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How Cyprus Exposed The Fundamental Flaw Of Fractional Reserve Banking

Tyler Durden's picture




 

In the past week much has been written about the emerging distinction between the Cypriot Euro and the currency of the Eurozone proper, even though the two are (or were) identical. The argument goes that all €'s are equal, but those that are found elsewhere than on the doomed island in the eastern Mediterranean are more equal than the Cypriot euros, or something along those lines. This of course, while superficially right, is woefully inaccurate as it misses the core of the problem, which is a distinction between electronic currency and hard, tangible banknotes. Which is why the capital controls imposed in Cyprus do little to limit the distribution and dissemination of electronic payments within the confines of the island (when it comes to payments leaving the island to other jurisdictions it is a different matter entirely), and are focused exclusively at limiting the procurement and allowance of paper banknotes in the hands of Cypriots (hence the limits on ATM and bank branch withdrawals, as well as the hard limit on currency exiting the island).

In other words, what the Cyprus fiasco should have taught those lucky enough to be in a net equity position vis-a-vis wealth (i.e., have cash savings greater than debts) is that suddenly a €100 banknote is worth far more than €100 in the bank, especially if the €100 is over the insured €100,000 limit, and especially in a time of ZIRP when said €100 collects no interest but is certainly an impairable liability if and when the bank goes tits up.

Said otherwise, there is now a very distinct premium to the value of hard cash over electronic cash.

And while this is true for Euros, it is just as true for US Dollars, Mexican Pesos, Iranian Rials and all other currencies in a fiat regime.

Which brings us to the crux of the issue, namely fractional reserve banking, or a system in which one currency unit in hard fiat currency can be redeposited with the bank that created it (as a reminder in a fiat system currency is created at the commercial bank level: as the Fed itself has made quite clear, "The actual process of money creation takes place primarily in banks") to be lent out and re-re-deposited an (un)limited number of times, until there is a literal pyramid of liabilities and obligations lying on top of every dollar, euro, or whatever other currency, is in circulation. The issue is that the bulk of such obligations are electronic, and in its purest form, a bank run such as that seen in Cyprus, and preempted with the imposition of the first capital controls in the history of the Eurozone, seeks to convert electronic deposits into hard currency.

Alas, as the very name "fractional reserve banking" implies, there is a very big problem with this, and is why every bank run ultimately would end in absolute disaster and the collapse of a fiat regime, hyperinflation, and systemic bank and sovereign defaults, war, and other unpleasantries, if not halted while in process.

Why?

One look at the chart below should be sufficient to explain this rather problematic issue of a broken banking system in which trust is evaporating faster than Ice Cubes in the circle of hell reserved for economist PhD's.

In summary:

  • Total US Currency in circulation (i.e., all US Dollars out there): $1,102 billion (source)
  • Total Deposits in US Commercial Banks: $9,294 billion (source)

Which means that if (and we are not saying it will) a Cyprus-style fiasco were to occur in the US, and those $9.3 trillion in total deposits seek to obtain "physical representation" in the form of actual currency (i.e., a systemic bank run), just as all those lining up in front of Cypriot ATMs are desperate to do each and every day when they have a €300 limit on physical cash withdrawals, there will be a roughly 88% haircut for every single dollar that US savers believe is "safe" in the bank.

Of course, this entire example is only applicable within the confines of the fiat monetary system, assuming there are no other currency equivalents, such as precious metals, hard assets, or even virtual electronic currencies. But naturally to the broken monetary system, which relies on nothing but faith, trust and, hence, credit, even the thought of an alternative to a regime in which the breakdown of trust results in a 90% (at least) haircut of accumulated wealth, is pure heresy.

Which is why the deeper the rabbit hole goes, and the more countries are Cyprus'ed, the greater the onslaught and attack against gold, silver, and other traditional and historic fallback currencies to what is increasingly pejoratively known simply as "paper."

 

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Sun, 03/31/2013 - 18:06 | 3394212 DoChenRollingBearing
DoChenRollingBearing's picture

Slow bank runz, bitchez!

Sun, 03/31/2013 - 18:11 | 3394225 The Shootist
The Shootist's picture

What moron wants toilet paper over gold and silver? Fuck 'em!

Sun, 03/31/2013 - 18:25 | 3394260 AlaricBalth
AlaricBalth's picture

But the FDIC insures about $5.5 trillion, so those should be ok, right?
;-)

Sun, 03/31/2013 - 18:34 | 3394285 Careless Whisper
Careless Whisper's picture

Does anyone really believe that those psycho criminal bankers can resist leaving that $9.3 Trillion (which is unsecured debt to a bank) untouched and unrobbed? 

Sun, 03/31/2013 - 18:47 | 3394321 Stackers
Stackers's picture

and $600 billion of that $1.1 trillion in physical currency is held outside the U.S.

Sun, 03/31/2013 - 20:22 | 3394526 SafelyGraze
SafelyGraze's picture

held outside the us ..

where it is soaked in pharmaceuticals

and detonables

so don't even *think* of holding it in your possession

hugs,
fido the screener dog 

Mon, 04/01/2013 - 02:56 | 3395221 TwoShortPlanks
TwoShortPlanks's picture

The only thing wrong with Fractional Reserve Banking is that the average fuck on the street doesn't know anything about it; he/she still thinks that there's a Ton of Cash and Gold in the vault of every branch.....if they had a clue we wouldn't be facing this issue.

If the average Tard could be bothered to know the truth... that's the real reason we're here.

Mon, 04/01/2013 - 07:10 | 3395350 Rakshas
Rakshas's picture

+1 for proper contextual use of the word Tard...... you are correct sir!!

Mon, 04/01/2013 - 08:00 | 3395405 TwoShortPlanks
TwoShortPlanks's picture

Thanks Rakshas.

I do a lot of...watching. For the life of me I cannot, by any wild stretch of my imagination, envisage more than 1 in 5,000-10,000 "Tards" getting it right, and fewer that 1 in 1,000 understanding even the basics, let alone the GFCs’ metamorphosis into today’s, quagmire....and God forbid, anything to do with Agenda21.

.....and the solution (way out), for the individual, is so simple.

Wed, 04/03/2013 - 06:26 | 3402390 Jafo
Jafo's picture

You guys don't get it.  You guys have got all the gold.  I've got my bit too.  By the time that TSHTF there won't be any gold for the "Tards" to buy because it will all be in strong hands.

The "Tards" won't have anything else left to do but try to buy equities or income producing real estate with their "cash" before the funds are either "bailed-In" to the bank reconstructions or stolen by the government.  I even suspect that a wad of cash will be more usefull than a stash of gold or even a purse of silver in the early days after TSHTF.  Later on the precious metals will but you a seat in the new game where the guy with a wad of pre-crash paper won't even get in the door.

Mon, 04/01/2013 - 11:02 | 3395848 DuplicationCube
DuplicationCube's picture

wow.. that's only about $1500 per american? worse than I ever realized.

Sun, 03/31/2013 - 20:28 | 3394543 Cloud9.5
Cloud9.5's picture

Hate to break it to you but the money is already gone.  They loaned it to a hair dresser in a house flipping scheme that flopped.

Sun, 03/31/2013 - 21:56 | 3394760 insanelysane
insanelysane's picture

Don't worry about that because Ben the Banksta buys the shit mortgages back from his Banksta buddies so it is all good.  It is the happy circle and we should all be doing the happy circle dance according to the talking heads on CNBS and Bloombug.

Sun, 03/31/2013 - 23:06 | 3394939 Muddy1
Muddy1's picture

circle jerk, there, fixed it

Mon, 04/01/2013 - 01:29 | 3395175 palmereldritch
palmereldritch's picture

The money isn't gone because it had to exist in the first place.

"The greatest trick the dollar ever played was convincing the world that it did exist."

Sun, 03/31/2013 - 18:38 | 3394301 kaiserhoff
kaiserhoff's picture

What Cyprus, Greece, et al point out is that governments everywhere have financial commitments they can't pay.

If we used wampum for money, we would have the same result.

Sun, 03/31/2013 - 18:45 | 3394310 knukles
knukles's picture

Yeah....
So those folks who've decided to leave any uninsured balances in the banks is fucked, stoopid, however one wants to describe it.
Ain't like nobody ever was told...
Them stickers on the banks doors?

The FDIC is, also, full faith and credit.
They're gonna make good....

Else the whole system collapses and the ponzi ceases, the rich and powerful have nothing left to scam...

The banks must be there for the robbers to rob, For Fucks Sake

This is why folks like me always tell other folks to keep a good bit o cash, fiat crap on hand, so the Fed and FDIC can have the time get the cash to the banks if demanded.
Also, I sincerely do not believe that those in charge here in the US are as fucking stooped as their Eurotrash counterparts... How fucking dumb can they be... They created the run upon themselves with that first, small suggestion that the depositor is first to bail out the blanks, before the bond and note holders.

The trial run has failed
The Eurokleptocracy just killed their very own fucking golden goose

Now what do the Feds other assets and swap lines look like today?
How do you spell bigger?
I knew you could

Sun, 03/31/2013 - 20:17 | 3394517 andrewp111
andrewp111's picture

The EU is run by circus clowns. They proved it with their first Cyprus deal, and then proved it again when they allowed the UK and Russian branches to remain open so the Big Boyz could quietly get their money out.

Sun, 03/31/2013 - 20:17 | 3394514 andrewp111
andrewp111's picture

There is no way the Congress would allow default on the FDIC's obligation to make good on the 250K that is guaranteed per depositor per bank - even if they had to issue trillion dollar coins to make good on it. But anything over that amount could disappear like MF Corzine racing down the Garden State Parkway.

Sun, 03/31/2013 - 21:07 | 3394643 Whatta
Whatta's picture

9 T's in deposits

25 B's in FDIC insurance reserves.

Hmmmmmm.....

Sun, 03/31/2013 - 22:27 | 3394831 Spigot
Spigot's picture

BTW, 2/3rds of US currency is held outside the USA. So in all reality there's maybe $400 billion total cash available internally. Probably there would be about 3 microseconds delay before the US.GOV decided to shutter cash withdrawls...

Sun, 03/31/2013 - 23:43 | 3395031 Vic Odd
Vic Odd's picture

Do you like musical chairs?

 

Numbers don't lie:

 

There is a total of $10,800,000,000  in deposits in US Banks

FDIC insurance fund: $33,000,000,000

It's called fractional reserve insurance!

For "national security reasons" I can't tell you this. Go directly to Gay Marriage debate, Do not pass Go, do not collect $200.
Sun, 03/31/2013 - 18:33 | 3394282 Political_Savage
Political_Savage's picture

Might want to remember 1934 - great theory, but bad outcome

Sun, 03/31/2013 - 18:36 | 3394288 Pool Shark
Pool Shark's picture

 

 

Only a bad outcome for the idots who were stupid enough to turn in their gold.

Those who held onto their physical gold saw a 50% overnight increase in its value.

MOLON LABE

 

Sun, 03/31/2013 - 20:54 | 3394617 disabledvet
disabledvet's picture

Why want to revisit your 2013. Gold isn't being confiscated but actual cash itself. This is PURE Sovietski..."money itself...and therefor you...are to be traced." absolutlute lunacy. Hilarity actually. The USA is not going there..."your bankrupt...so are we...let's work it out." Europe is saying "go ahead little country...tell us you can say no." Even Iceland tried to say yes to the euro. Guess what...saying no to the euro is verboten for a reason. Every dime has been accounted for. "your money is now their money." go ahead...say no.

Sun, 03/31/2013 - 18:35 | 3394292 RockyRacoon
RockyRacoon's picture

Latest CoinWorld reports an uptick in fake silver rounds, ingots, and coins.  Buyer beware!

http://theeyeballkid.hubpages.com/hub/Fake-silver-bars-and-coins

Sun, 03/31/2013 - 18:41 | 3394309 orez65
orez65's picture

Buy only US silver and/or gold eagles.

Mon, 04/01/2013 - 15:48 | 3396978 GoldForCash
GoldForCash's picture

I found a very well made fake bar. Inside copper, outside .999 silver. Passed the magnetic test, weight test, sight test. Failed the drill test. Yes be very careful....

Sun, 03/31/2013 - 18:13 | 3394230 NaiLib
NaiLib's picture

safe deposit box in switzerland is still the safest place, for your gold bars

Sun, 03/31/2013 - 18:15 | 3394236 Number 156
Number 156's picture

How do you repatriate it though? You'll get pwned by the government. Trust me.

Sun, 03/31/2013 - 18:18 | 3394245 NaiLib
NaiLib's picture

you dont, you emigrate, if you got enough of them

Sun, 03/31/2013 - 18:24 | 3394259 Number 156
Number 156's picture

That will work.

 

Sun, 03/31/2013 - 18:35 | 3394287 Political_Savage
Political_Savage's picture

Assuming capital controls are the only controls they've put in place. Ultimately NOTHING is safe if the governments globally coordinate actions... and we've already seen that happen with CB's

Sun, 03/31/2013 - 18:39 | 3394298 Pool Shark
Pool Shark's picture

 

 

Cocaine has been illegal for nearly a century, but you can still buy it on any given street corner.

And how much does cocaine cost per ounce?...

If the banking system collapses via a run on deposits; the feds will have their hands a bit full; they won't be going door-to-door confiscating gold.

[there will always be black markets]

Sun, 03/31/2013 - 18:23 | 3394256 bank guy in Brussels
bank guy in Brussels's picture

According to gold sage Dr Jim Willie CB, the safest storage is in Hong Kong, and not Switzerland, because of Swiss bowing to EU and US authorities ... whereas HK is saying 'f-ck you' to foreign investigators. From Jim's column:

« Where are the Safest Places to Store Gold Bars & Coins ?

« Hong Kong for a number of reasons will remain the safest place for Gold storage. It has a long history of professionalism, independence, and integrity. Following the independence in 1997, the city state nation has pursued a unique role and direction. It is under the Chinese wing, but has its own regional charter toward continuity and some measure of autonomy. The Mainland China rulers prefer to use Hong Kong as a port to the West, but also to copy it internally. The British roots helped to establish HK bankers as top notch, but they are no longer subservient to London whims. The HK banking hub is the foremost in all of Asia, with a new rival Shanghai having emerged.

« The HK airport has greatly expanded its vaulted services. My source indicates that the HK vault service capacity is three to five times greater than reported. It has associations with all the major vault firms in an impressive list. Their integrity is as great as their disdain for the US bankers, with whom they show zero cooperation, as confirmed by an Interpol source. The claimed advantages of Singapore are spurious and illusory. Don't bother, since it does not even have a Depository Bond agreement for the bullion vault firms. »

http://news.goldseek.com/GoldenJackass/1361998800.php

Sun, 03/31/2013 - 18:42 | 3394312 Number 156
Number 156's picture

Two things: 

 

  1. If things go pear shaped in the world economy, good luck in repatriating your gold.
  2. HK is run by the Chinese, see item1.

When you need it the most, that's exactly when you wont be able to get it.

Sun, 03/31/2013 - 18:47 | 3394318 knukles
knukles's picture

Horseshit
The safest place is the City of London

Wake the fuck up

Sun, 03/31/2013 - 18:58 | 3394358 Number 156
Number 156's picture

"Horseshit
The safest place is the City of London"

.... shaped like a table leg and painted black.

Sun, 03/31/2013 - 20:10 | 3394506 andrewp111
andrewp111's picture

Ahh, yes. The City Of London. Home of the Whale. Did you know that the UK is home to 3 of the world's biggest weak banks?

http://www.moneyandmarkets.com/media/images/mam/2684/chart1s.JPG

Would you trust the UK when the SHTF?

 

Mon, 04/01/2013 - 07:05 | 3395342 Ghordius
Ghordius's picture

ah, but he said "The City of London", and you are talking about the United Kingdom, an entity that has only limited control over the City, legally, politically and where it matters...

Sun, 03/31/2013 - 18:17 | 3394239 Banksters
Banksters's picture

However statistical models show that this could never happen.  Except when it does!

 

Sun, 03/31/2013 - 18:33 | 3394272 ShortTheUS
ShortTheUS's picture

What the models show when it does happen:

#Ref!!

Sun, 03/31/2013 - 18:22 | 3394242 Banksters
Banksters's picture

However statistical models show that this could never happen.  Except when it does!

In that event, the banksters have written clauses that makes it perfectly legal to steal it all.  So fuck off, and thank your the shit eating branches of your representative govts. 

Signed

THe banksters.

Jon Corzine, still fucking free...

 

I don't know what happened here with the extra posts!

Sun, 03/31/2013 - 22:47 | 3394894 Stuck on Zero
Stuck on Zero's picture

Not to worry.  If everyone runs to withdraw their money from the bank the Fed will pay off the depositors with Treasury bonds.

 

Sun, 03/31/2013 - 18:08 | 3394217 kushmere
kushmere's picture

The debauchers of currency, Bernake, Osborne, and the rest will not stop until they have destroyed us all. We'd be better with monkeys throwing darts at economic plans.

http://bestbitcoinsites.wordpress.com

Sun, 03/31/2013 - 20:05 | 3394499 krispkritter
krispkritter's picture

Hey, wait just a fucking minute there buddy...

Sun, 03/31/2013 - 18:13 | 3394223 virgilcaine
virgilcaine's picture

Your money is in decaying houses with rotten walls and chinese wall board.  It's not in the Bank. That's why they are pumping the Housing bubble again.  It's the bottom deck in the house of cards.

Sun, 03/31/2013 - 18:54 | 3394332 Number 156
Number 156's picture

Not really. The high formaldehyde content in the wallboard will keeps those walls as fresh as Lenin in his glass casket.

Sun, 03/31/2013 - 18:12 | 3394226 Number 156
Number 156's picture

Worthless fiat.

Sun, 03/31/2013 - 18:13 | 3394231 surf0766
surf0766's picture

Yea it will never happen here. Just like housing prices will never fall.

Sun, 03/31/2013 - 18:15 | 3394237 Racer
Racer's picture

All those fake promises that your money is safe up to a certain limit...... Pffttt.... and it's gone

Sun, 03/31/2013 - 18:16 | 3394238 NaiLib
NaiLib's picture

85 B in Freshly Painted bills each month forever. = 274 USD per US citizen each month, what is the av salary?

Sun, 03/31/2013 - 18:49 | 3394328 knukles
knukles's picture

Isn't the avg some $24k?

Uh oh......

Sun, 03/31/2013 - 18:24 | 3394243 damage
damage's picture

Again with this nonsense. It isn't fractional reserve, it's the whole central banking system. I've said it before, and I'll say it again.

I somehow doubt Cyprus' problem is a banking system which actually allows for loans to be made.

Where does the bank's money for making loans come from if they can't loan out deposits? How would there be any credit? If banks were supposed to be warehouses then why not just get a safety deposit box and fill it with cash? How do you expect to be paid interest on your savings account if they don't loan money out?

How come Canada's banking system pre-1935 was overall quite stable when they had fractional reserve? In 1930 while over one third of US banks failed, zero banks failed in Canada. We both had fractional reserve. The main difference is there was no central bank in Canada.

Banks can't get away with loaning more than their excess reserves without a central bank supporting them.  Because otherwise they'd go out of business within days because of the clearing debt.

Banks have a history of being well behaved when you have competing currencies and no central bank, in Canada at least. The problems in the US pre-1913 were mainly due to the ban on branch banking and regulations which forced US banks to hold a certain percentage of their reserves in US treasuries.

http://www.cato.org/sites/cato.org/files/articles/tir_14_04_01_selgin.pdf

http://www.youtube.com/watch?v=JeIljifA8Ls&feature=player_detailpage#t=917s

Tyler, you only make ZH look less credible when you try to equate fractional reserve with the real problems behind Cyprus.

http://www.freebanking.org/2012/07/13/more-dumb-anti-fractional-reserve-...

 

Sun, 03/31/2013 - 18:27 | 3394263 Seize Mars
Seize Mars's picture

Oh, yeah it's all nonsense. "...but but but..." (fill in favorite financial fraud de la semaine) " never happened in Canada. Hence, fiat money is workable, if only resonable people were in charge of it..."

You know what? Fiat money is a fucking fraud. No amount of pretend will make it better.

Stop pretending.

 

Sun, 03/31/2013 - 19:48 | 3394276 damage
damage's picture

Actually read the links I pasted and learn how banking works before making asinine statements.

"Stop pretending", isn't an argument.

If you want to play that whole game, to me it's obvious you're an indoctrinated fool who can't think for himself, like most of Rothbard's major fans.

It isn't fraud when no one is hiding that's how banking works. History has proven over and over that 100% reserve banking isn't what the free market will create.

http://www.freebanking.org/2011/05/31/the-state-and-100-percent-reserve-...

Mon, 04/01/2013 - 00:57 | 3395148 Seize Mars
Seize Mars's picture

All of my homosexual Jewish lovers will agree that I am asinine.*

Now, if Rothbard's fans are indoctrinated fools, then sign me up. Actually I signed myself up, in the sense that I am a contributor to the von Mises Institute.

Now to business. "It isn't fraud if no one is hiding that's how banking works." You are correct. That wouldn't be fraud. However, we don't live in that world. We live in a world where banks have gone to great lengths to cover up the way it really works. You are correct in that what is needed is business agreements where all parties are non coerced. As soon as I am no longer coerced into paying interest on money I haven't borrowed, you let me know. Yes, when the day comes when the banks adbicate their ownership of the US of A, you let me know. In the mean time, let's stop pretending that Canada doesn't have a housing bubble. Let's stop pretending Canada has a "health care system," when what it has is a coerced tax system in which people are forced to pay money to large companies under the giuse of "health care." Also let's stop pretending that Canada is anything other than a fucking rounding error of US GDP. Please, please let's stop pretending that Canada is free. It isn't. Neither am I. So here we are, two fucking farm animals arguing on a website. One says that if only the famer was a nicer guy, the whole thing would work. As for this old donkey, I would prefer real freedom.

The free market will creat whatever the fuck it wants, and doesn't require an overlord or a "system."

* Just thought I would head you off before you tried any more ad hominems, asswipe.

Wed, 04/03/2013 - 03:33 | 3402242 damage
damage's picture

Are you so fucking stupid you can't realize I was talking about the Canadian banking system PRE FUCKING 1935? Not modern day Canada?

As far as ad hominem goes your "stop pretending" statement is on the same level if not worse. At least I back up my arguments with reason. Sometimes though people such as yourself breathe stupid that burns me so badly I can't help but also drop a few insults as well.

Wed, 04/03/2013 - 22:19 | 3406586 Seize Mars
Seize Mars's picture

Why can't I be "fucking stupid?" What's it to you?

I also back up my arguments with reason, so now we have common ground. Anyways, consider this: if you trade with someone, how about being free to decide between the two of you, how to settle accounts? So let's say I want you to blow me. We agree that I give you some weight of silver, or some beads, or wampum, or fiat money. If you agree to it ( let's say you require some paper money for the blowing), why is it the government's business what unit of account we used?

Why does it have to be paper money? Why the coercion?

Sun, 04/07/2013 - 23:16 | 3420654 damage
damage's picture

I never fucking said that the government should be forcing anything. Can you fucking read? I am for FREE BANKING, as in.. NO RESERVE REQUIREMENTS, NO CENTRAL BANK, NO FDIC etc...

When did I advocate coercion? You're the one who tries to introduce coercion and force by claiming fractional reserve banking is "fraud", when historically that's what the consumers have demanded whenever there has been a relatively free market in banking. Most people don't want to pay a fee, they'd rather GET PAID INTEREST, as history has fucking proven time and again!

Mon, 04/08/2013 - 21:52 | 3424660 Seize Mars
Seize Mars's picture

Can I fucking read? Well, yes. Well enough, I suppose.

Sun, 03/31/2013 - 18:32 | 3394279 falak pema
falak pema's picture

not true at inception during virtuous phase, but true over time; thats human greed. 

Sun, 03/31/2013 - 18:33 | 3394280 bank guy in Brussels
bank guy in Brussels's picture

Actually I think it is even a simpler matter than that

Fractional reserve banking worked fine for 40 years, in both Europe and the USA, with just two simple rules in place

(a) No higher leverage than 12 to 1 ... instead of the 30, 40 or 50 to 1 like started to happen recently ... as opposed to what Tyler writes above, re-leveraging 'ad infinitum'

(b) Deposit banks ONLY make loans, no casino gambling, derivatives or investment banking games, what in the USA was called the 'Glass-Steagall' law, 30s till repeal in 90s ... but also followed in Europe, till Europe followed the US in repealing these two rules

With honest regulators who saw these above two rules were obeyed -

For 40 years banks did fine following those two rules ... when they dumped those rules in the 80s and 90s, first the leverage rules, then Glass-Steagall ... then everything started to blow up

My guess is that low 10 to 1 or 12 to 1 leverage for a bank, works fine because it is really just a substitute for money velocity ... it is an intrinsic BIG brake on credit excess, limits credit growth to normal credit 'breathing'

If it worked for 40 years with no problems under these two rules ... the system only collapsed when these two GOOD RULES were broken ... so why wouldn't the old system be okay, given that it NEVER broke?

Sun, 03/31/2013 - 18:41 | 3394307 kaiserhoff
kaiserhoff's picture

Well said.  Bubbles always pop.

Sun, 03/31/2013 - 18:49 | 3394334 knukles
knukles's picture

Me too
That be da troof!

Sun, 03/31/2013 - 22:22 | 3394822 damage
damage's picture

Even when these rules were in place the Federal Reserve has had a dismal record. There wouldn't even be a need for leverage limits if it weren't for the central banking monopoly which enables them to take such obscene risks in the first place.

Sun, 03/31/2013 - 18:45 | 3394317 PUD
PUD's picture

They were not good rules. Things didn't implode because the scale of things was small. Compounding debt (which is what fractional reserve money as credit is) poses little problem from a small base. Parabolic curves don't look too ominous when they first start their rise. It does not matter what leverage ratio you have so long as money is debt and debt carries compounding interest. 1% takes a long time 12% a lot less 30% gets you there pretty quick...

Mon, 04/01/2013 - 04:05 | 3395250 Seer
Seer's picture

I'm always amazed out how people CONTINUE TO FUCKING FAIL at applying the TRUE FUNDAMENTALS!  Thank you for injecting REALITY!

The leverage ALLOWS for bubbles.  Plain and simple!  We got larger leverage factors and we thus got larger bubbles.

Fractional reserve banking IS a Ponzi!  It's ALL based on perpetual growth.  When growth stops it implodes.

We'll be eternally fucked as long as we continue to believe that we have to have leaders AND we believe that fractional reserve banking can work.  SHEEP!

Sun, 03/31/2013 - 20:12 | 3394510 Augustus
Augustus's picture

When those rules were in place, the regulator could slow or expand the economy by simply changing the reserve requirements.  There was none of this fine tuning of interest rates by using purchases of Governemnt Debt.

China still uses the reserve requirement regs to  supposedly alter growth rate.  Some have written that the method is not very subtle, compared with the Fed being directly active in the bond markets.  It has always seemed to me that altering the reserve requirements was a very simple method with clear signals of intentions to everyone.

Mon, 04/01/2013 - 04:12 | 3395255 Seer
Seer's picture

Yes, as PUD noted above, fractional reserve requirements is no more than a growth governor.  All fine and good as long as growth CAN occur.  This is a finite planet, in which case growth WILL eventually stop: and I'm not seeing that there's enough in this planet left to keep pace with our growth demands.

All the bond buying is an attempt to buy time to prop up the system until someone can find some avenue for growth to exert itself.  Appears that no such avenue is on the horizon (otherwise TPTB wouldn't be twitching like a epileptic withdrawing from heroin addiction).

Sun, 03/31/2013 - 23:49 | 3394818 damage
damage's picture

oops dupe comment

Sun, 03/31/2013 - 18:41 | 3394311 PUD
PUD's picture

It "worked" because it was small. Clearly you do not understand compounding or the law of exponents

Sun, 03/31/2013 - 18:48 | 3394324 orez65
orez65's picture

Fractional reserve banking is pure and simple FRAUD. The banks counterfeit money and lend it.

Real loans should only be made from REAL savings, those that result from producing more than it is consumed.

Interest rates are then a signal to the market as to how much real savings are available to lend.

Mon, 04/01/2013 - 05:50 | 3395302 damage
damage's picture

Deposits in a bank account aren't "real" savings?

Sun, 03/31/2013 - 20:42 | 3394575 slightlyskeptical
slightlyskeptical's picture

The way it should work is that the banks should be able to loan out 80% of the deposits. That leaves 20% in reserve. . When the withdrawals take those reserve below 20%, the banks can borrow short term from the central bank, but will need to raise capital, draw in more deposits or have loans paid off in fairly short order.  It would slow down the velocity of money in a major way. to increase that velocity there will need to be more money- like for instance print to directly pay off the US debt. You can also print to buy consumer loans and refinance on better terms to get more spending into the economy. 

1. Abolish fractional reserve banking and debt based money

2. Print to pay off national debt and refinance consumer debt at better terms freeing up cash flow for consumers

3. Let social security fund primary mortgage loans- secured by future benefits

3. Print to run government- limit annual increases to 2%- balance comes from taxes if exceeded- this would allow for needed savings levels

4. Once it is settled through system - adjust wage base to an equilibrium with prices

At this point we can go forward with slower but yet much more stable growth. Without money trading being the huge portion of the economy it now is, we would return to a mouch more production oriented society, with a focus on innovation.

 

 

Mon, 04/01/2013 - 04:17 | 3395257 Seer
Seer's picture

Some good thoughts there, but then you tripped:

"At this point we can go forward with slower but yet much more stable growth."

There is no such thing as "stable growth!"  Sorry.

For those that are struggling to understand the ramifications of growth I STRONGLY recommend watching Dr. Albert Bartlett's presentation Arithmetic, Population and Energy.  This is the stuff by which ALL true FUNDAMENTALS derive.

Mon, 04/01/2013 - 05:41 | 3395297 damage
damage's picture

The way it should work is that the banks should be able to loan out 80% of the deposits

1. Abolish fractional reserve banking and debt based money

 

You just defined fractional reserve doofus.

Mon, 04/01/2013 - 03:58 | 3395246 Seer
Seer's picture

"Banks can't get away with loaning more than their excess reserves"

Can you please explain what that sentence means?

Are you meaning it as:

"Banks can't get away with loaning more than their reserves" ?

Just trying to figure out where "excess" can exist in this equation (given that equations should be, well, equal).

Sun, 03/31/2013 - 18:17 | 3394246 WTFRLY
WTFRLY's picture

Quick, better legalize industrial hemp so they can print moar.

Sun, 03/31/2013 - 18:19 | 3394247 Henry Chinaski
Henry Chinaski's picture

Yep.  Not just the flaw in fractional reserve banking, but Cyprus also exposed the fundamental flaw in interest rate manipulation.

What's the difference between a levy and mandatory negative interest rates?

Bitchez!

 

Sun, 03/31/2013 - 18:24 | 3394248 JustObserving
JustObserving's picture

Total US Currency in Circulation:  $1.102 trillion

The Amount Fed will print this year:  $1.040 trillion

The Amount of Money Fed has already printed: $3.7 trillion.

What can possibly go wrong?  How can we ever have inflation?

 

Sun, 03/31/2013 - 21:10 | 3394648 FreeNewEnergy
FreeNewEnergy's picture

JustObserving, your statement is naive and incorrect and I'm actually surprised nobody has taken you to task on it.

The Fed will not "print" $1.040 trillion, nor have they already printed $3.7 trillion. The Fed's money is all electronic, not paper, which was the point of the article.

There is $1.102 trillion in circulation as printed money, not electric. That is the only true statement in your comment.

Thus, bank runs should be imminent, though the sheeple of America are asleep or, as I found out this afternoon when talking to my sister (typical .gov worker, a school-teacher getting paid waaaaay more than she's worth, with benefits up the ying-yang) about Cyprus. She told me she preferred not to know, in the belief that something like that would never happen to her.

I said, "then you're openly saying you prefer willful ignorance."

She responded in the affirmative.

Willful ignorance it is then, for 99% of Americans, I assume. Don't be one of them. Read ZH, listen, learn, act. Save yourself. The rest probably aren't worth the effort.

-- A realist

Mon, 04/01/2013 - 04:38 | 3395263 Seer
Seer's picture

The Fed has EFFECTIVELY inflated assets!

Everyone keeps tripping over which measure of "inflation" is being used.  The "numbers" are being expressed via propped up pricing.  And though they're not necessarily in the form of "circulated dollars" (Austrian definition), one has to realize the effect is just the same.  The propped up pricing is requiring more electronic printing.  If you don't think that this effect is occurring then just ask yourself/yourselves whether all of this wouldn't just crash and burn if things weren't propped up.  We'd have a MASSIVE unraveling.  TPTB understand exactly what they're facing: it's a rock-and-a-hard-spot situation- no matter what course they take it's basically GAME OVER.

I wonder if the Austrian school ever really contemplated the kind of accounting manipulations that we're seeing today, the stuff of electronic bits...

"bank runs should be imminent"

Who the heck has any real wealth left in a bank? Most are massively in debt.  I'd be curious as to the breakdown of deposits, how much belongs to individuals vs. corp/businesses.

I was going to pop this up as a separate thread, but... ANY major shift is going to draw a response from TPTB.  If runs start to happen I'd wager that TPTB would counter by eventually heavily discounting paper over what's left in their electronic system; that is, cashing in your electronic bits is going to piss them off, in which case they'll hammer the shit out of the paper that you traded in for (just as they'd attempt to do with PMs).  I'm NOT stating that any such effort would work for TPTB, just that one has to see this as the most likely response (based on logic and history).  Eventually I see an attempt to wipe out the existing paper in order to restart a new game: this is what always becomes of fiat, no?

Sun, 03/31/2013 - 18:23 | 3394255 GoldForCash
GoldForCash's picture

The first ones to withdraw the 1,102 Billion gets to eat.

Sun, 03/31/2013 - 19:45 | 3394457 alentia
alentia's picture

Not to worry, they will print another $10T as soon as it starts, so no one gets to eat.

Sun, 03/31/2013 - 21:22 | 3394677 Taint Boil
Taint Boil's picture

 

 

.......they will print another $10T....

And if that is the case you’ll get hyperinflation – which of course everybody says can not happen. It won’t be because they want to print it’ll be because they’ll have to print.

Sun, 03/31/2013 - 18:28 | 3394262 falak pema
falak pema's picture

ZH provides in this analysis its own epitaph to the PM ballisitc rise meme; it is not politically acceptable to all developed nations caught with their fractional reserve pants down. Period. It will never be allowed to occur, like in 1933. 

Just as ZH has pointed out that the QE infinity meme is there to protect the Oligarchy icing layer of Equity crowning  the huge debt mountain, the fall of bubbleonomics will wipe out that equity to a large amount. And its the ZIRP gun that will fire the first salvo against debt accumulation as reserve $ will have to chose one day. 

Unless we find huge amounts of cheap energy in first world to fuel real growth....kaboom!  

Sun, 03/31/2013 - 18:32 | 3394278 NaiLib
NaiLib's picture

it will be interesteing to see when they start fracking in california,,, maybe that finally triggers the quake

Sun, 03/31/2013 - 18:35 | 3394290 Bill D. Cat
Bill D. Cat's picture

The problem is that they're buying hard assets with fictional money .

Sun, 03/31/2013 - 18:29 | 3394274 Benjamin Glutton
Benjamin Glutton's picture

Remind me again what percentage of actual cash v. total deposits banks are required to have on hand?

 

looks like they are leveraged 200:1 versus actual cash to me.

 

hilarious!

Sun, 03/31/2013 - 18:34 | 3394284 Peter Pan
Peter Pan's picture

The way I explain the weakness of fractional reserve banking to people is by telling them that while money is being deposited it is like stacking rows of cans on top of each other but that when the system goes in reverse it's like trying to remove the bottom row first without bringing the whole thing down. In other words.....impossible.

Another interesting example I once read is this one:

What fractional reserve banking does though is quite wickedly clever. The person holding the gold holds another mirror behind the piece of gold and when you look into the mirror you can see an almost endless number pieces of gold. Everyone feels happy and the banker is even happier than everyone else because he lends out those images to all the cretins of this world and collects real interest on illusory images. Just remember - only the first image is real.

Mon, 04/01/2013 - 04:54 | 3395274 Seer
Seer's picture

"when the system goes in reverse"

It all comes down to growth.  I'd been beating on this horse for years; and, well, the "horse" (growth) is dead.  I've introduced the notion of "economies of scale in reverse."  SLOWLY people are starting to get these things!

When there's "plenty" there can be all sorts of abuses, and those abuses generally don't matter much.  Now that there isn't so much "plenty" we're starting to see/feel the abuses more acutely.  War clouds are forming... TPTB require growth to enable them to live off the surpluses of others; if there's not enough surplus then they have to get it from others -war- or get it from those they have direct rule over (because people are stupid and demand that there be "leaders").

Sun, 03/31/2013 - 18:36 | 3394291 dbarrett
dbarrett's picture

Confiscation / theft of US depositors is unlikely to come anytime soon to the US. At least not until the government disarms the people! That's why I buy gold and silver (perhaps BitCoin in the near future, but that could easily be shut down by the NSA) anonymously for cash. And of course, since I am inclined to precious metals, I like to stare at today's Gold Price Girl! http://www.gold-price-girls.com

 

Sun, 03/31/2013 - 18:52 | 3394343 knukles
knukles's picture

She's precious!

Sun, 03/31/2013 - 19:43 | 3394454 alentia
alentia's picture

Photoshoped. Not real!

Sun, 03/31/2013 - 20:12 | 3394511 Pure Evil
Pure Evil's picture

My erection is unable to tell the difference.

Sun, 03/31/2013 - 18:39 | 3394299 eddiebe
eddiebe's picture

The crucial issue is confidence. Period. This applies to Fiat and even the PM's, although the PM's are obviously head and shoulders above the fiat scam.

The main issue surrounding Cyprus is about maintaining the confidence in the Euro, the banking system and the political structure of the EU. Ironically all those people lining up to draw out their Euros are just reinforcing the con, unless of course this warning shot is waking them up to the fiat con.

Mon, 04/01/2013 - 05:01 | 3395281 Seer
Seer's picture

"The crucial issue is confidence."

And ultimately that "confidence" maps to actual PHYSICAL resources necessary for sustaining life.  When people start having difficulty obtaining energy to cook and heat/cool with, start having problems obtaining food and medical aid, THAT is when this con-of-a-game collapses.  The tipping point is much more sensitive than most understand...

Sun, 03/31/2013 - 18:41 | 3394306 wkwillis
wkwillis's picture

Remember, most US currency is held overseas as a store of value. It is not available to banks to hand over the counter.

Sun, 03/31/2013 - 18:49 | 3394330 The Shootist
The Shootist's picture

Even less papier for depositors.

Mon, 04/01/2013 - 00:26 | 3395094 Vic Odd
Vic Odd's picture

 

According to the Fed Board, there are 4 times as many USDs outide the US as there are here.

Okay, so....Four to one ratio of Dollars abroad to dollars here at home.

 

There are $10.8 trillion in deposits in FDIC insured US Banks and FDIC insured Credit Unions

FDIC insurance fund has $33 billion.

Thats...Four to one ratio of Dollars in the banks to dollars insured by the FDIC.

 

and now....NINE to one ratio of digital USD  to paper Cash.

According to a Demonocracy infographic there is a little over 0ne billion ounces of silver in World reserves.

Many estimate that there is a 100 to one ratio of Paper silver derivatives to deliverable bullion.

We've come a long way since "Hey Goldsmith, can I leave my gold here for safekeeping?" 

 

 

 

Mon, 04/01/2013 - 05:06 | 3395282 Seer
Seer's picture

Does that money just sit in those other banks, or does it actually get used at those other banks (which means that it is in fact "in play")?

If overseas banks are returning ANY kind of interest then I'd have to conclude that the money is in play.

Sun, 03/31/2013 - 18:47 | 3394320 Sudden Debt
Sudden Debt's picture

so... all those Columbian drugloards... will first ship their pallets of dollars back to the US....
so there's enough cash to handle it...

BUT DON'T WORRY!!!
BANKRUNS CAN'T HAPPEN IN AMERICA!!! for the second time...

Sun, 03/31/2013 - 20:01 | 3394488 andrewp111
andrewp111's picture

There was an electronic bankrun in the US (global really) in 2008, against the uninsured money market funds - at a rate of $250 billion/hr. It was stopped by the Fed declaring a blanket deposit guarantee for MMFs. This is the real danger of bank runs. Withdrawing cash is slow, especially given the small denominations of US FRNs. But billions or trillions can be wired in a matter of minutes from a large bank.

Sun, 03/31/2013 - 19:00 | 3394346 socalbeach
socalbeach's picture

As long as the Treasury could physically print currency fast enough, the entire monetary base of about $3 trillion could be converted into currency.  If they had enough warning they could resurrect the $500, $1,000, etc., bills.  And if nothing else we've seen that Bernanke has not been timid in increasing the monetary base.  So the US banks running out of currency could be a problem, but to me it doesn't seem likely.  Withdrawing cash would reduce both bank reserve assets and deposit liabilities, so it wouldn't affect bank solvency. 

Excess reserves are about $1.6 trillion, so until at least (withdrawing cash would reduce deposits and the need for reserves) that amt were withdrawn in currency, banks in aggregate wouldn't have to call in loans, although they might have to stop issuing new loans before the limit were reached.

Am I missing something?

Sun, 03/31/2013 - 19:03 | 3394372 Bam_Man
Bam_Man's picture

No, you nailed it.

 

The $1.6 trillion in excess reserves are the insurance against a global bank run. They have been getting ready for this since 2009. 

Sun, 03/31/2013 - 20:42 | 3394548 socalbeach
socalbeach's picture

I tried to quantify the amt that could be withdrawn before the banks would run out of required reserves, and I come up with only $1.734 t vs excess reserves of $1.616 t.  So it looks like that is what's limiting, not the monetary base. Calculation follows, someone can check, maybe I'm not using the right Fed FRED variables (all caps) or formula:

WRESBAL = reserve balances with Fed banks = $1.776 t

VAULT = vault cash = 0.0533 t

DPSAC (DPSACBW027SBOG) = total deposits = $9.293 t

REQRESNS = required reserves = 0.1166 t

w = amt withdrawn in currency and coin

(WRESBAL + VAULT - w) / (DPSAC - w) = (totalBankReserves - w) / (totalDeposits - w) < effectiveReserveRatio = REQRESNS / DPSAC

Equating the 1st and last terms and solving for w using simple algebra I get w > $1.734t.

Mon, 04/01/2013 - 05:16 | 3395286 Seer
Seer's picture

"Excess reserves are about $1.6 trillion"

Is there really "excess?"

Are banks really holding more in reserves than is required?  I'd thought that the threat was that they weren't, and that's why the Fed is cramming them with electronic Fed notes.

I'm thinking that I'm confused over deposits and overall solvency with this multi-headed banking system that we've created- the "investment" and "deposit" hydra.  If loans start collapsing won't that place a lot of strain on deposits (the "reserves")?  Are "deposits" the only reserves we're talking about?

I think that there's an issue of liquidity and solvency here, not just one of liquidity...

Mon, 04/01/2013 - 06:02 | 3395312 bunnyswanson
bunnyswanson's picture

"As the supplier of the world’s most popular currency, the United States is in the position of a monopolist that has grown complacent abusing its “exorbitant privilege.”

But once the dollar’s supremacy is eroded by emergent challengers, goes the argument, the United States would finally be forced to curb its appetite for foreign savings, lowering the risk of future crises. Much depends, however, on the kind of relationship that develops among the system’s leaders.

The last time the world was obliged to live with a fragmented currency system, during the interwar period, the outcome was—to say the least—dismal. A lack of cooperation between the British, with their weakened pound, and a self-consciously isolationist United States was a critical cause of the financial calamities that followed the stock market crash of 1929.

Can we expect better this time around?"  (IMF statement on US Dollar)

http://www.imf.org/external/np/sec/pr/2013/pr1391.htm

"

IMF Statement on Cyprus

Press Release No. 13/91
March 24, 2013

Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), made the following statement today after discussions at the Eurogroup meeting on Cyprus:

“The agreement reached today on Cyprus provides a comprehensive and credible plan to deal with the current economic challenges in the country.

The plan focuses on dealing with the two problem banks and fully protecting insured deposits in all banks. It addresses upfront the core problem of the banking system through a clear strategy that ensures debt sustainability and does not excessively burden the Cypriot taxpayer. This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth.

“We believe the plan provides a durable and fully financed solution to the underlying problems facing Cyprus and places it on a sustainable path to recovery.

The staff teams of the IMF and the European partners currently in Cyprus will now work to complete the technical details. Based on this and final agreement of the mission in Cyprus, I expect to make a recommendation regarding potential financial support from the IMF to the Executive Board in coming weeks.”   (IMF on Cyrus)

 

Euro Statement:

The Eurogroup welcomes the plans for restructuring the financial sector as specified in the annex.

These measures will form the basis for restoring the viability of the financial sector. In particular, they

safeguard all deposits below EUR 100.000 in accordance with EU principles.

The programme will contain a decisive approach to addressing financial sector imbalances. There will be an appropriate downsizing of the financial sector, with the domestic banking sector reaching the EU average by 2018. In addition, the Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation.

The Eurogroup welcomes the Terms of Reference for an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent. In the event of problems in the implementation of the framework, problems will be corrected as part of the programme conditionality.

The Eurogroup further welcomes the Cypriot authorities' commitment to take further measures.

These measures include the increase of the withholding tax on capital income and of the statutory corporate income tax rate. The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution.

The Eurogroup urges the immediate implementation of the agreement between Cyprus and Greece

on the Greek branches of the Cypriot banks, which protects the stability of both the Greek and Cypriot banking systems.  The Eurogroup requests the Cypriot authorities and the Commission, in liaison with the ECB, and the IMF to finalise the MoU at staff level in early April.

?http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/136487.pdf

?Oops, I win!

Sun, 03/31/2013 - 18:53 | 3394349 Peter Pan
Peter Pan's picture

Fractional reserve lending and deleveraging do not mix terrible well. So one is left asking, WHY DON'T THOSE MORON EUROPEAN BANKERS REVALUE THE EUROPEAN HOLDINGS OF GOLD (11,000 TONNES) AND EXTINGUSIH THE BAD DEBT WITHOUT DESTROYING PEOPLE AND NATIONS?

Sun, 03/31/2013 - 19:58 | 3394485 Alpha Monkey
Sun, 03/31/2013 - 23:51 | 3395047 Vic Odd
Vic Odd's picture

 

There is a total of $10,800,000,000  in deposits in US Banks

FDIC insurance fund: $33,000,000,000

It's called fractional reserve insurance!

.

 

Mon, 04/01/2013 - 05:27 | 3395291 Seer
Seer's picture

Maybe because they're trying to milk things for as long as they can?

I'd be interested in what others think of what would happen with this scenario.  Would this flood the gold market?  What would it do to the (gold) seller's currency? and how would this affect their ability to effectively (as intended) to pay off debts?

Even if Europe could do this and wipe out all debts they'd likely still be facing problems of being able to pay for imports (especially energy).  Right now they're paying with fiat (which, at some point, WILL fail).  Think of it along the lines of Russia telling the EU that it'll only take gold in payment for gas and oil; and when the EU is out of gold? (it'll be a problem for Russia as well, though they're starting to mitigate this risk by dealing with China, which will also only last for so long)

Sun, 03/31/2013 - 19:00 | 3394365 Arthur
Arthur's picture

They would just crank up the printing press or issue $$ in the form of debit cards.  No worries 

Sun, 03/31/2013 - 19:03 | 3394373 eddiebe
eddiebe's picture

The safest place is a hole in the ground where I can get my hands on it whenever I so choose.

Mon, 04/01/2013 - 05:30 | 3395293 Seer
Seer's picture

Just be careful of rabbit holes...

Sun, 03/31/2013 - 19:06 | 3394379 Racer
Racer's picture

evaporating faster than Ice Cubes in the circle of hell reserved for economist PhD's.

*Sigh* If only there was a hell.....

Sun, 03/31/2013 - 19:55 | 3394482 mkhs
mkhs's picture

Hell is just a state of mind.

Mon, 04/01/2013 - 05:32 | 3395294 Seer
Seer's picture

"*Sigh* If only there was a hell....."

That's why one has to "believe."

Yeah, sometimes I wonder whether I should trade in realism for religion so I could "feel good" about hell...

Sun, 03/31/2013 - 19:35 | 3394442 ljag
ljag's picture

There is........it is the ussa

Sun, 03/31/2013 - 19:39 | 3394448 alentia
alentia's picture

That is why there is a Patriot Act and similar acts almost in every country. That makes officially printed cash almost illegal to use. 

 

Sorry fellow citizen you are not allowed to store your cash under the mattress, must deposit it in the bank.

Mon, 04/01/2013 - 05:41 | 3395296 Seer
Seer's picture

Yup!

"Cash" must be put to the use prescribed by TPTB.  In fairness, however, as far as the USD goes, they're FRNs, which means that they're only borrowed by us (it's a loan, which agrees with the phrase "money as debt").

I'm kind of thinking that at some point the plug will be pulled on the current paper stuff.

The phrase "use it or lose it" is quite apropos.  And, really, I agree.  There's little time left to take advantage of getting meaningful physical things in swap for the current paper...

Sun, 03/31/2013 - 20:14 | 3394512 nmewn
nmewn's picture

"One look at the chart below should be sufficient to explain this rather problematic issue of a broken banking system in which trust is evaporating faster than Ice Cubes in the circle of hell reserved for economist PhD's."

PHDizzy Printmo-whizzy ;-)

Sun, 03/31/2013 - 20:21 | 3394525 flyonmywall
flyonmywall's picture

I used to go to the ATM and take out $60 bucks. Now I just take out $500 at a time, every time I go to the ATM. Then I go to a local coin dealer and trade the debt instruments for a little silver, a little gold, and some historical value pieces, just for fun. I might as well get my FRN debt instruments out while they are still worth something.

Mon, 04/01/2013 - 05:47 | 3395300 Seer
Seer's picture

This is only PART of what you should be doing...

Be careful of thinking that once you trade one pile of representative wealth with another that the new pile won't come under attack.  And, really, a pile of "representative wealth" does no one any good if it only ever sits in one place (in the past you could let "money" sit in a bank and have it "grow," but this, as it too obvious at this point, is becoming a thing of the past).

Sun, 03/31/2013 - 20:52 | 3394609 AynRandFan
AynRandFan's picture

Where else but ZH?  Excellent.  Never would have thought of this.  Physical cash versus electronic cash.

Sun, 03/31/2013 - 20:53 | 3394618 Legolas
Legolas's picture

Assuming there are 375 million checking and savings accounts, it would take 10 days to drain all the bank reserves (assuming $500/day per account).

 

Can you imagine if the American people woke up and started doing this?  Even 25% of the population?

 

Wow....

Mon, 04/01/2013 - 05:51 | 3395303 Seer
Seer's picture

Tipping points shift the closer you get to them...

No way would people be this orderly.  But, your example does show how quickly things could happen (even in the most "favorable" [to stability] scenarios).

Sun, 03/31/2013 - 21:10 | 3394645 ziggy59
ziggy59's picture

Moolah Sublimation: State at which perceived currency goes from solid to its true state, electrons; without notice or warning

Also known as Corzine Effect, MF'd, Madoff Principle, and now Cyprus Phenomenon

Sun, 03/31/2013 - 21:47 | 3394743 SubjectivObject
SubjectivObject's picture

Fictional reserve banking.

(in principal, the reserve is there, if you believe strong enough)

Mon, 04/01/2013 - 05:53 | 3395304 Seer
Seer's picture

And, more likely, if you're interested in your principal then most likely what's there is only (the equivalent of) "interest" (hair-cut!).

Sun, 03/31/2013 - 21:56 | 3394768 jonjon831983
jonjon831983's picture

I think the Cyprus thing managed to resonate with a few more people than the previous "crisises".  Small sample size lol, my aunt actually started asking what to do with her money in the bank.  A couple buddies a bit uneasy as well.

Sun, 03/31/2013 - 22:15 | 3394803 suckerfishzilla
suckerfishzilla's picture

If the banks gave me a haircut today my cost would be $65 bucks.  I say hang them all. 

Mon, 04/01/2013 - 05:55 | 3395305 Seer
Seer's picture

Tip: keep scissors away from bankers! (maybe better to keep one's money with one's barber?)

Mon, 04/01/2013 - 00:14 | 3395080 Monedas
Monedas's picture

Fractional Reserve Disco Fire:    It's like a Brazilian nite club .... in Santa Maria .... the place is overcrowded with inebriated patrons .... the ceiling is on fire .... there's only one exit .... and the guards want you to prove you paid your bill !

Mon, 04/01/2013 - 05:55 | 3395307 Seer
Seer's picture

THAT! sets the tone! :-) (guards need to be holding pitch forks and signs reading "welcome to hell")

Mon, 04/01/2013 - 00:56 | 3395143 Curiously_Crazy
Curiously_Crazy's picture

About the only benefit of being one of the working poor is that ya don't need to stress about any of this shit.

I'm lucky if I have enough in my bank account at the end of each fortnight to buy an Oz of silver. After rent, food, electricity,  gas and petrol there is bugger all left.

Mon, 04/01/2013 - 06:00 | 3395311 Seer
Seer's picture

I remember Johnny Carson once talking about some statistic about IRS audits, that folks earning less than some paltry amount had nothing to worry about.  Carson quipped something along the lines of "oh contraire! if you're only making that amount you have EVERYTHING to be worried about!"

The KEY in everything, however, is to be able to manage one's EXPENSES. (and this should be accompanied by being able to differentiate "needs" and "wants")

Mon, 04/01/2013 - 01:15 | 3395164 headless blogger
headless blogger's picture

Don't show Ben. He might speed up the printing to make up the difference.

Mon, 04/01/2013 - 02:42 | 3395218 suckerfishzilla
suckerfishzilla's picture

THose 9 trillion bucks worth of deposits could buy all of the Silver inventory at the comex and have alot more than pocket change left over.  We could have kicked the shit out of the banksters a long time ago. 

Mon, 04/01/2013 - 06:09 | 3395317 Seer
Seer's picture

Banksters are holding a LOT of gold.  Further, increased rates of purchasing would drive up the "price" of PMs.

In the end it'll be about sustainability.  Growth will unwind until there's little in the way of "excess."  Once "excess" dries up there won't be anything for the banksters, for the non-producers.  Of course, one will have to accept a subsistence way of living, that's the trade-off: now we know why many subsistence folks have been approached by the System with the "micro loan" stuff- it's to hook them into the System ("micro loan" is a set of training wheels- they're looking to get you into that car, to saddle you to their debt wagon).

Mon, 04/01/2013 - 04:21 | 3395259 Quarky Gluon
Quarky Gluon's picture

Tyler, I don't know how you do it.  You write a whole, nice article praising the value of having physical paper and then in the very last sentance, out of nowhere, completely contradict yourself and state that the term physical paper is becoming increasingly perjorative (while doing the requisite ZH pump for physical PM's)?!

Mon, 04/01/2013 - 06:23 | 3395320 Seer
Seer's picture

Careful!  Keep in mind that everything is in flux and that there will be breakers tripping.  At some point FRNs are going to have value: actually, look around, when you really think about it, knowing what the state of things is, knowing that the USD is going to fail, it's amazing how much stuff an FRN will get you (yes, perhaps not as much as in the past, but compared to what it really should be able to buy? ha!).

Any "pejorative" I could see being applied by TPTB as they set the trap of canceling the USD after people have yanked it out of the banks.  NO 'DEPOSIT' NO RETURN

Electronic bits are going to be readily/quickly "adjusted."  I suspect that TPTB will ascribe some value to them (haircut)l I also suspect that the current physical money is going to be set to zero value (punishment for taking TPTB's trade bits, their ability to control trade, away).

If there's any guidance that I think most appropriate to cover nearly all scenarios: Know when to hold 'em and know when to fold 'em- do NOT sit on any pile of "representative wealth" for too long, best to apply toward assets that are productive (and when you think about this this is just good old-fashioned business sense; and it's further amplified by the FACT that one can forget about the notion of "retirement," and with it the notion of "retirement" funds/accounts).  If TPTB don't have velocity then they'll kick us until there is.

Mon, 04/01/2013 - 06:22 | 3395314 ozzz169
ozzz169's picture

Someone else that gets it, dont know why people think im nuts when I tell em to hold physical dollars (I think the new term for "paper" should be replaced by "electronic" as paper currency is much more valuable then "electronic"...

 

pop quiz, is it inflationary or deflationary the outcome in cyprus?     Extra credit what is best thing to do before the decision? 

 

 

(answer, deflationary, and get physical cash, if ecb would have bailed out this would be semi inflationary (what is going on in the US) but not really so as your just replacing assets that went down in value with printed money, but this just keeps the leverage at the bank level, it does not make extra funds for them to loan out, this is why the fed printing money like mad is not creating inflation)

 

 

Mon, 04/01/2013 - 06:38 | 3395328 Seer
Seer's picture

"dont know why people think im nuts when I tell em to hold physical dollars"

This is one-dimensional.

What good does merely holding ANYTHING do?  "Holding" means "inactive."  "Inactive" means "indecisive" or "not ready."  The KEY is to know WHEN to let those physical dollars go.  It is a certainty that the current USD, being fiat and all, WILL cease to exist one day.

Telling people to rush out and get physical FRNs is kind of like having people run out and buy guns w/o knowing how to use any gun!  It's scary when you think about it, but the trouble lies with the fact that people are not "trained," yet, training is really about conditioning, and wide-scale conditioning is, for all practical instances, more about propagandizing than anything else (most don't actually come to "learn/understand" something so much as just end up doing what they are told).

TPTB will shift the weighting of things when they sense everyone running to one side of the ship.  Enough people yanking their electronic bits will, in probability, result in a penalty of holding physical FRNs (with an attempt to make it more attractive to reconnect with their electronic tracking system).  Keep in mind that they most certainly CAN kill FRNs; PMs they cannot because they themselves hold them, and that that is the case throughout the world: easier to demonize a "defunct" currency that TPTB have shed themselves of.

And to think that I once worked to further electronic banking...

Mon, 04/01/2013 - 08:20 | 3395428 Augustus
Augustus's picture

Everyone withdraws their funds from the banks.  The banks call in all of the loans to have the cash for payments to depositors.  Depositors use the withdrawn cash to repay debrs to banks, and everyone else needing cash for loan repayments.  It all nets back to actual physical circulating cash. 

Where is the flaw?

Mon, 04/01/2013 - 08:38 | 3395450 dcb
dcb's picture

I think the most of the problems of fractional reserve banking become limited with low levels of leverage.

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