How You Can Win the Government's War on Cash

Most point to the bankruptcy of Lehman Brothers as the main trigger of the 2008 financial crisis.

Perhaps equally as important, but certainly not as well-covered, is what happened the following day...

That's when Reserve Primary Fund, one of the original and largest money market funds, saw its $785 million of Lehman holdings revalued to zero. Naturally, redemptions soared.

The fund's net asset value fell from $1 to $0.97 - a rare case of "breaking the buck," and redemptions were frozen for seven days.

As people ran for the exits from the 2008 meltdown, eventually almost 25% of money market assets sought redemption.

Liquidity instantly went from a waterfall to a trickle, and the financial system was pushed to the precipice.

With the crunch on, cash suddenly became extremely valuable. That was duly noted by central banks the world over. And those frozen redemptions give us some clues as to what lengths the authorities will go in order to achieve their aims; they're more determined than ever to do away with physical cash.

We now have some compelling evidence that central bankers are pushing to eradicate physical cash completely - and it's not for your benefit.

Here's what you need to know, and how to fight back... now.

We Could Be Forced to Pay for Banks' Misdeeds

Threats are coming from every angle you can imagine.

Numerous countries have already enacted, or are actively pursuing, bail-in laws. Essentially, these are intended to avoid calling on taxpayers, at least directly, to bail out a "too-big-to-fail" bank, a topic I've addressed before.

Instead, clients at that institution would see their deposits used to make up any shortfall required to make the bank whole. Whether this would be accomplished using amounts only above the $250,000 FDIC limit or not is a matter of debate.

This already happened in Cyprus, where clients saw portions of their deposits converted into "bank equity" with absolutely no say in the matter.

It's only a question of time before it happens again.

Greece Is a Powerful Example

Greek banks have seen deposits drop 27%, or €45 billion ($50.9 billion) since the start of the year as people feared a Grexit and return to a much devalued new currency, risking a wipeout of their savings.

That has yet to happen, but a €60 per day cash withdrawal limit is still in place since late June, despite Greece's creditors confirming there would be no "bail-in."

But Greeks still don't have unrestricted access to their own cash.

That lack of access has cost the Greek economy more than €3 billion ($3.4 billion) in July alone, as people are forced to dramatically cut spending and are unable to settle outstanding debts. People are simply unable to properly run their businesses.

That has forced many Greeks to look for alternatives. According to Reuters, increasing numbers are now resorting to barter, "swapping goods and services in cashless transactions."

CNBC recently reported that BTCGreece, calling itself the country's first Bitcoin exchange, has plans to set up 1,000 ATMs across the country, as citizens and businesses hunt for ways to skirt capital controls and get on with their lives.

And given how things are progressing, the Bitcoin alternative may catch on.

But if you still think you're in charge of your own "money in the bank," consider that the government can declare an "emergency" at any time and call for a bank holiday, leaving you high and dry.

Even the Financial Times would have you drink the proverbial Kool-Aid.

There's a Reason the Banks Are Pushing This

In a recent article, the Financial Times unabashedly suggested that,

"...even as individuals have taken recent crises as reasons to stock up on banknotes, authorities would do well to consider the arguments for phasing out their use as another 'barbarous relic,' the moniker Keynes gave to gold.

"Already, by far the largest amount of money exists and is transacted in electronic form - as bank deposits and central bank reserves. But even a little physical currency can cause a lot of distortion to the economic system.

"The existence of cash - a bearer instrument with a zero interest rate - limits central banks' ability to stimulate a depressed economy. The worry is that people will change their deposits for cash if a central bank moves rates into negative territory. The Swiss, Danish and Swedish central banks have pushed rates lower than many thought possible; but most policymakers still believe in an 'effective' lower band not far below zero."

Essentially, FT has argued that, by going to a cashless society (with all your savings held in financial institutions, of course) central planners can initiate negative interest rates. What that means is, rather than pay you a small rate of interest, they could instead charge interest on your balance.

And within a cashless society, there would be almost nowhere to hide. Why, just think of the possibilities for central planners...

  • A "one time" tax of 10% on deposit balances above $250,000 to save an imploding economy
  • A small tax debited monthly on your "cash balance;" i.e.: negative interest rates
  • Converting some (or all) or your retirement account into government bonds for "safety"

Of course just the talk of such action could be enough to have people and businesses spend their virtual cash instead of having it taxed away or confiscated.

So voilà, you have a sudden spending spree that massively stimulates demand... and then you have a crash when that finally fizzles.

Bottom line is you need to look for an alternative. Right now.

When They Come for Your Money, Here's Your Best Bet

Besides the more obvious options of holding some physical cash and physical assets like real estate, consider money that's stood the test of time: gold and silver coins.

There's no money that's more real.

Yes, their value can and will fluctuate. But, unlike paper dollars, they don't rely on the faith of the holder that they'll continue to have worth.

What if people decide they don't want your dollars since they have no intrinsic value?

Gold and silver are useful and so have retained intrinsic value for thousands of years. I see no indication that's about to change.

But avoid the collectible numismatics or "rare coins."

If you're U.S.-based, go for some of the most widely owned American gold and silver coins whose cost is closely tied to their gold or silver content.

Here are the best recognized options:

Gross weight Face Value Fineness
1 oz. Gold American Eagle 33.930 g $50 0.9167 (22 karat)
1 oz. Gold American Buffalo 31.103 g $50 0.9999 (24 karat)
1 oz. Silver GSM Buffalo 31.103 g None 0.999
1 oz. Silver American Eagle 31.103 g $1 0.999

Remember, if the central banks get their way, before long, physical cash could become the true "barbarous relic."

Owning even a few of these gold and silver coins will help protect you as the war on cash intensifies in the months and years ahead.

Follow us on Twitter @moneymorning.

Exclusive Interview: Who Broke the Global Bond Market? The two largest markets on the planet are in danger of seizing up. Four out of five Americans could be at risk of losing everything. How was this allowed to happen? And what can you do today to make sure you come out ahead when the music stops? Money Morning Executive Editor Bill Patalon sat down with Wall Street insider Shah Gilani to hammer out a plan for financial survival in the coming months. To tune into their talk - and receive Shah's twice-weekly Insights & Indictments - click here. Shah outlines five steps you should take today to ensure your financial future.