Masters Series: The Day the ATMs Run Out

Editor's note: A credit crisis may be on the way... and it will wipe out the stock market, the value of your home, and your ability to protect your wealth.

In today's edition of our weekend Masters Series – originally published on the Bonner and Partners website on February 23 – Agora founder Bill Bonner explains how this will unfold... and offers some advice on how to prepare for it...

The Day the ATMs Run Out
By Bill Bonner, editor, The Bill Bonner Letter

Please remember this 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.

Bottom of Form

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 January.

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 zeroes 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 existed before. 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 Paul Volcker was already on the job, raising interest rates to bring inflation under control.

And it 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 Switzerland, 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 policies (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 will drop sharply and fast. Creditors will look to their borrowers... traders will look at their counterparties... bankers will look at each other... and suddenly, no one will want to part with a penny, for fear he may never see it again. Credit will stop.

It's not just that no one will want to lend. No one will want to borrow, either – except for desperate people with no choice, usually those who have no hope of paying their debts.

Just like we saw after the 2008 crisis, we can expect a quick response from the feds.

The Fed 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 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 will drain cash machines. They will drain credit facilities. They will ask for "cash back" when they use their credit cards. They will 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.

As Bernanke put it, "a determined central bank can always create positive consumer price inflation." But it takes time!

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 will have $5,000 in your debit account. But all financial institutions will be 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 will still be valuable? Whose bank will be ready to fail? Who will be able to 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

Editor's note: Bill has seen how threats like this have played out in the past – and it won't end well. That's why he has prepared a presentation detailing what the next crisis will look like... and how to protect your savings.

Right now, for just $39, you can gain access to Bill's special reports, which detail how the credit crisis will affect you personally... what items in your home will become valuable during a crisis... how to go "off the grid" without ever leaving your neighborhood... and much, much more. Learn more about this incredible risk-free opportunity by clicking here.