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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DoChenRollingBearing's picture

Slow bank runz, bitchez!

The Shootist's picture

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

AlaricBalth's picture

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

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? 

Stackers's picture

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

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 

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.

Rakshas's picture

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

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.

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.

DuplicationCube's picture

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

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.

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.

Muddy1's picture

circle jerk, there, fixed it

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."

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.

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

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.

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.

Whatta's picture

9 T's in deposits

25 B's in FDIC insurance reserves.

Hmmmmmm.....

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...

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.
Political_Savage's picture

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

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

 

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.

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

orez65's picture

Buy only US silver and/or gold eagles.

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....

NaiLib's picture

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

Number 156's picture

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

NaiLib's picture

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

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

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]

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

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.

knukles's picture

Horseshit
The safest place is the City of London

Wake the fuck up

Number 156's picture

"Horseshit
The safest place is the City of London"

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

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?

 

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...

Banksters's picture

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

 

ShortTheUS's picture

What the models show when it does happen:

#Ref!!

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!

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.

 

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

krispkritter's picture

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

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.

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.

surf0766's picture

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