Show Me the Money! Ok , Where is it?

Here is an article I came across that I though might be of interest:

Stash The Cash
By Christopher Klein


The following is an excerpt from SafeHaven.com

Bold is my emphasis

Printing Money to Avoid Immediate Banking Collapse


"According to the Federal Reserve Board website, U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month. We have been discussing this with Sitka Pacific Capital's Mike 'Mish' Shedlock for the last two weeks. He concludes: "Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending." Simply put, the U.S. banking system has no reserves. In addition, the FDIC has recently begun modernizing large-bank insurance rules. We hope this is a wake-up call to everyone as to the extent of the credit crisis. Bank account balances should be used only for transactions. Instead cash should be held in the form of U.S. Treasury Bills at a conservative brokerage or trust. Under the mattress is also perfectly acceptable (your parents or grandparents had to do it!). For investors, we advised last year to sell the banks. Banks will be soon forced to sell assets (yes, even 10 year Treasury Bonds) at deeply discounted prices to pay depositors."

These guys are actually recommending that you keep all your money in either CASH in your house, or by short term treasuries. Only use a bank account to pay your bills, i.e. checks or card transactions.

Also, pay attention to the first part...

"U.S. non-borrowed bank reserves have gone from $37B to $199M (nope, that's not a typo) in the last month."

This is an actual Federal Reserve statistic, and is quite alarming. What this means is that in the entire federal banking system, according to the Federal Reserve, banks ONLY HAVE 199 MILLION of "cash". Banks are required to keep a percentage of their assets as "reserves" which used to mean actual cash in the vault so that in the event of a run on the bank they have money to hand out to their depositors. The Fed regulates this percentage and it varies (slightly) day to day. If a bank does not have the required reserves, it must borrow them by either going to another bank (the overnite, or fed funds rate) or borrowing directly from the Fed. (the discount rate).

The fact that the entire banking system has now borrowed over 90 percent of it's reserve requirements from the Fed or other banks is absolutely Orwellian. It signifies more than a credit crunch. What it means is that the banking system is currently damn near out of money.

This is NOT a good sign. This is bad bad bad. I am seriously considering the mattress cash.

For this and other great commentary about the state of our economy, follow Chris Klein at Wreckonomics

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Now, personally, I can't in good conscience advise people to either put their cash into U.S. Treasuries or stash it under their mattresses. The former course of action might be something to consider only from the standpoint that U.S. Treasuries are backed by "the full faith and credit of the United States"--for whatever that's worth. The mattress method "seriously" advocated may well be tongue-in-cheek ; I don't know. But , if it is a serious suggestion it is, in my opinion, the absolute worst thing someone can do.

In the world of economics, where money is concerned, people tend to act according to certain basic principles relating to the value of money(the medium of exchange). In the face of the declining value of money people will tend to want to use the money while it has a higher value ; they will want to use it before its value decreases below its present value.

As an example , a couple of weeks ago I had to fill up my car's gas tank. This was when the price of a barrel of oil was "sky-rocketing" and gold was over $1,000 an ounce. I thought to myself, "Should I fill up the tank or only fill it half-way to save myself some money , since gas prices had gone up a bit?" I decided to fill it up all the way. Why? Because I thought, "If I fill up only half-way at today's price and prices are higher the next time I go to put gas in the tank , even if I only fill up half-way again , the same amount of gas will cost me more money."

In the face of higher future prices , I decided to buy(spend) all the gas (good) I could now because I thought prices would go higher in the future and my money would buy less of the same good then. Had I decided to only fill up the tank half-way I would have , in effect , been stashing money(the money not spent in filling up the second half of the tank)under my mattress--assuming I did not spend the money saved on some other good. And this is the reason that , in the face of the declining value of a dollar , people are ill-advised to stuff their mattresses with cash!

According to the laws of supply and demand , when you have a high demand for a good and a small supply of the good the price of the good will increase ; when you have a low demand for a good that is in great supply then you will have a decrease in the price for buying the good. When demand for and supply of a good are equal then the price of the good will remain constant--this is called equilibrium. But , in the case where a good is in a state of price equilibrium can something other than the supply of, or the demand for, the good itself cause prices to rise? Yes! The supply of money (cash)...in our present situation, as the Federal Reserve prints more and more, the increasing supply of money.

As the supply of money goes up the value of each unit (dollar) of money goes down. As the value of each unit of money goes down it takes more units of money to buy a good. If I have one dollar now and the Federal Reserve prints and circulates enough additional dollars to decrease the value of the dollar I now hold in my hand by ten cents then the current value of the dollar I hold is now 90 cents. The supply of a certain good in equilibrium has not gone up ; the demand for that good has not gone up ; but , because my dollar is now worth 10% less than what it was before , it will take more money to buy the same good! The price of the good , in terms of money , will be greater! This is inflation. Inflation (higher prices for goods) happens because the value of money goes down.

You can't protect the value of your cash (its buying power) by hiding it in your mattress. Why? Because all the time that your cash in sitting there the Federal Reserve is printing and circulating more and more into the system--more importantly ,thanks to fractional reserve banking , banks are creating more and more money from thin air--devaluing the buying power of your cash. Let's say that you stash the cash for three years ; all the while the Federal Reserve is printing and printing cash , which devalues the dollar at 3% each year. At the end of the three years you dig out some cash from your mattress to buy some food. What once cost you $1 three years ago now costs you $1.09! To your astonishment , you find that you now have to pay 9% more for food than you did three years ago! This is inflation on a small scale!

In Part II of this post (coming tomorrow) take a look at a real world example of what a central bank , like the Federal Reserve , can do to the value of money in a very short period of time.