Category Archives: Economy and Meltdown

Guest Post: How Big Is The 'Bailout' Of Cyprus (Hint: Trick Question)

Authored by Antonis Polemitis and Andreas Kitsios, originally posted at Cyprus.com,

Most publications talk about the 10B or 17B Cyprus bailout.   Let’s take a pop quiz on the right answer:

(a) 17B Euros (89% of GDP)

(b) 10B Euros (52% of GDP)

(c) 2.5B Euros (13% of GDP)

(d) -3.0B Euros (-15% of GDP)

(e) -7.5B Euros (-39% of GDP)

Now let’s work through the answers, in steps:

 

(a)  The 17B figure was calculated assuming the bailout would provide 7B for the banks.    The final number provided not a single Euro for the banks who were asked, against the approach taken in the last 147 banking crises worldwide tracked by the IMF, to find the whole 7B out of their depositor base.   So, part (a) is wrong.


(b) The remaining 10B is described as a bailout of the government.  Of this 10B however, 7.5B is being used to refinance maturing debt.

This debt, I would guess, is mostly at this point beneficially held by ECB.   This is just an assumption, but we know that 75% of it was held domestically, largely by the banks.   This was probably the first collateral pledged by the banks via the ELA, so ultimately if the Central Bank and the government default it will ultimately fall on the ECB’s balance sheet.   The 25% is probably traded internationally and, again outside of Cyprus hands.

So, the 7.5B is being lent to Cyprus in order to be paid right back to Europe.   That is not charity, that is ‘hiding their embarrassing losses until later when someone else is in office’.    If moral hazard requires clueless Cypriot retail depositors to pay for their banks’ decision to lend to the insolvent Greek government, then presumably it also applies to the financial wizards at ECB that lent to the insolvent Laiki, despite having full access to their financial information.

That leaves 2.5B of fresh financing for the government which I will concede is new money, though until we see the Memorandum and the terms under which we receive this money, I am not too excited about it.    Cyprus could raise this amount domestically so long as it did not have to do it overnight (which it does not – it is to fund deficits over the next few years).

 

(c) Does that mean that 2.5B is the right answer?  Not really, see below.

 

(d) At least 5.5B of the ELA taken by the banks (I suspect it is more) was for losses in the Greek branches of the Cyprus banks.    These branches have 15B of deposits that presumably could have also been haircut, along with the Cyprus-based deposits, to make up for the losses. Yet, under tremendous time pressure, they were sold to a Greek bank (very suspicious), while the liabilities (the ELA) stayed in Cyprus and are now, beyond all logic, is being #b85b5a; text-decoration: none;”>transferred to the Bank of Cyprus.

We can call this: “Cyprus Contribution To Recapitalization of Greece, Part II”.    And since Greece is insolvent and illiquid without EU assistance, it is really assistance to the EU.

Given that, it is perfectly fair to subtract it from the EU’s assistance back to Cyprus.   That takes us to -3B

 

(e) The Greek PSI (write off of Greek government debt, implemented by the EU) impacted Cyprus, as Greece’s neighbor, in a wildly disproportionate manner.   Cyprus banks took 4.5B in losses there.

One could have imagined a solution at the time that partially compensated Cyprus for these losses.  In any case, it was a contribution by Cyprus in reducing Greek public debt and given Greece is backstopped by the EU, it reduces the EU debt load, so that is how we get to -7.5B.

Cyprus has certainly contributed to Greece’s bailout on a per-capita basis at a level vastly exceeding any of the nations that are putatively suffering from “bailout fatigue”.   Cyprus, voluntarily or not, has contributed around 5% of the Greek public and private debt reduction, despite being 0.2% of the European economy, so a rate of 25x the European average, plus or minus.

 

The apparent “thank you” from the EU, is to try to talk down the main basis of the Cyprus economy (financial services) and aim to destroy the rest of the otherwise fairly healthy Cyprus economy by sucking all liquidity out of the system, literally overnight.

I would grade (d) or (e) as correct answers.    But I don’t see any version of the numbers where Cyprus is not a net creditor to the EU bailout regime, as opposed to a net beneficiary.  Cyprus should be fighting to block the ELA transfer to Bank of Cyprus at this stage…

Is Fukushima Radiation Causing the Epidemic of Dead and Starving Sea Lions In California?

Painting by Jonathan Raddatz

 

Associated Press reports:

At island rookeries off the Southern California coast, 45 percent of the pups born in June have died, said Sharon Melin, a wildlife biologist for the National Marine Fisheries Service based in Seattle. Normally, less than one-third of the pups would die.

 

It’s gotten so bad in the past two weeks that the National Oceanic and Atmospheric Administration declared an “unusual mortality event.” That will allow more scientists to join the search for the cause, Melin said.

 

***

 

Even the pups that are making it are markedly underweight ….

 

***

 

Rescuers have had to leave the worst of them in an effort to save the strongest ones, she said.

 

***

 

Routine testing of seafood is being done by state and federal agencies  and consumer safety experts are working with NOAA to find the problem.”No link has been established at this time between these sea lion strandings and any potential seafood safety issues,” NOAA said in a statement.

Given that the FDA has refused to test seafood for radiation, we’re not that confident that the government is looking that hard to see if Fukushima fallout is the cause.

Reuters notes:

From the beginning of this year through last Sunday, 948 sea lion pups came ashore in Santa Barbara, Ventura, Los Angeles, Orange and San Diego counties, according to figures from NOAA.

 

“There really isn’t an oceanographic explanation for what we’re seeing,” Melin said. “We’re looking at disease as a possibility and also at the food supply, and it could be some combination.”

CNN reports:

This is an unprecedented crisis for the species in this state says the Pacific Marine Mammal Center.

 

***

 

“So we are seeing exponentially higher numbers” [Keith Matassa, who runs the Pacific Marine Mammal Center in Laguna Beach said].

 

***

When you say off the charts, this is what you’re talking about.

CBS News reported last week:

”They’re very sick,” said Keith Matassa, who runs the Pacific Marine Mammal Center in Laguna Beach. His team is nursing 115 sea lions back to health. “A normal sea lion at this age — 8 to 9 months old — should be around 60, 70 pounds,” said Matassa.

“We’re seeing them come into our center at 20 to 25 pounds, and really they look like walking skeletons.”

AP notes:

Biologists knew last spring that this year’s supply of anchovies and sardines could be limited, Boehm said.

 

“These two species of fish are an extremely important part of California sea lions’ diets, and females simply may not have been able to nurse their young sufficiently, resulting in abandonment, premature weaning and subsequent strandings,” he said.

 

Besides anchovies and sardines, sea lions also eat squid and other ocean creatures.

Time reported in April 2011:

Few people want to see the ocean’s anchovy stocks wiped out by radiation either. That’s just the scenario that seemed to be developing, however, when reports coming out of Japan revealed that elevated levels of cesium-137 had been found in anchovies in the waters off Chiba, near Toky0—a direct result of the ongoing crisis at the Fukushima Daiichi power plant.

 

***

 

In the big-fish-eats-little-fish way of the ocean, the radioactive contamination eventually gets passed up the food chain, concentrating in fats which get consumed and stored, until the isotopes finally come to rest in the very largest creature at the top of the food chain ….

Huge die-offs of sardines were also reported in the Chiba area of Japan after Fukushima.

Moreover, the Vancouver Sun reported in January 2012 that 94 per cent of the anchovies and 92 per cent of the sardines sold by the Japanese to Canada contained radioactive cesium. Some of the fish were caught in Japanese coastal waters; but others were made many hundreds of miles away in the open ocean.

(Note: there may be additional reasons for fluctuations in the numbers of anchovies and sardines other than radiation.)

Moreover, radiation from Fukushima was directly deposited into the kelp off the Western coast of North America … especially in Southern California.

Fish that eat the kelp have also gotten exposed to the radiation … as have the animals that eat those fish.

NOAA reports:

Sea lions … feed on the fish that live in kelp forests.

(Images here.)

There are numerous other routes in which the Fukushima radiation could be getting to the sea lion pups.  We noted last year:

A 1955 U.S. government report concluded that the ocean may not adequately dilute radiation from nuclear accidents.

 

MIT says that seawater which is itself radioactive may begin hitting the West Coast within 5 years.

 

In 10 years, peak radioactive cesium levels off of the West Coast of North America could be 10 times higher than at the coast of Japan.

 

As we’ve previously noted, Reuters reports that Alaskan seals are suffering mysterious lesions and hair loss:

Scientists in Alaska are investigating whether local seals are being sickened by radiation from Japan’s crippled Fukushima nuclear plant.

 

Scores of ring seals have washed up on Alaska’s Arctic coastline since July, suffering or killed by a mysterious disease marked by bleeding lesions on the hind flippers, irritated skin around the nose and eyes and patchy hair loss on the animals’ fur coats.

 

***

 

“We recently received samples of seal tissue from diseased animals captured near St. Lawrence Island with a request to examine the material for radioactivity,” said John Kelley, Professor Emeritus at the Institute of Marine Science at the University of Alaska Fairbanks.

 

“There is concern expressed by some members of the local communities that there may be some relationship to the Fukushima nuclear reactor’s damage,” he said.

Here’s a picture of one of the injured seals:

 

We reported yesterday that a new scientific paper shows that the Fukushima radioactive plume contaminated the entire Northern hemisphere during a relatively short period of time ….

 

Radioactive fish are also being found off the West Coast.

 

A California-sized island of debris from Japan is also hitting the West Coast.

 

And West Coast residents have also been exposed to Fukushima radiation from the air.  See this, this and this.

Unfortunately, the nuclear accident is nowhere near contained.  Japanese experts say that Fukushima is currently releasing up to 93 billion becquerels of radioactive cesium into the ocean each day, the reactors have lost containment, and groundwater is flooding into the stricken reactors (delaying clean-up).

And things may get worse for California, instead of better .

How Cyprus Exposed The Fundamental Flaw Of Fractional Reserve Banking

In the past week much has been written about the emerging distinction between the Cypriot Euro and the currency of the Eurozone proper, even though the two are (or were) identical. The argument goes that all €’s are equal, but those that are found elsewhere than on the doomed island in the eastern Mediterranean are more equal than the Cypriot euros, or something along those lines. This of course, while superficially right, is woefully inaccurate as it misses the core of the problem, which is a distinction between electronic currency and hard, tangible banknotes. Which is why the capital controls imposed in Cyprus do little to limit the distribution and dissemination of electronic payments within the confines of the island (when it comes to payments leaving the island to other jurisdictions it is a different matter entirely), and are focused exclusively at limiting the procurement and allowance of paper banknotes in the hands of Cypriots (hence the limits on ATM and bank branch withdrawals, as well as the hard limit on currency exiting the island).

In other words, what the Cyprus fiasco should have taught those lucky enough to be in a net equity position vis-a-vis wealth (i.e., have cash savings greater than debts) is that suddenly a €100 banknote is worth far more than €100 in the bank, especially if the €100 is over the insured €100,000 limit, and especially in a time of ZIRP when said €100 collects no interest but is certainly an impairable liability if and when the bank goes tits up.

Said otherwise, there is now a very distinct premium to the value of hard cash over electronic cash.

And while this is true for Euros, it is just as true for US Dollars, Mexican Pesos, Iranian Rials and all other currencies in a fiat regime.

Which brings us to the crux of the issue, namely fractional reserve banking, or a system in which one currency unit in hard fiat currency can be redeposited with the bank that created it (as a reminder in a fiat system currency is created at the commercial bank level: as the Fed itself has made quite clear, “The actual process of money creation takes place primarily in banks”) to be lent out and re-re-deposited an (un)limited number of times, until there is a literal pyramid of liabilities and obligations lying on top of every dollar, euro, or whatever other currency, is in circulation. The issue is that the bulk of such obligations are electronic, and in its purest form, a bank run such as that seen in Cyprus, and preempted with the imposition of the first capital controls in the history of the Eurozone, seeks to convert electronic deposits into hard currency.

Alas, as the very name “fractional reserve banking” implies, there is a very big problem with this, and is why every bank run ultimately would end in absolute disaster and the collapse of a fiat regime, hyperinflation, and systemic bank and sovereign defaults, war, and other unpleasantries, if not halted while in process.

Why?

One look at the chart below should be sufficient to explain this rather problematic issue of a broken banking system in which trust is evaporating faster than Ice Cubes in the circle of hell reserved for economist PhD’s.

In summary:

  • Total US Currency in circulation (i.e., all US Dollars out there): $1,102 billion (source)
  • Total Deposits in US Commercial Banks: $9,294 billion (source)

Which means that if (and we are not saying it will) a Cyprus-style fiasco were to occur in the US, and those $9.3 trillion in total deposits seek to obtain “physical representation” in the form of actual currency (i.e., a systemic bank run), just as all those lining up in front of Cypriot ATMs are desperate to do each and every day when they have a €300 limit on physical cash withdrawals, there will be a roughly 88% haircut for every single dollar that US savers believe is “safe” in the bank.

Of course, this entire example is only applicable within the confines of the fiat monetary system, assuming there are no other currency equivalents, such as precious metals, hard assets, or even virtual electronic currencies. But naturally to the broken monetary system, which relies on nothing but faith, trust and, hence, credit, even the thought of an alternative to a regime in which the breakdown of trust results in a 90% (at least) haircut of accumulated wealth, is pure heresy.

Which is why the deeper the rabbit hole goes, and the more countries are Cyprus’ed, the greater the onslaught and attack against gold, silver, and other traditional and historic fallback currencies to what is increasingly pejoratively known simply as “paper.

The Seven Broken Taboos Of The Cyprus Deal

Via Barclays,

From a European perspective, the list of broken taboos and assumptions continues to grow. It includes:

1. EU sovereign debt cannot be restructured: broken by the Greek PSI.

 

2. Senior bank debt-holders cannot be bailed in: broken several times with respect to banks in Denmark, Ireland and now two Cypriot banks.

 

3. Depositors are sacrosanct: broken by Cyprus – deposits greater than the formal guarantee (EUR100k) in the two biggest banks, with EUR4.2bn of uninsured deposits in Laiki Bank set for a large haircut of unknown size, and Bank of Cyprus deposits set for a haircut of around 35% according to several news reports (eg, Economist, Reuters).

 

4. Depositors should not be punitively taxed: broken by the Cypriot government and implicitly endorsed by the EU, but vetoed by the Cypriot parliament.

 

5. If capital controls are applied in the euro area, it is ‘game over’: broken by Cyprus – banks were shut for nearly two weeks; draconian controls of uncertain duration have been imposed.

 

6. Discussion of a euro exit is ‘off limits’: already it is apparent that euro exit was discussed with respect to Greece during H1 12; this topic again re-emerged last weekend with respect to Cyprus.

 

7. The EU can rely on the IMF to be sympathetic in providing financing without haircuts, even for countries with high public debt: from the Greek and now the Cypriot experience, the Fund is evidently evaluating new programmes more critically, particularly when debt/GDP ratios rise above 100%.

Cyprus can also be considered “the exception that proves the rule”. The euro’s core founding principles, based on the Maastricht Treaty’s “irrevocable” fixing of currency rates, and of the free movement of capital, have been violated. The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.

Guest Post: Debt-Slavery For Dummies

Submitted by G at Knowmadiclife blog,

Everything the Fed does ultimately leads to less economic activity, less savings and more debt resulting in poverty for Americans, not prosperity.  Debt is not prosperity. Debt is poverty and economic slavery.

Why are you working harder but getting poorer?

Let us analyze the effectiveness of the Fed’s only policy tool of printing money since the onset of the great financial crisis in 2008 by looking at:

  • Economic activity as measured by human action – the real source of all wealth
  • Earnings
  • Savings
  • Debt
  • Poverty
  • Government dependency

 

How can Americans ever be expected to reverse the slide into debt-slavery if real wages are stagnating? Even when using the official government inflation numbers which understate the real level of price inflation (CPI-W until 2009 and CPI-U from 2010) real wages in America have been flat at best since 2008.

Did you notice the mysterious vertical jump in the data series between December 2009 and January 2010? It was here when the government changed the inflation index it uses to calculate real wages from the CPI-W to the CPI-U. This change from one bogus number to a different bogus number resulted in an instant jump in real wages – further distancing the illusion from reality. Why are no mainstream economists telling us about this?

This arbitrary change in the inflation formula used to compute real wages is a great example of how government numbers do not reflect real economic activity. In reality, these numbers are completely meaningless in the real world. These numbers only have value in the illusionary matrix created by the Intellectual Idiots and the central planners for us to live in. It is smoke and mirrors to hide the ongoing failures of the central planners and the Intellectual Idiots advising them.

 

Artificially low interest rates discourages savings and increases spending by causing the cost of daily living to increase. We end up spending more than before for the same goods. Combine this with the government purposely understating the real level of price inflation and voila! – we magically have economic growth – at least the illusion of economic growth. In reality, we are getting poorer just to maintain the same standard of living. Consumption leads to poverty. Poverty leads to dependency on the state – economic slavery – debt slavery.

 

Stagnant wages combined with rising price inflation has forced many Americans to rely on debt just to make ends meet. This is not a sign of economic growth as the MSM and statist economists would have you believe. Most of the time reality is the opposite of what they are telling you. You have to think for yourself to know the truth. When you think for yourself the truth becomes apparent – Americans are going deeper into debt because they are broke not because they are prospering.

 

 

Is this what an economic recovery looks like? Of course not. Do not let the teleprompter reading propagandists on TV fool you. They are simply highly educated in that which is false. You know better than them.

The Fed’s policy of money printing has resulted in less economic activity, no wage growth, less savings, more debt, increased poverty and increased dependency on the government for Americans than when the GFC started! Americans are now economically worse off than they were in 2008.

The recession never ended. The central planners have simply hidden the deteriorating economic reality from us by money printing resulting in nominal price increases – in combination with misleading official unemployment and inflation figures. As long as the money printing continues things will continue to get worse, not better.  This leads us to one curious question: if the Fed knows reality is deteriorating and it’s monetary policies are causing this deterioration to accelerate, what is the endgame the government and the Fed have in store for Americans?

What is the road back to prosperity?

There is an easy solution that takes us away from this road to debt-slavery and puts us back on the road to prosperity. That road to prosperity for Americans is ending the Fed’s interest rate manipulation and letting the free market determine interest rates, or the “price” of money (Dr. Robert Murphy does an excellent explanation of this in this video). In a free market the interest rate is the price of money – it reflects the point where the supply of savings and the demand for debt in the economy balance. As interest rates rise Americans will be incentivized to spend less and to save more. Saving leads to prosperity. Prosperity leads to independence from the state – economic freedom.

The debt will liquidate and the money supply will contract, or deflate. This money supply deflation will allow the value of money to increase rather than decrease. Prices of things we buy will begin to fall rather than increase – making us wealthier. Real wages for Americans will begin to rise again. The American middle class will begin to grow again as it’s earnings is worth more, saves more and earns more on that savings.

As prices fall capital investment that previously was not seen as profitable will become profitable. Capital investment based on real consumer demand will pick up. Because this will be real economic activity based on the real market price of money (interest rate) and real consumer demand the destructive extremes of the Fed created boom-bust business cycle will ease considerably.

To find that road to prosperity we must first begin with reforming the Fed’s toxic policies designed SOLEY to profit the banks, it’s owners and shareholders (here and here and here)

That reformation starts with ending the Fed’s monopoly on the US money industry. Free up the money industry to competing currencies with legislation such as the Free Competition in Currency Act (explained by Professor of Economics at George Mason University Dr. George White here and by Congressman Dr. Ron Paul in this video). Give Americans freedom of choice in currency – examples would be gold and silver back currencies. If the Fed’s debt, our US dollar, is so great for Americans it should have nothing to worry about regarding competition from barbaric relics such as gold and silver, right?

Why are all the Fed’s policies leading towards economic slavery of the American people? Ignoring these policies will not change the inevitable economic outcome resulting from these policies. You can ignore reality but you cannot ignore the consequences of ignoring reality.

Why are YOU allowing this to be done to you?

Do you want to learn more about the Fed and sound money? More resources than you can shake a stick at are available at this Federal Reserve Knowledge Bomb or the Knowmadic Life website – check out the Recommended Reading, Documentaries and Site Links sections. Or you can go for the mother load of information at The Mises Institute at www.mises.org.

From knowledge comes awareness. From awareness comes freedom.