Alasdair Macleod: A Tale of Two Currencies…”Now is the calm before the storm”

Wednesday, April 6, 2016
By Paul Martin
April 6, 2016

There is a widespread and growing feeling that financial markets are slipping towards another crisis.
Now is the calm before the storm, a storm which in the absence of a good grasp of price theory, central banks are simply not equipped to weather.
The only shelter for individuals is sound money, money that cannot be expanded by governments and their licensed banks, which is gold and silver.

Submitted by Alasdair Macleod:

There is a widespread and growing feeling that financial markets are slipping towards another crisis of some sort

.In this article I argue that we are in the eye of a financial storm, that it will blow again from the direction of the advanced economies, and that this time it will uproot the purchasing power of major currencies.

The problems we face have been created by the major central banks. I shall assume, for the purpose of this article, that a second financial and monetary crisis will not have its origin in the collapse of China’s credit bubble, nor that Japan’s situation destabilises. These are additional risks, the first of which in particular is widely expected, but are subject to the control of a command economy. They obscure problems closer to home. Instead I shall concentrate on two old-school economies, that of the US and the Eurozone, where I believe the real dangers lie.

While the Fed has made some progress in making US banks reduce their balance sheet leverage, the Eurozone’s banking ratios have remained stubbornly high. Of course, new regulations have been introduced, but banks still game the system, and monetary policy has continued to blow financial bubbles. The message to large bank depositors, typically those with more than the insured $250,000 or €100,000 at risk, is that little has changed for the better.

All central banks in the advanced economies have tried to make their banking systems water-tight since Lehman, instead of addressing the underlying issues. After the banking crisis of 2007-08, the G-20 commissioned the Financial Stability Board to come up with recommendations to help prevent governments from picking up the tab on future banking failures. The terms of reference simply omitted to address the underlying issues. The result was agreement on bail-ins to deal with future insolvencies, and all G-20 member states undertook to introduce legislation to permit their central banks to override the normal creditor pecking-order in a bank failure.

Bail-ins put big deposits at greater risk than bail-outs, because they are swapped for equity that is usually worthless, instead of having a central bank guarantee behind them. However, in a future systemic crisis, bail-outs are still more likely than bail-ins, because the priority for the authorities will always be to keep money functioning as normally as possible. Whichever way this issue is dealt with, the larger depositors are bound to be considerably more sensitive to losses in the run-up to a banking crisis today than they were in the wake of the last crisis, because of the bail-in question. And there is always the fact that no two crises are the same, so the Fed’s rescue plan, which saved the world the first time, might not work so well the second time.

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