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Agcapita April 2013 Briefing - Bail-ins and the velocity of money
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Agcapita April 2013 Briefing - Bail-ins and the velocity of money

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So-called bank “bail-ins”, whereby losses are imposed on depositors, represent the next stage in the modus operandi of the political class in response to the ongoing solvency crisis in the state and …

So-called bank “bail-ins”, whereby losses are imposed on depositors, represent the next stage in the modus operandi of the political class in response to the ongoing solvency crisis in the state and financial sectors. The concept whereby thinly capitalized government agencies purport to guarantee trillions in deposits with billions in capital has always been implausible as an insurance scheme. There is nothing resembling
insurance about it. It is simply another unfunded government guarantee which in an age of insolvent states is being revealed, along with many other such guarantees, as the fiction it always was.

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  • 1. Agcapita UpdateApril 2013
  • 2. 1So-called bank “bail-ins”, whereby losses areimposed on depositors, represent the next stagein the modus operandi of the political class inresponse to the ongoing solvency crisis in the stateand financial sectors. I must say that the conceptwhereby thinly capitalized government agenciespurport to guarantee trillions in deposits withbillions in capital has always been implausible asan insurance scheme. There is nothing resemblinginsurance about it. It is simply another unfundedgovernment guarantee which in an age of insolventstates is being revealed, along with many other suchguarantees, as the fiction it always was.The balance sheet of the bank in which you deposit/lend your hard-earned savings should always bea matter of keen interest to you. Any scheme thatsupposedly de-risks deposits without truly reflectingthe cost of removing such risks is just allowingthem to accumulate to unsustainable levels - withpredictable consequences as we have seen inCyprus.I do believe some good will come of the events inCyprus. Middle class savers have had their eyesopened and are now being forced to pay attention to:1) bank balance sheets - deposit insurance schemesare a global fiction which, in part, have allowedmodern banks to become the highly leveraged,opaque, risk agglomerating machines that theyare;2) alternatives to bank deposits as capitalpreservation tools with consequences for thevelocity of money and inflation; and3) the risk of outright wealth confiscation and suddencapital controls as the new in extremis method offinancing bankrupt states.Agcapita Update
  • 3. 2Agcapita Update (continued)In a free market for banking, deposit rates wouldvary widely allowing accurate distinctions to bemade amongst competing institutions. Risky bankswould be forced to pay commensurately high ratesto attract depositors, while less risky banks wouldpay lower rates. Depositors would then be secure inthe knowledge that rates would reflect the aggregaterisk of the deposit taking entity not the interventionof an unfunded state subsidy. Price discovery inthe deposit market is a critical and missing piece ofthe puzzle for todays savers - which banks are safe,which are not, where do you park your cash withminimal risk of loss? In a global market of effectivelyuniform deposit rates there are no accurate signalswith which to make this decision. We need to allowthe markets to signal bank risk though deposit rateswhich in turn would act much more quickly thancurrent mechanisms to deprive banks of criticalcapital if they are taking excessive risk.There has been much discussion about the collapseof the velocity of money since 2008. Despite certainreservations that the concept of the velocity of moneymay be simply an accounting identity with no realexistence outside of economics textbooks, there hascertainly been an increased preference on the partof the middle class to hold money balances with theidea that deposits at banks, although they generatemeagre returns, will not generate nominal losses.That fiction is being stripped away. Middle classwealth is the only the source of funds to bail outthe insolvent state and financial sectors and whatremains of that capital is largely held in bank depositsand pension plans. To date, it has been sufficientto “appropriate” this wealth slowly via negative realinterest rates, but as events move progressively moreswiftly in the bankrupt developed world, the wellproven gradual process appears to be failing to yieldthe requisite funds - hence the transition to bail-insand outright deposit confiscation. A steady 5-6% ayear real interest rate tax is not sufficient when 30%or more is required overnight.Where such confiscations are imposed, capitalcontrols will not be far behind in order to preventany remaining middle class wealth from fleeing,worsening state and financial sector solvency furtherand depriving the political class of future emergencyfunds. Will the next stage of the developed worldfinancial crisis witness confiscatory bail-in schemesfollowed by severe clampdowns on all ways to getcapital to safe harbours?This leads me to my point on the velocity of money.If bank deposits are finally revealed to be vastlymore risky than the 1-2% nominal interest rates theyprovide and capital flight is going to be progressivelymore difficult, then perhaps we are about to see anincrease in the velocity of money, whereby middleclass capital rotates into real assets outside of thefinancial system - passive, un-leveraged hard assetinvestments with reliable cash generating capacitywhere possible. Think of the growing interest ininvesting in farmland and other productive assets asexamples. Time will tell, but we may look back onthe events in Cyprus as the catalyst for an upswingin headline rates of inflation - at least in real assets.Ask yourself if a physical gold holding is now reallymore risky than a European bank deposit and theconsequences this may have on nominal real assetprices?
  • 4. #803 – 5920 Macleod Trail SWCalgary, AB T2H 0K2CanadaDISCLAIMER:The information, opinions, estimates, projections and other materialscontained herein are provided as of the date hereof and are subject tochange without notice. Some of the information, opinions, estimates,projections and other materials contained herein have been obtained fromnumerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliatesmake every effort to ensure that the contents hereof have been compiled orderived from sources believed to be reliable and to contain information andopinions which are accurate and complete. However, neither AGCAPITAnor its affiliates have independently verified or make any representation orwarranty, express or implied, in respect thereof, take no responsibility forany errors and omissions which maybe contained herein or accept anyliability whatsoever for any loss arising from any use of or reliance on theinformation, opinions, estimates, projections and other materials containedherein whether relied upon by the recipient or user or any other thirdparty (including, without limitation, any customer of the recipient or user).Information may be available to AGCAPITA and/or its affiliates that is notreflected herein. The information, opinions, estimates, projections and othermaterials contained herein are not to be construed as an offer to sell, asolicitation for or an offer to buy, any products or services referenced herein(including, without limitation, any commodities, securities or other financialinstruments), nor shall such information, opinions, estimates, projections andother materials be considered as investment advice or as a recommendationto enter into any transaction. Additional information is available by contactingAGCAPITA or its relevant affiliate directly.Tel: +1.587.887.1541Fax: +1.403.648.2776www.agcapita.com