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Guest Post: Why You Always Want Physical Everything

Tyler Durden's picture




 

Submitted by Simon Black of Sovereign Man blog,

On the way from San Marino yesterday, I had to stop for some gas near Rimini, a beautiful beach town on Italy’s Adriatic coast. As an aside, Italian gas prices are among the highest in Europe… and the world… at €1.77 per liter (almost USD $8.50 per gallon).

Naturally, the vast majority of this is due to taxes. From the € 1.77 per liter, only about € 0.48 can be attributed to the price of oil. Profit margin and distribution costs run about € 0.28. The rest of it (just over 1 euro) is tax. This amounts to an effective tax rate of over 130% on fuel.

Anyhow, when I pulled in to the gas station, I whipped out my American Express card and asked the attendant in broken Italian to turn on the pump. He acted like I had just punched him in the gut, wincing when he saw my credit card. “No… cash, only cash,” he said.

I didn’t have very much cash on me, so I drove to the next station where a similar experience awaited me.

This is a trend that is typical when economies are in decline– cash is king. Businesses often won’t want to spend the extra 2.5% on credit card merchant fees… but more importantly, distrust of the banking system and a debilitatingly extractive tax system pushes people into cash transactions.

You can’t really blame them. In Italy there’s massive distrust of the local banking system. Most of the banks are insolvent, and the government has already started imposing capital controls by limiting withdrawals in some cases to 1,000 euros.

As a result, many bank customers are facing substantial difficulty in accessing their funds; it’s easy to understand why they want to deal in physical cash– the counterparty risk is much lower.

Nobody gives these issues much thought… right up until they get shut out of their account. But these are the real consequences of counterparty risk: anytime your asset is simultaneously someone else’s liability, you might have a big problem when tough times arise. This is when physical cash becomes a premium asset.

It’s the same thing with gold and silver when you think about it. In the early days of the post-Lehman financial crisis, precious metals prices were tanking. At least, on paper.

Gold and silver contract prices may have been plummeting in futures exchanges around the world, but simultaneously, premiums for physical gold and silver coins were skyrocketing. The US mint was unable to keep up with demand for physical coins, and premiums hit double digits by December 2008.

It was an obvious example of the huge disparity between the paper price and the physical price. And in tough times, the paper price is irrelevant. Physical is all that matters.

Cash is in the same boat. When you look at the numbers, the amount of physical currency in circulation is dwarfed by the digital money supply.

In the EU, the M2 money supply is 8.77 trillion euros, of which only 861 billion is in physical cash… about 9.8%. In the US, the proportion is similar– $10.02 trillion M2 money supply, $1.1 trillion in physical cash. The rest is all digits in a database.

It’s a prudent idea to heed this lesson from Italy, for as the banking malaise in southern Europe spreads, cash is likely going to be a premium asset in the rest of the world as well. And it certainly makes sense for individuals to have some holdings of cold, hard cash in addition to physical metal.

After all, if you’re only generating 0.0000001% interest in your bank account anyhow, what difference does it really make to hold physical cash? You’re not worse off for it, but you’ll be a lot better prepared in case something goes wrong.

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Fri, 08/24/2012 - 16:53 | 2735363 buzzsaw99
buzzsaw99's picture

black didn't have any cash, what a putz. i hope his smug ass ran out of petrol and was stranded somewhere bleak.

Fri, 08/24/2012 - 16:55 | 2735368 Robot Traders Mom
Robot Traders Mom's picture

In the end, he's on our side no matter how smug he is...

 

By the way, where did you get my son's baby picture from?

Fri, 08/24/2012 - 16:56 | 2735372 knukles
knukles's picture

That's been on the back of every Schlitz pull tab beer can since 1963.

Fri, 08/24/2012 - 17:00 | 2735381 Pladizow
Pladizow's picture

So Simon, will there be a two tier market.

$4.00/gallon in cash and $6.00/gallon with credit card?

Fri, 08/24/2012 - 17:09 | 2735399 risk-reward
risk-reward's picture

Already happening here in N. Georgia.  $.05 to $.07 extra for using a credit card just down the way...........

Fri, 08/24/2012 - 18:31 | 2735643 12ToothAssassin
12ToothAssassin's picture

There used to be a CA (or national? Im not sure) law that was lobbied for by CC companies that made it illegal to charge MORE for a credit transaction. That has either expired or been repealed becuase Ive noticed that there are higher credit prices on gasoline once again.

Fri, 08/24/2012 - 20:34 | 2735951 Dr. Sandi
Dr. Sandi's picture

Some of the local Arco stations are bragging that they no longer charge the 45 cent per transaction ATM fee. Instead, the credit price is 10 cents a gallon higher. Yow, cash in on the great savings on a 15 gallon fill up.

Fri, 08/24/2012 - 21:56 | 2736057 FEDbuster
FEDbuster's picture

Fiat is transitory.

Sat, 08/25/2012 - 00:39 | 2736280 tenpanhandle
tenpanhandle's picture

so is life.  It still costs $8.50 a gallon to fill up your Fiat in Italy.

Sat, 08/25/2012 - 01:00 | 2736303 Don Keot
Don Keot's picture

Would that be $8.50 fiat to fill up your Fiat or credit or debit?

Sat, 08/25/2012 - 08:16 | 2736579 GetZeeGold
GetZeeGold's picture

 

Three silver dimes in 1960 would buy you a gallon of gas.....those same three dimes will still buy you a gallon of gas.

 

Physical is good!

 

Sat, 08/25/2012 - 09:16 | 2736622 FEDbuster
FEDbuster's picture

Actually they will buy you 1.5 gal. of gas in the US.  3 silver dimes = a little over $6. today.  1 silver quarter = $5.25

Fri, 08/24/2012 - 17:12 | 2735406 Gene Parmesan
Gene Parmesan's picture

That already exists at the gas stations around me, with a more modest spread of course.

Fri, 08/24/2012 - 17:18 | 2735423 Buckaroo Banzai
Buckaroo Banzai's picture

If you keep two $100 bills tucked away in the back of your wallet at all times, you won't run into trouble like this.

Even if you are overseas, a good ol' american hundge is most likely accepted in a pinch. 

Fri, 08/24/2012 - 17:21 | 2735437 Gene Parmesan
Gene Parmesan's picture

All my cash is tied up in pogs, beanie babies and Mountain House #10 cans. Bring on financial armageddon!

Fri, 08/24/2012 - 17:27 | 2735457 SwimmininNawlins
SwimmininNawlins's picture

You my friend will want for nothing.

Fri, 08/24/2012 - 20:02 | 2735895 Papasmurf
Papasmurf's picture

You can trade beanie babies for damn near anything you need.  They are better than gold.

 

Fri, 08/24/2012 - 21:47 | 2736046 swmnguy
swmnguy's picture

Unlike gold or iPads, I think you actually could eat a Beanie Baby, if you were put to it.

Fri, 08/24/2012 - 21:59 | 2736063 Bindar Dundat
Bindar Dundat's picture

Funny , all my assets are tied up in cash.

Sat, 08/25/2012 - 01:03 | 2736307 Don Keot
Don Keot's picture

I'm finding you can get a pretty good discount with cash and no receipt.

Sat, 08/25/2012 - 08:18 | 2736580 GetZeeGold
GetZeeGold's picture

 

Funny , all my assets are tied up in cash.

 

Pretty colored paper will be a collectors item someday in the future......in about a couple thousand years. If you live that long you'll be rich.

 

Sat, 08/25/2012 - 08:19 | 2736581 ATM
ATM's picture

Just ask the owner!

Fri, 08/24/2012 - 17:33 | 2735463 Dr Benway
Dr Benway's picture

LOL, no. If you tried paying with a US note in Europe you would get some very strange looks.

 

Do any of you actually travel? LOL you get all your info from old James Bond movies.

 

And I don't think Simon does either, because paying cash in Meditarranean countries is really nothing new.

Fri, 08/24/2012 - 17:38 | 2735481 Buckaroo Banzai
Buckaroo Banzai's picture

Don't be a fucking retard.

"Estimates by the Federal Reserve suggest that as much as 60 percent of the $760 billion in U.S. currency outstanding at the end of 2005, or roughly $450 billion, was held outside the United States."

As bad as the US dollar is, it is still the most widely held foreign currency in the world. I'm quite confident it would be cheerfully accepted in a pinch, especially if you deliberately overpaid.

http://www.federalreserve.gov/boarddocs/rptcongress/counterfeit/default....


Fri, 08/24/2012 - 17:47 | 2735508 Dr Benway
Dr Benway's picture

LOL you think those statistics prove that you can pay with US notes in shops in EU?

 

Dude I visit Europe several times a year. I have lived most my life in Europe.

 

LOL too funny...

Fri, 08/24/2012 - 18:34 | 2735654 FeralSerf
FeralSerf's picture

I visit Europe every year and I see the same thing.  They always tell me I need to go to a bank if I need euros to pay.  They don't want American money!   This is especially true since Bush/Cheney pissed off everyone 10 years ago.  Before that, especially before the euro, there was a chance getting someone to take American money.  No more.

Fri, 08/24/2012 - 19:42 | 2735849 noses
noses's picture

Don't worry - most don't want US citizens either. And that's not caused by the citizens in question, they're just held responsible for their government.

Sat, 08/25/2012 - 20:10 | 2737793 flaunt
flaunt's picture

Who the fuck would want to immigrate to Europe anyway?  One shit bucket to another shit bucket both destined for the dustbin of history.

Fri, 08/24/2012 - 19:43 | 2735854 robertocarlos
robertocarlos's picture

Tom Cruise was in the paper yesterday because he couldn't pay his $350 restaurant bill in England. He only had an American Express card and US dollars. Some woman paid the bill with 50 Euro notes and left a $147 tip. The restaurant owner said if she didn't paythe bill the meal would have been comped. I laughed.

Sat, 08/25/2012 - 03:34 | 2736417 zipfish
zipfish's picture

Why was the bill in USD anyway if the restaurant was in England?

Fri, 08/24/2012 - 23:33 | 2736212 presk_eel_pundit
presk_eel_pundit's picture

Just wondering. Do they want only cash because they don't want the credit card paper trail for tax purposes?

Sat, 08/25/2012 - 10:03 | 2736696 Dr Benway
Dr Benway's picture

Yes.

Fri, 08/24/2012 - 17:57 | 2735543 NidStyles
NidStyles's picture

That's odd I have always had the opposite experience in Europe and Asia. USD's still are accepted everywhere except in Mexico and Australia. 

 

I travel more than most as well. 

Fri, 08/24/2012 - 18:00 | 2735554 Dr Benway
Dr Benway's picture

I now know with 100% certainty you are a liar.

 

Paying with US money in EU shops and gas stations? Bullshit.

Fri, 08/24/2012 - 23:26 | 2736183 HoofHearted
HoofHearted's picture

I'm in Paris all the time. They shit on American dollars. You can go down to the exchange place and get ripped off on the rate if you would like, then you can come back and pay in euros. One place you can pay in USD is Roissy Charles de Gaulle airport, but they also crucify you on the exchange rate.

Mexico, on the other hand, I've seen many people look at my wallet and ask for USD instead of the pesos I was about to pay in. I get a nice exchange rate there too. I barely even exchange currencies when going to Mexico...just hold the few hundred pesos I had left over from the last trip and generally don't spend many of those. 

Fri, 08/24/2012 - 19:44 | 2735860 noses
noses's picture

If the only place you're ever spending them are McDonalds and Burger King... But even they demand quite a cute surcharge (just checked - about 20% at the local Burger King).  Serves you right.

Fri, 08/24/2012 - 20:52 | 2735974 Overfed
Overfed's picture

Last time I was in Mexico they were more than happy to take USDs. Wasn't that long ago.

Sat, 08/25/2012 - 00:42 | 2736290 tenpanhandle
tenpanhandle's picture

last time I was in mexico I was in california.

Fri, 08/24/2012 - 19:27 | 2735815 franzpick
franzpick's picture

We spent 3 weeks with a rental car in Italy in 2007, used credit cards for gas, food, hotels and shopping, and no one ever blinked or offered a discount for cash. I think Black's experience shows how things are tightening up there, and probably elsewhere, and in the ongoing worldwide credit and profit collapse, a broadening tax-free black market is, IMO, an expected next step.

Sat, 08/25/2012 - 19:05 | 2737729 puckles
puckles's picture

I suspect that Black's experience, if he reported it accurtaely, indicates a typical Mediterranean desire to avoid the Fisc.  Period.

 

Sat, 08/25/2012 - 12:17 | 2737049 Ayn NY
Ayn NY's picture

I've paid for several cabs in London with dollars. I had pounds on me as well, they were the ones who asked if I had dollars. That was last summer when the dollar was in bad shape. There was a shop in Tours that wanted my extra dollars as well.

Fri, 08/24/2012 - 18:09 | 2735577 DaveyJones
DaveyJones's picture

"a good ol' american hundge is most likely accepted in a pinch"

 ironic given it's the "hundge" that's in the biggest pinch of all 

Fri, 08/24/2012 - 18:21 | 2735617 candyman
candyman's picture

Thanks for reminding me, I've been doing that for decades, except I keep a few in my trunk under the spare. Wonder if they are still there, gotta look.

Fri, 08/24/2012 - 21:31 | 2736026 masterinchancery
masterinchancery's picture

You really want 20s, lots of them, because some places will not accept higher denominations.

Fri, 08/24/2012 - 23:46 | 2736233 dolce vita
dolce vita's picture

...it's called a"HUNSKI"...

fixed  it for ya

Sat, 08/25/2012 - 08:50 | 2736600 defencev
defencev's picture

I guess You have not been out of country recently. Nobody wants 100 US bills anymore. Too many fakes. This stupid Simon Black makes a story out of his every little fart. I have no trouble using credit cards while travel overseas.

Fri, 08/24/2012 - 17:19 | 2735430 Precious
Precious's picture

I pay for my gas with goat cheese and soap.

Fri, 08/24/2012 - 17:34 | 2735471 Buckaroo Banzai
Buckaroo Banzai's picture

I pay for my goat cheese with gas.

*RIMSHOT*

Fri, 08/24/2012 - 17:39 | 2735489 Gene Parmesan
Gene Parmesan's picture

I gas my goats, take the cheese for free and make soap out of them before I'm done.

Fri, 08/24/2012 - 18:16 | 2735598 jimmytorpedo
jimmytorpedo's picture

i always travel with one hundred geese in the back of the car

fat liver anyone?

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