FDIC gives us comfort, but does not function in a systemic crisis - Jim SinclairGiven the track record of our Government and Wall Street working hand-in-hand to lie, cheat and steal from us, Americans are sure giving the Government/financial system a lot of leeway on what is being promoted about the economy and the safety of bank deposits in the banking system.
As for the economy, the initial reading on Q4 GDP for 2012 was that it went negative. The first revision, after some questionable "adjustments," turned the GDP reading barely positive. This is IF you really believe inflation is as low as the Government says it it. I do not. Based on all the presented evidence, plus my own personal spending experience, inflation is significantly higher than we're being told. Therefore, on a real inflation-adjusted basis, the real GDP is negative and probably was negative for all of 2012. Just because a unit of food costs more than it did last year, doesn't mean that anything happened to incrementally increase GDP. If anything, higher prices reduce demand.
As for the supposed "economic recovery." Let's look at some company earnings reports this week - companies that are directly related to and contribute to the GDP. First, AK Steel released earnings and warned of a weak first quarter today: AK Steel AK Steel produces steel products for the auto, infrastructure (bridges, roads, housing) and manufacturing industries. If pricing and demand is weak, so are the basic GDP-contributing industries.
How about Caterpillar? Earlier this week it announced that it's retail machine sales were dropping globally, including a 12% in drop in North America (i.e. the U.S.): LINK How about the restaurant industry? Earlier this week it was announced that casual dining spending fell 5.4% in February: LINK If there's any business segment that reflects the mood of the consumer and the amount of discretionary/disposable income of the middle class, it is the restaurant business.
Finally, there was a full-page ad in today's Denver Post in which a large furniture retailer here is offering 5 years, 4 months (64 months) of no-interest/no down payment financing. Free money for over 5 years. There is obviously a bank behind this scheme, but it's certainly consistent with the drop in furniture sales that were reported in the last Census Bureau retail sales report. How can the housing industry truly be seeing any strength if the banks have to finance a new furniture "give-away?" Stay tuned on housing, I will writing an extensive post soon that outlines in detail why the housing market is rolling over and the next leg down could be very painful.
Turning to the safety of your money in the banking system. The situation in Cyprus is not getting a lot of mainstream media airplay other than superficial reporting. To really follow what's going on, the significance and implications of what's going on, requires accessing good news blogs and international news websites.
Essentially the proposed bailout of the Cypriot banking system involves annexing some percentage of money sitting in Cyprus bank accounts. Now, people in the United States are being told that the Cyprus situation is a small little irritation in a far off island country and not relevant to the U.S. If it's not relevant, then why did the U.S. Government, via the IMF, join the EU in raising funds and in leading the proposed restructuring, which includes taking depositor accounts?
Here's Ben Bernanke's response to a question yesterday about the Cyprus situation: "As someone mentioned Cyprus is a tiny economy. I don’t think these issues as worrisome as they are and as concerned as we would be for the Cyprus people, I don’t think that they have a direct implications for the U.S. economy." I recommend reading this entire analysis: LINK If this is true, Ben, then why did the Federal Reserve print up $100 billion last week and move into the excess reserve accounts of the U.S. subsidiaries of European banks? Why is 50% of the entire $1.9 trillion in excess reserves - U.S. taxpayer guaranteed money - sitting in EU bank U.S. subsidiaries? Something smells rotten in the State of DC, where the IMF is headquartered, by the way.
My point on this is that, for some insane reason, the average U.S. citizen places a high degree of trust in the idea that the U.S. Government will always protect bank accounts. That's just not true. I bet 98% of you reading this do not even realize that a deposit into a bank is a loan from you to the bank. How many understand this? If you go to any bank balance sheet, you'll see that "deposits" are a liability account - a debt obligation from the bank to the depositor.
What this means is that in times of crisis, a bank depositor is just as exposed to a restructuring "haircut" or even full loss of money "loaned." Ultimately a depositor is nothing more than another creditor in a bankruptcy. The U.S. Government hides this risk by implementation of FDIC insurance. But the amount of FDIC liquidity available to cover a major crisis is minuscule. In 2008, the Fed and the U.S. Treasury printed up a couple trillion dollars and gave it to the banks to head off a bank run by depositors. If you think this can't happen in this country, ask anyone who was around in March 1933, when U.S. banks had either closed down or place restrictions on money being kept in banks....
When reality bites the average U.S. citizen, it is going to be extremely painful. The Cyprus bank crisis is a lot more significant that most people realize. It's also been the entire focus of the EU/IMF for the last week. It is also very significant for gold - gold vs. fiat currency and physical gold vs. paper gold (ETFs, futures):
Confidence in the banking system and trust in policy makers has been shattered and, regardless of what happens in the tiny Mediterranean nation, this will drive more investors around the world to seek safety in precious metals. LINKHave a great weekend!