Cypriot Crisis Reveals Lack of Rule of Law in Europe

From today's Daily Reckoning:

According to The New York Times, Mr. Artemis “complained that authorities rode roughshod over him and his board of directors by moving unilaterally to sell off units of the bank in Greece and planning to hit big depositors to pay for losses.”

How did this tiny island make it into the European Union (EU) in the first place? The Financial Times gave an insightful background:

“Many EU leaders had been deeply reluctant to admit Cyprus into the union in 2004, without a peace settlement that reunified the island. But Greece had threatened to veto the entire enlargement of the EU — blocking Poland, the Czech Republic and the rest — unless Cyprus was admitted. Reluctantly, EU leaders succumbed to this act of blackmail.”

Five years later, we are seeing the fallout of Cyprus due to Greece’s financial woes. Many accuse Greece of cooking the books to get into the EU, and then the country proceeded to blackmail the EU at the expense of other European countries.

 How did Greece get veto power over admittance of other nations to the EU? Apparently, once a country becomes a member of the EU, it can blackball admittance of other members unless its extortion demands are met. What a great organization! What genius designed this?

Here's the bottom line: there is no benefit that a country can derive from EU membership that it cannot derive more cheaply and with no loss of sovereignty by simply adopting unilateral free trade.

My letter to the Wall Street Journal re: Get Government Out of Money and Banking

Re: Bailout Strains European Ties

Dear Sirs:
This disgusting farce of a week of backroom squabbling by incompetent and clueless politicians and irresponsible bureaucrats over the future of the Cypriot banks should spur a public outcry to get government completely out of money and banking. The public has too long harbored an inflated opinion of the expertise of government officials that is completely unwarranted, as the Cypriot banking crisis has revealed. After creating the conditions for massive wastes of resources by manipulating the money supply and interest rate through their central banks, these same politicians and bureaucrats barter with one another like Arab rug merchants, giving no consideration to the legality of their actions or the rights of the parties involved. Were banks subject to normal commercial law, the courts would appoint receivers to liquidate and/or restructure problem banks in an orderly fashion. Politicians would have nothing to do with it. It is the politicization of money and banking that has created one money and banking crisis after another all over the world. Banks should be required by normal commercial law to keep one hundred percent reserves against demand/current accounts. Such accounts are bailments and not loans to the banker; as bailments, the bankers must be able to satisfy withdrawal demands from all depositors en mass. Savings are another category of bank liabilities, whereby the public loans its money to the banker for a set period of time. The banker re-loans this money at interest. The only possible security for the saving public is the banker's capital account and his reputation for good banking practices. If his losses become too great, the public can force him into bankruptcy. Were banks subject to these completely normal requirements of commercial law, there would be fewer problem banks, because bad bankers would be driven from the market.

My letter to the Wall Street Journal re: The Cypriot deal solves nothing

Re: Cyprus Gets New Bailout Deal

Dear Sirs:
In addition to being anti-democratic ("The bank restructuring doesn't need approval by the Cypriot Parliament. German Finance Minister Wolfgang Schäuble said Monday that the legislation needed to complete the restructuring of the Cypriot banking system is already in place."), the so-called bailout of Cyrus solves nothing and treats its residents as serfs ("Officials said they believe the country will now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the euro zone's financial system."). The cause of the crisis was not the run on the banks but the market's recognition of the reality. The misconstructed euro caused massive malinvestment leading to massive bank losses. So, what has changed to prevent future losses? Nothing! In fact the European Central Bank is pumping out even more money in the foolish belief that it can jump start the economies of its members. All it is doing is causing even MORE malinvestment and making future crises worse. As is standard operation procedure for incompetent and irresponsible bureaucrats everywhere, the people lose their money AND their freedom.

My letter to the NY Times re: What, Me Worry?

Re: A Bank Levy in Cyprus, and Why Not to Worry

Dear Sirs:
Is there any coercive and illegal act by a government anywhere that Andrew Ross Sorkin will not either endorse or rationalize away into the corn field? Apparently the outright attempted theft by the EU and IMF of Cypriot bank customers is just fine with him. He reminds me of the old Mad Magazine byline: What, Me Worry? When will the great New York Times start examining the real lessons of the euro debt crisis, whose latest victims are the Cypriot bank depositors? It should be apparent that there IS a limit to how much phony money central banks can print in order to cover up the wealth destroying effects of fractional reserve banking. Ah, yes, we may all actually have to learn something, even New York Times columnists, about the real nature of banking as a depository of current account funds, for which the bank must maintain one hundred percent reserves, and as a fiduciary intermediary, in which the saver lends his money to the banker for the banker's further lending to his borrowing customers at interest. The former banking service is completely sound as long as the banker abides by normal commercial law and is prepared to meet his depositors' obligations at any time, even if they all descend upon the bank at once. The latter banking service cannot be guaranteed beyond the banker's capital fund and his reputation for sound lending practices. So-called deposit insurance is no insurance at all, but merely a promise by the central bank to print as much money as necessary when the banker cannot meet his legal obligations himself. Fractional reserve banking has violated sound financial and economic laws, which has led to greater and greater crises. Finally the Germans have said enough, which has revealed the true rot not only in Europe but all over the world, for banking systems everywhere have adopted this fallacious fractional reserve model.

A lesson from Cyrus on the danger of fractional reserve banking

This Spiegel Online International article contains a hidden lesson in the danger and fallacy of fractional reserve banking, which is completely dependent upon the willingness of the people NOT to demand their money all at the same time. Murray N. Rothbard explained this fraudulent system in The Mystery of Banking. You can download the relatively small book for free from this website. Pay special attention to the chapters on separating deposit banking from loan banking. Deposit banking (demand deposits or current accounts) must be back 100% by reserves. Loan accounts are the only interest-bearing accounts, because the depositor LOANS his money to the banker to re-loan to his customers at interest. There can be no deposit guarantee other than the banker's capital account and his reputation. Know this--there is no such thing as deposit insurance. What everyone calls insurance is merely the government's promise to print as much money as needed to bail out the banker when he cannot meet his contractual obligations to repay his depositors. Such deposit insurance creates moral hazard, whereby bankers take increased risk knowing that their losses will be partially born by others. This is why J. P. Morgan's early 20th century attempt to create a private insurance fund failed. All he created was moral hazard that encouraged members of his consortium to take increased risk. As a result, Morgan and others lobbied mightily for the federal government to create a central bank that would bail them out of their periodic liquidity crises.

The Great Cypriot Banking Heist is making all this very clear to those who take the time to understand the REAL business of banking.

My letter to the Financial Times, London re: the fallacious goal of self-sufficiency

In your report about Japanese scientists unlocking methane stored in ice, you state that "production costs for methane hydrate-derived gas...is nine times the US LNG benchmark...Japan typically pays about four times the rate..."

This is too high a price to pay for the dubious honor of becoming more energy self-sufficient. In fact, there is no honor at all in wasting the nation's capital for the fallacious mercantilist goal of self-sufficiency in anything.

My letter to the NY Times re: Intent on Destroying the Yen

Re: Nominee for Japan's Central Bank Vows Aggressive Action

Dear Sirs:
Japan's new prime minister, Shinzo Abe, wanted a reckless central banker and he certainly found one in Haruhiko Kuroda. In a world of inflationists he is the current title holder. The failed Keynesian policies of money printing haven't worked for twenty years, but that isn't stopping the new head of the Bank of Japan from printing money until he destroys the yen, with the stated intention of "ending deflation". But what is wrong with deflation? Deflation means lower prices. Aren't lower prices what we all seek? Won't lower prices mean a rising standard of living even if one does not get a pay raise...perhaps even if one takes a pay cut? And aren't artificially high prices a barrier to economic equilibrium; i.e., if housing prices are so high that no one will buy, then prices must come down. Trying to prop up prices merely keeps the glut on the market. The Japanese people have been doing their fair share of innovating, working hard, and saving, but government and the central bank have been spending and inflating away all the people's good work. This horrible experiment in monetary central planning must end.

Send in the Clowns or How Unsound Money Gives Us Weak Leadership

The adverse consequences of fiat money credit expansion keep piling up.  Sometimes it seems that almost everything wrong with society today can be traced back to unsound money.  I know that I may sound like the heroine's father in the movie "My Big, Fat Greek Wedding", who annoyed his family and friends with his claim that every English word could be traced back to the Greek, but hear me out.  The Italians have just given more votes to a new political party, the Five Stars Party, with Beppe Grillo, a professional comedian as its spokesman.  Caretaker prime minister Mario Monti, called a technocrat, was punished for attempting to instill some sort of discipline in the Italian budget.  The electorate would have none of it.  The Slovenians just threw out their prime minister for recommending what has come to be called "austerity", meaning fiscally responsible government.  Even the usually responsible Dutch have announced that they will not meet the European Monetary Union's goal of a three percent or less government deficit this year...maybe next year...or maybe never!  The new prime minister of Japan has announced that he will appoint a new head of the Bank of Japan based upon the nominee's promise to drive the yen lower and generate more inflation.  And in America Fed Chairman Bernanke just testified before Congress that he will keep interest rates at zero until unemployment meets his goal.  Monetary responsibility?  Ha!

Fiat Money Makes It Appear that Resources Are Unlimited

 Fiat money, created in unlimited amounts by national central banks, allows government to claim more resources than under a sound money regime.  Over time the public grows to demand more and more from government, knowing that government's ability to print money allows it to confiscate resources and transfer them to special interest groups.  Any public concern that printing money might be harmful is ridiculed as a failure to understand its stimulative effect, as proven by Lord Keynes himself.  Europe is much further down this road than America, but we are determined to catch up.  With the ability of central banks to buy unlimited government debt, the public has grown to look upon any politician who recommends spending restraint as a throwback to the Dark Ages of analog television.

The effect of fiat money's "collective corruption", a term coined by Professor Thorsten Polleit, is to elevate society's time preference.  Societal values that reflect the way in which man must act to succeed in the real world are eroded over time.  The real world requires savings in order for society to progress.  Savings takes time.  Keynes' emphasis on aggregate demand would have us believe that consumption is the path to progress.  If this is true, why wait?  Consume now.  Since the central bank can funnel money to government in almost unlimited amounts, it appears that there is no reason to wait.  So we constantly hear that the failure of the capitalist economy must be overcome by government action, and any political leader who advises otherwise will be destroyed at the polls.  Thus has arisen a new kind of political leader, one whose theory of government matches that of the misled electorate.

Leadership Traits for Sound and Unsound Money Economies

Below are listed societal values and leadership traits that are appropriate for economies with sound and unsound money.

 Values of a Sound Money Economy:

Savings encouraged in the young
Low time preference required to save
Government spending reduces wealth
Self-reliance celebrated
War consumes wealth
Minimize debt
Private charity encouraged
Private property protected

Leadership Traits in a Sound Money Economy:

Stable private life
Man of personal achievement
Restrained, modest demeanor
Patient and respectful of others
Age a sign of maturity and wisdom
Respect for the law
Frugal
Resists foreign entanglements

 

Contrast the societal values and leadership traits above with those of an unsound money economy.

 Values of an unsound money economy:

Spending encouraged in all age groups
High time preference required to spend
Government spending stimulates wealth
No shame in dependency
War stimulates wealth
Leverage debt
Public welfare as an entitlement

Leadership traits in an unsound money economy:

Private life is irrelevant
Achievement in private life is irrelevant
Flamboyant lifestyle
Impatient and disrespectful of others
Youth a sign of vigor and willingness to act
Disrespect for the law
Spendthrift
Interventionist overseas

Unsound money elicits a leader who will spend and spend

One can see that the traits required by leaders of a sound money economy are not those that will be accepted by voters in an economy with unsound money.  As much as we may desire thoughtful, wise, frugal leadership, the electorate in an economy with unsound money will not accept anyone with those traits.  Instead it will desire those leaders who are most willing to exploit ruthlessly the ability of government to increase state spending.  Thus, most nations at war eliminate sound money as a war measure, because the electorate will feel the war's expense sooner and, therefore, question the wisdom of continuing.  Domestically, citizens in an unsound money economy expect the government to "do something" about helping them get a college education, the house of their dreams, free prescription drugs, and now even free healthcare.  If you can dream it, government should provide it!  And remember, we need not worry about mundane matters like cost and debt, because all this will take care of itself through the wonders of an expanding economy, stimulated to greater production by government spending of fiat money.

The lesson is clear--wise, frugal, thoughtful leaders need not apply.  A comedian leading the largest party in Italy is simply a manifestation of a process that has been at work for some time and is becoming the new norm.  Experience, integrity, knowledge, etc. are not prerequisites to leadership.  The public desires only a promise to spend...and the more recklessly the better.  Unsound money is a blatant attack on economic reality and leads inevitably to the kind of leaders who are best suited for operating in this environment; i.e., fast-talking, glib charlatans with movie-star good looks and low academic, military, and business achievement.  We want our leaders to entertain us in good times, placate us in bad times (feel our pain), and tell us that we are not responsible for ourselves...that government will take care of us via social programs that can only be funded by unlimited amounts of unsound money.  Until this tyranny of unsound money is removed as a tool of government, we can expect leaders who are as weak and debased as the currency they print.