Pop quiz: can you find Cyprus on a map?
I hope so, because they just became the first volley in what will turn out to be the final showdown of the 2008 financial crisis.
If you haven’t heard, Cyprus recently agreed to a bailout from the EU Central Bank. On the surface, this sounds like run of the mill bankster smoke and mirrors. Shift the money around, print tons more of it, keep the ball rolling, and hope no one notices. Well, someone just noticed, and just remember, you heard it here first on Enwealthen.
The surprise in the bailout is that Cyprus will be confiscating 7% to 10% of all bank accounts in the country. As if 0% interest rates around the world weren’t bad enough, now depositors are being punished for being stupid enough to save money, and then trusting the bank with their savings.
These aren’t just investor accounts or business accounts, but all accounts, including the ones of Ma and Pa Kettle just hoping to squirrel away a few Euro for a rainy day. Moreover, no account is safe, even the ones fully insured by Cyprus’ version of FDIC insurance will be garnisheed. Raniy day? Well, it’s pouring now, Ma.
Granted, Cyprus is apparently overrun with Russian oligarchs stashing their squeaky clean laundered millions away from public view. So there is not much public outrage spreading in Europe. It’s more of a panicked silence like a rabbit crouched in its burrow after hearing the first snap of the twig underfoot of an approaching bear. Everyone who has been paying attention knows there are only a few ways this is going to end, and all of them are ugly.
As an American, can you imagine waking up one morning to the news that Washington has just seized 10% of your savings? What would you do? That’s right, go down to the bank and immediately withdraw all your money, a.k.a a run on the bank. Due to fractional reserve banking, there is never enough money in a bank for all its account holders to withdraw all their money. So this results in the bank shutting down, either temporarily as a “bank holiday” or permanently.
In the time of the Great Depression, this was a common occurrence – rumor of a bank in trouble would spread, and the resulting run would close the bank, even if it weren’t in fact in trouble. Latest news from Cyprus is that Monday is already a public bank holiday, so all banks are closed, but the holiday has already been extended to Tuesday, in an attempt to forestall and prevent this run. They will fail.
Here in the United States, we have FDIC insurance that ensures that as a depositor in the bank, you receive your money back, even if the bank fails. In theory, this prevents runs on the bank since people will trust that they will receive their money even if the bank fails. However, if it’s the government stealing money, how can you trust them to ever give it back? It’s only a matter of time before all the banks in Cyprus are empty.
The only remaining question is how quickly will the banks in Cyprus fail, and how quickly will it spread to other countries. Spain is in trouble, and could be the next of the PIIGS. And once it spreads into the rest of the Eurozone, how quickly will it appear here in the United States? Only time will tell. However, if you haven’t already, now would be a good time to spread your risk a bit, perhaps diverting funds from your 401k or IRA into some physical assets such as real estate or precious metals. Stealing money is easy, but stealing property takes a little more work.
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What do you think? How will the Cyprus situation play out? How and when will it spread?
Photo of bank run courtesy of Wikimedia.