Lack of physical money to burst the bubble of current financial system

The current economic crisis may evolve into a global catastrophe, financial analyst Bill Bonner believes. 

According to the analyst, the financial system could take a surprising and catastrophic twist that almost nobody imagines, Pravda.Ru reports.  

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 last month.

But there was just $1.3 trillion of physical currency in circulation - about only half of which is in the US.

Also read: What if we had a Tally Stick money system

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. 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 before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

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. 

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. But imagine what happens to credit money. The money doesn't just stop circulating. It vanishes. As collateral goes bad, credit is destroyed. 

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 have $5,000 in your debit account. But all financial institutions are 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.

Pravda.Ru