The War On Cash Is Now A Global Phenomenon

July 23, 2015

More and more institutions are trying to make it harder for you to move your money into cash.

Globally, over $5 trillion in debt currently have negative yields in nominal terms, meaning the bond literally has a negative yield when it trades. In the simplest of terms this means that investors are PAYING to own these bonds.

Bonds are not unique in this regard. Switzerland, Denmark and other countries are now charging deposits at their banks. In France and Italy, you are not allowed to make cash transactions above €1,000.

This sounds laughable to most people, but it is a reality in Europe…and in the US, in some regions. Louisiana has made it illegal to purchase second hand goods using cash.

This is just the beginning. The War on Cash will be spreading in the coming weeks.

The reasoning is simple. Most large financial entities are insolvent. As a result, if a significant amount of digital money is converted into actual physical cash, the firm would very quickly implode.

This is precisely what happened in 2008…

When the 2008 Crisis hit, one of the biggest problems for the Central Banks was to stop investors from fleeing digital wealth for the comfort of physical cash. Indeed, the actual “thing” that almost caused the financial system to collapse was when depositors attempted to pull $500 billion out of money market funds.

A money market fund takes investors’ cash and plunks it into short-term highly liquid debt and credit securities. These funds are meant to offer investors a return on their cash, while being extremely liquid (meaning investors can pull their money at any time).

This works great in theory… but when $500 billion in money was being pulled (roughly 24% of the entire market) in the span of four weeks, the truth of the financial system was quickly laid bare: that digital money is not in fact safe.

To use a metaphor, when the money market fund and commercial paper markets collapsed, the oil that kept the financial system working dried up. Almost immediately, the gears of the system began to grind to a halt.

When all of this happened, the global Central Banks realized that their worst nightmare could in fact become a reality: that if a significant percentage of investors/ depositors ever tried to convert their “wealth” into cash (particularly physical cash) the whole system would implode.

None of these issues have been resolved. The big banks remain as leveraged as ever and at risk of implosion should a significant percentage of capital get pulled into physical cash.

European banks as a whole are leveraged at 26 to 1. In simple terms, this means they have just €1 in capital for every €26 in assets (bought via borrowed money).

This is why whenever things get messy in Europe, the ECB and EU begin implementing capital controls.

Consider what recently happened in Greece. Depositors began to flee the banks in droves, so they declared a bank holiday. This holiday included safe deposit boxes… so all the bullion or physical cash Greeks had stashed there remained locked up… just like the “digital” money in their savings accounts.

Again, it was impossible to get cash out of the banks… even cash that technically wasn’t “in the system” anymore but sitting in safe deposit banks.

The US financial system isn’t any better. Indeed, the vast majority of it is in digital money. Actual currency is just a little over $1.36 trillion. Bank accounts are $10 trillion. Stocks are $20 trillion and Bonds are $38 trillion.

And at the top of the heap are the derivatives markets, which are over $220 TRILLION.

If you think the banks aren’t terrified of what this market could do to them, consider that JP Morgan managed to get Congress to put the US taxpayer on the hook for it derivatives trades.

Mind you, this is the same bank that is now refusing to let clients store cash in safe deposit boxes.

This is just the tip of the iceberg. As anyone can tell you, it’s all but impossible to move large amounts of money into cash in the US. Even the large banks will routinely ask you for 24-hours notice, if you need $10,000 or more in cash. These are banks with TRLLLIONS of dollars’ worth of assets on their books.

This is just the beginning.


Phoenix Capital Research

Graham Summers is Chief Market Strategist for Phoenix Capital Research, an independent investment research firm based in the Washington DC-metro area with clients in 56 countries around the world.

Graham’s clients include over 20,000 retail investors as well as strategists at some of the largest financial institutions in the world (Morgan Stanley, Merrill Lynch, Royal Bank of Scotland, UBS, and Raymond James to name a few). His views on business and investing has been featured in RollingStone magazine, The New York Post, CNN Money, Crain’s New York Business, the National Review, Thomson Reuters, the Glenn Beck Show and more.

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