The Global Run On Physical Cash Has Begun: Why It Pays To Panic First

Tyler Durden's picture

Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote "Be Careful What You Wish For" saying that "if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances."

Well, maybe not... especially if physical currency is gradually phased out in favor of some digital currency "equivalent" as so many "erudite economists" and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency - just like physical gold - provides a convenient loophole to the financial repression of keeping one's savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.

For now cash is still legal, and NIRP - while a reality for the banks - has yet to be fully passed on to depositors.

The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: "as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain."

Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.

However, just because negative rates have not been passed on to savers yet or just because cash still has not been made illegal, that doesn't mean it won't be.

The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.

In other words, will there be a run on physical cash?

The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the "magic" of fractional reserve banking - there is simply not enough physical currency in circulation to satisfy all savers' claims.

Here is HSBC's Steven Major trying to explain the problem:

Based on the evidence so far, households have not rushed to withdraw cash and put it into a safe or, more significantly, pay for someone else to store it for them. This is because retail deposit rates have stayed at or above zero as banks have opted to not pass the lower market rates on.

 

The assumption that bank deposits can be rapidly converted into cash does not hold up, in our opinion. If everybody wanted to take their cash out of the bank at the same time, the system would soon run out as there are simply not enough notes in circulation. It would take a considerable time to print the currency needed to meet the demand. A central bank could enforce a negative rate for a considerable period of time under these conditions. For example, in the US, even if the production rate is doubled – and assuming the pace of retirement of old notes is unchanged and there is demand for USD3trn of new notes - printing would take 20-years.

 

To explain this, consider the demand for currency created if savers tried to remove cash from the US banking system. This demand could total anything between USD2.5trn (of excess reserves) and USD4.5trn (the Fed’s total balance sheet). Currently there is USD1.5trn of currency in circulation and the total annual production had a face value USD149bn in 2014, suggesting the 20 years it would take to print the cash.

 

Currency in circulation is small compared to the potential demand in a negative rate environment. As an example, the Fed’s assets are three times the currency in circulation and the Riksbank’s nearly ten times (see Table 1), but production capacity is limited.

While largely correct, Major is wrong about two critical things.

First, when estimating the potential demand for physical currency in circulation, one has to take into consideration not only the amount of total Fed reserves (or its entire balance sheet) but the entire fractional reserve banking system, and specifically the amount of paperless deposits parked at banks in the form of demand, checking, and savings account, or in other words, all the core components of M2. Not only that, but one must also consider the threat by increasingly more economists that large denomination bills may be outlawed, first in Europe with the €500 bill and then in the US with the $100 bill.

What a ban of Ben ($100 bill) would imply is that the total notional value of US currency in circulation would plunge from $1.35 trillion in the most recent week, to just $271 billion once the total $1.08 trillion value of $100 bills is eliminated. Putting this in context, there are as of this moment, $11.1 trillion in various forms of savings parked at banks as summarized in the chart below.

 

For the sake of simplicity, this analysis ignores what would happen globally in a comparable scenario in which paper currency in other developed markets is likewise "curbed" in part or in whole. Recall that for NIRP to truly work, paper currency has to be substantially eliminated everywhere it is implemented. We will analyze the impact of a global rush into paper currency in a subsequent post.

Still, what the chart above shows is that if, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers' claims, a ratio which drops to 20 cents of "deliverable" cash if the $100 bill is taken out of circulation.

* * *

The second, and far more critical error Major makes, is the assumption that "households have not rushed to withdraw cash and put it into a safe."  As we explained previously, while this may have been true for a long time since 2014 when the first cases of NIRP were unveiled, that is no longer the case. Recall from "Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding"

Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.

 

“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash--the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”

 


In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal, which also says at least one model costing $700 is sold out and won’t be available again for a month.

 

“According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.

Meanwhile, in Switzerland, circulation of the 1,000 franc note soared 17% last year in the wake of the SNB’s move to NIRP.

 

“One consequence of the decision to cut the Swiss central bank’s deposit rate into negative territory in late 2014, and deepen the negative rate to -0.75% early last year, may have been to increase stockpiling,” WSJ reports. “Holding money in cash would protect it from the risk of Swiss banks at some point charging a broad range of customers to deposit money.”

 

The connection between the increasing circulation of the big Swiss bill and the central bank policy is obvious,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. Well yes, it is. Just as the connection between soaring safe sales in Japan and Haruhiko Kuroda’s NIRP push is readily apparent.

 

So once again, we see that when one experiments with policies that fly in the face of logic (like charging people to hold their money), there are very often unintended consqeuences and when you combine sluggish demand with NIRP in a monetary regime that still has physical banknotes, you get a run on cash. And on safes to store it in.

And then this from "Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes":

 

Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts -- where it can make its way back into the financial system and be put to productive use.”

 

One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country's new "My Number" initiative, "the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”

No it isn't, and not because of concern about the outlook for the Japanese economy: that had no chance long before Abe and Kuroda came on the scene, mostly as a result of Japan's demographic spiral of doomed.

"It isn't a good thing" because it confirms that the global run on physical cash - as much as the bankers of the world would like to keep it under wraps - has begun, and as the chart above shows, in a fractionally-reserved world in which there are $10 in savers' claims for every $1 in physical currency, it quite literally pays to panic first, as the 9 out of 10 people who panic after the first one, will be stuck with nothing.

* * *

At the end of the day, what it all boils down to, is Exter's inverted pyramid. As a reminder, this is how Elliott's Paul Singer summarized the total notional value of all global asset classes:

  • Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
  • Global real estate: $180 trillion, according to global real-estate services provider Savills.
  • Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
  • Global equities: $64 trillion, per the World Federation of Exchanges.
  • Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
  • Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.

Because once the banks' physical cash runs out in a post-NIRP scramble, there is always - at least until it, too, is confiscated once again - gold.

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JoeTurner's picture

Ban cash and just force everyone to use credit cards...

MagicHandPuppet's picture

I've been thinking that "soon" will be a good time to cash out and pull out enough of the remaining fiat currency I have in the bank to get by for a few months... just in case. Perhaps "soon" has arrived.

Soul Glow's picture

Stocks will crash first.  Pull your money while they are crashing, save enough to get by for a few months, and spend it like it is going out of style.  I recommend silver but almost any asset will do.  Seriously, think of it this way, even an old rookie baseball card will have more value than fiat.  They are finite after all and you can't print a baseball card again.  Same with comic books.

abyssinian's picture

short the market! Don't need to pull all the money out. 

I need more asshats's picture

I yanked all my cash from Wells Fargo last week. Closed the account. Fuck 'em.

I'm doing my part. How about you?

38BWD22's picture

 

 

Took $500 from the ATM today...

Latitude25's picture

Pulled out cash and bought 2 AGEs at my LCS

Manthong's picture

I traded one Andrew Jackson for a box of 50 x .40  180 gr.copper clad hollow points today..

..a couple of years old but nice and shiny and they will hold or increase in value over time.

..it was a good trade.

deja's picture

I traded a bunch of green paper for some nice green tips.

NuckingFuts's picture

Bought $200 face value junk silver today to add to the stacks, never just bought pre-64 dimes and nickels before, just rounds.

So pulled out about 2,500 in fiat today and got a bunch of silver change.

Manthong's picture

..been collecting green tips and junk for a while.....

it's good for you, good for me

on that we can agree.

pop goes the weasel's picture

It's going to take a lot on get than we thought

Manthong's picture

..out of curiosity, what quality of junk did you get for 200 face value for $2500.00 ???

NuckingFuts's picture

200 face in quarters and dimes. It was roughly 80 in dimes and 120 in quarters. The final cost was roughly 2,600 and change. It was my wife's idea this time which is nice. She also just had a box of silver oz delivered this week too I got the mail and thought WTF? Then opened it and was glad I married her.

Manthong's picture

NF, if you don't mind my asking.. how do they look and who was the supplier...   ??

NuckingFuts's picture

Went to a local coin shop, not my favorite but the closest. Quality and dates vary a lot. I did go through the dimes and pulled out about 20 Mercury dimes and 5 much older barbers. Some were in very good shape, others poor. We just wanted to diversify the stacks with some smaller stuff. It's not near as pretty but we figure if the need arose the gold stores wealth, the sliver rounds for larger purchases and the junk for day to day stuff. Conflation lists the melt value at 1.06 on a dime.

Manthong's picture

"I got the mail and thought WTF? Then opened it and was glad I married her..."

Oh yeah... a keeper....    :-)

Manthong's picture

I think that the good news is that if you can see a fair amount of the relief on a .90 old silver coin, it will always be good tender to smart people in the future.

The Navigator's picture

 

why it pays to panic 1st?

 

1. so years of preparation validate your 'tin-foil' hat

 

2. so you can wave at your neighbors as you head for the hills and scream "I told you so, suckka's"

 

3. so you won't starve when the store shelves are bare in the next 5 hours

 

4. so you'll be at your  bug out location while others are stuck on the i-5 parking lot

 

5. so that when you get to the bank ATM it still works

 

6. so you don't HAVE to panic when the SHTF, you're all prepped up, ready to bug-in, bug-out, whatever it takes.

 

jeff montanye's picture

on a related note, this week i was closing out a wells fargo asset management account, moving it to vanguard, but opening a regular wells checking account to accompany the new credit union account, giving as my reason the derivatives risk of the too big to fail banks.

the banker, with twenty five years experience and multiple certifications and licenses asked "what are derivatives?"

i did not make this up.

StychoKiller's picture

Ya shoulda told him to read or watch "The Big Short"

Manthong's picture

heh.. heh..

most of them are not old or educated enough to understand of how reality can/will strike.

:-D

olenumbersix's picture

Anecdotal: 8 months ago my bank would cash checks for me at the drive through routinely for 5k or more, then I had to go inside, then it was 2 id's, (inside only) and now the amount for two id's, and going inside is shrinking. Makes me wonder. BTW don't bother asking which bank, cause there is no way I'm telling you its Suntrust.

DirkDiggler11's picture

Sun-don't-trust:
What a shit bank. I HAD two of my small businesses that I started banking with Suntrustless. At first everything was great, they gave me a personal banker to assist with transactions and no fees on either of the business accounts.

Well, my first personal banker quit Suntrust, as did the SEVEN others that followed her since 2007. Overall EIGHT different people in seven years. Next came the BS fees for everything. Raised hell over the fees and went to close out and transfer the balances from both account to the local LGE Credit Union, and Suntrustmenot agreed to refund all of the fees annually plus interest. I know, I had to laugh at the plus interest part.

Over time built up decent balances in both accounts and the businesses grew to the point of having just over $200K in each account at the start of this year. Not going to retire at 45, but each year the businesses net around $20K each once all of the bills are paid. Not enough to quit my day job, but good residual income. Once the balances grew the greedy SunFucks started calling me incessantly on my cell phone trying to pitch me all kinds of shit to invest my money in, and offering me $1MM line of credit on a signature loan to help me "grow my businesses". I politely told the rotating group of Fucktards "I'm not interested" at first, then my responses over the next month grew to more of what you would say to a telemarketer at 2AM that called you trying to sell you replacement windows.

Long story short I quietly opened up two accounts for my businesses at the credit union. About a month later I told the Sun-nuts managers, all 3 of them that had been pestering me on a non-stop basis that I was ready to get down to serious business investing the savings I had into some of their suggestions as well as taking out that $1MM lime of credit.

Priceless was the look on all 3 of their faces as I made them close out both accounts and make out the cashiers checks to the LGE credit union nearby.

Fuck SunTrust.

The Navigator's picture

Banks verus Credit Unions in a Bail-In situation.

Does anyone know if Credit Unions have to right to confiscate deposits for a bail-in situation like banks do?

OR will it depend on their financials (in the red v. in the black) - meaning should I ask for a CU's financial statement before deciding on with CU to open an account with?

adanata's picture

Hey Jeff... no shit. In 2005-6 I was advising a financial advisor; corporate CEO, re: the approaching housing bust due to fraudulant cds and he sent back an email asking, "What's a credit derivative?". People don't seem to realize brokers and financial advisors can't work unless they have a license. The cannot get a 'license' unless they are 'trained'. So who do you think "trains" them? The banks. Their job is to capture their clients assets and feed them into the banking system. It is especially sad because much, if not most, of the time the 'advisor' does not know they are harming their clients; they are actually trying to do a good job. They simply do not have the tools.

Generally speaking, neither your broker or financial advisor actually know anything about economics or investing. They are bombarded daily with skewed "information" and instructions provided to them by the banks/gov.

They both do exactly as they are told to do from on high.

jaxville's picture

Scrap silver coinage is the most recognizable specie there is.  We are only a few generations away from having used it as money.  Many of my customers use it to educate their children (and even some adults) about money.

Agstacker's picture

I used to go to the LCS but the local taxes really added up the cost, especially on larger purchases.  I've bought online since with no sales tax, buys an extra ounce or two.

NuckingFuts's picture

Replying to my own post. Before everyone tells me about better deals, I don't care. When the spirit moves me I buy.

Au_Ag_CuPbCu's picture

The premium on junk at my local coin shop is $3.75/oz.  I think you're good.

guardyernuts's picture

I'll give you a WAY better price than that on pre-64 nickels.  I'll sell you all you want at only, say, 8x face value.

Manthong's picture

I don't have near as many as Mr. Bass, but I certainly cannot lift them all at once.

BTW.. when you need to make stainless steel or certain armaments, call me.

..and outside of the injuns and buffaloes, a current nickel is good enough for me.

NuckingFuts's picture

Yea yea, I meant quarters not nickels. I'm not a nickle guy, I know some folks are really into them but that's a lot of weight and safe space from my point of view. But I am not judging, whatever works for you and let's you sleep well at night.

Manthong's picture

nice thing about the nickels is that they only cost 5 cents and will stay worth at least 5 cents....

my guess is that they will be the new quarters sometime in the future.

So WTF.. not to much to invest.. keep a stack of banker boxes and some tubs from loose change..

even though the commoditiy value is down today, the nickel is the only bullion value coin left in circulation.

Manthong's picture

..cool -- happy to be of service.

Tall Tom's picture

You are aware of the 1942-1945 US War Nickels that are 35% Silver, right?

 

http://www.coinflation.com/coins/1942-1945-Silver-War-Nickel-Value.html

 

I'll be happy to buy them at 8X face as they are currently worth 16X face....melt

Donnie Duvanie's picture

FYI - Someone told me the other day that the NSA had come in and audited a local pawn shop for their gold holdings. Now, why in the world would the NSA want to know Everything about Everybody who owns gold that is being held in a pawn shop?

Manthong's picture

guardyernuts

"I'll give you a WAY better price than that on pre-64 nickels.  I'll sell you all you want at only, say, 8x face value."

..so you thought you are a smart-ass, right?

guess what.. this is the big leagues, Mr less-than-a year newbie.

Donald J. Trump's picture

I don't know this case, but on zh you can never trust a profile.  Lots of accounts magically disappear and the user comes back reincarnated.

Manthong's picture

what the heck..

it's just annoying when a troll makes a stupid and totally moronic statement.

Tall Tom's picture

Take the lemon and make lemonade.

 

Personally I am more than happy to buy 1942 through 1945 War Nickels at 8X face or even 10X face..

 

They are .350 Fine Silver.

 

http://www.coinflation.com/coins/1942-1945-Silver-War-Nickel-Value.html

 

I will gain on arbitrage if that.

 

Use it as an opportunity to teach.

 

You also need to be paying 3X Face on Kennedy Halves dated 1965 -1970 as they are .400 Fine Silver

 

http://www.coinflation.com/coins/1965-1970-Silver-Kennedy-Half-Dollar-Va...

 

You educated that banker on derivatives, right?

 

Take the lemons and make lemonade.

pliny the longer's picture

mr trump thank u for lurking here, i don't like you or your brand of politics but i couldn't love more how u r giving a giant F U to the republican party, a/k/a socialist lite party.  that being said, u r so right to this old guy midwesterner.  i suspect some of u wall streeters come and go and change monikers whenever the risk of getting burnt is too high;  out here in the midwest, us old guys just look dumb but really we are paying attention.  ok, so most of us really are that stupid.  but some of us do pay attention.  well ok a few of us pay attention and know to chew our food.  fine, u win, a couple dozen midwesterners are smart enough to come in out of the rain but for some of us, we pay attention . . .

AGuy's picture

Stocked up on a bunch of Silver Brazing rods and Solder (a couple of weeks ago when Silver dipped on the anticipation its going up much higher). I had already purchased a lot of PMs back in 2002 and doubled down during the 2008-2009 when PM prices crash. Unfortunately I turns out all that PM investments turned out to be a terrible mistake because of a boating accident :(

 

 

SilverDoctors's picture

The panic to hoard cash will quickly morph into the panic for gold and silver when Deutsche's derivatives blow. 
The Golden Jackass Jim Willie, who rarely if ever makes any price predictions, came out this week in an interview and predicted gold and silver will be pushing $10,000 and $400 within 18 months...