charles hugh smith-Which Dominoes Are Next to Fall in Europe?

Wondering which dominoes are next to fall in Europe? Correspondent David P. provides a list based on a simple but powerful precept: follow the smart money. In this case, the smart money entered the at-risk banking sector of a particular nation to skim the fat premium offered by its higher interest rates--rates that reflected the higher risk. The smart money then exits the nations' banking sector before the inevitable solvency crisis triggers capital controls and depositor expropriations (the comically misleading "bail-in").

Why is any money left in at-risk periphery banks? David and I discussed two dynamics.

1. "The Chasing of Yield in a Time of Financial Repression. People chase those nickels, and since nobody (had) yet been hit by the steamroller, it was all fun and games. A good chunk of them are in time deposits, and now they can't escape. And a decent chunk is local money, too."

2. The assumption that small depositors would be protected from losses in the event of a bank failure. There was little reason for anyone to doubt that even in the worst-case scenario, depositors would be protected by one central authority or another.

3. The crisis has been averted or pushed forward into the future. Large depositors undoubtedly recognized the risk but likely reckoned that the European Central Bank's remarkable success at kicking the debt-crisis can down the road would stave off any real crisis indefinitely.

As we saw in The Real Cyprus Template (the one you're not supposed to notice), once the smart money exits the at-risk banking sector, it is allowed to fall. This suggests that one way to identify which dominoes are likely to fall next is to look at the smart money's deposits in each nation's banks.

If the smart money has pulled most of its capital out, ECB and Eurozone authorities have a diminishing stake in propping up the domino. As a result, its fall becomes increasingly likely.

Here is David's commentary and accompanying charts of seven European nations. I have arranged David's charts in a roughly periphery-to-core order.

In Cyprus, one group of depositors seemed to have the inside track on the danger of remaining as an "uninsured depositor" in the two big Cypriot banks. That group, for Cyprus, is classified by the ECB's statistics group using a long and incomprehensible ECB series name - BSI.Q.CY.N.A.L20.A.1.U5.1000.Z01.E. Here's a link if you are interested in the raw data. Translated into English, this is basically "Eurozone Banks outside Cyprus." Or more succinctly put, Smart Money.

Thank you, David, for the commentary and charts. As David observed in our email exchange, "Things fail from the periphery to the core." With this in mind, we might arrange the dominoes in this order: Slovenia, Portugal, Malta, and then Spain.

Though Spain and Italy are considered core E.U. nations, we should probably differentiate between political and financial cores and peripheries. Should a self-reinforcing crisis of liquidity, solvency and loss of trust gather momentum, Italy's debt situation could reach critical mass, regardless of its political status as a core nation.

Similar political and financial crises could arise in The Netherlands and France,too, though these crises will probably not be triggered by an exit of core-EU mobile capital.

Things are falling apart--that is obvious. But why are they falling apart? The reasons are complex and global. Our economy and society have structural problems that cannot be solved by adding debt to debt. We are becoming poorer, not just from financial over-reach, but from fundamental forces that are not easy to identify or understand. We will cover the five core reasons why things are falling apart:

1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy
Complex systems weakened by diminishing returns collapse under their own weight and are replaced by systems that are simpler, faster and affordable. If we cling to the old ways, our system will disintegrate. If we want sustainable prosperity rather than collapse, we must embrace a new model that is Decentralized, Adaptive, Transparent and Accountable (DATA).
We are not powerless. Not accepting responsibility and being powerless are two sides of the same coin: once we accept responsibility, we become powerful.

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