There have been an endless array of fancy names used for this simple process such as Quantitative Easing, LTRO, OMT, etc. It comes down to additional debt being raised (or sometimes moved around with sleight of hand as seen in Europe) and the global central banks "easing" this process by flooding with world with printed money.
Looking at it from the government's perspective, this strategy seemed to me as the more intelligent way to go because it was far less likely that the average citizen could figure out what was actually going on. Only those that have taken the time to study history can see what is actually happening: their hard earned wealth was being removed in the form of their purchasing power. This process is no secret and even has a name in the world of finance: "financial repression." For an simple walk through see What Is Financial Repression. Not only do people not understand what is taking place, they actually cheer for it because it comes with additional social programs, government transfer programs, or "stimulus.". They see it as a way to earn something for nothing, or a "free lunch" as it is called in the world of economics. This was seen most vividly during the recent election in the United States when Obama ran away with the votes promising more of the same.
Over time this process continues on until you reach the point of a complete currency collapse when very suddenly the remaining wealth transfer is moved from paper assets to things. I believe this will occur first in Japan then move to the rest of the developed world, but it could just as easily begin in the United States, U.K. or Europe.
However, as I mentioned at the beginning, something very different occurred in the small nation of Cyprus last night which became the fifth country in Europe to receive a bail out. As part of receiving their money from the "authorities" to keep their reckless government spending and bankrupt banks in business the nation has decided to remove 6.75% of the money in every bank account of its citizens which hold less than 100,000 euros and to remove 9.9% of the money in accounts with more than 100,000 euros.
That's right. They closed the banks for the weekend and will re-open them on Tuesday. When the people open their accounts on Tuesday their money will be gone. Stolen.
This move is truly shocking and one that will have massive consequences. Imagine waking up in Greece, Portugal, Ireland, Italy, or Spain this morning understanding that your government and banks are in desperate need of money. What would stop them from closing your bank this Friday and removing your funds?
Nothing.
Anyone who still has their money in one of these accounts will hopefully take this opportunity to remove it as quickly as possible.
This extrapolation can move out much further beyond the Eurozone. If you are living in a country with a bankrupt government and insolvent banks (remember the banks are now government backed), why would you keep a large amount of money in a bank account?
This conversation goes back to a topic I refer to time and time again which is raising "safe cash." People often assume I mean holding money in the bank when I say that because that is the most widely regarded standard of safety in the United States due to the FDIC (which currently guarantees up to $250,000 in deposits). However, looking through the lens of last night's Cyprus confiscation shows that it could be one of the most unsafe options for your "cash." I have often recommended that people hold "safe cash" in a fund that rolls 3 month or less t-bills, not in a bank account, and now I hope you understand why. For more on this topic see 2013 Outlook: How To Invest
To bring this conversation and thought experiment full circle, it is important to understand that removing funds from savings accounts is inherently deflationary (the opposite of the reflationary tactic prescribed during the sovereign debt crisis so far). I understand that they have "swapped" this former cash with worthless bank shares, but we'll see how much those shares are worth when they give the citizens the ability to sell them back for cash.
What would further bank confiscations through Europe mean for assets such as precious metals? The concept would be very similar to a Greek citizen believing that there was a coming overnight currency devaluation should one of the European countries leave the Eurozone. It would result in citizens thinking about pulling their money first, then deciding what to do with their money after it has been removed. For more on this topic see:
Why Precious Metals Could Surge During A Deflationary Bank Run
