The next time dollars will vanish... - The Daily Reckoning

The next time dollars will vanish...

Mar 12, 2015

- By Bill Bonner

Bill Bonner
Gualfin, End of the Road, Argentina

Dear Diary,

The stock market paused to draw breath yesterday, with the Dow down only 27 points. Not a bad day. Not a good day either, for there was no bounce.

September 15, 2008 was a bad day on Wall Street. Lehman Bros. sought Chapter 11 bankruptcy protection. The Dow fell more than 500 points. Putnam Investments shut a $12.3 billion money market fund. Mizuho Trust and Banking cut its profit forecast by half. And NYSE halted trading in Constellation Energy after its stock dropped 57%.

But this was just the beginning, not the end.

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The following Thursday...the Federal Reserve noticed an odd and alarming trend. Cash was disappearing. Outflows from money market accounts topped $550 billion in less than two hours. If that had continued...

Rep. Paul Kanjorski (11th congressional district of Pennsylvania) recalled:

    The Treasury opened up its window to help, and pumped in $105-billion into the system, and quickly realized it could not stem the tide. We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. ... If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed. We talked at that time about what would have happened. It would have been the end of our economic and our political system as we know it.

    People who say we would have gone back to the 16th century were being optimistic.

Neel Kashari, Interim Assistant Secretary to the Treasury, elaborated. He was talking about what didn't happen in '08-'09:

"Literally your ATM wouldn't work. You type in your code and no money comes out. You get your paycheck, you can't cash it."

    "The money was so tight that ATMs could have stopped working. It could have really gotten out of control..." added Lawrence G. McDonald, the co-author of the New York Times best-seller "A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman."
Few people understood what was happening: for the first time in history, a credit-based financial system was melting down. And those who understood it least were those in control of it.

Ben Bernanke:

    (June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
While Mr. Bernanke had no idea what was going on, some people did. One of them knew what to do, too:
    "On Friday night, I called my wife and I said, 'Brooke, I am not coming home this weekend. I will call you on Monday. Tonight, I want you to go to the ATM machine, and I want you to draw out everything it will let you take. And I want you to go tomorrow, and I want you to go Sunday."
Mr. Richard Burr, US Senator from North Carolina, was convinced, he said, " that if you put a plastic card in an ATM machine the last thing you were going to get was cash."

Every financial system must encounter stress from time to time. The shock of '08-'09 was severe. But it never got to the level that Senator Burr feared.

Next time, we predict, it will. And then some. Because the tensions, imbalances, distortions and malinvestments that caused the correction of '08-'09 are much worse today than they were then. And the same clueless people are still in charge.

Stocks are more overpriced. There are bubbles in auto loans, student loans, biotechs and corporate bonds. And, there is more $8 trillion more in public and private debt in the US alone.

What's more, the Fed has already played the ace up its sleeve. It lowered rates to zero 6 years ago. And there they have stayed, doing nothing but further enriching the rich and further distorting an already grotesque and unnatural economy.

Next time the crisis comes, millions of people are likely to take the advice Senator Burr gave to his wife. They will rush to the ATM machines. And dollars - old fashioned, paper greenbacks - will vanish.

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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