Print Friendly

slow1In a recent Texas Enterprise presentation, I described how losses to Cyprus depositors could occur elsewhere. Moreover, I suggested that this was not a one-time aberration of our understanding of normal. Rather, this is the new normal, better described by a Texas Enterprise reporter as “a slow-moving train wreck.”

Since his phrasing was more eloquent than mine, let’s go with that as a title to this month’s blog. Except in the short time since that title was conceived, the impending train wreck has just picked up speed.

The notion of a train wreck for an economy is of course in sharp contrast to our notion of “old normal,” in which an economy chugs along spewing off the multiple gifts of jobs, income and wealth all by itself, even without much need for government locomotion or correction.

That is the way it was for a long time. Yes, there were occasional interruptions in that steady progress, most of which proved to be no more than minor and short-lived recessions. But the train kept chugging along, because economies do have natural self-correction mechanisms to keep the train on the tracks and moving at a normal speed. This is the notion of an equilibrium growth path.

Primary among the natural economic mechanisms are prices of inputs and currencies. In recessions, unemployment creates low wages, and low demand for capital causes yields to diminish. With capital outflows, currencies decline, and goods become cheaper to produce and eventually become attractive to foreign buyers. Hence the economy’s engine turns around all by itself and keeps on chugging. In an economy’s boom episodes, those same resources become expensive — which is a self-moderation mechanism that slows sales and production.

During booms, interest rates increase due to scarcity and the inflation premiums that markets price into debt contracts. This means that in that economic environment, there is relatively little need for the Federal Reserve to further raise interest rates.

However, after WWII, self-correction gave way to statutory imperatives to not allow prices to reflect scarcity, which somewhat deterred the self-correction mechanism. Minimum wages prevented the unemployed from offering their services at a lower market rate, and reserve currency prices had a built-in upward bias so exports would not pick up. Hence the self-correcting market mechanisms were somewhat compromised.

For the most part, following WWII, monetary policy and contra-cyclical fiscal policy added to demand so as to keep the locomotive running at the highest maintainable speed, never mind a little inflation. In addition, the Fed’s routine fine- tuning required flexibility and timely policy to keep the engine’s mechanisms in working order — the locomotive would lurch forward when policymakers gave it some gas, and it would slow down when they applied the brakes.

But now, what was considered “normal” back then is almost unachievable: Not only is the engine in sad repair, but the ground under the tracks is giving way.

One reason for this is that we are now facing what the Fed calls “headwinds” — when they push the accelerator to the floor, there is no acceleration, but it’s not due to lack of trying. Same is the case in Europe and Japan: They are trying but getting no traction.

But now the old locomotive has sprung several more disconnects. For one, it suffered through The Great Recession just as old age caught up with both machinery and the work force. The aging population also requires fiscal resources to make good on government entitlements. That process tends to slow the old locomotive, as the government finances entitlements by diverting private resources.

Another slowdown occurs when the government foists its entitlement debt on first banks, financial institutions and, most recently, on central banks across the world — making them weaker and compromising the engine’s traction even further.

But now in a new bold move to come up with the funding for entitlements, European governments have chosen to cannibalize depositors in their own banks (and, in turn, the banks themselves) by forcing them to reveal the identities of foreign depositors to their home governments.

The end to Euro bank secrecy has already given rise to witch hunts for depositors, basically requiring them prove to their government that they paid taxes on funds in their foreign bank accounts. But since the truth will not be revealed until the end of the year, depositors have ample time to seek new ports for their holdings — which will no doubt be outside of the EU. The total amount of the deposits that are likely seeking a new home is estimated at about $21 trillion, or about twice the amount of U.S. commercial banking system deposits.

If that were not enough incentive for depositors to flee Europe’s banks or seek other alternatives, the EU has also made it clear that the ad hoc Cyprus bank formula for large bank resolution — in which depositors and other debtors take a hit when the bank goes insolvent — will be applied across all future EU bank insolvencies.

Needless to say, holding government bonds as assets is a leading cause of bank insolvency — if the government can’t service its debt, it certainly can’t rescue the bank’s supposedly insured depositors.

To add to the risks that Euro depositors face, the IMF has indicated a new policy for assisting financially strapped governments that rationalizes not assisting them. The IMF wisely decided that it will not rush in and be a lender to distressed sovereigns an act which often provides the funding needed to save banks.

Instead, it will wait until after the sovereign defaults on its existing debt as it wants no part of being written down with the rest of the bond holders.  This no doubt removes an important source of emergency funding for the sovereign and the bank depositor, which the IMF has come to realize simply enables the sovereign to keep on spending at its expense.

With support for bank deposits being removed, the conclusion is Euro depositors are at risk without much in the way of government back-up whether or not deposit accounts are anonymous. So Cyprus is the new rule and not the exception.

Banking and moreover, financial globalism — a system in which capital is free to flow toward the best use that promotes economic growth — is being sacrificed to support state deficits.  But the sacrifice will not be confined to Europe, as the U.S. and the Euro zone are placing maximum pressures on all haven countries to do the same so as not to lose competitive advantage.

So with Europe in the sixth consecutive quarter of recession, the slow moving train wreck has just picked up speed, no matter how much gas the monetary authority gives the aging locomotive. 

 

Sign up to receive the Spellman Report. Bracing financial and economic insight. Now with free delivery!


Comments

The Slow-Moving Train Wreck Has Picked up Speed: Foreign Depositors in European Banks Will Be Outed — 30 Comments

  1. Thanks for giving your ideas right here. The other matter is that any time a problem occurs with a pc motherboard, people should not go ahead and take risk associated with repairing the item themselves because if it is not done right it can lead to irreparable damage to an entire laptop. It’s usually safe to approach your dealer of a laptop for the repair of that motherboard. They have got technicians who’ve an skills in dealing with notebook computer motherboard issues and can have the right analysis and carry out repairs.

  2. magnificent submit, very informative. I ponder why the opposite experts of this sector do not realize this. You should proceed your writing. I’m sure, you’ve a great readers’ base already!

  3. I believe that avoiding refined foods will be the first step to help lose weight. They could taste excellent, but packaged foods currently have very little vitamins and minerals, making you consume more simply to have enough energy to get with the day. For anyone who is constantly taking in these foods, changing to whole grains and other complex carbohydrates will aid you to have more vigor while taking in less. Thanks alot : ) for your blog post.

  4. I have realized that online degree is getting common because attaining your degree online has developed into a popular choice for many people. Numerous people have certainly not had an opportunity to attend a conventional college or university although seek the elevated earning possibilities and career advancement that a Bachelor’s Degree offers. Still other folks might have a degree in one field but would want to pursue a thing they now have an interest in.

  5. Definitely imagine that which you stated. Your favourite justification seemed to be at the web the easiest factor to consider of. I say to you, I certainly get irked while folks consider issues that they plainly do not understand about. You controlled to hit the nail upon the highest as smartly as defined out the entire thing with no need side-effects , folks could take a signal. Will likely be back to get more. Thank you!

  6. Thank you for the auspicious writeup. It if truth be told was a amusement account it. Glance complex to far brought agreeable from you! However, how can we keep up a correspondence?

  7. My brother suggested I might like this web site. He was once totally right. This post truly made my day. You can not consider simply how so much time I had spent for this information! Thanks!

  8. I will also like to state that most people that find themselves without health insurance usually are students, self-employed and people who are unemployed. More than half on the uninsured are really under the age of 35. They do not really feel they are requiring health insurance simply because they’re young and healthy. Its income is often spent on houses, food, and entertainment. Lots of people that do represent the working class either whole or as a hobby are not given insurance by means of their jobs so they get along without because of the rising price of health insurance in the country. Thanks for the concepts you reveal through this web site.

  9. Hi there, just turned into aware of your weblog via Google, and found that it is really informative. I am going to be careful for brussels. I will appreciate if you proceed this in future. Lots of other folks can be benefited from your writing. Cheers!

  10. Thanks for all your valuable efforts on this site. Kim really likes managing investigations and it’s easy to see why. My spouse and i know all concerning the dynamic means you convey very important techniques by means of this web blog and as well attract contribution from other people on this concept while our own girl is without a doubt studying so much. Take pleasure in the rest of the new year. You’re conducting a glorious job.Thanks for the thoughts you have discussed here. On top of that, I believe there are many factors which will keep your motor insurance premium all the way down. One is, to take into consideration buying autos that are inside the good set of car insurance firms. Cars which are expensive tend to be more at risk of being robbed. Aside from that insurance coverage is also in accordance with the value of the car, so the more expensive it is, then higher your premium you only pay.

  11. My brother suggested I may like this website. He was totally right. This publish truly made my day. You cann’t imagine just how much time I had spent for this info! Thank you!

  12. Hi There! We are looking for some people that might be interested in from working their home on a full-time basis. If you want to earn $100 a day, and you don’t mind writing some short opinions up, this might be perfect opportunity for you! Simply check out the link here NOW!

  13. Heya i’m for the primary time here. I found this board and I in finding It really helpful & it helped me out a lot. I hope to offer one thing back and aid others such as you aided me.

  14. Most of the documents in the WordPress theme I have end in. php. I would like to be able to associated with text adjustments on display screen in the WordPress theme, also, how do you add additional pages, and so on?.

  15. Greetings, I believe your web site could possibly be having web browser compatibility issues. When I take a look at your website in Safari, it looks fine however, when opening in IE, it has some overlapping issues. I merely wanted to provide you with a quick heads up! Besides that, excellent site!

  16. Compruébelo, otros servicios técnicos de electrodomésticos le cobrarán el desplazamiento, la visita, el presupuesto y además es muy posible que le engorden el presupuesto con altos costes de mano de obra y cambiando algunas piezas, que pueden no estar en mal estado pueden no ser necesario cambiarlas en su electrodoméstico. Le ofrecemos visita y desplazamiento gratis en toda la Comunidad Madrid ya que tenemos técnicos repartidos por toda la Comunidad. La evolución de los electrodomésticos también ayuda a los técnicos, pues la mayoría de electrodomésticos nuevos vienen con sistemas de seguridad y de auto-diagnóstico.

  17. im very good with Dreamweaver so i know how to design the website, but i actually dont know which site would get a lot of attention… i want either a Rap site with news, table and etc.. or A youtube like site… or a porn site.. my main interest is usually making money away this so i need help picking the right begin….. and also besides google adsense, how else am i able to make money from a website?.

  18. In Firefox you have the standard silver precious metal toolbars where the address pub and file/edit bars will there be is the gold background. How do you customize and change that around?.

Leave a Reply

Your email address will not be published.