A Tipping Point In The Financial System – Part 2

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tipping-point

March and April 2013 may go down in history as the tipping point for the western financial system. In fact, it might well have been April 4, 2013. Grant Williams makes a persuasive case. Link.

Read Part 1 of this tipping point discussion.

Cyprus and So Much More Happened. So What?

  • Insiders moved billions of Euros out of Cyprus banks before the bank holiday and after the banks closed, via branches in London and Russia.
  • Confiscating depositor money is planned for future European bank failures, and Canada, the United States, and New Zealand have similar plans. Those plans may, or may not, be executed.
  • Confidence in the safety of banks has been drastically reduced because people realized that deposits in a bank are liabilities, NOT as safe as expected, and easily confiscated.
  • The Bank of Japan announced a very aggressive “money printing” strategy that is likely to end badly.

Why Might This Be a Tipping Point?

Desperation, TBTF bank fears, dollar weakness, a banking catastrophe, “extend and pretend,” panic, derivatives, and greed are high on the list.

Dr. Paul Craig Roberts: “The fact that the Federal Reserve is short selling bullion means that there is something desperate going on, and I assume it’s related to the US dollar. If the dollar drops sharply in exchange value the Fed can’t control the interest rate and the bond price and so all of the bubbles would blow up.

“All of the recent reports of countries moving away from the dollar to settle their international payments have most likely caused a great many countries to look at getting out of dollars. We not only have the BRICs moving away from the use of the dollar, but also China, Japan, and all of the East Asians.

“Recently we have even seen reports out of Australia that they are going to deal directly with China in their own currency. So this drop in demand for dollars when the Fed is creating one trillion new dollars every year means the exchange value of the US dollar is untenable.” Link.

Dangerous Scare Tactic?

Jim Sinclair suggested this could also be a scare tactic to push money out of Too-Big-To-Fail banks and into the economy, stock and bond markets. He said: “So it seems we have a last ditch effort to change the effects of QE, where we have only gotten a sideways movement in economic indicators to some sort of an uptrending line. It’s a huge gamble because if it doesn’t significantly impact the economy, it will clearly weaken the banks which are already weak in the first place… The reason it will weaken the banks is if the banks lose deposits of cash and near cash deposits, the strength in assets of the bank are reduced while the liabilities remain the same. So this is a huge gamble, an attempt to resuscitate the economics around the world with the risk that they are setting up another banking crisis…” So the catastrophic danger here is if the central planners fail they will have totally run out of tools and this thing will implode because they will have inherently weakened the banking system at the most inopportune time. This is one of the most dangerous and potentially fatal gambles in history.”

The Dollar

Other countries are reducing the use of the dollar for international exchange, each round of QE seems less effective at stimulating the economy and employment, the bond market is propped up by massive purchases from the Fed, while the Fed’s QE increases consumer prices. This keeps interest rates low but weakens demand for the dollar. Depositors are encouraged to pull their money out of an already shaky banking system by slamming them with the realization that a bank failure will be an invitation to confiscate and/or freeze their deposits.

Risky Banking System

The banking system is risky because it is highly leveraged and holding many assets of dubious value. How much is a Greek bond worth? For that matter, how much is a bond issued by the Italian or US government worth? It might be worth face value until confidence erodes and investors act upon the fact that sovereign debt will never be repaid – only “rolled over” and exponentially increased. These debt increases can continue for a while, but not forever. At some point, confidence fades and the value of those bonds and the underlying currency weakens. Central banks and governments are desperate to “extend and pretend” that bonds and derivatives supposedly worth trillions of dollars are real and safe.

Doug Casey: “All banks are in effect creatures of the state at this point. They all own a lot of government bonds, which are considered the most secure form of capital. Of course, that is the opposite of the truth; all these governments are bankrupt as well. The Greek government is just more overtly bankrupt than most.” Link.

Extend and Pretend – Bonds and Asset Bubbles

Do economists, central bankers, and governments really believe that printing money creates wealth and prosperity? I doubt they do, but they do know that printing money helps the “extend and pretend” confidence game, and it allows an increasingly unstable system to persist for a little longer. When does it stop? If banks were healthy, would QE be needed? If governments were financially sound, would their debt be forever increasing? If the dollars we use are safe and stable, why do gasoline, gold, cigarettes, and food cost many times more than they did in 1971 when Nixon defaulted on US promises to redeem dollars for gold?

Clearly, the money supply is expanding, prices are increasing, government expenditures are out of control, and QE is a tool to bail out banks and profligate governments. Inflate or die! Perhaps both!

Grant Williams: “Whether it’s Kuroda or Greenspan or Bernanke or King — or one day soon Draghi — there is NEVER any concern about asset bubbles on the part of these people; and yet there has been an asset bubble somewhere in the investment universe pretty much constantly for decades — essentially since the effective dismantling of the gold standard in 1971. Each bubble has burst more spectacularly than the last.

“Now we are giddily inflating the greatest bubble of them all: the government bond market.

“No matter what Paul Krugman says, you cannot print your way to long-term prosperity; and, given the sheer size and scale of this worldwide monetary experimentation, I can assure you it will end very, very badly indeed.”

“Whatever happens now in Japan, April 4th, 2013 is going to be remembered as a date when a line was crossed and things changed forever.”

Goldmoney: “Depositors are learning that governments, acting in the name of the tax-payer, will do anything for their own survival, debasing savings to cover state spending and now raiding deposits to maintain the status quo.”

Panic and Derivatives

Egon von Greyerz: “So the panic will be of a magnitude that no one can understand today. This will lead to destruction of paper currencies. It will also lead to precious metals going up dramatically as they will ultimately reflect the destruction of the paper currencies. There are two ways for people’s savings to disappear: It can be stolen by investors or depositors having to take massive cuts. The money can also be stolen or destroyed through endless money printing. This money printing is absolutely guaranteed in the future…What is clear is that the world has been living above its means for a very long time. What we have seen has been the result of printed money and a massive increase in credit. This is why much of what we have seen is not real growth, and therefore the wealth is not real wealth. This is why the current system cannot last.” Link.

Jim Sinclair: “Depositor money, brokerage money, and clearing house money have been tangled up in the mountain of derivatives as the banks have used this cash to speculate in an attempt to make huge bonuses for bank executives. Unfortunately, most have lost their ass. This means that in many cases depositor money has already been wiped out…So, clearly our central banks are now very uncomfortable. They are worried about something of significant size which has yet to be revealed to the public. I guarantee you that whatever it is will have to do with the derivatives created between 1991 and 2007… We will also witness the beginning of a level of fear and panic not seen in this world since 1929.” Link.

“John Rubino believes that a derivative meltdown will play out almost instantaneously. When one big bank faces some kind of trouble and fails, the banks with the largest exposure to derivatives (think JP Morgan, Citigroup, Goldman Sachs) will realize that the bank on the other side of the derivatives trade (the counterparty) is no longer good for their obligation. All of a sudden the hedged position becomes a naked position. The net position becomes a gross position. The risk explodes instantaneously. Markets realize that their hedged positions are in reality not hedged anymore, and all market participants start bailing almost simultaneously. The whole banking and financial system freezes up. It might start in Asia or Europe, in which case Americans will wake up in the morning to find out that their markets are not functioning anymore; stock markets remain closed, money at the banks becomes inaccessible, etc.” Link.

It can happen in the United States or Europe, and it can happen rapidly. I’m NOT suggesting it will happen this month or this year, but I do think we have reached a tipping point whereby the risk of a crisis in confidence and the risk of a banking and derivative collapse have substantially increased. If a financial collapse occurs, then some or all of the following should be expected:

  • Stock market crash
  • Bond market crash
  • Bank runs and bank holidays
  • Credit crunch
  • Massive money printing by the Fed and other central banks
  • Many more individual and corporate bankruptcies
  • Many more cities, states, and pension funds in financial trouble
  • Possible wage and price controls
  • Increasing unemployment
  • Much higher prices for gold, silver, and other commodities
  • Government will “do something,” and it will not help anyone but the financial and political elite and large banks.
  • Social unrest.

Arguing AGAINST such an imminent collapse is the record of central banks and governments printing and pumping money into the system to “extend and pretend” for a while longer. They have held back the forces of financial chaos, and they have delayed the consequences of bad monetary policies for a very long time. Perhaps Quantitative Easing and depositor confiscations can continue “extend and pretend” for several more years.

But if not, are you prepared? Do you own gold and silver outside the banking system as your personal insurance against such a financial collapse?

Summary

GE Christenson
aka Deviant Investor

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