We live in a world of government planning and fiat-currencies where the Central Bank has control and access over all the money within regulated financial institutions including amounts deposited in your checking and savings accounts. The deposited currency becomes digitally placed in a centralized hardware and software system. The government can choose to unilaterally freeze any account(s) or take the proceeds entirely. They can easily instruct any financial institution to transfer ownership of your digital currency (checking, savings, savings bonds) out of your name and into receivership holding accounts or directly into the government’s accounts.
If someone is suspected of doing something wrong and loses control of their money through confiscation, they are assumed guilty until proven innocent which requires many legal actions requiring large sums of lawyer’s fees to retrieve the funds. Suspected wrongdoing may be politically motivated or a political hit job/payback rather than actual or accused malice.
Cash creates a real problem for the government which may desire to swoop in and freeze or take everything that they can get. Cash is a safe-haven asset because it is portable and not directly accessible for government confiscation. Our leaders intend to fix this flaw to ensure their ability to gain overreaching access in every aspect of your life.
Why the concern?
- The total amount of physical cash currency (bills & coins) in the US financial system is about $1.5 trillion. 80% of that value comes from $100 notes.
- The total amount of deposits in regulated institutions of computer-based digital money (currency) sitting in short-term and long-term accounts is about 10 trillion.
- The US stock market in publicly traded securities is over $30 trillion.
- The US bond market, money lent to corporations, municipal Governments, State Governments, and the Federal Government is about $41 trillion.
- Credit Market Instruments such as mortgages, commercial paper, junk bonds and collateralized debt obligations, including a few other digitally-based instruments is about 71 trillion.
- The unregulated derivatives market in the US is estimated to be 600 trillion.
- Cash only represents about 1% of the financial assets available.
All these instruments can be traced and confiscated, except for cash. Cash-Is- King as long as the physical asset remains elusive and not displayed for ready pilferage by the government. Central planners know this and are attempting to rectify their problem by eliminating all forms of coin and paper cash instruments. This is not just a US Government objective, but almost universal in all fiat currency-based countries around the world
If even a small percentage of the public who possess assets in banking institutions ever panicked and demanded to convert their deposits to cash the entire financial system would implode. Remember that our US financial enterprise is entirely based upon debt instruments. When a bank takes in a deposit, it correspondingly becomes both an asset and offset liability on their accounting records.
Dodd-Frank passed under the Obama Administration in 2010, provided a safety-valve for regulated banks. It is called The Dodd-Frank Wall Street Reform and Consumer Protection Act. By this regulation, big banks can freeze checking and savings accounts from individual depositors and refuse to allow access in what is referred to as a “bail-in” provision. They can sweep the accounts and take the money. It should be referred to as the “big bank bailout and protection racket,” or “screw the public but protect the banks at all cost.” By creating the Consumer Protection Finance Bureau (CFPB) this sounded like a slick way to protect public consumers against unscrupulous business activities, but, the primary outcome was to protect big banks.
Government overreach has been in action for more than 100 years since the installation of the Federal Reserve System. Many citizens from other countries are also discovering this as government pilferage has become the norm. All one needs to do is review the “bail-in” confiscation that occurred on the Greek island of Cyprus to get a good idea of how this works. The Bank of Cyprus engaged in a controversial seizure of depositors’ savings of individual depositors in excess of insured $100,000 in Euros. Since Cyprus was used as a tax haven internationally, the scofflaws lost big time.
As long the American financial framework remains addicted to operating by the creation of debt using a Ponzi methodology and converting the debt instruments into assets nothing will change.
What assets can you rely on to possess value and exchange or trade into something else of value in the event of an economic turbulent circumstance? The next question and the discussion remaining is how to circumvent government attempted confiscation of your assets owned privately and earned privately over a long period of time. Currently, cash is still available as a safety-net asset.
Roll forward when the elimination of cash is implemented. Assume that all your accounts are frozen because you got caught in the crossfire of a government regulator or a judgment creditor.
- Living expenses including utilities, food, medical and transportation become unavailable.
- Rent or house payment cannot be paid.
- Federal, State, and Local Taxes cannot be paid.
- Professional licensing cannot be paid.
- Credit cards cannot be paid and may be canceled.
- Safety deposit box access is frozen.
- Freeze it, and figure out later, no matter that the government has a bunch of bureaucrats paid by your tax dollars that will fight you tooth-and-nail to take away what is rightfully yours. The government is fully aware that if they can successfully confiscate your money, they can spend it on their projects.
What are the conditions and timing for this?
- When the USA loses the World Reserve Currency status.
- When we have the next systemic meltdown of our financial system. When the “bail-in” occurs, the public will be forced to use available cash to pay bills. Those cash instruments may be accumulated through banking transactions and returned to the US Treasury Department which will, in turn, destroy them. No replacement cash will become available, therefore digital money transfers will become the norm.
What reason does the government give for getting rid of cash? Of course, the propaganda machine bellows out the obvious reason; to reduce fraudulent transactions!
Here is the real reason: There are approximately 1.5 trillion dollars of cash instruments floating around in the US economic system. If the owners of the physical cash instruments were required to deposit all of it and rely on digital access, then the banks would be able to leverage the 1.5 trillion about 10 times or more and make 10 trillion of new loans to the public and keep all the profit for themselves. The oligarchs have spoken.
How Does Fractional Reserve Banking work?
Let’s say that you sell some securities or real estate and deposit your net proceeds of $1,000,000 into a regulated bank. The bank will keep a small fraction, about 10% as a required reserve and loan out the remaining $900,000. to various parties. Banks must closely monitor liquid reserves and manage prudently.
Here is how the lending sequence works on a micro-level. Your proceeds are deposited in your bank. Subsequent persons will most likely deposit their proceeds in another bank, but the fractional reserve formula still applies.
- You deposit $1,000,000. Your bank makes loans to others for $900,000.
- Another person deposits $900,000 in their own bank. Their bank makes loans to other parties for $810,000.
- Another person deposits $810,000 in their own bank. Their bank makes loans to other parties for $729,000.
- Another person deposits $729,000 in their own bank. Their bank makes loans to other parties for $656,100.
- And the process continues.
Ultimately, your initial $1,000,000 will grow into $10,000,000 of new loans and deposits using a 10 percent reserve example. This method can theoretically create new money and loans from your initial deposit.
The Money Multiplier equation is as follows:
Initial Deposit X (1/.10) =$10,000,000
Banks are some of the most leveraged operating companies in the US. They are protected very much like a cartel through a combination of fractional-reserve banking and Federal Deposit Insurance Corporation (FDIC). They can operate with extremely high leverage using asymmetrical techniques and investment strategies and back them up for economic fluctuations with protection from derivatives positions. If derivative losses occur those losses have a priority claim as do government debts and will be paid through the “bail-in” or sweeping process.
If the bank pays the depositors 1% on their 1.5 trillion of new money based upon the elimination of coin and paper currency, they will pay out 1.5 billion dollars in annualized interest. They will re-leverage these deposits and make $10 trillion of new loans at, let’s say, 6.5% and earn $600 billion in interest payments, thereby creating an operating profit of $598.5 billion for the bank. This is a theoretical gross profit projection for a single year. This profit is for the banks and is not passed on the depositors.
Dodd-Frank protects regulated banks from derivative losses. The depositors could find themselves losing most of their money in what is referred to as a “bail-in action provision.” If the bank gets in trouble, it can call a bank holiday and reopen having confiscated money from public depositors under allowable provisions.
Depositing funds in the bank today carries great risk. Consider:
- Confiscation of your proceeds from a bank taking a great financial risk with your money, then by regulation expecting you to sustain significant losses. They will rationalize that you will receive equity in the form of stock in the otherwise bankrupt entity. Dodd-Frank created this.
- Federal Deposit Insurance proceeds will not bail you out in excess of the insured amount.
- Consider the above discussion under the circumstance where banks pursue negative interest rates. They could charge the customer to deposit money in the institution, making holding money in the bank more costly than holding cash (coin and paper) currency individually.
- Observe the pressure on cash in this example.
I look forward to your comments including those who may have a different viewpoint.
Dan Harkey
Business and Private Money Finance Consultant
Cell 949 533 8315
dan@danharkey.com
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