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Faith in the System

April 1, 2013 – 4:55 pm

images4As the Cyprus banks reopened this week the damage has already been done. The banking system is made up of a tremendous number of rules and regulations but it comes down to confidence. If you are not confident that your money is safe you take steps to try and make it safe.

That describes the depositors in Cyprus. They are lacking confidence when the ECB and IMF along with the EU agree to take depositors money to solve the banking industry’s problem. Even when that decision was reversed the damage was already done.

Think in terms of the bank run during the Great Depression here in the U.S. The banks closed and struggled for years thus causing a collapse in the economy. FDIC insurance is there to give people confidence in putting money into the banks and the banks in turn loan it out to oil the machinery of the economy.

The EU and its cohorts short circuited confidence and it will spread to other EU countries. That means the EU will likely slip deeper into recession as depositors take money out and the banks that worry about depositors doing just that hold on to the cash by not lending. The trickle down result is less economic activity.

The lesson here is, if you want a strong economy do not mess with people’s hard earned money! PERIOD!

Good Trading
Steve Peasley

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