bank provides such admirable “stability” (as indicated by the line in blue, which looks a bit like the EKG of a heart attack victim). Since 2012 money supply growth has gone “parabolic”. This isn’t going to end well – click to enlarge.

However, this aggregate statistic actually masks the extremely uneven distribution of money supply growth across the euro area. For instance, Germany’s money supply has increased by approximately 125% since 2008. Countries that have been hit by severe banking and economic crises – particularly Greece and Cyprus, in both of which the commercial banking system has essentially collapsed – have seen their money supply nosedive in the same span.
In order to illustrate this, we have charted the amount of deposit money extant in the Cypriot banking system since 2008. After the initial crisis in 2008, Cyprus “benefited” from the inflationary push the ECB implemented in 2009-2010 in the form of LTROs. When these LTROs began to be paid back and euro area-wide money supply growth screeched to a halt in 2011, the Greek and Cypriot crises not surprisingly went into overdrive. All the losses that had been masked by monetary inflation up to that point suddenly became obvious.
After the decision in favor of a depositor haircut in Cyprus had been made, the country’s deposit money supply collapsed by about 44% over the ensuing two years, with the bulk of the decline occurring in 2012. Since then, it has essentially flat-lined:

Deposit money in the banking system of Cyprus: total (in red), the portion owned solely by residents in black. Total deposit money is still down more than 40% from the 2011 peak – click to enlarge.

However, prior to the bust, the money supply of Cyprus was growing immensely – which explains the unhealthy artificial boom that ruined the island’s economy. The responsibility for this is equally shared between the country’s reckless banks and their new “lender of last resort”, the ECB. The central planners had suppressed interest rates to a level they thought appropriate for Germany, which was long held to be Europe’s “sick man”. These rates were however highly inappropriate for Europe’s periphery.

Cyprus, M1 during the boom years – going gangbusters – click to enlarge.

In case you’re wondering: M1 is no longer reported separately by the Central Bank of Cyprus, so we had to make do with piecing together extant deposit money as a reasonable proxy for the Cypriot money supply.

Cyprus Shows us Why the Fiat Money System is Doomed

This brings us to our point: what this inter alia shows us, is how strongly asset prices depend on monetary inflation. The stock market of Cyprus rose nearly six-fold from 2003 to 2007 – exactly the time when money supply growth started to go “parabolic”. This was not the result of business getting “six times better” in any sense. It was simply a reflection of money printing.
Now consider what a roughly 44% decline in the money supply has led to: a 99.986% collapse in stocks prices. Given that stock prices can be used as a proxy for the trend in asset prices in general, a lot of the collateral backing loans in Cyprus is likely worth far less than the outstanding debt it supposedly covers. Indeed, house prices in Cyprus have declined with nary an interruption since 2008 as well (recently a small bounce could be detected) – albeit to a far smaller extent than stocks. Still, the housing bubble that was a notable feature of the boom years has essentially been wiped out as well.

Cyprus house price index: declining for almost seven years, which has wiped out nearly all the price gains made in the “parabolic” stage of the bubble – click to enlarge.

In fact, the events in Cyprus, Greece and more recently Puerto Rico reveal a harsh truth: nearly all the socialist regulatory welfare/warfare states of the West are in reality bankrupt. The only thing holding up the charade is the fact that central banks are able to create nigh unlimited amounts of money from thin air. As soon as a country or a self-governing region no longer enjoys a central bank backstop, it is game over.
This leaves only very little by way of choices. Look again at the chart of the euro area money supply above, or a recent chart of US money TMS-2. What would happen if these money supply measures were to deflate, or merely stop growing?
Just as in Cyprus, asset prices would decline to reflect such a deflation – and these price declines would have to be expected to be very pronounced, given the extent of monetary inflation that has already occurred and the degree to which asset prices have been disproportionately affected. Stocks are titles to capital, and these price distortions have also affected capital goods.
This would in turn lower the value of much of the collateral supporting outstanding bank loans. The monetary system would likely suffer a deflationary implosion. This wouldn’t be a bad thing per se, even though it would be quite disruptive. After all, the existing real capital would continue to exist. Not a single factory would cease to exist if the money supply somehow declined. Only prices would change, and ownership of real capital would in many cases change as well.
Moreover, the essential insolvency of the system, including the insolvency of the governments running today’s welfare/warfare states would be revealed, and a lot of unproductive and wasteful activity would cease by necessity. Unfortunately, just as has happened in Cyprus, many innocent and hitherto prudent bystanders would become victims of this economic disruption as well.
Our guess is that the powers-that-be simply won’t let that happen, so they will be “forced” to take option two: they will keep inflating, and very likely at an ever more accelerating pace. In the end this will be even more destructive, although it will keep buying time for a while, just as it has since 2008.
Government and central bank officials will naturally choose the “buying time” option, hoping that the really big problems won’t materialize on their watch, but rather on that of their successors. In that sense, Ben Bernanke has timed his exit from the Fed exceedingly well.

Conclusion

The modern debt money system has a limited life span and it cannot stand still. The problem is that with every iteration of the boom-bust cycle, more real wealth is destroyed and more obstacles to the creation of real wealth are erected.
Hapless governments desperately try to squeeze blood out of a turnip by taxing and regulating the private sector to death, while central banks keep promoting monetary inflation. At some point the limit to this game will be reached – and the longer it takes to get to that point, the more devastating the eventual denouement will be.
We don’t see it as our task to offer a solution – with respect to that, we can only reiterate that a return to an unhampered free market system is the only way out, painful as it may initially prove to be. We know however that modern-day governments will simply not go down this path, as it would involve a vast loss of power for them.
All we can do is point out the risks, so that people can at least prepare on an individual level. A major lesson everybody should take to heart from the Cyprus experience is this: when the next crisis strikes, do not believe any of the promises uttered by government or central bank officials. You will be lied to in the critical moments, and you could stand to lose a lot if you believe the lies.
You don’t have to take our word for it: just ask anyone in Greece or Cyprus what they got for believing their deposits were safe.

Why Government Hates Cash

Submitted by Tyler Durden on 08/24/2015 20:10 -0400
http://www.zerohedge.com/news/2015-08-24/why-government-hates-cash
Submitted by Joseph Salerno via The Mises Institute,
In April it was announced that Greece was imposing a surcharge for all cash withdrawals from bank accounts to deter citizens from clearing out their accounts. So now the Greeks will have to pay one euro per 1,000 euros that they withdraw, which is one-tenth of a percent. It doesn’t seem very big, but the principle at work is extremely big because what they’re in effect doing is breaking the exchange rate between a unit of bank deposits and a unit of currency.
Why would they do this? Why would they want to do this? Well, it’s one of the anti-cash policies that mainstream economists have vigorously been promoting.

PAVING THE WAY FOR NEGATIVE INTEREST

To make the calculations easier, and to illustrate the effect, let’s say that the Greek “surcharge” is ten dollars for every 100 dollars withdrawn. Now, instead of being able to convert one euro in your checking account into one euro in cash, on demand, you will only be able to buy one euro in cash by spending 1.10 euros in your bank accounts. That’s a negative 10-percent rate in some sense. That is to say that you can only take out one euro from the bank if you’re willing to pay 1.10 euros. So, you would only really get ninety cents for every dollar that you wanted to withdraw and that’s very significant because this means it will be more expensive to buy an item with cash than with bank deposits.
At the same time, the Greek government made it very clear that if you deposit the cash in the banks, you don’t get 1.10 euros of bank money for every euro you deposit.
So the system is now structured to lock the money in the banks. Now, what does that allow them to do? If you lose 10 percent every time you withdraw one euro in cash, they can lower the interest rate that you get on bank deposits to negative 5 percent, or negative 6 percent. You still wouldn’t withdraw your cash from the banks even if the interest rate went negative.
What we are witnessing is a war on cash in which governments make it either illegal or inconvenient to use cash. This, in turn, allows governments the ability to spy on and regulate financial transactions more completely, while also allowing governments more leeway in manipulating the money supply.

THE ORIGINS OF THE WAR ON CASH

It all started really with the Bank Secrecy Act of 1970, passed in the US, which requires financial institutions in the United States to assist US government agencies in detecting and preventing money laundering. That was the rationale. Specifically, the act requires financial institutions to keep records of cash payments and file reports of cash purchases or negotiable instruments of more than $10,000 as a daily aggregate amount. Of course, this is all sold as a way of tracking criminals.
The US government employs other means of making war on cash also. Up until 1945, there were 500 dollar bills, 1,000 dollar bills, and 10,000 dollar bills in circulation. There was even a 100,000 dollar bill in the 1930s with which banks made clearings between one another. The US government stopped issuing these bills in 1945 and by 1969 had withdrawn all from circulation. So, in the guise of fighting organized crime and money laundering, what’s actually occurred is that they made it very inconvenient to use cash. A one hundred dollar bill today has $15.50 worth of purchasing power in 1969 dollars, when they removed the last big bills.

THE PROBLEM IS INTERNATIONAL

The war on cash in Sweden has gone probably the furthest and Scandinavian governments in general are notable for their opposition to cash. In Swedish cities, tickets for public buses no longer can be purchased for cash; they must be purchased in advance by a cell phone or text message — in other words, via bank accounts.
The deputy governor of the Swedish Central Bank gloated, before his retirement a few years back, that cash will survive “like the crocodile,” even though it may be forced to see its habitat gradually cut back.
The analogy is apt since three of the four major Swedish banks combined have more than two-thirds of their offices no longer accepting or paying out cash. These three banks want to phase out the manual handling of cash at their offices at a very rapid pace and have been doing that since 2012.
In France, opponents of cash tried to pass a law in 2012 which would restrict the use of cash from a maximum of 3,000 euros per exchange to 1,000. The law failed, but then there was the attack on Charlie Hebdo and on a Jewish supermarket, so immediately the state used this as a reason for getting the 1,000 maximum limit. They got their maximum limit. Why? Well, proponents claim that these attacks were partially financed by cash.
The terrorists used cash to purchase some of the stuff they needed. No doubt, these murderers also wore shoes and clothing and used cell phones and cars during the planning and execution of their mayhem. Why not ban these things? A naked barefoot terrorist without communications is surely less effective than the fully clothed and equipped one.
Finally, Switzerland, formerly a great bastion of economic liberty and financial privacy, has succumbed under the bare-knuckle tactics of the US government. The Swiss government has banned all cash payments of more than 100,000 francs (about $106,000), including transactions involving watches, real estate, precious metals, and cars. This was done under the threat of blacklisting by the Organization of Economic Development, with the US no doubt pushing behind the scenes. Transactions above 100,000 francs will now have to be processed through the banking system. The reason is to prevent the catch-all crime, of course, of money laundering.
Chase Bank has also recently joined the war on cash. It’s the largest bank in the US, a subsidiary of JP Morgan Chase and Co., and according to Forbes, the world’s third largest public company. It also received $25 billion in bailout loans from the US Treasury. As of March, Chase began restricting the use of cash in selected markets. The new policy restricts borrowers from using cash to make payments on credit cards, mortgages, equity lines, and auto loans.
Chase even goes as far as to prohibit the storage of cash in its safe deposit boxes. In a letter to its customers, dated April 1, 2015, pertaining to its “updated safe deposit box lease agreement,” one of the high-lighted items reads, “You agree not to store any cash or coins other than those found to have a collectible value.” Whether or not this pertains to gold and silver coins with no collectible value is not explained, but of course it does. As one observer warned, “This policy is unusual, but since Chase is the nation’s largest bank, I wouldn’t be surprised if we start seeing more of this in this era of sensitivity about funding terrorists and other illegal causes.” So, get your money out of those safe deposit boxes, your currency and probably your gold and silver.

ONLY (SUPERVISED) SPENDING IS ALLOWED

Gregory Mankiw, a prominent macroeconomist, came up with a scheme in 2009: the Fed would announce that a year from the date of the announcement, it intended to pick a numeral from 0 to 9 out of a hat. All currency with a serial number ending in that numeral, would instantly lose status as legal tender, causing the expected return on holding currency to plummet to -10 percent. This would allow the Fed to reduce interest rates below zero for a year or even more because people would happily loan money for say, -2 percent or -4 percent because that would stop them from losing 10 percent.
Now the reason given by our rulers for suppressing cash is to keep society safe from terrorists, tax evaders, money launderers, drug cartels, and other villains real or imagined. The actual aim of the ?ood of laws restricting or even prohibiting the use of cash is to force the public to make payments through the financial system. This enables governments to expand their ability to spy on and keep track of their citizens’ most private financial dealings, in order to milk their citizens of every last dollar of tax payments that they claim are due.
Other reasons for suppressing cash are (1) to prop up the unstable fractional reserve banking system, which is in a state of collapse all over the world, and (2) to give central banks the power to impose negative nominal interest rates. That is, to make you spend money by subtracting money from your bank account for every day you leave it in the bank account and don’t spend it.