It will first start as trickle, and then it will grow to the
size of a brook, then as other brooks join it will grow to the size of a creek,
and then as other creek join it then a small river, and as the small rivers
join together a large continent draining river.
The trickles are just starting in Luxembourg, a country
known for it’s banking, but not much else.
Luxembourg is a country with banks deposits in significant excess of its
gross domestic product, just like Cyprus.
But just like Cyprus, Luxembourg cannot print enough physical currency
to cover the entire electronic Euro currently held/deposited within the various
disk drives of its banks.
Cyprus banks had deposits greater 10.8 times the GDP of the
country. Luxembourg banks according to
IMF in 2011 held deposits greater than 20 times the countries GDP. I suspect that deposit growth has been
greater than Luxembourg GDP growth, meaning that deposit to GDP is even greater
today. If you think Cyprus is bad, just
wait. The “ChubbChubbs” are coming. It will sweep over the continent, each of the
weak sisters being picked off one by one, as they succumb to monetary forces at
work.
It was a good wave to ride while it lasted by the shore is
close at hand the wave is starting to break lose form, it is really had to keep
on your board in the spray and foam of a crashing wave. The smart surfers would have already pitched
out, looking for the next wave.
So the really smart money is starting to slowly move those
electronic Euro’s out of Luxembourg. I
suspect a significant percentage of those electronic Euros’ that are being
moved are also being converted to electronic Dollars. Given that of all the various world
currencies that are convertible and not illiquid, and that have enough GDP to
cover deposits being held within the confines of their banking system, the
United States is it. At this time the
exchange rate is rather favorable for jumping out of the Euro, not as good as
it was a few weeks ago, but it is only going to get worse in the coming months.
Some of electronic Euro’s are staying in Europe. These electronic Euro’s are just going to
other location in Europe, which for the moment appear to be safer. The reason for this is that individuals and
companies need to cover operating expenses within Europe. But where to put those funds is the solvency
question? As I look upon the GDP
landscape the only European country with enough GDP to cover this flood of
electronic Euro’s is Germany.
Another possible location is Switzerland, but even the Swiss
have limits how many Euro’s they are willing to accept at the current exchange
rates. A big large flow of Euro will
destabilize their currency something the Swiss National Bank is battling
everyday, but even their reserves are limited.
As stated in the CNBC article "The Insanity of the Cyprus Crisis". The ECB is not the FED. The ECB on its own has no ability to print
money to rescue failing banks. The ability
to print money falls to the various member National Country Banks that are
members of the ECB who issue money in the name of the ECB. The ECB is responsible for just 8 percent of
the notes issued the various National Country Banks. The National Country Banks are responsible
for the remaining 92 percent, and the bad news it that their responsibility is
limited to only those notes that they physically issued. The majority of the printing of Bank notes
his handled by each member country.
There is a country code printed on each note. For those who are interested “G” is the code
for Cyprus.
The European Banking Authority, which has some limit
responsibility in regulation bank the majority of the authority rest with the
respective nations and their respective agencies, does not have the authority to
borrow money (issue bonds) to rescue these failed banks, since it does not have
any taxing capacity to back up any bonds.
What individual/corporation would put their electronic
Euro’s in Italian Banks, Spanish Banks, Portuguese Bank, French Bank, Belgium
Bank, or Dutch Bank? If I were a citizen
of any one of the afore mentioned countries, I would be giving serious
consideration to a minimum the amount of funds held in a bank.
The next question is when is a Euro note not a Euro
note. Some would say that it is any such
note with a Country Code of “G”, after all 92 percent of that note is backed by
the full faith and credit of the Government of Cyprus.
We have gone from “one for all and all for one”, to “one for
some of us and some for some of us”, the finally step will be “one for me and
nothing for the rest”. It will be a very
interesting summer, as another one bites the dust.
