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What An American Bank Run Would Look Like
Technically the title of this post is wrong: the truth is that nobody could possibly know or predict what a bank run would looks like in details suffice to say that it would have terminal and devastating results on the global economy. One needs only remember what happened when the Reserve Fund broke the buck and the $3 billion money market industry was at risk of unwinding (for those who do not, Paul Kanjorski does a good summary here). What we do, however, wish to demonstrate is the tenuous balance between physical money - yes, just like precious metals, there is actual "physical money", better known as currency in circulation - and more abstract, confidence-based, "electronic money." Now when it comes to talking about systemic instability, pundits often enjoy bringing up the case of the $600+ trillion (recently discussed here in a different capacity) in synthetic derivatives, whose implosion would "wipe out the world." While that may indeed be the case (the memory of the CDS-precipitated AIG implosion is still all too fresh), since nobody really can comprehend the side effects of the collapse of global derivative system, which by some estimates is over $1 quadrillion when combining exchange and OTC based derivatives, it is largely based on pure conjecture. And, as we demonstrate below, one doesn't even need to do get that high up in the pyramid of credit money. The truth is that should there be an American bank run, what would happen is the conversion of all electronic dollars into physical dollars, as retail Americans rush to empty their checking and savings accounts, exit their money markets, while institutional America converts all "shadow" liabilities into hard dollar assets (Zero Hedge has a specific methodology of defining what liabilities make up the shadow banking system). The truth is that should there be a D-Day in the American banking system and there is a global scramble for physical paper (ignore gold) the conversion ratio for binary dollars into hard ones could be as high as 30 to 1. Which begs the question: should one apply a 90% discount when evaluating their electronic dollar exposure? That, and many other questions too...
Physical dollars
When looking at actual "hard" dollars, there is just one place: the Fed's weekly H.6 statement which shows what the total amount of currency in circulation at any given moment is. The H.6 is the statement that breaks down the two forms of monetary stock tracked by the Fed: M1 and M2. Currency is at the very top. As a reminder, currency, together with Fed bank reserves are the only two actual forms of money "printed" into circulation. Yes, there is much polemic over the nature of bank reserves, but they, together with currency in circulation are the only two actual liabilities on the Fed's balance sheet, backed by such assets as Treasurys, Mortgage Backed Securities and, questionably, gold (questionably, because as Ron Paul has been crusading, the existence of gold on the Fed's asset side is taken on faith, and is based on promises by the Fed that it in fact exists, but nobody is allowed to actually see it).
So how many actual physical dollars are there? Well according to the H.6, as of June 27, there was $967.3 billion in currency currently circulating within the US economy, while the H.4.1 tells us that as of July 6 there was $1.66 trillion in bank reserves with the Fed, which if need be can be promptly released as currency to the wider public on demand (granted the dynamics of this release are completely unclear).This adds up to just over $2.6 trillion in "physical currency" (which also happens to be the "record" asset side of the Fed's balance sheet).
So that's what the the 'supply' side of money looks like in a dollar bank run. What about the demand. In other words, who will have the non-contractual "right" to pursue these $2.6 trillion in cold, hard cash?
Let's start with the M1, which is where the first tranche of electronic dollars is situated.
M1, in addition to currency in circulation, also contains demand and checkable deposits. The most recent number for these two is $982.9 billion. So far so good: if only demand and checkable deposits were pulled, the currency in circulation would be sufficient, although there would be a small impairment of just about 1.5%.
Next up, we go to the M2, which in addition to the M1 components, also contains such abstract concept as Savings Deposits, Small-Denomination Time Deposits and Retail Money Funds. The dollar values associated with these assorted claims on cash are $5,662.8 billion, $827.9 billion, and $698.7 billion respectively, or a total of just under $7.2 trillion. Add to this the roughly $1 trillion in non-cash M1 and you get $8.2 trillion. And this is where things start getting interesting. Because should every retail saver who has documented paper claims in America's checking, savings, time-deposits and money market pull their money, they would find that there is just $2.6 trillion in cash available to actually satisfy said claims.
But wait, there's more.
While the M2 conveniently ignores it, another major component of monetary aggregates is institutional money funds, which adds another $1.833.2 trillion in claims to physical fiat. Added across and we get just over $10 trillion.
But wait, there's more.
Remember how on March 23, 2006 the Fed discontinued the M3 because it was "too expensive" to keep track of all this "money." Well, courtesy of various replication loophole Zero Hedge has been able to track a far more comprehensive indicator of the broadest money stock in the US economy: the shadow banking system, which for all intents and purposes is the same as above: namely claims on actual money however more by institutional accounts than retail.
The breakdown, based on the most recent Z.1 (through March 31, 2011) is as follows:
- GSE Liabilities: $6,577.8 billion
- Agency Mortgage Pools: $1,166.3 billion
- Asset-backed securities Issues: $2,280.6 billion
- Securities Loaned by Funding Corporations: $709.0 billion
- Liabilities in Fed Funds and Security Repo agreements: $1,263.3 billion
- Total Outstanding Open Market Paper: $1,131.2 billion
Whipping out the calculator, and we get... $13.1 trillion in shadow banking system claims. Adding across with the M1 and M2 stock noted above and one gets $23.1 trillion. As a quick reminder, the physical money, in a best case scenario, is $2.6 trillion when adding reserves, and in a worst case, $967 billion. In other words, the paper to physical dilution is anywhere between 8.8 times and 24 times.
But wait, there's more.
Observant readers will recall that in our 2009 piece which before anyone else had even considered it, explained how the Fed bailed out the world with FX liquidity swaps, one of the key take home messages was that there was a synthetic short on the USD to the tune of about $6.5 trillion courtesy of the USD carry trade and other considerations. In other words, this is how many dollars would have to be conjured up into existence to satisfy existing electronic claims (and why the Fed had to scramble to implement the FX swaps when it did). One thing that is certain is that in an American (and thus global) bank run, all of the dollar shorts would cover in milliseconds as the carry trade would collapse instantaneously.
The take home is that courtesy of this latest and greatest demand on cash, there is up to another $6.5 trillion in potential claims on underlying hard dollars (and likely much greater as this BIS study was conducted at a time before ZIRP, and before the USD was the new, step aside JPY, carry currency of the world).
Summing it all up
Putting together all of the above, there are anywhere between $967.3 billion and $2.6 trillion in physical claim satisfying pieces of paper which everyone would scramble to grab if the sky was falling, and against these there are just under $30 trillion in paper claims on said hard paper. This can be seen visually on the indicative chart below:
Do readers see now why it is irrelevant to add X trillions or even quadrillions in derivatives? Because when just taking the plain vanilla electronic claims on circulating dollars there would have to be between a 11x and 31x haircut when everyone rushes to procure the suddenly all too precious pieces of paper with the picture of a dead president on the face.
For all intents and purposes this has been more of a thought experiment than any indicative scientific evaluation as there are many other nuances when analyzing all of the above. However, for the sake of esthetic purity, the truth is that no matter how one slices and dices it, there will be an unimaginable scramble to get out of electronic dollars and into physical ones. The amusing thing is that there are many who are worried that physical silver claims may be diluted by outstanding paper. This is true, however, ironically, it is very true when dealing with the heart of the fiat system. And recall that we refused to look at the $1 quadrillion in credit money at the derivative level. We believe that for illustration purposes, knowing that at best 10% of electronic money is covered in a worst case scenario should be sufficiently enlightening. As for those who say that all the Fed would need to do is merely hit the print button and not stop, remember: this money would simply flow to bank reserves. How it gets from there to outright currency in circulation is something the Fed has been bashing its head over the past 3 years, so far, unsuccessfully. And any money paradropped into circulation directly, would not do anything to alleviate the dilution factor as it would add to both sides of the "claim" and "deliverable" ledger (not to mention that it would also leads to instantaneous hyperinflation).
So, in the loosely paraphrased immortal words of Troy Mclure, now that you know, roughly, what a bank run would look like, don't do it.
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this is not fox news, i understand that fear sells, but seriously this is going too far.
with articles like this floating around, our biggest risk is not a run on banks -- but rather the slow transformation into an idiocracy
http://en.wikipedia.org/wiki/Idiocracy
who said it was slow...
Im thebankrunner
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Hi, I'm Troy Mcclure. You may remember me from such instructional videos as "Ponzinomics: A New Serf's Guide to Financial Slavery" and "Dig Your Own Grave and Save!"
It would look like that " Raging Bull" outside the Ponzi house... On Liberty Street.
You know You're (Jaded) when you type CNBS in the search bar for a quick Bond Quote...
The real 'bank run' will be on coins, specifically nickels and cents (for the remaining pre-82 copper ones). The FED can't conjur coins out of thin air and they will always be worth their intrinsic melt value. Plus, just like silver and gold, they have no counterparty risk. Hyperdeflation following the collapse of the 100 year bubble will return the cent to a current day purchasing power of 25 cents. The dollar has devalued to four cents of its value pre-FED. Post-FED, these small coins will increase massively in purchasing power. Most people have very few nickels lying around...
is there a nickel/cent-coin-ETF to trade?
When I was taking chaplain classes the teacher said God was instructing Christians to save pennies and nickels.
There you go.
Great avitar, I think I know the feeling the station commander at Mumba felt when he heard those fateful words, "Lusaka tower, this is Green Leader--"
A friend of mine designed two logos for our NPO. I kept this one for personal use: a hummingbird & a hibiscus flower.
I did not junk you.
I recently made a withdrawal at the bank. As the teller was processing the transaction, his computer froze up for about 2 minutes. I told him maybe a bank run was in progress. He was not amused…
He was contemplating joining your cause!!! Wink/Wink...
So much of our purchases are on credit/debt cards these days. Will there be a run on the banks for linen/dollars?
Well for you people worried about a food run...use those toilet wipes...dollars to get some long term foods. Mountain House foods (long term storage foods) dispelled the myth that FEMA was sucking up all their supply. Just good old heavy buying by worried Main Street.
http://mountainhouse.com/
Costco has a good supply...uh wait...no they don't.
http://www.costco.com/Common/Search.aspx?search=mountain+house&cm_re=1_e...
This is precisely why I come to ZH. A really astute article on a par with some of the best I've seen. If we're in the province of hypotheticals, I'm afraid it gets worse - a nationwide bank run, coupled with an international run on the USD will necessitate a government-led adjustment on the currency, and if Greece in November 1944 is anything to go by (Change from old drachma to new drachma) the New USD might have an exchange rate from the old of 50,000,000,000 to 1. So don't even think about risking your life with the mob to take out cash from your bank which will inevitably be worthless anyway. Greece's treasury was looted by the occupying nazis, and the US treasury is looted by the occupying zionists and their minions of bankers. History is not without a sense of humour.
The disappearance of silver coins from circulation is dangerous. In the event of chaos and a loss of faith in the system, circulating silver coins would still enable exchange to take place by assuring the seller of services or goods, that he/she is receiving real value. The absence of silver circulating medium makes any chaotic scenario far more unmanageable. The big losers of course would be banks as they would largely be bypassed for all the small transactions.
At the height of the GFC scare in Australia, billions were literally withdrawn from the banks and tellingly enough, most of that money was never re-banked. It seems people have a fear in the back of their mind about what banks might or might not do. Greece at present is another even more telling example of the preference for cash in the hand rather than cash at bank. Billions are leaving the Greek banking system and are highly unlikely to return.
One bit, two bits, four bits, a dollar. Now many know what a bit is? Now think about those silver dollars.
Outisde of this and similar forums...who uses actual cash?
I do...usually to buy silver...
Drug dealers.
Bank run = bank holidays = people buying real assets with electronic money = commodity hyperinflation
so long as those commodities can be delivered.
You can thank your friends at the Fractional Reserve.
This is why the fiat issue is irrelevant. It's credit which is the problem, not fiat vs gold.
Having said that, following the run on the dollar, the treasury would be out, printing many extra zeros on the shiny new notes they are producing, and at this point when FRB kicks back in, is when hyperinflation starts.
… and here is the REAL reason for the drawdown.
http://www.worldreports.org/news/170_fuhrer_may_try_to_escape_via_a_stat...
Unfortunately, this article focuses on a process and not the possible intended result.
In all bank runs, the banks have shut down. Specie redemption was suspended and banks were protected. The banks also stopped providing any kind of credit. They were allowed to call credit in, regardless of the contractual terms of the loans.
Essentially, everything will be done by the government to protect and preserve the banks. It matters not how, why or when. Therefore, this is an exercise in futility.
Why would you need paper dollars if no one will accept them? What good are binary credits if the bank refuses to honor them? Still, exchange will go on as it is the bedrock of society- any society.
The real question being asked should be: why is all the fear being created in the first place? All the banks in Europe could have been made whole in one fell swoop. The assets could have been conjured, liabilities hid, balance sheets fabricated. No, we get an unfolding drama, one used to jerk markets up and down, creating volatility-volatility that is very profitable to trade when you are generating the market actions.
The US could have raised the debt ceiling in a day. No, we get the whipsaw of political gamesmenship. Then it is played against carbon taxes in Australia, Chinese inflation, Middle East revolution and the "bond vigilantes".
It almost seems accidental and random in its' extremes and that is purposeful. If you could put your finger on it, it would be too easy- you could identify the players and the criminals- you would know your enemy. If everyone is a victim, then there is no one to blame.
So, what would be the intended result? Why would you make a complete disaster out of a global financial system unless you were planning on replacing it with something else? You will need a phoenix to rise from the ashes, but it cannot be telegraphed, it has to be waiting to be sprung, from surprisingly mundane places, whispers from the void that are allowed to coalesce around a central theme. A void already functioning as a mass media system, the voice of the whole world coming together to create a "new" way of managing society and risk. A safe system, a fair system, a system generated by the people.
The leaders will be required to make grave sacrifices, the paradigm will be changed, the "greatest" revolution will transform society and humanity will be free to evolve to a higher and better place on the ladder. It is quite possible that money will disappear. Your position will have a standard reward, perhaps structured housing rewards as well. Limits on procreation? Elimination of choice to cut down on waste? Movement by mass transit to preserve the environment? The introduction of a class society based on intellect and accomplishment by predetermined goals?
Who knows? It will be palatable, it will remove most forms of wealth from individuals into social collectives or special governing structures, it will be heavily defended by a police state.
No shit, now go pick up a history book. The reason for all the fear mongering is quite clear, there is a huge deflationary period coming (it has too), only this time it will not be one of monetary or money deflation but rather human lives. FYI - humanity has been effectively "eating" fossil fuels of all kinds since the invention of the Haber Bosch process. There have always been limits on procreation, something that continues to be ignored, especially by the poor. You contradict yourself, a "fair" system by the people, really? People only care about survival of their own kind, all others be damned. Look at the "fair" policies that societies established in order to combat discrimination. The policies are discriminatory themselves. None of this will change until we have real leadership. Current leaders make sacrifices for everyone else while enriching themselves.
Although, your optimism is appreciate.
You may have misunderstood my missive- although reading for understanding is not an American strength. There is nothing optimistic about slavery. You are deluded if you think "real leadership" is available.
You are operating from a mindset of having control and input to the existing system. That normal market forces can present themselves and act on the economy. Historicism is not always a predictor of future events. I am well versed in economic history.
You are a bit naive in your understanding of how the Elite operate, how mass propaganda is devised and carried out, how populations are manipulated to a predetermined result. Yes, people care about their own survival, which is why they will accept any opportunity for security- regardless of how it is structured or how much they will have to give up- as long as the suffering is universal in appearance.
I understand the "elite" and propaganda just fine. my point was more towards the lack of leadership. All the things you mention still require leadership in order to make them happen. I see no real leadership anywhere. If I am naive in this area, then you are naive in your assertion that people will accept "any opportunity for security". Bullshit, in our neck of the woods, we will secure our own physical assets and liberties, by force if necessary. Independent responsibility still exists, don't right that off just yet. Your faith in the elite's ability to control outcomes is unfounded. They can not.
So, you choose to ignore hundreds of years of history. You ignore hundreds of years of political actions in countries all over the globe. You act as if this all happens without "leaders".
They have no need to go to your neck of the woods. It is not a strategic asset. People have always accepted security- that is why they support government- even as it robs, poisons and kills them.
I have no faith in the Elite, they are my enemies; but to ignore and remain ignorant of your enemy only insures your overwhelming defeat. Rather than brandishing a shaking sword, you might want to exercise your brain. It is a much better weapon in this type of fight.
I seem to remember a ZH article stating that the money market funds now have the right to close to withdrawals post 2007...
Economics is bullshit. While I have made money on a number of articles (that stay focused on shit you can trade), modern economics is built on infinite growth (especially now that deflationary periods are essentially "not allowed" anymore). If indeed the lights go out at all the banks, you don't need to know shit about economics, all you need to have are tradable skills and lots of physical everything ranging from gold to arable land, water, and many like-minded and well armed neighbors. Live a productive life and hedge accordingly, there is simply nothing else you can do. Nature makes no promises regarding any of our survival, why people think they should be guaranteed anything is the whole reason we are in this mess to begin with.
great post I totally agree. It doesn't hurt to walk through some scenarios should the bank shut, stop or limit credit card activity etc. Great posts here about the fragility of the system overall and the complete lack of respect for how disruptive the smallest things can be.
A bank run will NOT be allowed to happen. The banks will all take a holiday first, then the FDIC will make a big announcement that they've raised the FDIC insured amount of money in checking and savings accounts to $250,000 USD, and, finally, the daily ATM/withdrawal limit is now $200 USD. Study what happened in Argentina in 2001 as it was a practice run for what's happening in Greece, Ireland, the U.S.
Beat me to it. Yep, cash and all tradable goods of value will be king.
A bank run can happen because it already happened once in 2008/9. It was a virtual run on MM funds. In that case if I'm not mistaken, the run involved transferring billions of virtual dollars from one virtual account to another one considered to be safe. The scenario described in the post would induce a bank holiday as mentioned by another poster and which has many historical precedents. My guess is that during such a holiday, the deciders will determine which shadow/dark agreements need to be honored and which don't a and thus won't. The Chinese took this course during the 09 crash by deciding that they would declare moot many counterparty agreements essentially because they were deemed to be fraudulent in the inducement (aka silly). No one seemed to have an answer to convince the chigov they were wrong.
Also, It is now becoming possible to have a retroactive bank holiday. Declare that all financial institutions must Roll back all the data bases to a date/time in the past.
Inflation, bitchez?
DERP
Counterfitting will go balastic.
I agree with the contention that the Treasury and Fed would start limiting cash withdrawals in the event of a loss of confidence.
But here's how I think the entire scenario would play out:
1. A false-flag attack is launched somewhere in the world, causing panic and triggering a sudden selling frenzy in stock markets across the world.
2. CDS spreads spike, tanking the banks that sold these derivatives.
3. Banks start to fail in Europe and then the U.S.
4. Citizens in every country, including the U.S. start panicking and withdrawing all their money from the banks.
5. The ECB and the Federal Reserve freeze most bank withdrawals, allowing the average person to only withdraw a few hundred dollars per day.
6. Trading on stock markets across the world is halted as exchanges are temporarily shut down.
7. All the major central banks of the world hold an emergency meeting in Switzerland to find a way to end the financial crisis.
8. They agree to return to the gold standard, but they must all partially default by devaluing their currencies and then re-pegging to gold.
9. The new gold standard is announced at a press conference in Switzerland. President Obama is in attendance wth many other world leaders.
10. Banks and markets gradually reopen in a phased return to normalcy.
11. Within weeks, food and fuel prices spike due to the sudden devaluation of the currencies.
12. The U.S. and the European countries implement price caps on food and fuel.
13. OPEC rebells against the price caps, refusing to sell oil to the U.S. and Europe.
14. The U.S. and the European nations invade the OPEC nations, sparking a regional war in the Middle East.
15. Meanwhile, citizens in the U.S. and Europe riot due to unaffordable food prices.
16. The outcome of this is unknown.
It could go that way. I would diverge at step
8. They agree to a new (fiat) monetary standard (take your pick depending on your flavor of conspiracy), but they must all partially default by devaluing their currencies and then re-pegging to the new currency.
I frankly don't understand the people that think that after a world wide economic collapse, that world leaders will come to their senses and implement a gold standard. But I'm willing to listen.
Wouldn't coins go up exponentially in value in this situation? I we see a 90% drop in physical Money Supply and loss of digital money,, we get instant deflation. Imho, that says PMs, and coins become the new cash, in addition to possible paper cash. spare change becomes very valuable overnight
Does the Mint still let you buy dollar coins on credit with free shipping?
Cuz that might be handy..
(though junk silver quarters/dimes might be handier!)
Oops
I agree except if they do intend on going back to a gold standard, even a partial gold standard, they will most likely have to confiscate all of our gold first.
Why? Because the cost/oz will have to be well over $5000, and no way will they let the price appreciate that much while any physical metal is in private hands.
Depends on how much of the physical is in private hands that matter (ultra-rich) versus the nobodies (voters without a history of donation to politicians).
This might all come out well for PM holders. Or we all might have to keep our mouths shut and trade PMs on the black market.