A Deposit In A Bank Is Not A Riskless Form Of Saving

Like Lehman Brothers before it, Cyprus may well come to be seen not so much as the cause of further crisis but as yet another symptom of the ‘long emergency’ that continues to suffocate the western economies.

We would describe this emergency as, fundamentally, an inevitable crisis triggered by an unsustainable explosion of credit; western banks and western governments are now like Macbeth’s “…two spent swimmers, that do cling together / And choke their art.”

The prime minister of Luxembourg, Jean-Claude Juncker, has provided two clear insights into this world of deceit:

“We all know what to do, we just don’t know how to get re-elected after we have done it.”

And,

“When it becomes serious, you have to lie.”

This is what we now have by way of government: a self-serving elite who cannot be trusted, operating to a timetable defined by, and limited to, the electoral cycle.

This liberty deficit is possibly more severely damaging than the supposedly intractable fiscal one that lies beneath it. Yet whatever emerges from the disaster, Cyprus has reminded us of a couple of awkward truths:

  1. A deposit in a bank is not a riskless form of saving.We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week:

    Banks are not vaults. They are thinly capitalised asset managers that make a promise– to return depositors’ money on demand and at par– that cannot always be kept without the assistance of a solvent state.”

  2. When states become insolvent, the piper must ultimately be paid. Fatal, embarrassing insolvency is not a problem that can be perpetually or painlessly deferred.

Cyprus matters not because of the size of its economy or because it is (for the time being) a member of the euro zone.

It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

CLSA strategist and financial market historian Russell Napier writes as follows:

“The key impact will be long term as the citizens of the Euro, like the citizens of the Soviet Union or the American colonies before them, eventually reject the sacrifice of political rights necessary to support the system.”

“When the history books are written, the Brussels-imposed sequestration in Cyprus will be seen as the tipping point when the citizens of the Euro system realized that the socio-political sacrifice needed to sustain a single currency was just too great.”

Actions have consequences. Cyprus may end up being a storm in a teacup. Like Russell Napier, we fear it may well be the start of something altogether more sinister.

If you have yet to consider the sanctity, stability, ‘store of value-ness’ and true safety of the paper currency you hold within the banking system, now might be a good time to start.

Read original article here

7 comments on “A Deposit In A Bank Is Not A Riskless Form Of Saving

  1. jazz606
    March 28, 2013 at 5:38 pm #

    Whilst the €uro persists so will the ‘ long emergency’.

  2. bwanamakubwa
    March 28, 2013 at 10:25 pm #

    On Monday I closed my bank account in the UK and placed all of my somewhat meagre funds elsewhere, but NOT in the Eurozone.
    Many of my friends and acquaintances are doing exactly the same. We are abandoning anything to do with Reich IV (aka EU).

  3. West Tipp
    March 29, 2013 at 8:46 am #

    Would it be possible to have an orderly break up of the Euro?
    A major crisis is coming down the line. The longer Brussels try to keep the Euro together the worse the end result will be, when it finally does break up? As a citizen of Ireland employed in the battered “Real” economy, I am fast becoming a Eurosceptic. One size certainly does not fit all with Europe?

    • Morningstar
      April 1, 2013 at 3:45 pm #

      One size fits all – never does work, and trying to force everybody everywhere into the ‘model’ can only lead things one way…. downward !

      For example in education…. can you equalise everybodies inherent ability to learn or retain knowledge ? (Everyone knows the truth about this…) You cannot do so and maintain the highest standards, thus to ‘equalize’ the education, it must be to the lowest average standard which allows very few to ‘fail’ (and we even tell them that its not their fault !) Further, the Bell curve showing intellect, demands that those of average to mediocre ability be given preferential treatment to their ‘learning model’ which drives those at the top end to boredom, underachievement and often bad behaviour in response…… unless their parents understand the issue and take major positive steps to resolve the ‘problems’. Thus we have a lack of competitive spirit in education in order that those who dwell mainly in the average sphere can appear to out perform those who should move ahead into the higher achieving realms.

  4. Simon Roberts
    March 29, 2013 at 9:09 am #

    “We all know what to do, we just don’t know how to get re-elected after we have done it.”

    That’s a great quote and really sums the issue up.

    Being a child of the Cold War, it seems strange to have to say that democracy is at fault here.

    We all know Churchill’s comment that “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” and I used to labour under the same impression.

    It was only really when I looked into it myself that I realised that there is a much better historical alternative.

    People who bother to read and understand the US Constitution quickly come to the conclusion that it’s primary purpose is to protect the people from politicians (a noble and touchingly realistic objective), but there’s actually even more to it than that.

    The US Constitution doesn’t mention democracy. I assumed at first that this was some kind of historical oversight -perhaps the word wasn’t in such common use as it is today.

    But the framers of the US Constitution recognised that democracy is tyranny by majority, which can be subverted by manipulation of sources of public information (eg the Press).

    Placing strict limits on the power of government not only curtailed the power of politicians but also the power of the people over other people.

    In the UK today, we think of a Republic in terms of monarchy but, despite being an ardent monarchist myself, I have come to the conclusion that a Republic as envisioned in the US Constitution is the best form of government.

    It really is an amazing document and well worth taking the trouble to understand. The foresight of those people in the 18th Century deserves admiration and if you are interested in this kind of thing I would heartily recommend also reading Thomas Jefferson, who seems to have a scarily deep understanding of human nature. He foresaw pretty much all the evils that visit mankind today and included in the US Constitution the means by which to avoid them.

    The great sadness of course is that the American people have allowed their marvelous Constitution to be subverted,

    • tanker21
      April 8, 2013 at 3:54 pm #

      Indeed. And along the same line I heard it said recently that the US “right to bear arms” was intended not as a precaution as foreign invaders but as a last resort defense against over-mighty government – which was an angle I hadn’t heard before but makes sense in the way of their Constitution.

Trackbacks/Pingbacks

  1. Cypress – What having a Bank Account really Means | 38 South - March 28, 2013

    […] Another Warning after Cypress  A deposit in a bank is not a riskless form of saving. An absolute lesson in what happens when private debt (the banks) is transferred to public debt (the taxpayer) by unelected bureaucrats (the EU, IMF et al).  Gold under the bed anyone? […]

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