Bank run in Cyprus coming soon to U.S.
A banking crisis in Cyprus is the latest sudden financial shock the so-called experts never predict, but always tell us are no big deal. It is a big deal, and it’s an indicator of what’s coming to the U.S. on a fantastically larger scale.
For the last three years, the turmoil in Europe has focused on the PIIGS: Portugal, Ireland, Italy, Greece and Spain. All of these countries have significant sovereign debt problems, and as a result, bond purchasers – mostly big banks – have demanded higher interest rates than those countries could afford to pay. The reasonable thing to do when you can’t pay your bills is to go bankrupt, but if those governments went bankrupt – repudiated their debt – that would force the big European banks that finance those governments to go bankrupt as well. Nobody wanted that, so the European Union decided to bail out these governments by having the European Central Bank print more money to fund the purchase of the bonds at a lower interest rate.
Because Germany has the strongest economy, fiscal situation and banks, it’s in the driver’s seat. Other European nations hate that. Germany forced concessions on those governments, including raising taxes and slowing government growth. Most reports call that austerity, but there are no real cuts in government spending.
One interesting dynamic here is the EU would probably have allowed the governments to go bankrupt if the problem would have stopped there. The bailouts were more about saving the banks than the governments. This exposes the unholy partnership between governments and banks.
The root of the problem is fractional reserve banking. When you put your money in a bank, the bank promises to return your money to you on demand. The only way it can do that is by holding all deposits in a warehouse. But banks don’t do that. They only keep about 10 percent of their deposits as reserves, as allowed by government, thus the name “fractional reserve banking.”
Imagine if you put your furniture in a storage facility with a contract that you could remove your furniture at any time. Imagine if you showed up to obtain your furniture only to find the warehouse had loaned out 90 percent of your furniture at interest. Only 10 percent of your furniture was actually available as required by contract and the warehouse is using your furniture to make more money. This is obviously fraud. You would sue the warehouse for damages and the warehouse would face criminal sanctions as well.
This is how banks operate. Fractional reserve banking is inherently fraudulent. They’re technically bankrupt, but when government creates central banks and cartelizes the banks, legislatures legalize that fraud and technical bankruptcy in return for banks funding government debt. The reason this works for a while is people don’t typically show up and demand all their money at the same time and, unlike furniture, money is fungible. People allow this fraud to continue as long as they are confident the banks will be able to meet withdrawals. But it is inevitable that a trigger will occur and many people will want to withdraw their money at once. That trigger starts a bank run, the bank is exposed as fraudulent and the bank goes bankrupt.
Before the days of central banks, bank runs were limited to individual fraudulent banks. If there was a threat of contagion, a large bank, like J.P. Morgan, would intervene to stop the run. Consequences were localized by market forces. But because governments have organized all banks in the Western world into cartels under central banks and all are fraudulent, a bank run on one can spark a bank run on all. That would crash the economy. That’s why every talking head downplays the significance of the bank run in Cyprus. They do it to keep up people’s confidence in the fraudulent system.
The trigger for this bank run was a deal for a bailout of Cyprus bondholders brokered with the EU by the Cypriot president. The deal called for a tax on deposits in Cyprus banks. Many Russian billionaires keep their money in Cyprus banks and they don’t vote in Europe, so the EU planned to steal their money from their bank deposits to fund the bailout. But they couldn’t put the entire burden on the Russians, so they were going to tax all deposits at progressive rates. It turns out that while people will allow government to steal their money through everyday taxes and counterfeiting money, they would not stand for this naked theft of their deposits. The Cyprus parliament rejected the deal.
But the damage is done. The EU wants to steal people’s money out of their bank accounts. Money is safer stuffed in a mattress. The PIIGS have been experiencing a slow motion bank run – a bank jog – for several years. It will accelerate. And Europe can’t pretend its problems are restricted to the PIIGS anymore.
And the U.S. is in worse shape. Federal deposit insurance can’t stop it. First Europe falls. Then the U.S. falls harder.
The views and opinions expressed in Conspiracy Theorist are the views and/or opinions of the author and do not reflect the views and/or opinions of the Dayton City Paper or Dayton City Media and are published strictly for entertainment purposes only.
Reach DCP freelance writer Mark Luedtke at MarkLuedtke@daytoncitypaper.com