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Wednesday, April 10, 2013

Savers and Takers: The New Fault Lines and Social Unrest

An upcoming struggle is emerging in civil society.  It will be between those who have money but lack the political and financial power to defend it, and those who have the political clout to take it.

The Savers and the Takers.

This will happen because the capitalist system has been turned into a financialist system. The economy is no longer served by the banks and financial institutions.  We are now at a point where the banks force the economy to serve them.  Those who benefit are the financial class, their servants in the political class and the large international organizations such as the EU, the IMF and the World Bank.  Those who suffer are the rest of us who are trapped in the system and cannot find the means to escape it – but they do have small amounts of saved money or equity. 

Who are the savers? In short, it is those people who look to their own future and have taken decisions to set aside “value” from today and hold it for use tomorrow.  This includes those with savings deposits, private pension funds (401K, RRSP, ISA etc) and those who have equity in their homes. It also includes those who hold small physical amounts of precious commodities such as silver, gold and palladium.

The takers are those governments with unreasonably high debt levels and unfunded future liabilities. In cooperation with them are the major international banks that have over leveraged themselves as well as supra-international institutions such as the EU.

This meme – savers and takers – will shape much of the political and economic discourse over the next few years.  The existing examples of where this has occurred have been Greece, Spain, Ireland and Portugal.  How this all plays out is not clear, but there are lessons to be learned about the limits of the individual and social unrest.  

It may be that the takers themselves are those who will be responsible for a reset of the system which will produce chaos and then a new system (Capitalism 2.0 or something different?)  

The small time savers have their money stored in banks. As they are now beginning to realize, this may not be a safe plan. Having seen what happened in Cyprus and Spain and what is being planned in the UK, USA, Canada and Australia, they are getting worried.  As such, depositors are starting to remove their money from banks or are trying to figure out where else to store their wealth. 
This willingness to do whatever it takes on the part of the takers has a basic flaw.  The major banks are frequently leveraged out at 25: 1. This means they only have to lose some 4% of its deposits before they have liquidity problems. For more cautious banks that are leveraged out 15:1, this means they would only have to lose some 6% of their deposits before entering into crisis mode.  For those high risk institutions which can be leveraged out at 60:1, a two percent loss would start a bank run.
It can be seen that the savers - trying to guard what little they have - may start the run by taking out their savings. If only 4% or more of them do this, we are in trouble.

There is a lesson in all of this. 

It is tough to run a capitalist system with no real capital.  Real capital cannot be created by central banks simply “printing” money.  Real loans and real money have to be backed by real wealth or collateral.  It is clear that the ability to produce real collateral for loans is disintegrating as the standards are falling.
A Cyprus Style Bank Robbery
How will the takers take the money from the savers?
Multiple approaches exist. Among the most common or obvious are:

1. ZIRP –long term “zero interest rate policies” punish the savers and rewards the debtors.

2. Inflation is the silent thief and it is used by debtors to reduce the cost of repayment.

3. The Cyprus model – simply take the money directly.

4. The Spanish model – place an indirect tax on deposits using the banks as intermediaries.

5. The Australian Model – tax the private pension funds of those with more than $100,000.

6. The Canadian Model – force depositors into a bail-in.

7. The UK and USA model – use guaranteed deposit insurance money to bail out banks.

8. The bank model – use fees and huge spreads on interest rates (as much as 27%) along with fees on fear and the misspelling of products.

The Outlook

There is only one rule in economics that actually works:  That which cannot go on forever – won’t.

As such, the short term emergency policies of money printing and low interest rates will stop because they must.  When they do stop, the sins of more than 30 years of overspending and debt will have to be paid.

It is unlikely that either more austerity (belt tightening) or more stimuli can fix the current economic difficulties.  We are so far in debt in both sovereign and personal terms neither of these two models can assist. The austerity model (UK) is not doing so well and neither is the stimulus model (France).  The outcome is likely a major reset of the financial system which will cause much more trauma than the 2008 upset.  Savers beware and stand by for future shock.


Unless the banks and governments change the way they deal with the rest of civil society, we will be facing significant fault lines in our societies. The savers and the takers will find themselves increasingly at risk of social confrontation and social unrest.  The choice would appear to be between a long period of painful adjustment or a short sharp period of chaotic uncontrolled change.  Both will hurt.

Supporting material can be seen at:

The Canadian Model for takers: 

The UK and USA model for takers:

The Spanish model: 

Why derivatives are dangerous:

Austerity model not working:

The inversion of banks and the economy: 
ZIRP and Zombies:
A potential model for urban unrest and outcomes:

On a lighter note and just for fun, we are going to have an all Goldman Sachs MMA cage match between Mark “Brutal Reckoning” Carney and Mario “Whatever it Takes” Draghi.  Carney will be arriving at the Bank of England in July and this may lead to some interesting confrontations as ideas emerge on how to deal with fragile and fragmented economies.

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