Cyprus is Deflationary
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Golden Oxen post=7018 wrote: BTW, what is that about the world moving into gold? $20,000 an ounce? Are there really still people touting that line? Yawn.
I remember hearing that one from another gold basher when it was $200. Amazing how some folks learn nothing from history, especially ones that should know better. Hold on to your cash, it has an excellent history of preserving wealth. Yawn
The point of the thread is mainly that this week, this month, undoubtedly this YEAR, people in Cyprus need cash. And we can learn lessons from this painful scenario.
When you lose access to all your cash because your government and banks won’t let you take anything out, then you will do whatever you must to get some cash. Including liquidating gold, even when one truly wants to hold onto it until the total collapse of all fiat currencies. Whenever that is.
Grocery stores in Cyprus may take your gold this week, but at nowhere near the spot price.
Hi Folks,
Alan:: It is in short supply in Cyprus at this moment — or at least it is according to Skip, and I have no trouble believing that, given the crisis there. But it is not in short supply elsewhere. Go down to the bank and withdraw as much as you please. No problem. Provided you’re not in Cyprus.
Actually there is a problem, a big one. In the US for instance, alledgedly if you request any large sum above $5k you will be subject to a SAR (suspicious activity report) to the treasury and over 10k is notified to the IRS. Also depositing cash in largish sums can also arouse suspicion. These measures are to combat the ‘cash economy’ of illegal operations such as drug dealers, though they are not a problem if the transactions legal, it still means TPTB know whose got all the cash… Most ATMs are also automatically limited to small fixed cash amounts per day/week for security purposes. Its a similar in the UK, with limits to cash withdrawals without prior notification. Most large transactions are done by bankers draft.
As for trying to take cash between countries, fuggedaboutit
Maybe that’s why ‘bitcoin’ has become so popular, though watch out for those solar flares. :whistle:
L,
Sid.Skip’s point is a good one. Gold may be money (in that its a store of value) but it acts more like a foreign currency at the shopping center. Namely, to spend it, you must first
a) convert it into the local currency, and when this happens, you
b) receive a variable-sized haircut on its quoted valueThat’s because we’re not on the gold standard any longer – when exchange rates were fixed between gold and the dollar.
And the less cash there is – say we have a bank holiday – the bigger the haircut will be for people trying to sell gold.
But even today when things are calm you expect to lose 3% on the spread for gold eagles.
I’m not saying gold is bad, far from it. But I’m saying “gold is not money.” Take your gold bar to Whole Foods and see just how much you can get. Same reaction if you take a stack of Yen. “WTF is this, and can you please bring me some dollars?”
Everything has its place – and I totally agree with Skip, cash has its own merits, and it is not to be sneered at. And at the point that it becomes obvious that it is important – it will be way, way too late to get some.
HI Skip,
The point of the thread is mainly that this week, this month, undoubtedly this YEAR, people in Cyprus need cash. And we can learn lessons from this painful scenario.
When you lose access to all your cash because your government and banks won’t let you take anything out, then you will do whatever you must to get some cash. Including liquidating gold, even when one truly wants to hold onto it until the total collapse of all fiat currencies. Whenever that is.
Grocery stores in Cyprus may take your gold this week, but at nowhere near the spot price.
Ultimately this points to three critical issues: cash flow, literally having the cash to go about the business of ones life; wealth, in terms of perceived ‘value’ in terms of social status goods and chattels, but mostly ‘monetary’; and fungibility, that is the general exchange-ability of items.
The ‘cash crunch’ coupled with the non-operative banking system is going to cause the whole economy (what’s left of it) to seize up as Zerohedge have pointed out. Wealth is going to be re-assessed in terms of what wealth really means; from access to true power and influence, and the ability to stay alive and in good health via such necessities as eating, something familiar to the developing world, but long forgotten (for about six decades) in the west. And as for being a ‘fun guy’ 😆 , the fungibility of anything in terms of what an items trade value will be worth will depend much less on the spot price of anything, and much more on whether the seller is willing to take said item at all in exchange for say food. Unless at the pointy end of a gun perhaps… :dry:
I expect refugees shortly, and I don’t think they’ll be Syrian:
Refugees in Cyprus Cypriots flee fighting between the island’s Greek and Turkish communities
L,
Sid.gurusid post=7024 wrote: The ‘cash crunch’ coupled with the non-operative banking system is going to cause…[w]ealth…to be re-assessed in terms of what wealth really means; from access to true power and influence, and the ability to stay alive and in good health via such necessities as eating, something familiar to the developing world, but long forgotten (for about six decades) in the west. And as for being a ‘fun guy’ 😆 , the fungibility of anything in terms of what an items trade value will be worth will depend much less on the spot price of anything, and much more on whether the seller is willing to take said item at all in exchange for say food. Unless at the pointy end of a gun perhaps…
L,
Sid.All very true, Sid.
One complicating factor that further confuses hyper-inflationists is the current dominance of RELATIVE pricing of wealth between countries. Cyprus is currently somewhat isolated in its deflationary extremes, by its geography and its capital controls. This re-prices assets within its borders while surrounding countries are not yet forced to re-price wealth. So you get a Cyprus Euro actually being worth LESS than a German Euro, due to their relative portability (the German Euro is still entirely portable while the Cyprus Euro is not).
A couple of things: I see Cyprus as a valuable example of the shape of things to come. And so one must be able to extrapolate these conditions beyond Cyprus. Folks seem to have trouble even intellectually comprehending the current conditions WITHIN Cyprus, which are so obviously deflationary. If these conditions spread, as I believe they will, the relative pricing between countries becomes less obfuscating in regards to the direction we’re really headed here–towards Deflation. We must imagine what happens when ALL Euro countries must institute capital controls. With the outflow of billions from Italy lately, that day is getting very close. Who the heck is leaving any money in Spain, Italy, Greece, Portugal, now that we’ve seen the Cyprus solution? If we are to believe in the inter-connectedness of global finance, how long before Euro Zone capital controls trigger outflows from non-Euro countries, including New Zealand, Canada, the US, and more capital controls there too. The age of free-flowing capital is ending. Even Paul Krugman admits that.
When all countries are equally isolated by capital controls, the effects of deflation are greatly magnified, both in terms of their deflationary power(the effect is multiplied when trading partners are also locked down under capital controls) and in terms of the clarity in which the deflation falls into focus for us (i.e., the trend will be undeniable for all, unlike today where people can’t extrapolate beyond Cyprus). Right now, people see Cyprus as a speck in a sea of free-flowing credit. I see it as the growing of a parasite that will consume the host. Credit will be toast.
Once capital controls lock a country into isolation, all forms of wealth begin to reveal their pitfalls, and there will be increased costs in dealing with them. Stoneleigh has long argued as a result that cash is not a long-term solution to our problems, but fully advocates building self-sufficiency in terms of community, food production, etc.
davefairtex post=7023 wrote: Gold may be money (in that its a store of value) but it acts more like a foreign currency at the shopping center. Namely, to spend it, you must first
a) convert it into the local currency, and when this happens, you
b) receive a variable-sized haircut on its quoted valueThat’s because we’re not on the gold standard any longer – when exchange rates were fixed between gold and the dollar.
And the less cash there is – say we have a bank holiday – the bigger the haircut will be for people trying to sell gold.
But even today when things are calm you expect to lose 3% on the spread for gold eagles.
I’m not saying gold is bad, far from it. But I’m saying “gold is not money.” Take your gold bar to Whole Foods and see just how much you can get. Same reaction if you take a stack of Yen. “WTF is this, and can you please bring me some dollars?”
Everything has its place – and I totally agree with Skip, cash has its own merits, and it is not to be sneered at. And at the point that it becomes obvious that it is important – it will be way, way too late to get some.
Nicely put–thanks Dave.
One thing I can’t stop contemplating is that even in universal deflation, strategies for wealth preservation will probably still vary from state to state. One thing that won’t vary is the value of self-sufficiency, and in this respect it is surely the best strategy of all, but I still have to try to anticipate some of the pitfalls in my particular circumstances here in New Zealand, and there are some conditions here which I think might be unusual.
Like Cyprus, this is an island country. Unlike Cyprus there are oceans of difference in terms of New Zealand’s geographic isolation. One COULD practically sail out of Cyprus and land in many ports. This will exacerbate capital flight even in the face of strict capital controls. Of course, such flight will entail risk, such as imprisonment and wealth confiscation. But at least it is possible. In New Zealand, only the hardiest sailors could contemplate sailing to another country. It’s far. It’s dangerous. And so capital controls could have even more extreme effect here in New Zealand.
In the same vein, there is not the population here to give full effect to some strategies, like US dollar cash holding, for example. I’m only speculating, but if you take a South American country where millions of people have long relied on US dollar cash as a backstop against corruption/devaluation, not to mention the criminal underground, then the power of US dollar cash as a hedge against deflation is quite obvious to me. In a super-isolated country like New Zealand, it seems that US dollar cash might be easily stamped out under capital controls. Unlike Europe, Asia or the Americas, there isn’t an immediate border with which to transact using the US dollars. And there isn’t the history of the underground US dollar market.
I guess this takes me to something Stoneleigh has alluded to: the “currency risk”. Each country might encounter differing conditions even while the effects of capital controls have some similarities. It would be really easy to make US dollar holding illegal in a little isolated country like New Zealand. Then again, so few people would be doing it, that it might be well under the radar, and banks would still want US dollar liquidity, in theory. Certainly the New Zealand dollar is terribly over-valued currently, and that is a great risk in and of itself. But at least NZ cash would be highly liquid within my country even after the NZ dollar collapses in value. Just like Euros are in Cyprus right now, no matter what the future prognosis is for the Euro itself.
Within NZ, I don’t see gold as having many advantages in the short-term for all the same reasons as above, but perhaps it might have some special advantages for a place like New Zealand, even while its nominal value drops through the floor. Everything will have a spread/cost associated with dealing in it, including some forms of cash. Again, it shows how nimble we have to be. I’m beginning to appreciate my chickens a lot more…though they’re still too young to start laying, so I better not count them yet.
Hi Skip,
One complicating factor that further confuses hyper-inflationists is the current dominance of RELATIVE pricing of wealth between countries.
Yes and this points to something i’ve mentioned before and that is currency devaluation, which is again different from inflation. A currency can devalue overnight if faith in it disapears, you don’t have to print loads of it for that to happen. For instance, back in 1992 sterling dropped out of the ERM on ‘black wednesday’ despite panic purchases of sterling to prevent it falling out of the 6% exchange rate range limit of the ERM. It eventually fell by 20%. This is why its key to understand inflation/deflation as currency volume increase/decrease relative to available goods and services. The notional value of the ‘cypriot euro’ – the ones still stuck in the banks – will definitely have a greater risk and hence proportionately lower ‘value’ in terms of trust, and the extra ‘cost’ of that risk for such things as paying for imported stuff (food/fuel) will no doubt go up accordingly. However, the hard copy paper cash on the streets, depending how much there is, might have a higher notional value for a while at least. Of course there could arise some peculiar consequences in this particular economic petridish; with all those euros suddenly turning up – if they make it to the streets – coupled with shortages of certain goods and services you could see some sharp price swings both ways as people seek to offload one set of goods for cash to buy another more desired set of goods, like say food or fuel. A true process of ‘marking to market’ if there ever was one… :blink:
L,
Sid.Hey Sid. Yes, The Automatic Earth has discussed the scarcity of certain items, including some necessities, in the worst of deflation, as factories close due to bankruptcy and lack of credit to start new enterprises. That is a real juggling act. When do you buy that big cast iron wood stove. We’ve decided to start accumulating some of those things, even at inflated prices, given that there could be shortages of such things. I still question whether the nominal value of such items will be greater than they are currently. After all, as purchasing power drops, each dollar buys a lot more. So the $2000 wood burner today may be only $200 next year but that might suddenly be a lot more expensive when no one has even $20 in their pocket. But if you have somehow preserved your cash through to the bottom of deflation, then you could buy 10 wood stoves if you wanted–though they might be the LAST 10 wood stoves around. I heard Stoneleigh point out in one of her talks that even the best farmland in the nation went totally bid-less at auction during the Great Depression.
As you say, some items might get bid up before the worst of it, but I also believe that will often be temporary. Cash may well ALWAYS be in shorter supply than any goods of ANY kind, by the nature of its function in a negative feedback loop in a deflating economy.
You bring up another point worth more thought, which I also allude to in my first comment: re-denomination of a currency is NOT the same thing as hyper-inflation. Some very savvy, humanitarian economists and activists are advocating abandoning the Euro and re-denominating the national currency into a new currency. Such as in Spain. Note, these people are not wishing hyper-inflation on the country when they demand re-denomination out of the Euro! Yes, this would immediately devalue the purchasing power of Spain. But if re-denomination is “well-managed” (and it’s almost hard to do worse than the current bad management), then that new currency finds a floor. It doesn’t become toilet paper, even though there is a time when the world doesn’t trust it. Think of a now-debt-free country with great internal resources and wealth. Even re-denominated, a well-run currency will return to some level of fair competitive value. Hyper-inflation on the other hand does not necessarily entail a re-denomination at all. Hyper-inflation is the result of a debauched government that throws in the towel on fiscal management and the world refuses to take any of its currency at any value at all (or at least exponentially devalues it to the point of near nothing-ness).
Cyprus could re-denominate. This is high inflation as priced in the re-denominated currency, at least initially, but not necessarily a “hyper-inflation” where all fiat is rejected. It depends on what Cyprus can do to manage its resources and people. How much can it eject corruption and avoid external manipulation? How much can it return to its roots and manufacture or farm using its unique advantages.
Arguably, some places have no unique advantages. Those countries may never return to real competitiveness. They really have only been supported by credit all along, and eventually might become desolate. I think James Howard Kunstler has interesting things to say in this regard, when he talks about parts of the Middle East. A hundred years ago, much of that region had NO people in it because it was so inhospitable. Take away oil from such a place, and there is no way for such a region to sustain itself. No matter what it does with its currency. It has nothing else to offer and no one can live there, because there’s no water or arable land.
re: capital controls
I was brought up – like many people – in an environment of capital controls/ currency controls/ exit-visas/ extreme nationalism/ paranoia and so on.
I think that capital controls are going to be very difficult to implement these days – unless international trade and travel become tiny like in the 1950’s.
Let me give you a simple example. Some Cypriots/Brits may find it easy to let holiday homes to foreigners in return for money out of the country. Of course, there are many variations on this theme. The only thing one can be sure of is that such a society will rapidly degenerate into a police-state.
I hope you’re right that capital controls will be difficult. Arguably, some aspects of modern life make it EASIER for governments to control our money:
– No one carries cash. When we’re all reliant on digital accounts, the capital control is as easy as the flick of a switch. In the hold days, when cash was always kept on hand for “a rainy day” it would have made capital controls harder.
– We’re more easily tracked. Our whereabouts and movements are easy to monitor–our cell phones identify our location, our passports keep tabs on every exit and entry to nearly every country.
– We’re all so complacent. In other times, we might have been more wary. I have a mate here in NZ whose father had to escape Eastern Europe. His father is old now, but insists that some money be kept well hidden out of the banks. My friend thinks his father is crazy. Unfortunately, my friend is the majority and his father is the minority. With so few people prepared to resist capital controls, I wonder if they’ll be instituted more easily.
Tell me how you think we are less likely to succumb to capital controls–I’m honestly curious to hear that point of view.
Hi Skip,
Yes, The Automatic Earth has discussed the scarcity of certain items, including some necessities, in the worst of deflation, as factories close due to bankruptcy and lack of credit to start new enterprises. That is a real juggling act. When do you buy that big cast iron wood stove.
This is the problem with both notional and nominal values in that they are psychological speculations. The real value of said stove will be dependant upon many more things such as the availability of wood, the serviceability of the chimney and so forth. May be it would be better to ‘super insulate ones home with the addition of a heat recovery ventilation system? Or maybe just get used to being cold but out of the wind and rain as it always used to be. It starts to come down to the real big issues such as what are real values? What is real worth? What is real wealth? The problem is most people have not been equipped to even begin to think about these things yet alone understand them – its taken me several decades to get past my [strike]education[/strike] dumbing down to really begin to see past all the crap and discover what is of true worth in this human created hell.
This is what I was alluding to when I quoted the alleged North American Indian saying:
It also points to the real problems that Kuntsler and Richard Heinberg discuss of resource depletion across the board. There are a few places left that have reasonably undisturbed resources, but compared to the mess that modern industrial culture has made of the ‘low hanging fruit’ especially of energy resources it is meagre pickings indeed. Ironically some of the richest mineral deposits are now in our landfill sites.
As for things like competitive advantage and import substitution, these have always been economic myths used to hide hegemonic exploitation. Old school went along the lines of: [strike]Rich[/strike] developed country to [strike]poor[/strike] developing country, “You give us your mineral wealth for some cash/loans, and then we’ll give you nice shiny products”, whereas the new school goes along the lines of “you give us nice shiny products made out of your resources and manpower, and we’ll give you lots of our [strike]worthless debt[/strike] currency.”
I await with intrigue to see how Cypriot import substitution is going to work, I guess they could always holiday at home… :unsure:
L,
Sid.skipbreakfast post=6976 wrote: It seems to me that many hyper-inflationists (I’m talking to you Marc Faber) are getting really desperate and jumping through incredible hoops to try to prop up their predictions in the face of really powerful evidence to the contrary.
Check out this slightly bizarre interview with Marc Faber last month. This is a guy that told everyone to buy gold because hyper-inflation was imminent and the Fed would “print, and print, and print” until cash had no value.
Now Mr Faber, like many hyper-inflationists, including Peter Schiff, are starting to hedge their bets. In fact, Faber is looking a bit crazed to be honest.
When challenged about gold’s inability to hold up as a safe haven lately, Faber responds that Fed liquidity is creating “bubbles and bubbles and bubbles…and also this bubble will come to an end”. So wait…gold is now a bubble Marc?! Whoa. That is not what you were saying last year or the year before, when you were predicting hyper-inflation and gold going to the moon. Now he says “not even gold can protect you”. Of course, in a deflation, gold is not protection, because all asset prices are pressured down in a deflation.
And what’s up with his trademark laugh (at 3:20 to 3:30). That is the nervous laugh of a man on the defensive. Clients are probably yelling down the phone at him daily: “Where’s my hyper-inflation!”
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