Cash is King in a deflation — but there are dangers

Risk 1: Capital controls

Restrictions on bank withdrawals (no ATM withdrawals, no bill payments, etc)

Restrictions on money market fund redemptions

Greater restrictions on retirement fund liquidations

Fixing an official exchange rate and criminalizing market rate transactions

Banning the conversion of domestic currency to foreign currency

Banning the movement of assets out of the country to foreign financial institutions

Barriers, restrictions, additional transaction costs imposed on foreigners seeking to deposit funds or make investments in safe havens

Forcing sovereign debt owners to accept longer maturities rather than principal repayment

Banning gold ownership

Reissuing the currency in a new form (an acute risk in Europe)

Restrictions on the size of cash transactions

Civil Asset Forfeiture is already happening

Risk 2: Being Taxed to Death on Real Estate, Stocks, Savings

What can you do?

There are no no-risk solutions, but different options will suit different people, depending on their circumstances. Some may choose to store assets in another jurisdiction or in another currency if those options are available, but losing control over assets abroad is a distinct possibility, as is difficulty in converting the currency chosen as a store of value back into something that will functions as cash at home.

Physical travel may become much more difficult as capital controls lead to border controls of other kinds. Holding assets close to home gives one the greatest degree of control, but with certain obvious risks attached. Typically, he who loses the least in a deflation is the winner, as there are no easy answers.

Legal niceties are very likely to go by the wayside as deleveraging proceeds and the global grab for scarce cash begins in earnest. Those who posses the power to grab assets left in harm’s way are very likely to do so, then possession will be nine tenths of the law.

Safe deposit boxes are not a secure option in the event of a bank run. If the bank’s doors are shut, the likelihood of being able to access a safe deposit box is vanishingly small. The odds of the contents remaining where they were left for long enough for the owners to be reunited with their property are also rather low. Even when there is no threat of an imminent bank run, financially-strapped central authorities may be minded to help themselves to the assets of others.

Moving money abroad to a safer haven is not the simple solution one might imagine either. Governments that could not stop the hemorrhage as it was happening are seeking to reverse the capital flight after the fact. Of course, such actions will only further inflame fear, while doing nothing to address the reason for capital flight. They will thus increase the impetus for capital to flee in any way that it can.

If you are able to get cash from the bank and hide it at home, that can be a problem too, as David  Böcking writes about in a June 18, 2012 article in Der Spiegel: Desperate Greeks Withdraw Money from Accounts  Many Greeks are emptying their bank accounts out of fear that the country may return to the drachma. But most of the money is not going abroad. Instead, individuals are storing cash in safe deposit boxes (there aren’t any more to be had at the banks, they’re all taken) or at home ( at least €50 billion)– leading to an increase in burglaries (700% in Crete, €50,000 in cash from a house of an old couple in Athens, etc… people are withdrawing hundreds of millions of euros from the banks every day. In May alone, outflows totaled €5 billion. According to official figures, €80 billion has been withdrawn since the start of the crisis…Greeks fear a currency reform such as banks closing to prevent further transfers into foreign accounts, or marking existing Euro bills with stamps that wouldn’t be valid in other countries and replaced with the drachma again.

Once fear is in the ascendancy, it is very difficult to combat. Governments and central banks simply do not have the control they think they do, and they do not understand the nature of battle they are engaged in. It is not a matter of restoring certain objective conditions. Central authorities are trying to fight the inexorable recognition that the magnitude of the debt that has resulted from our 30 year credit expansion dwarfs the wealth of the world, that the $70 trillion in G10 debt underpins some $700 trillion in derivatives.

That realization, and the natural reactions stemming from it, are the problem. As confidence evaporates, so does liquidity. Credit – the vast majority of the effective money supply – ceases to be equivalent to money. The resulting crash of the effective money supply is deflation by definition. This is what we have been predicting since the inception of theautomaticearth (TAE). This is how credit expansions always end – with the implosion of credit instruments that amount to no more than a pile of human promises that cannot be kept.

Why Safe deposit boxes aren’t safe
1) The State of California started taking money from safe deposit boxes that hadn’t been touched after just 1 year.  The requirement used to be 15 years of no contact with the bank, but California  lowered it to 7, then 5, tnen 3 and now just 1 year (Leamy).
2) England is opening safe deposit boxes looking for cash to see who might be a drug dealer (Edwards)
3) Nicole points out the government will just take the money it needs, i.e. In Greece and Italy, suddenly No ATM withdrawals allowed, no bill payments, nothing. You Just get locked out overnight.  In Greece, the government is pulling funds directly out of its citizens’ bank accounts from anyone suspected of being a tax cheat
4) The Greek government is trying to get money moved from greek banks to other countries back.
5) if your money is still in euros in Greece, if a return to drachmas, maybe you’ll have 50% of your money as it’s devalued in half

Weiss writes about what has happened in other countries when the financial system explodes: Brazil begged people to donate their gold and gold jewelry, confiscated everyone’s bank accounts by freezing them, and replaced their money with a far less valuable currency. In Russia, millions fell victim to crime and corruption, traffic tickets for no reason, smuggling, narcotics – criminals owned or controlled half of the countries private businesses. Banks closed their doors forever.  In all countries, unemployment can be up to 50%, with little government aid because there aren’t taxes to be collected, a downward spiral.

Weiss recommends that you 1) plan to live without SSN, Medicare, etc since we’re heading on a course where that won’t be there (i.e. unfunded liabilities), 2) Washington may no longer be able to bail out your bank or guarantee your deposits when skyrocketing loan defaults push it to the edge of the precipice 3) Ensure your family’s safety because police, fire, and emergency services will probably be hard to come by in many communities 4) If you live in a city, have a plan and a place to go if things become uncomfortable for you. 5) Make sure your bank is the safest you can find. 6) Build a wall of privacy around your finances. The central government will not be your friend, or state or local government either. 7) Others will try to seize your wealth, especially in a city or suburbs 8) Keep a low profile 9) Hide your assets.


Leamy, Elisabeth. 2012 Not-So-Safe-Deposit Boxes: States Seize Citizens’ Property to Balance Their Budgets. ABC News

“They figured the safety-deposit box was safer than keeping it under the mattress. In the case of a lot of citizens, they were wrong, weren’t they?”

California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money…

…Some states keep their unclaimed property in a special trust fund and only tap into the interest they earn on it. But California dumps the money into the general fund — and spends it.

2) Governments may also decide that the contents of safe deposit boxes may constitute evidence of criminal activity, and reserve the right to assess the property stored, making the owners prove legitimacy. In a liquidity crunch, it is quite likely they will regard there being no legitimate reason for holding cash, and private gold ownership may be declared illegal. Both cash and gold could be subject to confiscation.

Edwards, Richard. 2012. Safety deposit box raids yield £1bn of drugs, cash and guns. The Telegraph.

Scotland Yard said that Met’s Specialist Crime Directorate raided seven properties: three safe depositories, an office and three residential addresses…

…”Operation Rize is a money laundering investigation and is entirely unprecedented, one of the largest of its kind ever undertaken in the UK,” he said. “In the past safety deposit boxes have been searched on an individual basis often resulting in the recovery of guns, drugs and cash. We believe that this operation has the potential to impact upon many layers of serious crime.”

The investigation has been running for two years and included intensive work with lawyers to ensure they were able to seize all of the boxes.

Members of the public who have innocently and legally stored their valuables were”inevitably” going to get swept up in the disruption, it was predicted.

Black, Simon. 2012.  It starts: the government’s plan to steal your money. Sovereign Man

European officials yesterday flat out admitted that they were discussing rolling out a series of harsh capital controls across the continent, including bank withdrawal limits and closing down Europe’s borderless Schengen area.

Some of these measures have already been implemented sporadically; customers of Italian bank BNI, for example, were all frozen out of their accounts starting May 31st upon the recommendation and approval of Italy’s bank regulator. No ATM withdrawals, no bill payments, nothing. Just locked out overnight.

In Greece, the government has taken to simply pulling funds directly out of its citizens’ bank accounts; anyone suspected of being a tax cheat (with a very loose interpretation in the sole discretion of the government) is being relieved of their funds without so much as administrative notification.

It’s no wonder why, according to the Greek daily paper Kathimerini, over $125 million per day is fleeing the Greek banking system. European political leaders aim to put a tourniquet on this wound in the worst possible way.

Bruce Krasting On Capital Flight and Forced Repatriation

All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace”safe”. Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.

In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:

•The Bank could default. The principal in the account is at risk. The guarantee (up to E100k) is from the government. What’s that worth?

•The government could default. The chaos that would follow would result in a freeze of all bank balances.

•The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur…

…A move is being made in Brussels to”force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost…

…If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal.

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