Phoenix Capital Research recently published an article entitled “Physical Cash Poses a HUGE Problem For Central Banks”. According to that article,
“More and more institutions are trying to make it harder for you to move your money into cash.”
That’s not precisely true. Generally speaking, we don’t have any “money” (gold or silver) in circulation. We only have “currency” (fiat, paper and digital dollars). It would therefore be more correct to say that,
“More and more institutions are trying to make it harder for you to move your wealth [not money] that you’ve stored in the form of paper debt instruments into cash.”
In other words, financial institutions are trying to force people to store their wealth in paper or digital debt instruments rather than convert that wealth into physical cash.
“Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.”
That’s evidence of deflation. I.e., positive interest rates generally correspond to inflation; negative interest rates correspond to deflation. Most people would only consider paying, say, 2% negative interest on an investment if they were convinced that value/purchasing power of the principal they invested would grow by, say, 3%. The only way the principal would be likely to grow in terms of purchasing power would be by means of deflation. Paying negative interest rates is self-destructive during a period of inflation, but could make sense during a period of deflation.
“Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000.
“This is just the beginning. The War on Cash will be spreading in the coming weeks.
“The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, these financial entities would very quickly implode.”
• We’re used to thinking of bank runs as the sort seen in the A.D. 1946 movie It’s a Wonderful Life. In that movie, George Baily (played by Jimmy Stewart) ran the Bailey Savings and Loan and managed to fight off a bank run in order to stay in business. The depositors wanted to withdraw all of their cash. George Bailey persuaded them to take only some of their cash and, at the end of the day, there was still a dollar or two left in the bank’s coffers and so the bank did not fail by falling into insolvency.
Today, if there were a bank run, it would be evidence that people no longer trusted their bank or the banking system. They’d want to get their wealth out of their bank and out of the banking system. That means people would not want digital dollars stored on debit cards because all digital dollars are actually in the (distrusted) banking system. They’d want to get out of the banking system by storing their wealth in a form that was not immediately subject to the banking system control or devaluation. That means they’d want to move their wealth from digital into the form of physical cash which could, theoretically, survive the collapse of a bank or of the banking system.
If people were really smart, they might recognize that even physical, paper dollars are subject to devaluation by the government and/or banking system and therefore opt to escape the banking system entirely by fleeing to gold or silver. But, life being what it is, we can expect that in the event of a system banking collapse, people will first stampede for paper dollars before they realize they’d be better off stampeding for precious metals.
However, because the vast majority of today’s currency is in digital form, there’s even less physical cash in most bank vaults now then there was when Frank Capricorn directed It’s A Wonderful Life movie in the 1940s. As you’ll read, there may be only be about $1 in physical cash for every $500 worth of digital and paper debt instruments in circulation.
There’s not enough physical cash in existence to satisfy more than a small percentage of bank depositors if they decide to suddenly close their accounts. Result? Today’s banks are even more vulnerable to bank runs than they were during the Great Depression.
More, if it’s true that there’s already a growing “war on cash,” then it follows that governments are waging that “war” based on the expectation that there may soon be widespread bank runs.
• “When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of [digital] money market funds.
“Money market funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can easily pull their money out at any time).
“This works great in theory. But when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.”
In A.D. 2008, the public tried to withdraw $500 billion over a period of four weeks.
Suppose another, similar financial crisis developed tomorrow. Would the public still try to withdraw their wealth from those paper and digital debt instruments over another period of four weeks? Or would the public have learned from the A.D. 2008 “Great Recession” to withdraw in four days or even four hours?
Who can say?
Nevertheless, if I had to bet, I’d bet that the next time the public stumbles into a “Great Recession,” they’re more likely to try to withdraw their wealth from paper and digital debt instruments in a matter of hours rather than weeks.
If so, when the public realizes they can’t withdraw their wealth, they will panic and start selling their paper debt-instruments for any amount of physical cash (or even gold and silver) they can get. If so, prices for paper debt-instruments will plunge, and those storing wealth in paper and digital debt-instruments will lose their assets.
“When the 2008 money market fund and commercial paper markets collapsed, . . . the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their ‘wealth’ into physical cash the whole system would implode.
“None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.
“European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money). This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.”
I.e., because European banks are so highly leveraged (26 to 1), if an average of just one bank depositor out of every 26 tried to withdraw their funds at the same time, that might be enough to render the bank insolvent, bankrupt and non-functional.
In order to prevent the banks from being rendered insolvent by simultaneous withdrawals by just 4 or 5% of their depositors, governments could impose currency controls to prevent that first 4 or 5% from withdrawing more than a fraction of their wealth from their bank accounts each day.
Result? If the average bank account held €5,000, and the government limited withdrawals to, say, €1,000 per day, it would take five times as long and/or five times as many depositors trying to simultaneously withdraw all of their savings before the banks might be rendered insolvent.
Again, we see evidence that the primary reason for currency controls could be to prevent or at least inhibit bank runs.
Implication? Governments impose currency controls in anticipation of a major economic dislocation and possible bank runs.
- “Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes, so all the bullion or physical cash Greeks had stashed there remained locked up—just like the “digital” money in their savings accounts.
“Again, it was impossible to get cash out of the banks–even cash that technically wasn’t ‘in the system’ anymore, but was sitting in safe deposit banks.
“The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.”
Thus, there are close to $70 trillion in paper and digital debt-instruments in the US but only $1.4 trillion in physical cash. If everyone simultaneously panicked and tried to convert their $70 trillion in paper and digital debt-instruments into cash, there’d only be about $1 cash for every $50 in paper debt instruments. On average, only one man in 50 would be able to turn all of his paper/digital debt-instruments into cash. 49 out of 50 would lose some, most or all of their assets.
In such scenario, the prices of debt-instruments like stocks and bonds could be expected to tumble as panicked sellers took any cash offer they could get in order to get out of their paper and digital debt instruments.
But the 1 man in 50 ratio gets worse because:
“And at the top of the heap are the derivatives markets, which are over $220 TRILLION.”
Thus, there’s not just $70 trillion in standard paper and digital debt-instruments. There’s also another $220 trillion in derivatives.
That’s nearly $300 trillion in US paper/digital-debt instruments in a world where there’s only $1.36 trillion in cash, paper dollars. That works out to about $220 in paper/digital debt-instruments for every $1 in physical, paper dollars.
Worst-case scenarios are, by definition, the least likely scenarios. Even so, the math implies that in a worst case scenario, only 1 man in 220 would be able to convert his paper/digital debt-instruments into cash.
Even if we don’t go into the worst-case, 1-in-220 conversion scenario, it’s not the least bit unlikely that in a difficult (but not worst-case) scenario, there’d be no more than $1 dollar cash for every $50 worth of paper debt instruments. If so, on average, only 1 man in 50 (2%) would be able to convert all of his debt-instruments into cash.
More, it’s similarly conceivable that the prices of paper debt instruments might fall by as much as 98% to match the supply of paper dollars. While 98% losses are unlikely, 90% losses are possible and 50% losses are virtually guaranteed.
- “If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.”
Assigning liability for derivative losses to American taxpayers is an abomination. If the derivatives make a profit, the proceeds go to the bankers and associated rich folk. If the derivatives suffer a loss, the rich are protected and the taxpayers are supposed to shoulder the loss. This situation is not only unjust but also mathematically irrational.
$220 trillion in derivatives is about 12 times the size of the “official” $18 trillion National Debt. Assuming that Congress passed a law that charged all $220 trillion in potential derivative losses to US taxpayers, Congress thereby increased the “official” National Debt by 1200%.
Note that there are about 320 million people in this country. $220 trillion in derivatives divided by 320 million people equals almost $700,000 in derivatives debt charged to each and every man, woman and child in this country. That’s about $2.8 million for every family of four.
How many families of four do you know who have $2.8 million in assets they’d be willing to give to Uncle Sam and all his rich buddies? Not many, I’ll bet.
Congress might just as well have voted to charge derivative losses to Santa Claus or the Tooth Fairy. There’s no way a significant loss in derivatives will be actually paid by anyone—regardless of whatever the Congress has declared in its laws.
The mathematical impossibility of ever paying the derivative debt implies that Congress’ real motive behind assigning the derivative losses to the people was not to get the people to actually pay the possible debt (since that’s mathematically impossible). Instead, Congress’ primary motive may have been to inspire those who hold derivatives to have confidence that they “can’t possibly lose” by holding the derivatives. That would be a false confidence, of course, since no one can possibly pay the debt that might result if the derivatives fail. If the $220 trillion in derivatives fail, all those “rich folk” and wealthy corporations foolish enough to hold derivatives will lose much or all of their presumed paper and digital assets.
In fact, it’s conceivable that Congress passed a law shifting derivative losses to the idiot taxpayers in order to help prevent the idiot rich from dumping their derivatives and causing a panic in the derivatives market.
Whatever Congress’ motive, it’s all bunk. The derivatives’ potential debt can’t ever be paid. And, as I’ve argued for five or six years, what can’t be paid, won’t be paid. Before our economic woes are finally completed, the derivatives will be shown to have little more value than Confederate dollars. It’s got to happen. There’s no way any significant debt associated with $220 trillion in derivatives can ever be paid.
We spend our lives thinking rich people must be smart. Then we see something like this derivatives fiasco and realize that many of the rich are just as stupidly greedy as any greedy welfare queen looking to get “somethin’ fer nuthin’.”
Makes me laugh.
- “Mind you, JP Morgan is the same bank that is now refusing to let clients store cash in safe deposit boxes.
“This is just the tip of the iceberg. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24 hours notice if you need $10,000 or more in cash. These are banks with TRILLIONS of dollars worth of [paper and digital] assets on their books.”
Pretty bizarre, hmm? JPM has trillions of dollars in assets, but not enough cash to hand out more than $10,000 without a 24-hour notice. That’s not just strange—it’s scary.
But there may be another, less frightening explanation. Perhaps the 24-hour notice isn’t required simply because banks are short on physical cash. Again, maybe the primary reason for the 24-hour notice and delay is to slow or even prevent bank panics and bank runs.
I.e., what if 20% of bank depositors decided to withdraw all their deposits from their banks today, but couldn’t withdraw more than $10,000 without a 24-hour notice? The banks might give you $10,000 today but hold the balance of your deposits for at least 24 hours.
In that 24 hours, the banks and/or government might declare a “bank holiday” that could last for days or even weeks. During that “bank holiday” you wouldn’t be able to withdraw the remainder of your deposits.
Other depositors, who might’ve been inspired by the first 20% who tried to withdraw their funds, could be completely prevented from withdrawing any of their funds by the “bank holiday”.
Unable to withdraw their funds, the public might resort to anger, rage or riots. But there wouldn’t be a bank panic and there wouldn’t be any bank runs so long as the “bank holiday” remained in effect.
So, which is the scarier scenario? That banks need a 24-hour delay because they don’t have sufficient physical cash on hand—or that banks need a 24-hour delay to slow or prevent an anticipated economic collapse and subsequent bank runs?
Regardless of whichever scenario scares you more, both scenarios provide sufficient reason to start converting however much wealth you’ve stored in the form of paper or digital debt-instruments into hard assets, physical assets, including cash, gold and silver.
• If it’s true that the primary reason for currency controls is to protect banks from bank runs, it follows that the primary reason for current currency controls and the “war on cash” is that the government expects an imminent economic disruption that could trigger bank runs across the nation.
All of which implies that:
1) Paper and digital debt-instruments (like bank accounts, pension funds, stocks and bonds) may soon become extremely illiquid and all but impossible to sell and convert into cash;
2) Panic will ensue and the market value of those illiquid paper debt instruments will plunge;
3) Those who’ve stored their wealth in paper debt instruments will lose some, most, or even all of the wealth they entrusted to paper “assets”.
And all of that implies that:
1) If you’re storing any of your wealth in the form of paper and/or digital debt instruments; and,
2) If you’re smart; then,
3) You will convert at least some of your paper debt instruments into cash and/or gold and silver now, before a possible “severe economic disruption” takes place and makes such conversions virtually impossible and leaves you trapped with suddenly worthless paper and digital debt-instruments.