Sep

30

 Do you see any analogies between the Eurozone banking situation today and the failure of CreditAnstalt in 1931? - A Reader

The business of credit is always a Ponzi scheme in the sense that the issuer of notes, checks and IOUs never have enough money on hand to cash out all the promises. How could it not be? The stock and bond markets are nothing but promises to pay in the future rather than now. From the very beginning the United States has been founded on IOUs, not cash; George Washington's first pay day as President came in the form of a check, not dollars. The entire justification in U.S. law for having banks and insurance companies and securities firms all be special entities is that "the law" will somehow guarantee that these special people called bankers and brokers will never make imprudent promises to pay. Most of the time, the banks, insurance companies and securities firms succeed in at least the appearance of being prudent. They have to; their business is to sell their reputation for being "safe". But there are no actual guarantees being made; that is why the fine print always ends up saying "we promise but we don't personally back what we are saying".

The conventional financial histories try to point to "events" like the formal bankruptcy of the CreditAnstalt in 1931 as "causes". They follow the same approach that most military histories do - and all German General Staffs did - in studying the "lessons" of war. (Apologies for all the quotation marks, but the infection of the language by scholastic theology is now universal. Just as almost all discussions of enterprise end up using Marx's vocabulary, history has not escape from the assumption that life is a classroom.)

The CreditAnstalt had failed by 1919. Its assets - loans made before the Great War - had been melted away to nothing by a pile of sugar in the rain; having Hayek in the bureaucracy did nothing to prevent the new stub of a country called Austria from printing its way to hyperinflation. What happened in the next dozen years was simply the redecorating of the accountings of all the banks in Central Europe to pretend that there had been no default by the authorities that controlled domestic legal tender. (As long as your depositors have no ability to swap their paper money and statements of account for coin, the banks as custodians have no trouble.) The country was ruined, but the banks were still fine. Their trouble came when their foreign counter-parties who had been sending gold to Vienna in the 1920s lost faith that they would ever see any repayments that could be sent abroad and actually cashed out into other currencies.

The event that caused that loss of faith was a decision to "save" the Atlantic world from the Great Depression. You will not find anything in the contemporary accounts or the current academic histories that says otherwise. In January 1930 The Hoover Administration led the Allies to agree that reparations need no longer be paid; what that meant, of course, was that Austria's currency would no longer have even an indirect connection to specie because there would be no more international lending by the U.S.

It seems to me that the present offers a completely different situation. Anyone can escape the clutches of official IOU currency by following Kyle Bass and buying bullion; they can also go further down the rabbit hole and buy Bitcoins. But, in neither case is there any doubt that the person selling gold or digital currency for conventional legal tender can go into the FX market and choose which other StayPuffedMarshmallow currency - pounds, euros, dollars, yen, francs, pesos, etc. - he wants to trade for.

By 1931 the world of commerce had literally begun to freeze because large foreign exchange transactions were no longer possible except the pseudo ones between the central banks and even the people with "good" money (U.S. dollars, in particular) found that they no longer had any. For a comparable modern situation, imagine that half the credit and debit cards in the U.S. suddenly disappeared and there were no replacements and no new extensions of consumer credit.

Deutsche Bank has already failed in the same way the Credit Anstalt did in 1919; the difference is that the units of account that DB's credit and debit cards use have not have lost all exchange value. Germans will still be able to go to Florida for their winter holidays and use magnetic stripe and chip credit to pay for their Mai Tais.


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  1. Jim Nesfield on October 1, 2016 7:34 am

    Ponzi suggest that the intent to default was baked into the initial transaction. The verifications of assumptions used to derive the likely payment in the future has to be adjusted in a real time fashion to actual results. The current system of forecasting is steeped in a time lag, that can be solved using distributive ledgers AKA Block Chain. This would require a contractual basis using published standards, not secret fiat issuances for political purposes regarding currency. Confidence games rely on the Con giving the Mark their trust whereby the Mark believes they are obtaining something for nothing. In the end the Mark pays and losses. In the case of Bretton Woods the system is dead and a new basis must be configured to include Block Chain and real time adjustments to expected cash flows for a better pricing of debt and equity. Imagine a corporation issuing debt and the actual transaction ledger of that corporation was updated daily to reflect the actual returns. Ironically the post WWII Deutsche Bank had that ability via being the only game in Germany to arranged inter customer exchanges of debt and equity with a great deal of assurance on that repayment to creditors via lock box arrangements. Who is minding the lock box and who publishes the facts? The information is tiered as to institutional versus retail as was the case with MBS circa 1990 to 2001. So the failing of the flow of commercial transactions suggest that undiscovered performance data is known to some and not others. The percentage of difference between published and black market currency exchange rates might suggest a great deal of unpublished information remains to be known. Calculating the unknown requires an audit of the known.

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