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Page added on March 26, 2013
Orlov: Bangs and Whimpers
Quite a few people wrote to me over the past week asking about all the noise coming out of Cyprus. If you haven’t heard, there is a financial collapse that is unfolding there: banks are closed and people can’t get at their money. The Cypriot banks are insolvent. This is no surprise: all banks everywhere are insolvent, and would fail immediately were the various types of ongoing bailouts to suddenly stop. These bailouts include an ever-longer list of annoying financial jargon—liquidity injections, quantitative easing, toxic-asset-purchasing by central banks, accounting tricks such as “mark-to-fantasy,” which allows them to make bogus claims as to the value of their assets, yadda-yadda. The point is, the financial system failed in 2008, and stayed that way. The faulty formula behind all modern finance is debt raised to the power of time, and only works when there is exponential growth in economic activity and energy. Energy’s exponential growth stopped in 2005 due to resource depletion; three years later finance collapsed. Permanently. Since then we have been witnessing a global game of “extend and pretend,” which cannot be played indefinitely. If something can’t go on forever, it doesn’t.
Perhaps you have also heard about the nasty Russian oligarchs who used Cyprus as an offshore to launder their ill-gotten gains. Russian interests stand to lose tens of billions of dollars on the Cyprus fiasco. They were going to use that money to put their young idiots through Harvard, snap up Miami real estate, cruise the Mediterranean in megayachts and so on, and they probably still will. But they are not at all happy, still sore from what happened in that other EU offshore, Iceland, and thinking of something to do about it—something painful, embarrassing, or both. By the way, the money-laundering charge is just anti-Russian bigotry, which is a hold-over from the Cold War. You see, when Apple Computer parks its cash offshore, that’s called “minimizing international tax exposure.” But when a Russian company does it, it’s called “international money-laundering.” Cheating and stealing are the last two competencies left in modern finance, yet when Russians do it it’s somehow considered bad? That is just hypocrisy pure and simple.
In case anyone wants a solution to the Cyprus crisis, I have a modest proposal. Take Cyprus out of the Eurozone and make it part of the Ruble Zone. Pay depositors in full, in Russian Rubles. Now reprice and sell Russia’s natural gas exports to Europe in Rubles. Eurozone would still be insolvent, but Cyprus would be fine and the Russian depositors would be happy. Of course, Germany et al. would have to start exporting products to Russia at a steep discount to earn the Rubles to pay for the gas. Failing that, they could buy Rubles using Euros, and then Russia would turn around and use them to buy gold.
What the Cyprus crisis exposes is just the tip of the financial collapse iceberg. Cyprus is small, far away, and by itself unlikely to crash the entire system, but you never know—icebergs are known to flip and crumble unexpectedly. But taking a slightly longer view, the experience the Cypriots are going through exposes the risk of having all of your eggs in the one basket labeled “finance.” If you want to maximize your stupidity, keep your money in a bank or any other financial institution. A slightly less stupid strategy is to hold wastebaskets full of physical Dollars or Euros (which will eventually be worth their weight in recycled paper). Less stupid still is the strategy of holding precious metals (which will probably be confiscated once governments become sufficiently desperate). There are some non-stupid options as well, but if you want to learn about those you will have to read my book (which is going to press this week).
Speaking of which, here is this week’s excerpt:
A likely endgame
Here is a likely endgame for the finance and import-driven global economy. Supposing global finance suffers another “whoopsie” à la 2008: a “credit event,” money markets lock up and so on… This scenario has been rehearsed once already, and nothing has been done to prevent it from happening again except for some temporary stopgaps consisting of national governments sopping up all the bad debt. What is different now is that all the governments have already shot all of their magic bailout bullets. The guilty parties are still at large, richer than they were before this crisis and probably thinking that the next crisis will make them even richer. The last time it happened, President Bush the younger famously declared: “If money isn’t loosened up, this sucker could go down,” and money was indeed loosened up, and is getting looser all the time. But how loose is too loose? At some point we are bound to hear, from across two oceans, the shocking words “Your money is no good here.”
Fast forward to a week later: banks are closed, ATMs are out of cash, supermarket shelves are bare and gas stations are starting to run out of fuel. Nothing useful happens when people swipe their credit cards at the few stores that remain open (not that anyone is shopping, except for food and ammo). And then something happens: the government announces that they have formed a crisis task force, and will nationalize, recapitalize and reopen the banks, restoring confidence. In short, the government will attempt to single-handedly operate their corner of the global economy by other means. The banks reopen, under heavy guard, and thousands of people get arrested for attempting to withdraw their savings. Banks close, riots begin. Next, the government decides that, to jump-start commerce, it will honor deposit guarantees and simply hand out cash. They print and arrange for the cash to be handed out. Now everyone has plenty of cash, but there is still no food in the supermarkets or gasoline at the gas stations because by now the international supply chains have broken down and the delivery pipelines are empty. Restarting them requires international credit, which requires commercial banks to start operating normally, and that in turn requires functioning supply chains and retail.
8 Comments on "Orlov: Bangs and Whimpers"
GregT on Tue, 26th Mar 2013 2:41 pm
Thank you for being a voice of reason Dmitry, I patiently await my signed copy of your new book.
Arthur on Tue, 26th Mar 2013 7:44 pm
“I have a modest proposal. Take Cyprus out of the Eurozone and make it part of the Ruble Zone. Pay depositors in full, in Russian Rubles. Now reprice and sell Russia’s natural gas exports to Europe in Rubles. Eurozone would still be insolvent, but Cyprus would be fine and the Russian depositors would be happy.”
GDP EU-18T$, Russia-2T$.
Dream on, Dmitri. Did you check if Cyprus is interested? They aren’t. And last time I checked, Russia still gets top money for it’s oil and gas by Europe, so what do you mean ‘insolvent’?
Don’t feel sorry btw for Cyprus… just on the Dutch news: before the crash you could not buy a car there below 70,000 euro (100,000$). Everything was luxury and big spending, thanks to a banking sector 8 times the real economy. Go back to your goats and olives, you Cypriots. Now that rhymes.lol They thought they would be bailed out, but tough luck, they were not. Has nothing to do with peak oil, or an impending crash of the financial system, just recklessness and stupidity.
And Dmitri can go back to the biggest hobby in his life, predicting that the US will collapse, just like his USSR of former fame.
GregT on Tue, 26th Mar 2013 9:01 pm
According to the CIA world fact book, the EU debt to GDP was 82.5% in 2011, Russia’s was 8.3%. 82.5% is about as close as you get to being insolvent. Raise interest rates a couple of percentage points and it is game over.
Arthur on Tue, 26th Mar 2013 10:27 pm
In Holland it is common for starters to take a mortgage 3-4 times the yearly income. They live and work 30 years and the mortgage is paid off, like in my case. So a debt of 1* yearly income is unspectacular.
Debt levels:
EU – 82
US – 101
Japan – 200
The state debt levels of EU or US in itself are completely unproblematic. The trouble lies in the rapid systemic increase of the debt, first and foremost in the US. And even more problematic are the unfunded liabilities (medicare, pensions, handouts, veterans, empire). In the US 13 times GDP and EU ca. 3 times GDP.
GregT on Wed, 27th Mar 2013 12:10 am
Sorry Arthur,
I have to disagree with you. The government debt levels that we see in the US, EU, and Japan are highly problematic, as they are as well in Canada. That is why it is referred to as a sovereign debt CRISIS. The only way out is through austerity. Whether by QE, inflated currencies, taxes, etc. doesn’t matter, in the end it is our purchasing power and quality of life that will suffer.
While I cannot speak first hand as to what is occurring in the EU, from what I see daily in the media, it would appear that all is not well, to say the least. I also hear on a daily basis that Europe could be the disaster that will start the domino affect that may very well bring down everyone else with it, including Canada. The Prime Minister of Canada has even publicly stated this.
The US government is in very serious trouble. They cannot continue with QE forever, and if they stop, the entire system will implode. People are losing their jobs, their homes, and their entire life savings. The real unemployment rate is approaching the level that was reached during the great depression, businesses are going under left, right, and centre, and one out of every six people in the country are on food stamps. Government at all levels cannot afford to pay their bills, services are being cut, people are being laid off, and in some instances public infrastructure is being sold off to foreign investors.
The trouble is partly due to the tripling of energy costs in every sector of the economy, and partly due to a monetary system that is based on perpetual exponential growth. When growth is limited by constraints in resources, the system becomes riddled with debt, or it comes crashing down. We are perilously close to the crash.
Arthur on Wed, 27th Mar 2013 9:05 am
Greg, there is not that much difference between us, witnessed by the rest of the last sentences of my post. I only said that the state debt level **in itself** would not be cause for alarm… at least not in the old days, of low energy cost and as a consequence growing economy.
You are right, austerity is the only solution and that is what is being applied in Europe, ask the Greeks, Spaniards and Cypriots. The US has the luxury of owning a reserve currency and tries to QE itself out of the budget problems, calculating that the inflation can be distributed over the rest of the planet.
You cannot compare our situation with the thirties… during the past decades the female part of the population started to work as well, not to mention the most effective workers of them all: machinery, automation, trucks, oil tankers, etc. Our level of income is still lightyears ahead of that of the thirties, where people had to worry about the next piece of bread.
Could the financial system crash? Sure, happened in Russia in 1998, where most people lost their life saving:
http://en.wikipedia.org/wiki/1998_Russian_financial_crisis
That directly lead to the rise of Putin and a mild sort of nationalism. The suicide of Berezovski last week btw is a clear sign that the US/NWO has lost any grip it had on Russia, via these jewish olicharchs and these fake human rights infiltrators like the NED or Soros and the rest of it. Russia and China are now firmly owned by Russians and Chinese. Europe is going to be next, starting in Greece, followed by any other country that will be severely hit by the crisis.
Let the crisis come. Let all the savings be wiped out. It will be hard, it is not going to be fun, but there will be a life after it. Pax America/Pax Sovietica are out, globalism is out, mass immigration is out, third world worshipping is out, feminism is out, mass media are out, hollywood is out, travelling is out, liberalism is out, Anglo-Soviet history writing is out, what is required are the survival instincts of nations and homogenous groups and the creativity of the Euro’s (EU+US) to respond to the situation and create a post-industrial society that is still liveable.
GregT on Wed, 27th Mar 2013 4:27 pm
Arthur,
I completely agree.
Contributor1 on Thu, 28th Mar 2013 6:24 am
I believe that Cyprus was a shot over the bow to gauge the global response to the expropriation of personal wealth in broad daylight. If we’d passed the test there would be demonstrations occurring in every city around the world, but our silence communicates our capitulation. We’ve allowed the bankers to assert that “What’s mine is mine and what’s yours is mine.” without even a peep. Another way to put it, “Welcome to 21st century style slavery!” because if my money no longer belongs to me, how about my home and even my body?