"Literally, Your ATM Won’t Work…"

Tyler Durden's picture

By Bill Bonner Of Bonner And Partners

Literally, Your ATM Won’t Work…

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply…

There’s Not Enough Physical Money

Here’s how… and why:

It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $11.7 trillion as of last month.

But there was just $1.3 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

Less Than Zero

Our current money system began in 1971.

It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

But the next crisis could be very different…

Short-term interest rates are already close to zero in the U.S. (and less than zero in Switzerland, Denmark, and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

What then?

The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

…and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

It’s not just that no one wants to lend; no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

Just as we saw after the 2008 crisis, we can expect a quick response from the feds.

The Fed will announce unlimited new borrowing facilities. But it won’t matter….

House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles, and resources – all we be in free fall.

The NEXT Crisis

In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

Are you with us so far?

Because here is where it gets interesting…

In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes. As collateral goes bad, credit is destroyed.

A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day could find his portfolio has no value at all a few days later.

All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

Dollar Panic

Let us stop here and remind readers that we’re talking about a short time frame – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

You will go to buy gasoline. You will take out your credit card to pay.

“Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

Whose credit cards are still good? Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” today.

But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

Our advice: Keep some on hand. You may need it.

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DeadFred's picture

Yeah, we know, but do you have a time frame? Early is the same as wrong.

Captain Debtcrash's picture
Captain Debtcrash (not verified) DeadFred Jun 6, 2015 8:43 PM

There will be no Cash Only signs, the result of the next crisis will be a ban on cash.  It is easy to see that the winds are already blowing in this direction, and though there are a few ways to do it, I have little doubt, that to counter exactly what this post is describing they will make a move to ban cash.

OldPhart's picture

My thoughts exactly, but there will be a blackmarket created almost instantly.  What the ultimate medium of exchange will be is sort of a toss-up.  Inititally, though, I think cash will still be king until more realize there is nothing supporting it.

rejected's picture

Ummmmm,,, nothing is already supporting it.

Tom Servo's picture

LOL - unless they introduce a parallell cash / cashless society that can facilitate the illegal drug trade, cash will always be around.  After that a black market pretty much will form around the cash side.

 

I chuckle every time anyone mentions a cashless society, because there is too much invested in the illegal drug trade all across the spectrum.

Government needs you to pay taxes's picture

This is a useful exercise.  If you could not hold cash or cash held zero value, you need to have something others are willing to barter the essentials for.  To my eyes, that would be guns, broads, and whiskey.  In many scenarios, a gun gets you even, whiskey numbs the pain, and a broad will make you feel good.  Look for me, I'll have the best prices in town!

Keyser's picture

We can thank the fractional reserve banking system for this conundrum, along with the blind greed of the banksters... Water, water everywhere and not a drop to drink... 

Manthong's picture

They can’t get rid of cash..
The drug trade is too valuable to the State.

The Juggernaut's picture

Bill Bonner is talking about deflation which is when the $USD fiat is worth something.  This is what most will think but forget the final step; Hyperinflation.  The Fed will step in one final time and through fear people will let them dump money everywhere... that's when the cash you have is worth nothing.  Any dollar denominated instrument will skyricket because people will be getting rid of worthless paper for tangibles like guns and ammo.  The S&P will sky rocket to 100,000, Gas will go to $300 a barrel.  Whats best is if you actually pay off all your debt now because youll need cash to barely make the price of food.  Once hyperinflation hits, thats when you max out everthing on hard assets as fiat goes down the drain.

 

If we went from 1913 prices then overnight went to 2015 prices there would be absolute panic and there would be a Revolution that would make 1776 look like a thumb war.  The Fed just did it slowly over the years but once the truest Austrian Ecnomics pinciples come into play the coersive game is over.  Fiat is wothless and will always be.

 

The ultimate winner will link their currency to gold and/or a basket of commodities.  The $USD fiat is currently backed by men and women who unknowingly or knowingly become hitmen and hitwomen when they join the US Armed forces or CIA.  Major General Butler knew it was a mafia and it still is a mafia today.

 

SafelyGraze's picture

"There’s Not Enough Physical Money"

what with credit cards and debit cards and grocery store loyalty cards and iris scanners and proximity sensors and google's skin tattoos and square and face recognition and gift certificates and SNAP and WIC and whatnot and so forth, nobody needs ATMs any more

paradise has arrived

 

Gobbler's picture
Gobbler (not verified) SafelyGraze Jun 7, 2015 12:34 AM

I walked through the potato patch.  I met Martha.  She offered me a cocktail.  Thank you.

Creepy Lurker's picture

I see you got back in. Is anyone taking bets on how long he lasts this time?

Fun Facts's picture

They're going to have ATM's dispense trinkets and beads.

That should be good enough for the schmuckster nation.

Realname's picture

Im developing an ATM that dispenses wampum...and scratch-off oyster shells (the winners find a pearl).

FEDbuster's picture

To a starving man a can of soup is worth more than a stack of hundreds or an oz of gold.  Scarcity and need will determine what will have value. A life sustaining item (water, food, medicine,etc) could become the most valuable item of all.  In Cormac McCarthy's book The Road the father and son take a gocery cart of can goods from the "bunker" they found.  They leave the small bag of gold coins they find there behind, the coins were just dead weight. 

overmedicatedundersexed's picture

Fed, you know :"the road" is fiction? right? food & water are basic needs. gold is to make eating possible in most civilized lands- the road is end of the world stuff and then who cares if you eat?

Manthong's picture

“ATM that dispenses wampum”

I still have my Puka shell necklace..

It will be worth a fortune then.

 

..still fits, too  :-)

Payne's picture

This too is a story short in History.  The FED reserve did not print currency during the Last Great depression and yes Barter currency was issued on a local basis.  Same would happen again.  Local currency based on a dollar value.

green sheen's picture

Ever wondered what a dollar is? Where they come from?
https://youtu.be/kgoFcyttk-s

ATM's picture

The gold isn't for the panic. It's for afterwards.

I would certainly like to emerge from the coming shitstorm with some wealth. Many things will have value but show me one thing that has the concentrated value that gold does (besides the odd piece of art).

MansaMusa's picture

I totally agree!   I've been stacking 10-20 extra cans of beans each supermarket round.  All that "guns & ammo" talk sounds good but they'll be useless in a zombie apocalypse.  The state will step in and ban outlaws.

Instead buy a loarge knife/crossbow and TONS of food!   And keep your prayers up...

Realname's picture

Youre probably better off buying big bags of dried beans. Theyll last longer and you can pressure can them yourself.

Seek_Truth's picture

The good thing about a crossbow is that unlike a gun it won't give your existence and location away.

The problem with a crossbow is that you'll run out of bolts.

Ideally, you want a recurve bow, for which you can make your own arrows.

And you should be getting dried goods- beans, bulgar wheat, protein powder, psyllium, etc.

Also, stock up on honey- it doesn't have an expiration date.

DrLucindaX's picture

McCarthy seems to suggest the world of "The Road" took place in the afternath of the Yellowstone Caldera Supervolcano erupting. 

random999's picture

Your skin tattoos tell me you have 539.201 dollars in debt. Would you like some more?

 

If they ban cash they couldnt just stop there. You would have to ban gold, silver, platinum, cigarettes, tulips and a lot of other more or less valuable things. If you push it too hard and people still see no value in the currency they are forced to use, they will go barter! Yes you can (and have practically already done so) illegalize barter trading. But you cant stop the critical mass of people. Even police thugs will eventually stay home and grow their own potatoes.

Creepy Lurker's picture

That won't stop them from trying, but yeah it will become futile very quickly.

 

Lore's picture

The psychopaths can't ban cash any more than they can ban barter. Both are already king on the street. What're they gonna do, send out the enforcers because somebody traded home repairs for a pail of garden produce?  PISS OFF.  And we are already in hyperinflation.  The only things stopping it from becoming obvious are controlled media and the fact that the QE is being funneled into containers that keep it off the street.  But the stock market keeps rising to silly numbers with no real economic fundamentals to back it.  Nothing is real anymore!  It's all just bullshot foisted by the psychopaths: macroeconomic "global warming."  No wonder they're so desperate for war!  They need cover for the fact that they're just about finished stripping and looting, and need to project blame on a scapegoat.  Are you sick as I am of hearing the media prattle about "Putin's Aggression?"  YOU'RE THE AGGRESSORS, YOU DEGENERATE BANKSTER GARBAGE.

John_Coltrane's picture

Barter is of course illegal (and likely a capital crime) in North Korea, yet it is the basis of their real economy.  Which tells me central control of a true economy is impossible even in a police state.  And it has always been thus!

In Communist Russia, 97% of the farmland was collective yet over 60% of all vegetable and fruits came from the 3% of the privately owned plots.  Central planning and control is both ineffective and unenforaceable (see the drug trade for example)

Tall Tom's picture

This is what most will think but forget the final step; Hyperinflation.

 

At the beginning of the Weimar Hyperinflationary Inferno cash disappeared from circulation. People resorted to issuing their own Promissory Notes becauseof the lack of Government issuance.

 

You can read about it in the book, "When Money Dies"

 

www.goldonomic.com/When Money Dies.pdf

 

 

I strongly suggest that you do as time grows increasingly short.

Tall Tom's picture

OFF TOPIC...

 

Here is a video on YouTube critical of our Zerohedge...

 

https://www.youtube.com/watch?v=llbzUyv1CLU

 

You may want to let this poster know your position.

ZH Snob's picture

I tried.  couldn't get past a couple of minutes.  old applesauce is a real snooze.

can you summarize his position, TT?  I am somewhat curious.

Lore's picture

Don't bother.  It's nothing new, just some dude's verbose editorial, mainly about fractional reserve banking, trivially critical of the Tyler pseudonym.

Government needs you to pay taxes's picture

That guy is for eating. . . you know, after the SHTF.

MontgomeryScott's picture

I lasted about 20 seconds over there before re-starting the Alex Jones Sunday show again. I was reminded of WB7's contributions (which are always quite good).

'Applesauce' pro'lly owns a chain of ATM's (and probably once worked for Bear-Stearns as a men's room janitor).

Dipshits like this will ALWAYS be around (until they aren't). This bitch will be the first one to suck the cocks of those who tried to tell him (and he didn't listen until it was one second too late). When he's rejected, he'll line up outside his regional camp FEMA, hoping to get a slice of bread.

Sorry, I don't have an account on GOOKLE-TUBE.

He's got his meds, so he's happy. Let him live out his self-deluded lies.

HEY!

LOOK!

BRUCE JENNER is a WOMAN!

Signed, Applesauce

(sent from my i-phone in my mommy's basement)

fiftybagger's picture

Take note goobermint workers:

"Former civil servants and officers are undoubtedly the poorest of the poor in Austria today. They are too proud to press their claims, can get no employment. Thus it happens every day, again and again, that elderly, retired officials of high rank collapse on the streets of Vienna from hunger."

Bendromeda Strain's picture

Yup, and the enforcers were paid with commodities. The story went that people who were fiat dependent upper middle class would be "missing" things from their homes every week. First it was the candlesticks, then the entire service, finally the piano.

willwork4food's picture

First deflation then hyper inflation. We have been in a deflationary economic coma for 7 years now..so guess what's next?

Why would they leave money on the table?

moneybots's picture

"Bill Bonner is talking about deflation which is when the $USD fiat is worth something.  This is what most will think but forget the final step; Hyperinflation."

 

The final phase of the inflation/deflation cycle is deflation, not hyperinflation.

Any of the gold promoters talk of gold going to 3,000, 5,000 an ounce.  None talk of gold going to a million dollars an ounce or more.

MontgomeryScott's picture

You have NO IDEA of the terms you are discussing.

'INFLATION' and 'DEFLATION' have NOTHING (DIRECTLY) to do with the so-called 'PURCHASING POWER' of the FIAT CURRENCY in question; they are terms which describe the number of units of this FIAT CURRENCY in 'circulation'. You are confusing a REACTION with an ACTION. DEVALUATION and DEFLATION are exact opposites, in fact (when discussing economics).

mtl4's picture

Bonner is right as deflation always precedes hyperinflation (hyperinflation is the result of a government's over reaction to the deflational forces) but the curious part will be how politicians respond to the threat of cash hoarding.  Typically they try to just ban whatever is being hoarded so back in 1933 people were hoarding gold, therefore they just made it illegal to own.  If this time people are hoarding cash then logic would say they would then switch to a cashless approach making it illegal to pay with dollar bills anymore.  This will then likely set of a wave of additional temporary currencies which could be anything like commodities (PMs, fuel, food alcohol, drugs, etc) or it may see the rise of states again creating their own currencies as they did back in the early days of the US.  Some people may still trade in dollar bills but that group will diminish greatly if they turn around and make such acts illegal and therefore punishable in some way shape or form.

winchester's picture
winchester (not verified) Manthong Jun 7, 2015 3:21 AM

drug is outter part of the economy of a society, the maine line on the inner part is...corruption, corruption need cash. to me, cashless do not mean " problem with drugs " ( even if i agree with you all ) but it more mean " problem for corrupted to get the stolen stuff " and the men with hands on the joysticks are rarly agree to put joystick in ass and play kinnect mode instead.

 

cashless is a slow process that will not happen because before it is done and functionnal there will be serious fights everywhere to get the joystick.

NoDebt's picture

"drug is outter part of the economy of a society, the maine line on the inner part is...corruption, corruption need cash"

True.  Just ask Denny Hastert.

A Nanny Moose's picture

I am attempting to wrap my brain around the logic here. The idea that government should ban that which government created in the first place seems rather absurd. Why not simply remove the gun from the room?

bbq on whitehouse lawn's picture

Cash is personal property, credit is just an account entry. Cash has costs, credit has no cost untill it leaves the system as cash.
So if everything is credit then its a closed loop of without costs or the issance of property.
Thats why credit is used to control the finance system instead of cash. No hyper-inflation, no deflation, just controling access to accounts and the moveing of them without the use of property.

A Nanny Moose's picture

Cash has costs? It costs me nothing to stuff my cash in my mattress. The cost of credit is the time-value of money (interest). On the lender side the cost is measured in risk (of default

Still...what is the logic of government banning that which has value largely due to government fiat in the first place? Without government fiat there are no FRNs. Why not strike down the legal tender laws?

MontgomeryScott's picture

Let's simplify this for you.

The so-called 'government' is thought of as being a 'BENEVOLANT SERVANT'.

THIS IS A VERY LARGE MISTAKE.

When the so-called 'GOVERNMENT' is comprised of people who want to take everything that everyone owns via issuance of CREDIT, the NATURAL last steps will involve the banning of an object of trade that doesn't allow this 'GOVERNMENT' to get a cut of it.

FRN's are simply electronic entries on a computer. The FEDRES is an illegal entity (and their fiats are illegal by LAW). 'No State shall... make anything but gold and silver coin, a tender in payment of debt'... OOPS.

I'll follow Bill Bonner's advice, and keep a few debt instruments on hand (to use as fire-starters or toilet paper, or collectibles).

THEIR so-called 'logic' isn't RATIONAL, or 'LOGICAL', but it IS 'REALITY'.

MontgomeryScott's picture

Lead, Brass, and Antimony are the NEW 'commodities'.

You'd all best get in on the 'ground floor'.

A handgun is the tool that you use in able to get to your battle rifle.