Red Money - (Conspiracy Theory #11)

Bruce Krasting's picture

A muse on a hot day.

I was having a drink at a swell bar in the city the other night. The
place was packed. My friend and I had a laugh about an old story that
crossed our lives many years ago. The story of Red Money. Some time
later, as we were leaving, a well-healed guy comes to me and says a bit
conspiratorially, “ I believe in Red Money too”.

I am not sure where this story originated. It has been around forever.
The reason it has stood the rumor mill test of time is that it is so
fundamentally believable.

It goes like this. One morning we wake up and the Treasury has made an
announcement that it is going to convert all US currency from green to
red. The process will commence immediately and continue for a period not
to exceed four months. Very few would be impacted. If you had money in a
bank, money fund or brokerage account it would make no difference. If
you had some green cash you would either spend it or deposit it into
your account. It would not influence the value of the holdings of
foreign reserves. That is all “electronic” money. Red money would only
impact cash money.

The Federal Reserve reports that there is approximately $1 trillion of
US coinage outstanding currently. That number is up from $570b in 2000
and $260b in 1990. As a percentage of economic activity it has risen
from 4.5% of GDP in 1990 to 7% today.

For as long as I can remember the Federal Reserve has always had this
disclaimer on the Coinage Outstanding line in the reported balance
sheet:

16. Estimated.

In this case “estimated” could mean anything. It might be something
reasonable like +/- 10%. But if you are inclined to believe in Red Money
you might also be inclined to believe that this estimate could be off
by 100%.

What might happen if we woke up to a red money world?

-Again, for all electric money and most of the actual cash holders this
would mean nothing. The next time you went to an ATM it would come out
red. The new and old would be equally acceptable. As old is spent it
would work its way through retailers and Banks with no problem. After
the four months money could still be changed. But it would require
disclosure.

-US money is in every corner of the world. When the word gets out that
it can’t be used after a given period of time it too will be exchanged
back through the banks. The moneychangers around the world would have a
field day for a while.

-There are many groups out there that are holding onto cash money for
reasons that go in color from grey to black. You have the husband who
tries to hide money from his wife. You have a million small retailers
who skim cash every week to hide from the IRS. Illegal aliens in the US
all have cash money. There is a ton of gambling money. On the completely
illegal side we go from bad to worse. Drug dealers, drug cartels,
organized crime, bank robbers and all manner of burglars. Throw in the
pirates, gunrunners, crooked politicians and very bad boys that I put in
the Jihadists camp.

How much of the money outstanding is in these hands? More than we want
to believe. $300-500 billion would be my guess.

-You can’t deposit more than $10k into a bank and not have a “flag item”
requiring disclosure and identification. While some black money will
get back into the banking system the bulk of it will be stuck. This will
be a global phenomenon.

-If you had a million or so in hundred dollar bills that were going to
be toilet paper in a few months and the “teller window” was closed, what
would you do? Spend it as fast as you could. What might you buy?
Anything, including: Jewelry, uncut diamonds, gold and silver, big
boats, as many cars as you could find, houses, raw land, cases of wine,
art works. Anything that had a chance to hold value. Fur coats and
expensive clothes would be flying off the shelf. Restaurants would be
full and travel/leisure would explode.

-Red Money would have to be done with a wink and a nod. It would be
understood in advance that a consequence would be that Bergdorf Goodman,
Saks and Macy’s would quadrupled their cash sales overnight. That would
be the intended consequence. So long as the money was going into
consumption they would look the other way. But at the same time some
very big (and smart) eyes and ears would be looking at the money flow.
This would be a good way to flush some of those bad boys into the open.

-Counterfeit money would be burned.

-The Fed sends billions of new money out every day. This would be a
massive ramp up. If you believe in this concept it is no stretch to
assume that the contingency plans for how this would get done are
already in a book. It would be expensive. But the jolt to the economy
and the associated increase in tax receipts would offset it. How much
would we pay to get a “follow the money” lead to Bin Laden? How much
have we already spent?

-The most desperate characters would face the biggest risks of
disclosure. They might just let the money they are sitting on turn to
dust. That would not be a bad outcome either.

-This could backfire on the Fed. What would be the consequence of this
if we went into it assuming there was a trillion out there and after a
few months we find it is actually 2 or 3 trillion? A very big
credibility problem. Economists would have to burn the mid-night oil
trying to re-figure the connections between monetary grown and GDP. The
old ratios would be worthless. If the number were much bigger than we
are guessing at then it would be a big slap in the face of the
Keynesians. Money does not multiply as fast as we thought.

-On the flip side we could get an unanticipated result. Only $500b could
show up. The rest would be smoke and off the balance sheet. It would be
quickly replaced by the Fed. They would love that opportunity.

-I have seen several reports of big ticket missing cash in both Iraq and
Afghanistan. How much of this has not been reported? Who has this
money? What are they doing with it?

-If one wanted to give the global economy a ~$300 billion of “instant
demand stimulus” this would be on the list. It would be a micro burst of
activity that would support another (longer) inventory cycle. Yes, a
lot of this money would be re-channeled into useless things like a
packet of diamonds, a Corvette or a condo in Miami. But that is what we
have been doing for the past twenty years. This just picks up the pace a
few notches. There is next to no cost to this. We might just catch a
bad guy.

-For some this would destroy the dollar bill as a store of wealth and a
medium of exchange. Roubles, Yuan, Euro’s, Yen, Aussies, Loonies and
Kiwis would fill the void. That would not be a bad result either. Who
doesn’t want a weaker dollar?