Are we there yet?

18 03 2013

A couple of years ago, I wrote a post with exactly the same title as this one, regarding whether we were at Peak Oil or not……  Well this one is about Peak Debt….. and the reason I’m writing it is that a momentous event in a tiny place with a population of just 1.1 million called Cyprus happened overnight, which could have enormous repercussions for the global economy……

One of John Lennon’s most pertinent lyric in a whole lifetime of song-writing this morning is “I read the news today, oh boy”…..

Traders braced for market turbulence amid bailout chaos in Cyprus

A Cypriot parliamentary vote on the proposed €10bn (£8.6bn – AU$12.5bn) international bailout, which also includes plans for a raid on bank deposits, is expected to be held on Monday. President Nicos Anastasiades said the bail-out was “painful” but necessary to avoid a “disorderly bankruptcy”.

Christopher Pissarides, a Nobel Prize-winning economist and chairman of the government’s economic advisory committee, warned that the island’s fragile economy would collapse within “two or three days” if the legislation was not passed.

What I want to know is, how many days will it take to collapse the economy if a bank run occurs?  Monday (local time) is a bank holiday.  Coincidence?  You tell me…..  but apparently there are queues at the ATMs in Nicosia already.  If this doesn’t cause a run on the banks, I don’t know what will.  It’s not even inconceivable that a run on banks in all the PIIGS nations of Europe could start over the next few days.

Steve Keen believes the EU has thrown Cyprus to the wolves.  In Business Spectator, Steve eurowrites

If there was one lesson that I thought the world had learnt from the Great Depression, it was the need to guarantee depositors’ funds. So much for that fantasy. Now the EU has shown that its obsession with austerity has gone so far that even this historical wisdom has been abandoned. Not only are depositors’ funds not guaranteed, they are being lost even in banks that have not (yet) failed.

So who will have confidence in banks, any bank, after this?  Is the money even there to be withdrawn…?  Steve Keen thinks not……

The public will be waiting a while: the cash currently simply doesn’t exist. Currency constitutes only a tiny percentage of the aggregate money supply – whether defined as that found in bank at-call cheque and savings accounts (M2), or including term deposits and other not-at-call accounts (M3). If everyone wants it, then only one in twenty will get it, if Europe’s figures are at all comparable to America’s (see figure 1). That’s why a collapse in confidence in deposits is called a bank run: only those who run first to the bank get their money.

Graph for The EU has thrown Cyprus to the wolves

Now most people have no idea that their money is not in the bank at all…..  and when the word gets out that if you want your dough right now,  you won’t get it, there will be some seriously pissed off people outside the banks…!

The Matrix utterly relies on confidence.  We are all (well mostly…) confident that because it is printed on a ten dollar note that it is actually worth ten bucks, then it must be.  It’s labelled legal tender even…..  what could go wrong?


For starters, it appears a lot of Russians, wealthy ones one could reasonably expect, have been using Cypriot banks as safe havens for their Rubles.  Silly Ruskies…  But as that favourite show of mine (The Gruen Transfer) has been asking, “what would Putin do?”  I doubt he’ll be taking this lying down…..  the British government has already said they would rescue any armed services personnel in Cyprus who loses money over this…  The repercussions could be very unpleasant.  The stock market has already taken a 2% hit, though that sector of the economy goes up and down every time I sneeze…  The best the rest of the world can hope for is that Cyprus is sufficiently unique that it won’t spark panic in Athens and Madrid or in Lisbon, Dublin and Rome.  I know people taking their money out of Aussie banks today…..  not kidding.