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As we noted last week, one of the biggest problems for the Central Banks
is actual physical cash.
The financial system is predominantly comprised of digital money. Actual
physical Dollars bills and coins only amount to $1.36 trillion. This is only
a little over 10% of the $10 trillion sitting in bank accounts. And it’s a
tiny fraction of the $20 trillion in stocks, $38 trillion in bonds and $58
trillion in credit instruments floating around the system.
Suffice to say, if a significant percentage of people ever actually moved
their money into physical cash, it could very quickly become a systemic
problem.
Indeed, this is precisely what caused the 2008 meltdown, when nearly 24%
of the assets in Money Market funds were liquidated in the course of four
weeks. The ensuing liquidity crush nearly imploded the system.
Because of this, Central Banks and the regulators have declared a
War on Cash in an effort to stop people trying to get their money out of the
system.
One policy they are considering is to put a carry tax on physical cash
meaning that your Dollar bills would gradually depreciate once they were
taken out of the bank. Another idea is to do away with actual physical cash
completely.
Perhaps the most concerning is the fact that should a
“systemically important” financial entity go bust, any deposits above
$250,000 located therein could be converted to equity… at which point if the
company’s shares, your wealth evaporates.
Indeed, the FDIC published a paper proposing precisely this back in December
2012. Below are some excerpts worth your attention:
This paper focuses on the application of “top-down” resolution
strategies that involve a single resolution authority applying its powers to
the top of a financial group, that is, at the parent company level. The paper
discusses how such a top-down strategy could be implemented
for a U.S. or a U.K. financial group in a cross-border context…
These strategies have been designed to enable large and complex
cross- border firms to be resolved without threatening financial stability
and without putting public funds at risk…
An efficient path for returning the sound operations of the G-SIFI
to the private sector would be provided by exchanging or converting a
sufficient amount of the unsecured debt from the original creditors of the
failed company into equity. In the U.S., the new equity would become
capital in one or more newly formed operating entities. …
…Insured depositors themselves would remain unaffected. Uninsured
deposits would be treated in line with other similarly ranked liabilities in
the resolution process, with the expectation that they might be written down.
http://www.fdic.gov/about/srac/2012/gsifi.pdf
In other words… any liability at the bank is in danger of being
written-down should the bank fail. And guess what? Deposits
are considered liabilities according to US Banking Law. In this legal
framework, depositors are creditors.
So… if a large bank fails in the US, your deposits at this bank would
either be “written-down” (read: disappear) or converted into equity or
stock shares in the company. And once they are converted to
equity you are a shareholder not a
depositor… so you are no longer insured by the FDIC.
So if the bank then fails (meaning its shares fall)… so does your deposit.
Let’s run through this.
Let’s say ABC bank fails in the US. ABC bank is too big for the FDIC to
make hold. So…
1) The FDIC takes over the bank.
2) The bank’s managers are forced out.
3) The bank’s debts and liabilities are converted into equity
or the bank’s stock. And yes, your deposits are considered a “liability” for
the bank.
4) Whatever happens to the bank’s stock, affects your wealth.
If the bank’s stock falls at this point because everyone has figured out the
bank is in major trouble… your wealth falls too.
This is precisely what has happened in Spain during the 2012
banking crisis over there. And it is perfectly legal in the US
courtesy of a clause in the Dodd-Frank bill.
This is just the start of a much larger strategy of declaring War on Cash.
The goal is to stop people from being able to move their money into
physical cash and to keep their wealth in the financial system at
all costs.
Indeed, we've uncovered a secret document outlining how the Fed plans to
incinerate savings to force investors away from cash and into riskier assets.
We detail this paper and outline three investment strategies you
can implement
right now to protect your capital from the Fed's sinister plan in our
Special Report
Survive the Fed's War on Cash.
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