Reggie Middleton Explains The Impossible Trinity

The Impossible Trinity or “The Trilemma”, in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

Put plainly, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. Trying all three simultaneously has NEVER, EVER worked! Of course, according to the ECB, it’s different this time…


Realize why the ECB is doing this QE thing to the level that it is. Their banks are still in trouble, material trouble. Reference “Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe” from 5 years ago and tell me if you think its gotten better (Hint: pay very close attention to the countries these banks are domiciled in, capital controls data soon to follow several paragraphs below)…

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

 Well, it’s all relative. The banks are smaller, leverage is down – and that’s after 6 years of global QE, ZIRP and now NIRP, yet each and every bank is STILL big enough to collapse the country that it’s domicled in…

 Global Bank Risk as Determined by Veritaseum

With this in mind, let’s review the The Anatomy of a European Bank Run!

Below is a chart excerpted from our work showing the asset/liability funding mismatch of a French bank. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation. Both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM! That problem is asset/Liabitlity mismatch.

bankrun diag

What many bank depositors who believe their bank deposits are actually cash don’t realize is that they are creditors to the bank – short term lenders. You bank accounts, time deposit accounts, CDs, checking and savings accounts are short term, UNSECURED loans to bank that uses said loans to engaged in significantly and materially more risky endeavors to generate profits. What sort of endeavors, you may ask? Well, as was the case with many French, Cypriot, Italian, Spanish and German banks, making real estate, corporate and government loans of a longer term to profligate nations such as Greece, for one. It’s good work of you an get it. Borrow from mom and pop savers at 25 basis points and lend to Greece at 23%. Good money, dude!

anatomy of a bank run

That is, until it becomes apparent that the money you lent Greece isn’t going to come back.

bankrun het map

Even that, in and of itself is not a problem since the fractional reserve banking system doesn’t really require you to have the money that you borrowed from mom and pop on hand to pay them all back. It works, until it doesn’t. When mom and pop figure out what you’ve done with their money by reading and article such as this, that’s when the stinky brown stuff hits the fan blades. You get a run on the bank as everyone tries to get those overnight, and 1 and 2 month deposits out – at the same time.

This is what happened to Bear Stearns and Lehman, literally overnight – although the signs were available months beforehand if you paid attention. I predicted both of these collapses at least 60 days before they occurred: The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?

Anyone in the EU area would be doing themselves a disfavor if they didn’t read “EU Area Residents’ Step-by-Step Guide to Escaping the Upcoming Bank Bail-ins & Capital Controls“. Believe it!


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