Banking system heading for the rocks

Banks are reopening in Cyprus today.

But with withdrawals limited to €300 and capital controls ensuring that withdrawals of more than €3,000 (or equivalent in other currencies) from the island aren’t allowed, ZeroHedge describes the banks as functioning as little more than “glorified ATMs”.

Three facts are becoming glaringly apparent to relatively attentive market observers:

1) Banks are still hopelessly over leveraged
2) As a result, another 2008-style crisis (or worse) is inevitable
3) Governments will plunder increasing amounts of their citizens’ wealth in order to try to keep the party going. This will be done via inflation, increasing taxation, and – in crisis moments – emergency confiscation measures

As a result, diversifying your wealth has never been more important.

On a slightly higher philosophical level, Detlev Schlichter gives a more optimistic take on the Cyprus situation – arguing that if it jeopardizes people’s faith in government deposit insurance, it could mark a turning point towards an improved financial system:

“I suspect that the real purpose of these ‘safety nets’ [deposit insurance] has always been to provide cover for more generous bank credit expansion… Under present arrangements there is little incentive for banks to position themselves in the marketplace as particularly conservative. Depositors have been largely desensitized to the risks inherent in banking. They no longer reward prudent banks with inflows and punish overtly risky banks with the withdrawal of funds, and even if they do, the banks can now obtain almost unlimited funds from the central bank, at least as long as they have any asset that the central bank is willing to ‘monetize’.”

Read the whole thing; it’s worth it.

Gold and silver continue to consolidate, with the yellow metal holding above support at $1,600 and silver still in the price range seen since mid February.

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