Cyprus is back in the headlines. The president of the euro group, Jeroen Djisselbloem, told CNBC Friday that Cyprus faces a “very tough time ahead.” The island nation confirmed that the cost of its bailout has risen from 17.5 billion euros to 23 billion euros.
People living in Cyprus still face capital controls, including a cash withdrawal limit of 300 euros per day.
SitkaPacific Capital Management's Mike Shedlock, who is also the author of the Global Economic Analysis blog, says the Cyprus fiasco is an example of what can happen in a banking system that really can’t guarantee everything it’s promised. He argues these are issues that exist in the U.S. banking system too.
“Here in the U.S. we have something like $3 trillion worth of monetary base, with $50 trillion worth of money out there that’s lent on that monetary base,” Shedlock told The Daily Ticker on the sidelines at the Wine Country Conference in Sonoma. “So how are we going to pay this all back? We can’t.”
Shedlock argues that deposit insurance - guaranteed by the FDIC for accounts up to $250,000 - can’t possibly cover all bank deposits.
Shedlock points to New Zealand, which does not promise to insure depositors, as a better system.
Depositors may be forced to figure out if the banks they put their money in are solvent. Shedlock says the current system creates “moral hazard.”
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