Yesterday I wrote how “confidence” makes the world go ’round pertaining to the banks. I want to go one step further with that train of thought. If the confidence of depositors is broken then bank runs logically follow. “Deposit insurance” is a laughable concept, just look at the FDIC. Don’t get me wrong, “insurance” makes people feel safe, so the health of your bank (any bank) doesn’t matter… until it does. The FDIC has almost exactly 1/4 cent of funds for every dollar insured. This is a 400 to 1 ratio. Any insurance company with “reserves” at this non existent level would be shut down and the executive officers sent to jail (in the old days) for gross malfeasance. Deposit insurance is factually meaningless, the only upside is that it has held “confidence” together… so far.
That said, if you can understand that the banks are truly on their own and that “insurance” will run out in the early minutes after the real “game” starts then you can make the logical leap that governments themselves are on the hook. The problem now is that these governments have already blown out their balance sheets (the ability to pay) and have only one tool available to fix any banking problems that will (are) arise(ing). This is an obvious “next step” in chain of logic. The confidence in the currencies themselves will fail. In other words, “What good is the currency issued by a bankrupt entity if the ‘full faith and credit’ of that entity is what gives the currency its value?” THIS is the next logical step that could happen in a nanosecond when it occurs. It will occur.
I found it quite humorous (sad really) that guest after guest yesterday completely pooh poohed the significance of Cyprus. Larry Fink of Black Rock said “I don’t really care, it’s really not something of concern”. Huh? Is that because $10 billion is chump change? Other guests just talked about the “strength” of the economy, earnings and the stock market, nothing matters other than the STOCK MARKET. I seem to remember other times in history similar to now when “nothing mattered” because the stock market was “up.” Like Oct. 1929 and 1987, Jan 2000 and again in Oct. 2008. Those, as now were Alfred E. Neuman moments in history; “What, me worry?” There is a minor difference… never in the past were most all sovereign governments mathematically bankrupt and insolvent.
Today we await the Fed’s meeting and people are saying things like “fundamental improvement of the economy” and talking about the Fed starting to withdraw or begin its “exit plan.” Hello? Can the Fed really pull the plug and shut off the life support machine? Not even possible, no, it will NEVER be possible because of one minor detail, that the Treasury must sell their bonds… to someone… and that ONLY someone is now the Fed!
Please do not be fooled or lulled to sleep now. The Cyprus situation is as big (or actually bigger than) as Lehman Bros. was back in 2008. “Size” doesn’t matter, this is about confidence, trust and intentions. The potential for a global bank run exists. The potential for the “West” (the IMF) to lose face and thus credibility has never been higher since 1944. Behind all of this is the “confidence” in the dollar itself which will crumble. Like I said yesterday and over the weekend, this situation is 100% “pregnant” and cannot be undone. The West showed their hand, they showed their intent, they plan to steal depositor monies and the rule of law is not a matter of concern. Foreigners are not stupid (Americans are not stupid either, they are merely lulled into a deep sleep because “the government will never let anything bad happen” syndrome), they WILL move their monies (otherwise known as running the bank). Nigel Farage advised Brits yesterday to “Get your money out while you can.”
We are now in the last hands of the biggest high stakes poker game in history. This is for ALL the marbles, power and riches of the world. Cyprus is a teeny tiny almost insignificant country in Europe. It does however have huge symbolism and now apparently “leverage.” They have the power to blow up the entire EU by leaving it as others will follow. They have the power to slap, embarrass and rend powerless the West by doing a deal with Russia. The world will soon find out whether the music just stops suddenly in bank runs or whether central banks turn up the printing presses into hyperdrive. Either way, having assets outside of the system and in real money is your best bet!