Wednesday, February 4, 2015

Well that escalated quickly

For those that jumped on the bullish EURUSD freight train yesterday you better jump back off before it wrecks.

The ECB has announced today the removal of the credit rating waiver for Greek bonds.

Official announcement can be read here:

This is the ECB's way of playing hardball with Greece. To be clear there's no happy outcome for anyone at this point. Greece's new leadership is smart to reject being saddled with more debt. The ECB, like other central banks, has been running a giant ponzi scheme as it prints money to purchase ever more worthless debt instruments from undercapitalized banks in Europe.

Greece wants to reinstate pensions and benefits to workers. It amazes me that they could be so rational on one side of the equation i.e. moving towards defaulting on debt now that can never be paid back, while so irrational on the other side - making financial promises to the public they in no possible way can keep.

This is going to be an interesting battle between the Troika and Greece's new government. Several people have asked us what we predict the outcome will be. While we do have several predictions on specific outcomes I would say here it doesn't even matter. There is NO good outcome either way based on the parties calling the shots. Both sides lose in all options being put forth.

It's regrettable that this turmoil has to happen at all. Governments need to get out of markets and stop interfering with them in the first place. Greece simply has too much debt. This was the inevitable result of lax credit standards that appear everywhere in our current financial system.

Here's the problem with the modern banking system - its fraudulent. You cannot ever have a healthy financial system if you permit counterfeiting. If you deposit money in a bank and they are then able to create out of thin air credit equal to 90% of your deposit and lend it to someone who can spend it as freely in the economy as you can you will have massive distortions arise.

Why are we so afraid to hold banks and politicians accountable for what at the core is a simple crime? This is actually a crime in broad daylight and no one seems to be complaining. Protestors are angry and rightfully directing that anger at politicians and bankers however they don't understand the crime. They want more politicians to pass more regulations. We've been given Basel I, Basel II, and now Basel III as improved banking frameworks. For the average person this stuff is complicated, hell even for the advanced financial professional this stuff is complicated. At the end of the day though it all tries to treat symptoms rather than causes. Our financial system does not and will not work with fractional reserve banking. The remedy is simple 100% reserves against deposits. This doesn't mean that banks can't be in the lending business. Having banks intermediate lending between savers and borrowers can be a great thing. All that needs to be done is that instead of depositing money with the bank you lend the bank money in the form of a note just like they will turnaround and do with the borrower. Clean and simple and money doesn't get created out of thin air. Your money is available to the borrower but during the duration of the note it is not available to you. No duplication, no funny money. Simple right?

And before I finish this evenings rant I just got a notice from our bank in Cayman that any of our accounts denominated in Euros would be charged a rate of -0.40%. Yep negative deposit rates. That is what governments around the world are doing right now to screw you the saver. First they dilute your money by printing more of it and then they charge you a fee simply for trying to keep it safe.

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