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.  



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www.telegraph.co.uk

 

 

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.

Conclusion

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.

 

 

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Supporting material can be seen at:

The Canadian Model for takers:  http://tinyurl.com/cvcf9v9 

The UK and USA model for takers: http://tiny.cc/z4jcuw

The Spanish model: http://tinyurl.com/cedrumy 

Why derivatives are dangerous: http://tinyurl.com/blhtc3q

Austerity model not working: http://tinyurl.com/c4chw5l

The inversion of banks and the economy: http://tinyurl.com/cdrnm7f 

 

ZIRP and Zombies: http://tinyurl.com/9wng9vf

 

A potential model for urban unrest and outcomes: http://tinyurl.com/cpwqle5

 

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.  http://tinyurl.com/c4dlrdt

 

 

Excuse Me Waiter - There is a Horse in my Soup! (Globalized Supply Chains are an Issue)

Is that you Black Beauty?

 

What can you do about horse meat showing up on your plate or in your burger? 

 

 

A long supply chain means no control of what you are eating.  The recent series of scandals concerning horse meat showing up in burgers, frozen lasagna and IKEA meatballs highlights two of the major problems with globalization.  This is just the surface of the problem.  No doubt there are other things going on we have not heard about yet.  Hopefully there is no soylent green in the food chain yet! (Cultural reference to the 1973 science fiction film of the same name.  Google it. Scary stuff.)

But seriously, when a supply chain reaches hundreds or thousands of kilometres and spans national borders, little control can be exerted even if the buyers are motivated to ensure good products.  A live horse can be sold in Belgium or the UK, shipped to Poland or Hungary and the meat can be resold in Romania.  It can then be relabeled and shipped to France or Spain or Ireland. Then it can be processed as beef and sold in the UK or anywhere else.   

The second problem is that the consumer or final-point-of-sale retailer really has no ability to find out what went wrong or who to blame. In addition, trying for a resolution by suing those responsible can be a tiresome process with limited prospects of success.  And that is just within Europe.   Imagine what happens when the food supply chain runs through China or India.  Good luck establishing responsibility in that case.

Then there is the issue of dog meat entering the supply chain in Spain. Don’t even think about that one...

What can the consumer or small local retailer do about this problem?  The answers are rather simple.

 

First, if you are a retailer, buy from a local supplier who has a short supply chain.  Your ability to monitor and trust goes up if you have a good view of your local supplier. 

Second, as a consumer, you should always buy food that as closely as possible resembles its original form. If you are buying highly processed pre-made frozen meals, you really have no idea of what that “beef” might be in your frozen lasagna. However, if you buy a pork chop or some ground beef, your own eyes should do a good job assessing what you have.  You can also see the person who is selling it to you if you buy from a local butcher shop.  So again, trust goes up a bit.

 

The answers? 

Buy locally produced food.

Buy real food that has not been heavily processed.  This goes for both meat and vegetables.  

Both of these choices are probably good for you – in health terms and for your local economy.

 

This is economics for the rest of us - enjoy that lasagna that comes from a globalized supply chain.  As for me, I have a sudden craving for a nice bag of oats!

The USA, UK and EU are Planning to take your Savings: A Whiff of Desperation in the Air?

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***

Yes, they are planning to take your savings in the USA, the UK and the EU.

Katia Christodoulou / EPA

A woman unsuccessfully attempts to withdraw from a Cypriot bank ATM in Greece on Sunday.

 

 A recent paper by the Bank of England and the American Federal Deposit Insurance Corporation (FDIC)  demonstrates that both governments have a plan to take your savings money in a financial crisis.  Scarily enough, the paper was published in December 2012.

As recent events in Cyprus, Spain, Portugal, Greece and Italy have shown, an unthinkable financial crisis can actually emerge at any time - just like it did in 2008. The 2008 crisis required trillions of dollars (pounds, euros) to bail out broken banks.

So, you have to ask yourself:  Could my government take my money out of my savings account?

The answer is almost every case is “Yes”.  In the USA, the UK and the EU,  not only is it possible, but the reality is that two of the governments have just recently discussed how they would take your money.  As with almost all economic writing, it lacks clarity and appears bland, but when read and reread it several times, it is chilling.  

The title of the paper is Resolving Globally Active, Systemically Important, Financial Institutions.

 

A translation is necessary here.  To an economist or banker the term “resolving” means “giving money to.” “Globally active” means a bank that has operations in more than just one country.   The term “systemically important” is banker speak for “we think this bank is too big to fail and therefore we have to bail it out.”  The term “financial institutions” refers to banks as well as large insurance companies such as Lloyd's of London or AIG in America. 

 

The title of this paper is actually “In the event of another financial crisis like the one in 2008, we are going to take money from savers and tax payers and give it to the international banks which are holding us as financial hostages by being too big to fail.” 

 

As an aside, this is also an indirect admission that the problems that caused the 2008 financial crisis have not been addressed.

Have a look at the following key paragraph, and then see the explanations below.

34. The U.K. has also given consideration to the recapitalization process in a scenario in which a G-SIFI’s liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalization of the firm, as they may do under the Banking Act in the use of other resolution tools. The proposed RRD also permits such an approach because it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in, provided that the amount contributed does not exceed what the deposit guarantee scheme would have as a claimant in liquidation if it had made a payout to the insured depositors. That is consistent with the contribution requirement that is already imposed on the Financial Services Compensation Scheme in the U.K. in the exercise of resolution powers10 and simulates the losses that would have been incurred by those deposit guarantee schemes during bank insolvency. But insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation. Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.

(See the full document at: http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf )

 

The abbreviation RRD refers to the European Union Recovery and Resolution Directive.  In other words, the joint UK and USA paper actually has its roots in the large European Union, so the concepts in this paper could easily be applied to the other countries in the EU.  (Hello France and Belgium and yes even Germany!!) 

 

The following words are key to the intent  of the authors:  it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in.  This means that money that is intended to be given to depositors (savers) in the event of a bank failure can instead be given to the bank itself as a means of resolving the crisis. 

In other words, depositors are told that the first 100,000 dollars (pounds, Euros) of their savings are guaranteed by a government program so that even if the bank fails, the depositor will get their money back up to the agreed limit.   

 

Now, the new plan is to give that guaranteed money to the bank, rather than the depositor. 

 

The theory behind this is explained in the second underlined section. These economists have the idea that if the bank is going to fail, why not give it the guaranteed money to the bank so it can continue operations, and small depositors will then not lose any money as the bank keeps going.  They also appear to reason that larger depositors (more than 100,000) may lose money in the event, but that this plan will be cheaper overall.

 

On the surface, this accounting trick may sound reasonable, but the plan is deeply flawed.  

 

First, it breaks the guarantee that you will get your money back if there is a bank failure. The bank gets it.

 

More importantly, it does not address what will happen after the deposit guaranteed money is given to the bank.  The flaw is that if the public becomes aware of the money transfer – and they will – then the large depositors and bond holders will lose faith in the institution.  They will quietly take out their money as soon as they can, and then the cycle starts over again.The outcome is that the bank will fail again.  Only this time, the money that should have gone to the small time depositors from the FDIC is already gone – taken by the bank!  So another bailout is needed. This is simply a wealth transfer from the government to the banks at the expense of the saver and taxpayer.

 

Behind all the laws, rules and economic jargon that no one can really understand, there are some real world facts that cannot be changed.

 

They are:

 

1.  Most of the advanced Western democracies have crippling debt levels that they cannot fix through increased austerity, taxes or increased stimulus.  They will need to find more money and they need it soon.

 

2.  The governments and banks of the advanced democracies are run by persons who have a significant interest in maintaining the status quo which gives them their power and wealth. 

 

3.  When government and banks need more money, they will get it. They will change the laws to make this happen.

 

4.  Savers have money, debtors do not. 

 

5.  Governments and banks have multiple ways of getting this money, either though taxes, fees, low interest rates or inflation or – most simply – just taking it as they are now discussing in this paper.

 

Conclusion

 

The belief that your money is safe in a bank due to the government guarantee on the first 100,000 is no longer a valid concept.  Those that have the power (Banks and Governments) may need this money soon.  If you have it, they will find a way of taking it.   

This is economics as it is for the rest of us. Savers beware!

 

 

More Austerity or More Stimulus? – Chaos and Confusion Ahead

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***


How to fix the economic malaise that is gripping most of Europe and North America?

One school of thought says that it has been an excess of government spending and entitlement programs that has caused the problem and we need to cut spending (austerity).  Another school of thought says that more spending by government will create growth and more jobs for a better future (stimulus).  Both of these schools of thoughts advance multiple arguments about why they are right.

Protesters in Montreal in April 2012.  Note the green and black flag
which identifies this group as anarcho-primivitists.
Photo by the author.

 

Here is another thought.  Maybe the debt driven financial system we have in the advanced economy democracies is so broken that neither of these approaches can have a positive effect.  What we need – or will get anyway – is a major financial reset that will be devastating.    

The Austerity School of Thought

This group includes major countries such as the UK. The British Chancellor of the Exchequer George Osborne is advocating cuts in spending and reductions in government programs. In short, Mr. Osborne believes (hopes?) that this policy will see less money going into the non-productive government sector and more money finding its way into the productive private sector.  Additionally, the government will not have to borrow as much money for next year’s budget, which in turn means lower debt payments and more money available for non-debt related spending.

The Stimulus School of Thought

Over on the other side, we find the new President of France with the somewhat confusing last name:  Francois Hollande.  He is a follower of the stimulus school of thought which suggests governments must spend in dire economic times and support failing industries though tax payer support or nationalization.  He and his supporters believe that the stimulus to the economy will create more employment which in turn means more tax dollars to be collected. In the medium to long term, this school of thought thinks that the growth created will more than outweigh the new debts (and costs) being created by borrowing more.   

What if Both are Wrong?

It is possible that neither school of thought is valid and both will fail. The problem may be that most of the advanced economy countries are so far in debt that there can be no turnaround. 

Increased austerity may only create greater economic misery and the savings from less debt will not be sufficient to allow the economy to take off again. As such, increased austerity means a shrinking economy with more unemployment and greater social welfare costs which means greater debts which means less government money which means more unemployment which means – well – you get the point.   It is a death spiral.  This problem was highlighted by a recent IMF report which suggests that austerity cuts do not have the positive impact hoped for.

Increased stimulus means greater debt, which means next year’s budget will have to support more interest payments on the debt which means that you will have higher debt payments which means you will have to borrow even more money which means even higher debt payments which means......another debt induced death spiral.   

Conclusion? 

If governments involved had only modest debt levels, then either approach might be reasonable based on the unique circumstances of individual countries.

However, with most national governments in Europe and North America having been on debt fueled spending binges dating back to the 1980s or 1990s, they are so far in debt that they are in a death spiral in either case.   (Hello to Norway, one of the notable exceptions which is cash rich due to oil resources and good long term planning!)

The solution – or at least the result -  will be a major system reset which will involve massive cuts in government spending or a number of governments defaulting on national debts – at least to foreign donors.  (Hello Argentina in 2002, Zimbabwe in 2006 or Brazil in 2000.)  This means at least another lost decade, especially for the youth group of 16-29.

This is economics for the rest of us – with chaos and confusion ahead as debt levels continue to soar and no workable solution in sight.

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 Annex on Debt

Some of the debt levels are so massive that they are literally not comprehensible to the average person. For instance: 

USA – 16 trillion dollars of debt or close to 100,000 dollars for every working American. This does not include unfunded liabilities such as entitlement programs which may equate to considerably more than the stated national debt.  It also does not include state and municipal debts (Hello Detroit!)

UK - £1,111.4 billion at the end of December 2012, equivalent to 70.7 % of GDP (Yup – that is more than a trillion pounds). This is only debt to the private sector and does not include unfunded liabilities. Even with low interest rates, this means the UK government will have to spend at least 47 billion pounds on debt payments next year.  Imagine what could be done with 47 billion pounds if it was not going to the money lenders.

Italy – somewhere north of 2 trillion (with a T) Euros and rising with a shrinking economy. 

Spain – close to 900 billion Euros and rising fast despite having ransacked the national social security savings pool last year.