There is a war on physical money. Stores and retail establishments all over the West are beginning to refuse cash as payment. This is part of a wider trend forcing customers to rely on debit and credit cards to purchase goods and services. People are losing control of their wealth at a time when many financial institutes are at the brink of insolvency. On top of this, global debt has reached highs unseen since the great recession in 2007, and a second recession could be around the corner. During times like these, people take a great risk by leaving their wealth in a system that looks poised to fail.
The Problem with Modern Banking
Fractional reserve banking, the system used in the U.S, U.K and other developed nations, is great in good times, but potentially disastrous when things go badly. Under this system, banks are only required to keep 10% of the money they receive from customers. The other 90% is loaned as debt. But remember, 100% of the customer's money and 100% of the loaned money still exists. And this means money is 'created' out of thin air.
There is more 'money' floating around than could ever be redeemed by the banks, especially if many borrowers default on their debts at the same time. While bank illiquidity is usually seen as a thing of the past, it poses a very real threat if economic conditions get bad enough. This lesson has been learned the hard way by savers in Greece who, during that country's recent financial meltdown, saw their withdrawals limited to only 60 Euros per day - they lost access to their own money! It got even worse for Cypriots who had up to 47% of their savings above 100,000 Euros seized by the government. If you think such things can't happen in the west, think again. In the United Kingdom, a bank called Northern Rock became unable to meet its obligations, causing Britain's first bank run in 150 years during the Financial Crisis of 2007.
Now, the global economy has more debt, lower rates, and geopolitical crises around the globe. A recession in times like these could send western banks into insolvency, and they will take your money with them.
The Importance of Controlling Your Wealth
What happens if the global economy collapses, and your money is in the banks? That depends on how bad the crisis is, and what currency you are holding. For savers of soft currencies outside Europe, the United States, and other industrialized nations, kiss your wealth goodbye. But for savers in modern economies, the governments have a variety of techniques they will use in the event of a crisis. None of these techniques are good news for savers.
1. Modern governments generally insure deposits. And if multiple banks fail they will have to be bailed out with taxpayer money. But where will this money come from? Governments around the world are already burdened with debt, and simply do not have the cash to bail out the banks without printing money.
2. Governments will be forced to print money and cause hyperinflation, destroying to value of the money in circulation, and the money held in banks. Savers will be forced to indirectly pay for the bank bailouts with the value of their savings. On top of this, people may be restricted from removing money from the banks.
3. In some countries, withdrawal limits may be implemented to prevent people from moving money out of the banks. And people will be forced to watch their wealth evaporate from inflation. But this depends on the country. Some countries may want to encourage spending because it boosts economic growth. These countries will probably move to ban gold, bitcoin and other alternative stores of wealth.
Buy Gold Before It’s Too Late?
The United States banned gold in 1933 during the great depression with executive order 6102. This was done because people were hoarding the metal to protect their wealth from unstable banks. All U.S citizens were forced to trade in their gold for $20.67 per ounce. The metal is worth almost $1,300 today. While it is unlikely that governments will attempt to actually seize privatelyheld gold in modern times, it is likely that they will make the metal harder to purchase. And it may become prohibitively expensive during a hyperinflation scenario.
Government's may also impose negative interest rates. While negative interest rates are typically only used on banks in Europe, during a serious financial depression, the policy will probably be expanded to citizens as well. Savers will be forced to keep their money in banks while negative interest rates and inflation eat away its value. Inflation coupled with stagnant economic growth is a rare but catastrophic combination.
What Does All This Mean?
There is a war on physical money in many Western countries, and retail establishments are making it harder and harder to use cash to purchase goods and services. While using debit and credit cards may, on the surface, look like a convenience, it is potentially dangerous to hold large sums of money in the banks during such economically uncertain times. People should make sure they control their wealth because if the global economy goes south, the banks will be the first to collapse, and they will take your money with them. Precious metals remain the best alternative.