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How Your Bank Could Steal Your Money

By Bill Bonner on June 22, 2015

The Dow ended the week back above 18,000 points, despite all the hand-wringing over a potential Greek default.

Gold fell back below the psychologically important $1,200-an-ounce mark.

It is a wait-and-see period.

We are waiting to see what will happen with Greece, for example.

An emergency summit will be held today in Brussels to determine its fate. More on that in today’s Market Insight, below.

A Heinous Accusation…

But before we get to the Greeks, we rise to our own defense.

Last week, a reader leveled a heinous accusation – a dirty blow, beneath the belt, outrageous, and hideous.

He implied we were a closet Democrat.

Can you imagine?

Our escutcheon sullied… our dignity impugned… our intelligence and savoir faire challenged in such a defamatory manner!

Wrote Diary reader Bud S., in response to our recent series, “The Good, the Bad, and the Ugly” (To catch up, here’s Part I, Part II,Part III, Part IV, and Part V):

Commenting on Bill’s current list of ugly people, it seems like the common denominator is that they’re all Republicans.

Hmmm… How can you have a list of ugly people without a Clinton or an Obama on it?

Hmmm… very interesting, guess you can make of that what you will.

Let us assure readers we are not now, nor have we ever been, a Democrat. Not even with a small “d.”

We confess that in our youth – our lungs filled with the gas of civic virtue and our head with delusions of democracy – we once pulled the lever for Jimmy Carter.

As presidents go, he was not the worst. But we quickly realized our error and swore off voting forevermore – a pledge that we have solemnly honored ever since.

If our barbed words seemed to prick Republicans lately, it is only because – at least as far as the zombie wars are concerned – they are the loudest and dumbest jackasses in the field.

Yes, there are plenty of Democrats in this pasture, too. But you get the impression that their motives are purer. They are just in it for the money. And the Imbecile Vote – which is, of course, decisive.

Showdown in Europe

Back in Europe it is like a showdown in an old TV Western.

Greece on the one side… Germany on the other.

Each in the street, facing off, waiting for the other to blink an eye or draw his gun.

And waiting… And waiting…

One deadline passes. Another approaches.

If we had money in Greece, we’d definitely want to make sure our passport was up-to-date and our savings were outside of the country.

Apparently, there are a lot Greeks with the same idea. The Wall Street Journal reports that cash outflows from Greek banks doubled in the last four days. The smart money is voting – to leave.

Big banks are private businesses. But they are so closely connected to the government and so heavily regulated that they may as well be public utilities.

Banks are responsible for creating roughly 90% of the money supply. They do this by simply lending money into existence.

Banks are also tools for “public policy” implementation – that is, for clumsy and counterproductive central economic planning. They play an integral role in QE. And overnight lending rates between banks determine where short-term interest rates go.

The feds also bail the banks out when they get in trouble…

You may think you have “money in the bank.” You don’t. Your “deposits” are really loans to the bank.

You lend it your money. It agrees to pay you back – under certain conditions. And it can change those conditions when it has the backing of the feds.

Our Meeting with the President

As the crisis nears, first the feds will limit withdrawals to a certain amount per day. The amount will seem reasonable; most people will see the need and not be inconvenienced.

But a growing number will see the handwriting on the wall… and begin taking out as much cash as they can. Then the feds will reduce the maximum withdrawal limit. Then they’ll ban withdrawals altogether.

When your bank reopens, your deposits could be subject to a tax (a negative interest rate). Or they could be transformed into a different currency.

That’s what happened in Argentina at the start of the new millennium. And it’s what could happen in Greece too.

We were involved personally, in a minor way, in the Argentine crisis. It was the late 1990s. The government of Carlos Menem had pegged the peso to the dollar. But the Argentine version violated just about all the rules of how a currency peg should work. And the smart money was beginning to bet that he couldn’t hold the peg.

We visited President Menem in the Casa Rosada. (The U.S. has a White House. Argentina has a Pink House.)

“Are you going to keep the peg?” we asked.

“Of course, we’re going to keep it. There is no way we would ever abandon it. It is now the heart of our economy. It is why foreigners such as you are willing to invest in Argentina, because you know the currency is safe. It is the reason we have such a booming economy.”

A few months later, Argentina abandoned the peg. It closed the banks. People had tried to protect themselves from a devaluation of the peso by opening accounts in dollars. But when the banks reopened, they discovered that their dollars had been converted to pesos – with a 66% loss!

The important insight is that government and banks always work together to protect themselves – not you.

Is Your Money Safe?

We saw it happen in Cyprus, too. The government there (working with the big banks) changed the terms of the deal – suddenly and, for depositors, catastrophically.

It gave big depositors – with over $100,000 in the bank – a haircut and a shave equal to nearly half their money. Why?

The Cypriot banks had bought Greek government debt. The fall in value of those bonds (the Greeks couldn’t pay then, either) left the banks on the edge of bankruptcy.

The loss was very real. Who ended up paying for it?

The banks that made the bad investments? The government that regulated the banks and forced them to buy government bonds?

Nope. The depositors! Innocent, but perhaps naïve, the depositors got scalped.

And now, Greek depositors – the smart ones, at least – are taking precautions. They yanked out €3 billion ($3.4 billion) this week – or about one-quarter of all deposits for the year.

In the U.S., the FDIC guarantees individual deposits at member banks up to $250,000.

How good is that guarantee?

In a pinch, all sorts of things that you took for granted suddenly have question marks behind them.

What’s the bank’s collateral really worth? How much does the bank have in reserves? How much does the FDIC have? How long will I have to wait to get my money? What will it be worth then? What will I do in the meantime?

You may want to take precautions too.

Regards,

Signature

Bill
Paris, France


 

Market Insight

Investors Bet on Eleventh Hour Greece Deal

by line

 

An eleventh hour deal on Greece looks likely…

The Athens Stock Exchange soared 8.5% this morning on hopes that a default would be averted.

But even if Greece does default, investors are betting that any financial contagion will be limited.

If investors believed a Greek default would call the solvency of other deeply indebted European nations, such as Spain and Italy, into question, the price of Spanish and Italian bonds would be in free fall. This is what happened in the summer of 2012, the last time the European financial crisis reached a crescendo.

But although yields – which move in the opposite direction to prices – on Spanish and Italian debt rose last week, they were up only modestly.

062215 DRE Spainbond

062215 DRE Italybond

As you can see above, yields on Spanish and Italian 10-year debt are up 1 percentage point since their record lows in March.

But that’s still well below previous highs – a strong signal that any potential Greek default will be contained.

Spanish yields peaked at 7.6% in July 2012, while Italian yields hit a high of 7.2% in November 2011.

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