Cyprus and the Eurozone Crisis shows why we’d be better off with a Gold Standard

Posted by PITHOCRATES - March 30th, 2013

Week in Review

Debtors love inflation.  They love to borrow cheap dollars.  And love even more to repay their loans with even cheaper dollars.  Creditors, on the other hand, hate inflation.  Because they are on the other side of that borrowing equation from the debtor.  And when a debtor repays a loan with depreciated dollars the creditor who loaned that money loses purchasing power.  Causing the creditor to lose money.  Just because they had the kindness to loan money to someone who needed it.  Which is a strong disincentive for making future loans.

This has long been at the heart of all banking wars.  And banking crises.  The fight between paper money and hard money.  Printed dollars versus specie (gold and silver).  People who want to borrow money love paper.  Because banks could make a lot of it to lend.  Something they can’t do with gold and silver.  Because it takes a lot more effort and costs to bring new gold into the economy.  Those who want to borrow money argue that hard money hinders economic activity.  Because there is a shortage of money.  And because governments are always interested in boosting economic activity they are always in favor of expanding the paper money supply.  This generous expansion of credit is currently miring the Eurozone in a sovereign debt crisis.  And launched a confiscation of wealth in Cyprus.  Greatly threatening the banking system there.  As few depositors trust their money will be safe in their bank.  Causing people to return to specie (see Cypriot bank crisis boosts demand for gold by Ian Cowie posted 3/27/2013 on The Telegraph).

The Cypriot banking crisis reminds even the most trusting savers that not all banks or jurisdictions are safe – and is boosting demand for gold, bullion dealers claim.

As if to prove the old adage that it’s an ill wind that blows no good, enthusiasts for the precious metal argue that financial shocks in the eurozone are reminding savers of gold’s attractions…

[Daniel Marburger, a director of Jewellers Trade Services Partners (JTS)] said: “The situation in Cyprus has reignited the wider Eurozone sovereign-debt crisis. At a time like this, people are attracted to gold because it is the ultimate crisis commodity.

“The proposed levy on deposits of Cyprus’s savers has not only shaken confidence in the single-currency Eurozone, it illustrates the fragility of savings held within the banking system. In our experience, clients are attracted to gold because it offers insurance against extreme movements in the value of other assets. Unlike paper currency, it will never lose its intrinsic value…”

“The events in Cyprus prove once again that bank customers do face risks as creditors who are owed money…”

When you deposit your money into a bank you become a creditor.  You are loaning your money to the bank.  Who pays you interest to loan your money to others.  If the inflation rate is greater than the interest you earn your money actually shrinks in value.  And the more they print money the more it shrinks in value.  That’s why as a creditor you won’t like the harmful effects of inflation.  Even if it makes the people happy who borrow your money from the bank.  Because they get a real cheap loan at your expense.

Which is why people are drawn to gold.  Because they can’t print gold.  So it holds value better than paper.  And the government can’t just confiscate a percentage of your savings if it isn’t in the bank.  Another reason why people are drawn to gold.  If the banking system collapses, or if the government seizes people’s retirement savings to ward off a banking system collapse, people can take their gold and move somewhere else that isn’t having a financial meltdown.  And not lose any of their wealth.

Which is, of course, the last thing you want to happen in a country.  For a sound banking system is essential for a prospering middle class (if it weren’t for banks only rich people would own homes, cars, go to college, etc.).  Which is why a responsible monetary policy, and responsible people in government, is a prerequisite for a sound banking system.  Which few nations in the Eurozone have.  As few nations throughout the world have.  For they all want to buy votes by giving away free stuff.  And having the power to print money allows them to give away a lot of free stuff.  Pensions.  Health care.  College educations.  Lots and lots of government jobs.  Etc.  But there comes a point when you give away too much.  And you have sovereign debt crises.  As well as confiscations of wealth.

This was the advantage of a gold standard.  Like when we coupled the value of our world’s currencies to the price of gold.  It did not allow any nation to inflate their currency.  For if they did people would exchange that devalued currency for the fully-valued gold.  A strong incentive not to devalue your currency.  Which was nothing more than a promise to pay in gold.  The gold standard kept governments responsible.  But because it made it so difficult to buy votes everyone cheered when President Nixon decoupled the dollar from gold.  Putting an end to the last vestiges of a gold standard.  Allowing governments everywhere to be irresponsible.  Bringing on financial crises.  And the confiscation of wealth.  As we see happening in Cyprus.  And will no doubt see elsewhere.

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The Cyprus Bailout includes the Confiscation of People’s Personal Savings

Posted by PITHOCRATES - March 17th, 2013

Week in Review

President Obama isn’t worried about the deficit.  Or the debt.  Neither are Democrats.  Who see no problem with increasing federal spending even more.  Probably because there are Nobel Prize winning economists like Paul Krugman saying deficit spending is a good thing. Because what can possible go wrong with spending money you don’t have?  No doubt the very same things they were saying in Greece.  Italy.  And Cyprus (see Analysis: Cyprus bank levy risks dangerous euro zone precedent by Mike Peacock posted 3/17/2013 on Reuters).

A hit imposed on Cypriot bank depositors by the euro zone has shocked and alarmed politicians and bankers who fear the currency bloc has set a precedent that will unnerve investors and citizens alike.

After all-night Friday talks, euro finance ministers agreed a 10 billion euro ($13 billion) bailout for the stricken Mediterranean island and said since so much of its debt was rooted in its banks, that sector would have to bear a large part of the burden.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across Cyprus – the ministers are forcing the nation’s savers to pay up to 10 percent of their deposits to raise almost 6 billion euros…

The decision sent Cypriots scurrying to the cash points, most of which were emptied within hours. Most have been unable to access their bank accounts since Saturday morning, a move unlikely to engender calm…

A Cypriot bank holiday on Monday will limit any immediate reaction. The deposit levy – set at 9.9 percent on bank deposits exceeding 100,000 euros and 6.7 percent on anything below that – will be imposed on Tuesday, if voted through in parliament…

“I understand that electorates in Germany and northern Europe demand some sacrifice. However, when you accept a solution that basically expropriates 10 percent of deposits, you set a dangerous precedent,” Vladimir Dlouhy, former Czech economy minister and now international advisor for Goldman Sachs told Reuters in Berlin. “If we get into deeper trouble, God help us, they may try to take 50 percent.”

Ouch.  That’s what can go wrong with too much government spending.  And too much debt.  The government will just seize your money.  Scary.  Hearing stuff like this makes you pay a little more attention to that idea someone floated about the government expropriating 401(k) retirement accounts.  Taking our retirement money.  But being magnanimous enough about it to give us something valuable in return.  A promise to pay us a fixed retirement benefit.  Something as reliable and solvent as Social Security.  Preferably like it used to be.  Before they began forecasting it was going bankrupt.

So this is the downside to spending money you don’t have.  Bank runs.  As people pull their money out of our banks before the government can seize it.  Causing banks to fail.  Crashing the economy into a depression.  Just like all those bank failures in the Thirties caused the Great Depression.  But other than this there is little to worry about spending money you don’t have.

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