You Don’t Own What You Think You Own

History tells us that sometimes wealth can be taken from us not just gradually, but overnight. A steady watering down of property rights suggests now is the time to prepare for such an event once more.

In our last time out, we wrote about how our system of money confiscates and redistributes wealth by design. Through fractional-reserve banking and money printing, the central bank cartel steals from and enslaves ordinary citizens through the hidden tax of inflation.

Like ordinary taxation, such confiscation is subtle and institutionalised. It percolates through generations of economics education until inflation is not just normal but desirable. A guaranteed “modest” level of annual currency debasement becomes – with irony intended – the gold standard of economies. And as these economies become gripped by debt, the vicious long-term cycle of debasement is secured.

This great hustle is a boiling frog – a creeping normality of transparent, gradual theft. But occasionally in economic history, often at the climax of these long-term cycles, the temperature shift isn’t so gradual. Sometimes there is no concealing the theft, and the frog is eviscerated publicly. Sometimes they take it all, not over decades but overnight.

To illustrate this type of scenario, let’s consider two short cautionary tales before we then turn to today’s horizon.

The US Bank Holiday and Gold Confiscation of 1933

Following the great stock market crash of 1929, the United States faced a period of unprecedented economic hardship. Unemployment soared and deflation took hold. The banking system, meanwhile, was on its knees. Many banks could no longer recovery money lent out at the height of the bubble that preceded the economic depression. As banks began to fail, a vicious cycle of bank runs ensued. Savers rushed to withdraw their savings before they became the next victim of the crisis.

By early 1933, the banking system was near complete collapse. One day after his inauguration as President, on March 5th, Franklin D. Roosevelt declared a national bank holiday, closing all banks and stopping all transactions for 3 days. This window would give time to assess the solvency of the banking system and take significant actions to stabilise it. But what would follow would provide a harsh lesson for many savers.

At the end of the bank holiday, Congress passed the Emergency Banking Act. Among additional regulatory powers over transactions and foreign exchange, the Act also allowed only banks deemed financially stable to reopen.

But what of the insolvent banks? Well, some were restructured and merged into other banks, and some were fully liquidated. This meant that those who held savings in these banks now had to wait a long time to regain access. Often when they eventually did get access again, they had lost a large portion – or even all – of their money. In effect, gone, overnight. Of course, this write-off did not apply to debt held with banks. Instead, the debt was retained and transferred to approved or restructured banks.

In early April 1933, Roosevelt announced the next step: criminalising holding gold bullion. Executive Order 6102 prohibited the hoarding of gold coins, gold bullion and gold certificates by individuals and corporations. It mandated that they turn in their gold for paper currency at a fixed price of $20.67 per troy ounce. Less than a year later, the US government would pass the Gold Reserve Act. This Act revalued the statutory price of gold from $20.67 per troy ounce to $35. In other words, those who had complied with the confiscation law a year earlier had been hustled.

The Cyprus Bank Bail-Ins of 2013

Exactly 80 years later on a small Mediterranean island, savers were about to be on the end of another taking. Cyprus had fared poorly in the global subprime mortgage crisis while also taking on considerable holdings of Greek sovereign debt. At the same time, the Cypriot banking sector had grown so substantial in size that it exceeded the entire country’s GDP. Foreign deposits had soared, with a notable Russian presence on the books of the banks. By 2012, the situation was critical, and the Cyprus government approached the IMF, EU and ECB for a bailout.

In March 2013, the terms were revealed. Like in 1933, a bank holiday was initiated for several days alongside capital controls to restrict transactions. A bailout deal had been reached, but it would require a “bail-in” of the banks. In effect, this meant that depositors were about to have their deposits confiscated to help recapitalise the two most impacted banks: Laiki Bank and the Bank of Cyprus.

In the case of Laiki Bank, the bank was deemed non-viable and was wound down as part of the deal. Depositors with uninsured deposits faced substantial losses, with some estimates suggesting many lost everything above the insurance limit of 100,000 euros.

In the case of Bank of Cyprus, uninsured depositors were subjected to a one-time levy of almost 50% to help recapitalise the bank. In addition, a portion of uninsured deposits was converted into equity in the bank. This gave depositors ownership stakes in exchange for their losses. But this ownership offered little consolation, as the value of these shares declined significantly following the conversion.

The Great Taking: Heeding Warnings from History

80 years apart, these two examples are unfortunately not isolated cases. There are cases of rapid confiscation of wealth – be it via bank failures, bail-ins, gold confiscation, you name it – littered throughout history. It follows, therefore, that the first important lesson we should take from such cases is not to underestimate their probability. Indeed, a growing number of prominent finance voices believe that global conditions are ripe for another overnight wealth confiscation. For what it’s worth, I also believe the probability has increased dramatically in the last few years.

A growing voice among those financial doomsdayers is David Rogers Webb. Webb rose to prominence late last year through his book, The Great Taking. In his book (which interestingly Webb has made available for free on his website), Webb explains what he calls “the end game of a globally synchronous debt accumulation super cycle”. This end game will culminate, he argues, with central banks taking collateral from people on a scale of the likes never seen before in history. Webb calls this massive seizing of collateral the “Great Taking”, and argues that it will encompass securities, bank deposits and private property financed with any amount of debt.

Now, were this not supported by extensive background on the regulatory and legal framework that has been put in place to enable this great taking, one might dismiss Webb’s claims outright. Alas, Webb outlines many long-term changes to legislation and regulations that support his claims. Among many areas, Webb points to the design of central clearing parties (CCPs) and the replacement of securities ownership with ‘securities entitlement’ as key mechanisms.

To explore these concepts in more depth, we must reflect on the second important lesson from these examples: you don’t own what you think you own.

You Don’t Own Your Stocks

Central clearing parties are the institution at the top of the chain when we transact in securities, bonds and options. In its clearing role, the CCP acts as the middleman between buyer and seller, ensuring that both parties fulfil their obligations. When two parties trade, the clearing house steps in to guarantee that the seller delivers the asset and the buyer pays the agreed amount. In effect, then, the CCP takes on the counterparty risk.

But here’s where it gets scary. If you purchase a stock via a broker, you take on what is known as a “security entitlement”. This is not the same as direct property rights to the security. And guess who takes on the custody of the real security? Yep, you guessed it, the CCP (or its depository parent company). In other words, you don’t own the actual stock; you own a contractual “entitlement” to it.

As Webb notes in his book, the critical point here is that security entitlement is not the same as ownership. It means, in legal effect, that we are unsecured creditors for the CCP, ranking below other secured creditors. Stocks “owned” in brokerages, pension plans and investment funds can essentially therefore represent collateral for a few large creditors, and are often pooled with other customers’ assets. A chain of hypothecation complicates matters further, allowing secured creditors to use the same assets held in pensions and funds many times over, adding layer upon layer to a multi-quadrillion-dollar derivative complex.

Now, you might think, “At least my “security entitlement” guarantees that I can buy and sell the stock when I want for the value it trades for, so who cares where the custody it is registered?”. And fine, that might be true for now – but what if a CCP fails?

What Happens if a Central Clearing Party Fails?

A recent Reuters article drew broader attention to this possibility. The article reflected on the advice of the Financial Stability Board (FSB). The FSB provides regulatory recommendations to the G20 economies, to which those countries have committed to follow. In this case, the FSB set out recommendations in the event that a central clearing party enters significant financial distress.

Given the size of overall transactions now flowing through CCPs, their failure could have a dramatic impact on the global economy. The FSB is therefore keen to ensure they have options for orderly “resolution” – which is regulator speak for failure. They set these options out in more detail in a consultation report published in September 2023. The report sets out seven tools, the first of which listed they call “bail-in bonds”. In their language:

“Bail-in bonds are subordinated debt or unsecured debt ranking junior to other liabilities issued by a CCP (or its parent) to recapitalise the CCP (through conversion into equity) and/or absorb losses in resolution. A CCP would issue bail-in debt in BAU periods for use in a potential resolution scenario. Bail-in bonds for use exclusively in resolution would allow a resolution authority to subordinate these unsecured, junior liabilities of a CCP upon the CCP’s entry into resolution and to convert those liabilities into equity or other ownership interests in the CCP or in a successor entity. If necessary, the bail-in bond documentation would include subordination terms or conversion terms under the relevant legal regime.”

The salient issue here is what is treated as an unsecured liability. In The Great Taking, Webb explains that the status of security entitlement falls into this category. In essence, this puts the everyday Joe last in line to receive the assets they thought they owned.

Cutting through the FSB’s jargon, let us picture the scene of how a bail-in bond might function. Much like in the US and Cyprus, it would begin with the authorities shutting things down for a few days. Transactions and clearing activity would stop while they worked on the “resolution”. After the collateral you unknowingly provided is used to pay off secured creditors, a bond in the failed clearing house that remains would be issued. Your stocks in your brokerage account the night before would be replaced by bonds in a bankrupt clearing company.

Needless to say, this would be a taking unlike anything before. It would devastate the finances of anyone exposed to this legal structure of severed property rights. No doubt, too, it would also likely create civil unrest unlike anything in modern history.

But as things fall apart and financial desperation sinks in, Webb believes it would set the scene for the next phase of this long-planned hustle: the “saviour” of Central Bank Digital Currencies (CBDCs). To “compensate” for the theft, rapidly devaluing digital fiat currency would be pinged straight to your mobile phone. The climax of the hustle would therefore be the launchpad for the next hustle. Why let a good crisis go to waste?

How to Protect Yourself

I am yet to read of a serious debunking of The Great Taking. Indeed, many other voices in the finance space have validated Webb’s reading of the legal and regulatory setup. But whether or not the taking itself takes place in such catastrophic terms as Webb imagines, protection is prudent.

At the heart of this great taking is a great transference of wealth, from those who hold the unreal to those who hold the real. This is precisely where the focus of any protection should sit.

#1: Hold precious metals

Gold is apex money at the tip of Exter’s pyramid. It holds this position because it is the ultimate safe haven asset. It is a physical commodity with intrinsic value, a recognised store of value for millennia, and an asset without counterparty risk. In a crisis of the unreal, gold is the real. One must therefore logically conclude that it might play a useful role in such an unprecedented situation. This is not, however, to say that your central bank cannot order gold confiscation as they have done before (e.g in 1933 in the US). Rather, it is unlikely to be first in line.

#2: Reduce your property debt

The common lesson from economic history is that deposits are often lost, but debt is seldom lost. That’s just how the hustle is designed. With this in mind, it is important to note that Webb also argues that property debt is a potential mechanism for a taking. It can be taken advantage of either through competing claims of ownership or simply through crushing its mortgagee in deflationary conditions. Real estate detached from this debt model may therefore offer another form of protection.

#3: Independent food, water and energy

You cannot, of course, eat gold or the roof over your head. In the event of a great taking, there would be significant civil unrest, inevitably disrupting supply chains. Our reflections on real estate must therefore also consider how we can make our food, water and energy more independent. That might mean harvesting your own energy and food from your land. Equally, it might simply mean filling up the pantry with supplies with a long shelf life.

Are You Prepared?

While the sheer scale of what we have discussed seems unthinkable, maybe even improbable, the examples from our past and the legal mechanisms in our present should give one pause for thought. Just what if? What if decades of planning really enabled them to pull off their most audacious hustle yet? What if they took it all?

Whatever your place in the world, whether the victim or the thief, intended and unintended consequences would ensue. It would seem prudent that all parties to the hustle ask “what if?”. That question should be quickly followed by another: am I prepared?

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