February 12, 2015
Puerto Varas, Chile
Ten years ago, the legendary American mathematician Edward Lorenz paid a visit to the University of Maryland’s Atmospheric and Oceanic Science Department.
As retold by Professor Christopher Danforth of the University of Vermont—
At some point during his stay, [Lorenz] penned the following on a piece of paper: “Chaos: When the present determines the future, but the approximate present does not approximately determine the future.”
Chaos, of course, is the field of mathematics that deals with finding order in what otherwise may appear to be random. Stock market prices. Weather patterns. Even warfare and politics.
Lorenz was a pioneer in this area, famously coining the term ‘Butterfly effect’. This observation suggests that a tiny butterfly flapping its wings may cause minuscule changes in the air which ultimately lead to a major storm system.
In other words, nothing is consequence-free. Everything affects everything else. And Lorenz’s definition of chaos perfectly sums up where the world is right now.
We can see that nearly every Western nation is broke. Many central banks are borderline insolvent. Most Western banking systems are poorly capitalized and highly illiquid.
This approximate present will not approximately determine the future. Nothing is going to happen tomorrow. There will likely be no giant collapse this afternoon.
But as Lorenz suggests, there will come a time when these conditions have a major impact on what happens down the road. What happens now absolutely will determine the future.
Over the last few years, words like ‘unsustainable’ and ‘unprecedented’ have been used copiously when referring to government debt levels and monetary policy.
And with good reason. Because it absolutely IS unsustainable to go deeper into debt year after year. It absolutely IS unsustainable to maintain interest rates at negative levels, or levels that fail to keep up with inflation.
These conditions may not drive immediate consequences. But eventually a major storm system will form.
Consider this—just days ago, the yield on some of Nestle’s corporate bonds went into negative territory to minus 51 basis points.
This means that investors are willing to PAY Nestle 0.51% per year for the privilege of loaning the company money.
Imagine that. You have to pay someone else to loan them money, instead of the other way around.
But this goes far beyond Nestle.
According to the Financial Times, there is now $3.6 TRILLION worth of government debt around the world with negative interest rates.
And yes, there are banks now (primarily in Europe) which require depositors to pay them interest… and even bizarre cases of negative interest rate mortgages (i.e. the bank pays you to borrow money).
This is beyond absurd. There are zero incentives to save and produce, and every incentive to borrow and consume. It should be completely obvious that this system is entirely broken.
But it’s more than that.
As the negative interest rate bandwagon continues to pick up steam, people WILL reach their breaking points. They’ll be forced into an “anywhere but a bank” option to hold their cash.
Think about it—if your bank is charging YOU interest to be a customer, wouldn’t you rather just rent a safety deposit box and stuff it full of cash? It would be a hell of a lot cheaper.
Now imagine dozens of people showing up to your bank demanding cash withdrawals.
Then dozens more. Hundreds. Thousands. Even more.
Quite simply, this is enough to cause a collapse of the entire banking system. Why? Because as we have written so many times before, banks do not have the money.
Most banks have razor thin liquidity—as a percentage of customer deposits, many Western banks hold less than 3% in cash equivalents… and an even smaller amount in physical currency.
If there were a sudden rush from people wanting to pull their money out of the banking system, whether to hold physical currency, precious metals, bitcoin, or any other alternative, it could cause a run on the banks.
And since most of them are in absolutely pitiful financial condition, they would absolutely collapse.
Perhaps most ironically, judging by their actions, governments and central banks are almost pushing for this to happen. They’re slashing deposit rates and bond yields, practically daring the public to take its money out.
They obviously think we’re a bunch of suckers. But they’re dead wrong.
This is the topic of today’s podcast. Needless to say, it’s important. We’ll discuss this problem in more detail, as well as a number of solutions that I want you to know about:
https://www.schiffsovereign.com/podcast/this-is-exactly-how-the-banking-system-will-collapse-16106/
