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Eric Fry, presenting the special "Fireworks Edition" of The Non-Dollar Report...
Alarmist headlines are making a comeback!
As the Greek government defaults, the Chinese stock market tumbles and U.S. stocks slump, financial journalists are dusting off their 2008-vintage lexicons to remind themselves how to use words like "crisis" and "panic."
It's been a while since they needed them.
Meanwhile, the VIX "Fear Gauge" has returned from the dead to hit a five-month high, which indicates that many investors are well outside their comfort zones. (To learn more about the VIX, check out this post: "Greed Isn't Always Good.")
 Perhaps this week's financial pyrotechnics will end as abruptly and delightfully as tonight's firework displays. But today's guest columnist, Bill Bonner, is dubious. Bill advises caution - the kind of caution that raises a bit of cash and accumulates a few ounces of gold.
"Lots of things can go wrong in a crisis," Bill says flatly. "Cash helps you get through it."
Importantly, when Bill refers to "cash," he is not merely referring to the green paper stuff you store in your wallet; he is also referring to the yellow shiny stuff you store in your safe... or under your floorboards.
Bill likes gold, plain and simple.
"But what good is gold," one of Bill's nervous followers inquired recently, "if the government can outlaw it or confiscate it when times get tough?"
Said Bill:
First, precious metals aren't illegal, so far. Second, making something illegal doesn't necessarily make it unpopular.
President Roosevelt banned gold in 1933. The feds wanted complete control of money. The dollar was backed by gold. So getting control of the dollar meant getting control of gold.
Once the feds had the gold, they could devalue the dollar by resetting the dollar-gold price from $20 to $35. In an instant, people lost more than 40% of their wealth (as measured by gold).
That ban lasted for 42 years. It ended in 1975, largely because of our old friend Jim Blanchard. Jim set up the National Committee to Legalize Gold and worked hard to get the ban lifted.
Today, the feds don't need to outlaw gold. It is regarded as "just another asset," like Van Gogh paintings or '66 Corvettes. Few people own it. Few people care - not even the feds. They are unlikely to pay much attention to it - at least, for now...
[But] smart people will turn to gold... just in case. It is a form of cash - traditionally, the best form. You can control it. And with it, you can trade for fuel, food and other forms of wealth...
Gold is useful. Like Bitcoin and dollars-in-hand (as opposed to dollars the bank owes you), gold is not under the thumb of the government... or the banks. You don't have to stand in line to get it. Or to spend it.
Yes, as more and more people turn to gold as a way to avoid standing in lines, the feds could ban it again.
But when we close our eyes and try to peer into a world where gold is illegal, what we see is a world where we want it more than ever.
Bottom line: Bill prefers the dollars-in-hand to the "dollars the bank owes you." He advises holding a significant supply of tangible dollars and/or gold in places where you can actually see and hold them.
Don't store your "cash" in an ATM, he warns, because as the Greeks learned this week, ATMs won't give you your cash when you need it most.
Interestingly, Bill issued this particular warning four months ago, in a posting entitled "The Day the ATMs Run Out..."
When Bill issued this warning, the Greeks had not yet started lining up in front of ATM machines... and the idea that ATMs might run dry seemed a bit crazy. But now that this "crazy" event has come to pass, we've decided to republish the balance of Bill's crazy thoughts and ideas from that posting of February 23, 2015.
Please enjoy this encore performance of "The Day the ATMS Run Out..."
The Day the ATMs Run Out...
Please remember today's warning when you go to the ATM to get cash... and there is none!
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: Cash could evaporate suddenly and disastrously - just before we drown in it.
Credit Money
Here's how... and why:
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 U.S. (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 Fed Chairman Paul Volcker was already on the job, raising interest rates to bring inflation under control.
And the modern money system also survived the "credit crunch" of 2008-2009. 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 countries like Switzerland, Germany, Belgium, 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, zero interest-rate policy (ZIRP) and quantitative easing (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.
But then, just like we saw after the 2008 crisis, we can expect a quick response from the feds.
The Federal Reserve 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 will 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 there was 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.
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.
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 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?" is 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.
Regards,
Bill Bonner
For The Non-Dollar Report
[A version of today's content originally appeared in Bill Bonner's Diary of a Rogue Economist.]
Eric's Note: The freezing of bank accounts in Greece may only be a taste of what's to come. Our founder, Bill Bonner, has issued a new warning that right now in America, the highest levels of government and the banking system are locked in a desperate last stand against a disturbing monetary shock. One that will make what's happening in Greece seem mild by comparison.
This looming crisis could disrupt your life in ways you never thought possible. You could suddenly be locked out of your bank account... unable to withdraw cash or deposit a check... your stocks could swing wildly out of control... your Social Security payments could pile up unopened on your kitchen table... because no one will cash them.
To find out what has Bill so concerned, click here:
The Great American Credit Collapse
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