After Cyprus, New Tolls For the Euro
2013-03-22 0:00

By Rick Falkvinge | Falkvinge

After the attempted tolls on bank savings in Cyprus for saving the Euro, a new kind of tolls can be heard in the distance for the currency. The fundamental trust in the currency as a store of value has been broken, according to multiple signs across Europe. Even with the Cypriot parliament backpedaling frantically, the situation appears snowballing Ė there could be a bank run in two weeks.

When I was speaking at the first European Bitcoin conference in Prague, another speaker was a seasoned economist whose name I forget. He described how todayís bank system with so-called fractional reserve banking is essentially a crumbling Ponzi scheme. In summary, banks have the right to conjure up money out of thin air and lend that money to you against interest that they get to keep. (Yes, really, thatís actually how it works today, although it is admittedly a very simplified description.) As part of the Q&A, I asked him what the first sign of a collapse scenario materializing would be.

He responded that a first sign of collapse would be that people didnít trust their holdings in the currency to retain their value, so they would actively seek to trade it off for other stores of value Ė other currencies or just about anything else. This was an answer that made sense in the light of the history of known hyperinflations and currency collapses.

In the past days with the Cypriot bailout measure, these first signs of a currency collapse scenario have materialized. People are now actively seeking to trade off their Euros, no longer trusting them as a store of value. When this has happened in the past to currencies, they have not survived.

This was visible on first on Cyprus, where people made a so-called run on the bank to get their money in cash to save it from the negotiated 6-10% ďsave-the-EuroĒ toll from all bank accounts, except the banks were closed, so it became a run on ATMs which predictably drained of cash in a heartbeat (and deliberately were not refilled).

A ďrun on the bankĒ means that people no longer trust the banks to hold their savings, so everybody tries to withdraw their money at the same time Ė something that no current bank survives, as the customersí money isnít in the bank vaults. This is a scenario that can develop in hours in any economy, when some people start withdrawing in a sign of distrust and more people follow suit to not be the one left standing when the music stops.

The tremors of the bank run Ė or the attempted bank run, thwarted only by a bank holiday Ė were felt far and wide across the entire Eurozone. People in several countries got the message loud and clear: itís their savings, their retirement money, that may be next up for a shave.


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The Confiscatory Cyprus Bank Tax Idea Destroyed European Bank Confidence
By Gary A | Seeking Alpha

In Cyprus, the ECB had forced a tax upon the bank deposits. The plan was to force Cyprus banks to exact a 9.9 percent tax on accounts with more than 100 thousand Euros and a 6.5 percent tax on accounts with less than 100 thousand Euros. Those latter accounts are protected by deposit insurance.

The Cyprus Government was trying to modify this confiscation and just voted unanimously to void the agreement, choosing instead to play a game of chicken with the ECB. The ECB blinked and promised to supply necessary liquidity to the Cyprian banks without taxation. There will likely be a run on the Cyprian banks when they are reopened, and that is rescheduled for Thursday but may not open even then, to the hardship of the poor and elderly who have accounts.

Had the ECB plan been approved it would have likely put gold back into the picture. I had written previously that in the bankersí order of things, gold was less pristine as collateral than treasury bonds of the strongest nations, like Germany, the US and Japan.

But confidence is waning in the Eurozone, and if there could be a bank run in Cyprus, there could be one in Spain, Italy, etc. Contagion often starts with banks not trusting each other. The ECB had planned to use the 5 plus billion euros collected along with new loans to stabilized the nationís banks. Now it could be up to the Germans to bail out Cyprus, and if so, bigger demands could be forced upon the wealthy nations of Europe.


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