Trichter
Member
Here's a very timely article from Nicole Foss at The Automatic Earth. Here are some quotes:
Spreads can continue to rise within the eurozone while rates for the whole region rise relative to other sovereigns believed to represent a lower risk. All risks are relative, and the risk-averse psychology of a decline magnifies all differences. Attempts by central authorities to fight the psychology of decline with bailouts perversely reinforce it under such circumstances, by convincing investors that there really is something to worry about. The psychology of a rally is supportive of central interventions, making them appear successful, but declines make central authorities look incompetent, no matter what they do.
Each subsequent bailout, meant to be definitive, buys less and less time before the spiral of fear continues upward again. In the case of Spain, yields began to rise again mere days after a $100 billion bailout that was not even contingent on austerity measures, as previous bailouts for other countries had been.
............
Capital flight from the periphery is currently being quietly financed by other European central banks, allowing Greeks and other depositors in the periphery to continue withdrawing funds without banks closing their doors. Instead of a bank run, we have seen what has been described by several commentators as a "bank jog".
However, the rest of the eurozone cannot continue such support indefinitely, especially as fear causes the pace of the 'jog' to pick up, and contagion spreads the problem to other states. When that support ends, bank insolvency will be revealed.
The kind of capital controls one should expect, and prepare for, include:
Restrictions on bank withdrawals
Restrictions on money market fund redemptions
Greater restrictions on retirement fund liquidations
Fixing an official exchange rate and criminalizing market rate transactions
Banning the conversion of domestic currency to foreign currency
Banning the movement of assets out of the country to foreign financial institutions
Barriers, restrictions, additional transaction costs imposed on foreigners seeking to deposit funds or make investments in safe havens
Forcing sovereign debt owners to accept longer maturities rather than principal repayment
Banning gold ownership
Reissuing the currency in a new form (an acute risk in Europe obviously)
Restrictions on the size of cash transactions
Assets held within the grip of the system are at risk. There is a critical dependence on the solvency of middle men, on government guarantees, and on the powerful resisting the temptation to grab what they can in the financial free-for-all of deflation and deleveraging that is picking up momentum. None of these is a good bet. Whatever actions one might plan to take, it is necessary to take those actions before push comes to shove. That way they can be taken under conditions of relative calm.
There are no no-risk solutions, but different options will suit different people, depending on their circumstances. Some may choose to store assets in another jurisdiction or in another currency if those options are available, but losing control over assets abroad is a distinct possibility, as is difficulty in converting the currency chosen as a store of value back into something that will functions as cash at home.
Physical travel may become much more difficult as capital controls lead to border controls of other kinds. Holding assets close to home gives one the greatest degree of control, but with certain obvious risks attached. Typically, he who loses the least in a deflation is the winner, as there are no easy answers.
Once fear is in the ascendancy, it is very difficult to combat. Governments and central banks simply do not have the control they think they do, and they do not understand the nature of battle they are engaged in. It is not a matter of restoring certain objective conditions. Central authorities are trying to fight the inexorable recognition that the magnitude of the debt that has resulted from our 30 year credit expansion dwarfs the wealth of the world, that the $70 trillion in G10 debt underpins some $700 trillion in derivatives.
That realization, and the natural reactions stemming from it, are the problem. As confidence evaporates, so does liquidity. Credit - the vast majority of the effective money supply - ceases to be equivalent to money. The resulting crash of the effective money supply is deflation by definition. This is what we have been predicting since the inception of TAE. This is how credit expansions always end - with the implosion of credit instruments that amount to no more than a pile of human promises that cannot be kept.
And finally there is this quote from Martin Wolf at the FT at the end of the post:
It is often forgotten that the failure of Austria's Creditanstalt in 1931 led to a wave of bank failures across the continent. That turned out to be the beginning of the end of the gold standard and caused a second downward leg of the Great Depression itself. The fear must now be that a wave of banking and sovereign failures might cause a similar meltdown inside the eurozone, the closest thing the world now has to the old gold standard...
...How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile...
...Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.
http://theautomaticearth.com/Finance/capital-flight-capital-controls-capital-panic.html
Spreads can continue to rise within the eurozone while rates for the whole region rise relative to other sovereigns believed to represent a lower risk. All risks are relative, and the risk-averse psychology of a decline magnifies all differences. Attempts by central authorities to fight the psychology of decline with bailouts perversely reinforce it under such circumstances, by convincing investors that there really is something to worry about. The psychology of a rally is supportive of central interventions, making them appear successful, but declines make central authorities look incompetent, no matter what they do.
Each subsequent bailout, meant to be definitive, buys less and less time before the spiral of fear continues upward again. In the case of Spain, yields began to rise again mere days after a $100 billion bailout that was not even contingent on austerity measures, as previous bailouts for other countries had been.
............
Capital flight from the periphery is currently being quietly financed by other European central banks, allowing Greeks and other depositors in the periphery to continue withdrawing funds without banks closing their doors. Instead of a bank run, we have seen what has been described by several commentators as a "bank jog".
However, the rest of the eurozone cannot continue such support indefinitely, especially as fear causes the pace of the 'jog' to pick up, and contagion spreads the problem to other states. When that support ends, bank insolvency will be revealed.
The kind of capital controls one should expect, and prepare for, include:
Restrictions on bank withdrawals
Restrictions on money market fund redemptions
Greater restrictions on retirement fund liquidations
Fixing an official exchange rate and criminalizing market rate transactions
Banning the conversion of domestic currency to foreign currency
Banning the movement of assets out of the country to foreign financial institutions
Barriers, restrictions, additional transaction costs imposed on foreigners seeking to deposit funds or make investments in safe havens
Forcing sovereign debt owners to accept longer maturities rather than principal repayment
Banning gold ownership
Reissuing the currency in a new form (an acute risk in Europe obviously)
Restrictions on the size of cash transactions
Assets held within the grip of the system are at risk. There is a critical dependence on the solvency of middle men, on government guarantees, and on the powerful resisting the temptation to grab what they can in the financial free-for-all of deflation and deleveraging that is picking up momentum. None of these is a good bet. Whatever actions one might plan to take, it is necessary to take those actions before push comes to shove. That way they can be taken under conditions of relative calm.
There are no no-risk solutions, but different options will suit different people, depending on their circumstances. Some may choose to store assets in another jurisdiction or in another currency if those options are available, but losing control over assets abroad is a distinct possibility, as is difficulty in converting the currency chosen as a store of value back into something that will functions as cash at home.
Physical travel may become much more difficult as capital controls lead to border controls of other kinds. Holding assets close to home gives one the greatest degree of control, but with certain obvious risks attached. Typically, he who loses the least in a deflation is the winner, as there are no easy answers.
Once fear is in the ascendancy, it is very difficult to combat. Governments and central banks simply do not have the control they think they do, and they do not understand the nature of battle they are engaged in. It is not a matter of restoring certain objective conditions. Central authorities are trying to fight the inexorable recognition that the magnitude of the debt that has resulted from our 30 year credit expansion dwarfs the wealth of the world, that the $70 trillion in G10 debt underpins some $700 trillion in derivatives.
That realization, and the natural reactions stemming from it, are the problem. As confidence evaporates, so does liquidity. Credit - the vast majority of the effective money supply - ceases to be equivalent to money. The resulting crash of the effective money supply is deflation by definition. This is what we have been predicting since the inception of TAE. This is how credit expansions always end - with the implosion of credit instruments that amount to no more than a pile of human promises that cannot be kept.
And finally there is this quote from Martin Wolf at the FT at the end of the post:
It is often forgotten that the failure of Austria's Creditanstalt in 1931 led to a wave of bank failures across the continent. That turned out to be the beginning of the end of the gold standard and caused a second downward leg of the Great Depression itself. The fear must now be that a wave of banking and sovereign failures might cause a similar meltdown inside the eurozone, the closest thing the world now has to the old gold standard...
...How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile...
...Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.
http://theautomaticearth.com/Finance/capital-flight-capital-controls-capital-panic.html
