Posted on 04/02/2013 10:58:59 AM PDT by blam
Cyprus Triggers Preference For Goods, Gold And Silver
Commodities / Gold and Silver 2013
April 02, 2013 - 07:10 PM GMT
By: Alasdair Macleod
Almost certainly prices for goods in Cyprus will rise as a result of its banking crisis, because the imposition of capital controls will restrict imports, leading to supply bottlenecks. In addition residents will no longer be complacent about keeping money on deposit, but seek other alternatives. Large depositors may be trapped, but smaller local depositors will draw them down for cash to stock up on things needed tomorrow while they are available.
Cypriots will therefore change their preferences from money in the bank in favour of goods. And the lessons from Cyprus are not being lost on ordinary folk across the eurozone, so bank depositors elsewhere are likely to alter their preferences away from bank deposits as well, depending on how they view the soundness of their own banks.
The purpose of this article is to draw attention to the price effect of the likely change in preferences between bank deposits and goods. Prices change either as a result of monetary inflation, which is a gradual process, or as a result of changes in money-preference, which is often substantial and sudden in its effect.
The most recent example of the effect of a change in money-preference was the global banking crisis five years ago, when it went the other way. Banks quickly switched to being risk-averse, and consumers did the same thing. On this occasion it was a change in preference in favour of money, the consequence being prices of goods and services needed to fall significantly to restore the balance between supply and demand. This was why so many manufacturers were in trouble.
When preferences for goods increase, as seems certain in Cyprus, the price effect could also be alarming, exacerbated by those capital controls on import payments. A price boom is created, rapidly driving up local prices against supply constraints.
We must now consider to what extent a decline in money-preference in favour of goods might take hold in other countries in the eurozone, where private citizens become concerned about the security of their deposits. The indications are that depositors are already looking to withdraw deposits in the weaker eurozone states, confirming that a change in money-preference is spreading. This being the case, the surprise for observers will be the sudden strength of price inflation, the root of which is eroding confidence in the eurozone's banks. What is remarkable is the clumsy way in which it is being precipitated, in an apparent desire to punish little Cyprus.
This punitive action is therefore likely to develop into a withdrawal of deposits large and small around the eurozone. With it will go an increasing preference for goods, pushing prices sharply higher, particularly in Spain, Portugal, Greece, Italy and even elsewhere as the effect spreads. The question then becomes how will the ECB respond: will it raise interest rates to curb this unexpected price inflation, or keep them low for fear of precipitating a collapse of insolvent banks and governments?
At stake is an eventual loss of confidence in the euro itself, as larger deposits flee for safety. In the short-term the US dollar and Swiss franc should benefit, but that doesn't get your money out of the banks, because if the eurozone's banks fail no bank and no paper currency is safe and their depositors might be raided. The only safety is in true money that has stood the test of time: gold and silver.
Ping.
As I said before the future medium of exchange will be the calorie.
O, great. Just what we need, a new infusion of cash into the U.S. stock and housing markets.
This just proves once again that there is no such thing as a “free lunch”, though I don’t expect government bureaucrats to get the lesson. If you rob from your depositors to cover the banks’ failures, then depositors will pull out their money and more banks will fail. Duh.
Here’s a question for Freepers out there....would you be willing to pay say $500 for a 5250 round brick of 22 Long Rifle Ammunition? $250?
How about a thousand rounds of 45 ACP or 420 rounds of 5.56mm SS109 Lake City ammo?
Times of strife and uncertainty coupled with availability make some things worth more than others.
Just like what happened in Wiemar Germany.
The people want at least SOMETHING tangible for their money.
Because they know if they wait the Cash will only be good for Sod!
Once people start panic buying food, it will resemble the empty ammo shelves at Cabelas.
It's like being on a lifeboat from the Titanic while seats are being sold to the highest bidder on it. My seat becomes more and more valuable with each new passenger paying to get on until the boat is overloaded and sinks.
If I was peddling U.S. stocks or real-estate, I might be happy. Having grandchildren who have to live with the consequences, not so much.
A thing is “worth” precisely the amount someone will pay for it at a given time, no more and no less.
Precisely And in times like these, some people place more value on lead, brass, copper and powder than they do certificates of gold or silver.
If you can’t touch it, readily sell it for milk, bread, butter, eggs, etc. it isn’t real.
And if you can’t pick it up and run with it you don’t really own it.
Wait until you see what happens when the average 4-day deep urban supply depth of stapels goes dry and they couldn’t buy anything anyway because their EBT cards don’t get charged..
>>As I said before the future medium of exchange will be the calorie<<
I am freaking RICH!
Try running with a certificate of deposit, or a “demand order” for gold.
Excellent.
I like your calorie measurement idea.
Cabellas opens their latest new store in my neck of the woods next week. Many locals have been wondering if they will plan accordingly for stock, because I can guarantee you everybody from every hill and holler will be making a mad dash for that aisle.
Good news.
How do you taste with barbecue sauce?
Lmao
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