So-called bank “bail-ins”, whereby losses are imposed on depositors, represent the next stage in the modus operandi of the political class in response to the ongoing solvency crisis in the state and financial sectors. The concept whereby thinly capitalized government agencies purport to guarantee trillions in deposits with billions in capital has always been implausible as an insurance scheme. There is nothing resembling insurance about it. It is simply another unfunded government guarantee which in an age of insolvent states is being revealed, along with many other such guarantees, as the fiction it always was.

1. Agcapita Update
April 2013

2. 1
So-called bank “bail-ins”, whereby losses are
imposed on depositors, represent the next stage
in the modus operandi of the political class in
response to the ongoing solvency crisis in the state
and financial sectors. I must say that the concept
whereby thinly capitalized government agencies
purport to guarantee trillions in deposits with
billions in capital has always been implausible as
an insurance scheme. There is nothing resembling
insurance about it. It is simply another unfunded
government guarantee which in an age of insolvent
states is being revealed, along with many other such
guarantees, as the fiction it always was.
The balance sheet of the bank in which you deposit/
lend your hard-earned savings should always be
a matter of keen interest to you. Any scheme that
supposedly de-risks deposits without truly reflecting
the cost of removing such risks is just allowing
them to accumulate to unsustainable levels - with
predictable consequences as we have seen in
Cyprus.
I do believe some good will come of the events in
Cyprus. Middle class savers have had their eyes
opened and are now being forced to pay attention to:
1) bank balance sheets - deposit insurance schemes
are a global fiction which, in part, have allowed
modern banks to become the highly leveraged,
opaque, risk agglomerating machines that they
are;
2) alternatives to bank deposits as capital
preservation tools with consequences for the
velocity of money and inflation; and
3) the risk of outright wealth confiscation and sudden
capital controls as the new in extremis method of
financing bankrupt states.
Agcapita Update

3. 2
Agcapita Update (continued)
In a free market for banking, deposit rates would
vary widely allowing accurate distinctions to be
made amongst competing institutions. Risky banks
would be forced to pay commensurately high rates
to attract depositors, while less risky banks would
pay lower rates. Depositors would then be secure in
the knowledge that rates would reflect the aggregate
risk of the deposit taking entity not the intervention
of an unfunded state subsidy. Price discovery in
the deposit market is a critical and missing piece of
the puzzle for todays savers - which banks are safe,
which are not, where do you park your cash with
minimal risk of loss? In a global market of effectively
uniform deposit rates there are no accurate signals
with which to make this decision. We need to allow
the markets to signal bank risk though deposit rates
which in turn would act much more quickly than
current mechanisms to deprive banks of critical
capital if they are taking excessive risk.
There has been much discussion about the collapse
of the velocity of money since 2008. Despite certain
reservations that the concept of the velocity of money
may be simply an accounting identity with no real
existence outside of economics textbooks, there has
certainly been an increased preference on the part
of the middle class to hold money balances with the
idea that deposits at banks, although they generate
meagre returns, will not generate nominal losses.
That fiction is being stripped away. Middle class
wealth is the only the source of funds to bail out
the insolvent state and financial sectors and what
remains of that capital is largely held in bank deposits
and pension plans. To date, it has been sufficient
to “appropriate” this wealth slowly via negative real
interest rates, but as events move progressively more
swiftly in the bankrupt developed world, the well
proven gradual process appears to be failing to yield
the requisite funds - hence the transition to bail-ins
and outright deposit confiscation. A steady 5-6% a
year real interest rate tax is not sufficient when 30%
or more is required overnight.
Where such confiscations are imposed, capital
controls will not be far behind in order to prevent
any remaining middle class wealth from fleeing,
worsening state and financial sector solvency further
and depriving the political class of future emergency
funds. Will the next stage of the developed world
financial crisis witness confiscatory bail-in schemes
followed by severe clampdowns on all ways to get
capital to safe harbours?
This leads me to my point on the velocity of money.
If bank deposits are finally revealed to be vastly
more risky than the 1-2% nominal interest rates they
provide and capital flight is going to be progressively
more difficult, then perhaps we are about to see an
increase in the velocity of money, whereby middle
class capital rotates into real assets outside of the
financial system - passive, un-leveraged hard asset
investments with reliable cash generating capacity
where possible. Think of the growing interest in
investing in farmland and other productive assets as
examples. Time will tell, but we may look back on
the events in Cyprus as the catalyst for an upswing
in headline rates of inflation - at least in real assets.
Ask yourself if a physical gold holding is now really
more risky than a European bank deposit and the
consequences this may have on nominal real asset
prices?

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