Hmmm, George, youre right regarding the 80/20 rule and my original quickie, knee-jerk post. (http://www.greenspun.com/bboard/q-and-a fetch-msg.tcl?msg_id=00185o) An averaging, linear approach does not describe a realistic appraisal on predicting behavioral cash withdrawals. Ive been trying to think about it (that sounds so pathetic) but Im not sure how to proceed because all the assumptions are invalid.

Throwing the 80/20 at the problem only gives us a more realistic distribution on the withdrawals picture than a straight-line approach; ie: 20% of the withdrawal transactions will represent 80% of the total cash withdrawn from the system. But again, the assumptions kill us because were assuming there will be no additional constraints placed on the withdrawal opportunities. Thats realistically invalid because if the supply system perceives some possibility of abnormal demand, the banks will likely introduce additional constraints on withdrawal transactions.

Whats interesting is that given the existing $50 billion and the quite reasonable assumption that the Fed will make another $150 to $200 billion available, there probably would be plenty of cash to supply the market demand leaders and others as well. Oddly enough, I think the banks ought to advertise plenty of cash AND make it MORE conveniently available to those attempting withdrawals. Actually placing more constraints, or even contributing to the perception of increased withdrawal transaction difficulties will be counterproductive to their own goals.

Heres why - its a variation on the scarcity and valuation angle. If a commodity - cash - is demonstrated to be common, easy to get and universally available, the perception of cashs scarcity, or rarity, is diminished, thus lowering immediate demand. As constraints to availability are applied and increased (transaction difficulties and limits on withdrawals) when the actual supply of cash is quite good to meet present demand, a perception of increasing rarity is generated which is false under current conditions. Therefore, the very efforts to decrease the transaction totals, when supplies are adequate, will have the exact opposite psychological effect than the one rationally desired.

What is so absolutely odd about the whole market response on the cash supply side is the solution to fight cash supply worries is counter intuitive. Worried about getting cash? Heck - all the bankers ought to get out on the sidewalks waving cash and giving it away. If they all did it (I know - unrealistic) the consequence would be a lowering of the immediate demand for cash. Their rational responses, increasing transaction difficulty and anticipated limits on individual transaction totals will actually increase the demand frequency for more withdrawal transactions and reinforce the perception of scarcity.

-- Karl (valleycable@earthlink.net), July 24, 1999

Answers

The "enlightened ones" want a crash. Want panic. Want hunger. Want death.

To control the masses and create ONE bank.

-- dw (y2k@outhere.com), July 24, 1999.

You're a couple of decades late and a little more than a dollar short. There already is, effectively, one bank now. The only thing you're talking about is putting the icing on the cake.

-- Procopious (whynot@zog.net), July 24, 1999.

Yikes, dw. Your lights are flashing and the gate is down.....but there isn't a train in sight!

Please continue, you guys, you have my full attention on this! Too many pieces in this puzzle for me. Thanks Karl! Where's Linda? Now THAT girl can solve a mystery......

-- Will continue (farming@home.com), July 24, 1999.

The men with the power over money are no dummies. The men and women who play games with the money are caught up in a web of computers, analyists, tickers, suits and constant busy-ness. They are trading too fast to see the crash. Those who are selling gold...those who control the banks are making the biggest power play of the century - right before your eyes. Will they loose? NO. Will many? YES. Y2K is perfect.

-- dw (y2k@outhere.com), July 24, 1999.

I don't buy the numbers being thrown around re available cash for bank withdrawls. I think there are a lot of people who have already stuffed their mattresses with LOTS of cash. Among our GI friends we have withdrawn and stashed close to $750K in CASH. That is 5 people or couples. When I go to the bank and cash Chubby Hubby's pay checks into $5s,10s, and 20s, the teller acts like it is coming out of her pocket. I keep about $100 in the checking acct. When insurance or some big expenditure needs to be paid, I put the cash in and write a check. There is another tell tale sign going on in my area. Contractors, if they know you at all, are now giving 10 to 15% discount for CASH. These same guys a year ago gave me a lecture about their licenses and having to report income, etc. etc. They are now putting it in their mattress too. More currency is going out of circulation than we think. This week I paid the contractor $2700 in cash for redoing a bathroom. Paid the electrical contractor $4700 for hooking up the 40kw generator....in cash with a 15% discount. He is a GI too, so I know that is going into his mattress. I guess, what I am saying is that the banks could run out of large sums of cash before there was a major bank run. There has been a silent slow bank run for a year or more. Same with long time stock investors. Its the baby boomers who think its Camelot, that are buying the stock while we older ones are taking our money and running. Best get your money out while you can. And it IS YOUR MONEY no matter what the banks would have you believe !!

Taz....who sleeps well on her lumpy mattress.

-- Taz (Tassie@aol.com), July 24, 1999.

Taz - I think you are exactly right. I know I have SEVERELY limited the amount of cash that I deposit into my business account--mostly checks only. Also, ever notice how many "ratty" looking bills are in circulation now? I'll bet that nothing is going into the burn bags anymore.

-- jeanne (jeanne@hurry.now), July 24, 1999.

Jeanne...I know that is true, especially the $5 bills. The manager of the Dollar store says you NEVER see a new $5 anymore and that bills are coming out of the bank with scotch tape on them where they have been torn. 6 months ago, if you cashed a $1000 check, you would get most of it in $5, 10, 20 and a few 50s. I used to have to stipulate to give it to me in $100. Now, they hand you 10 $100 bills and you have to ask them to give you the smaller ones. I cashed a pay check and asked for $5,10 and 20. I got $300 in those and the rest were $100 bills. Since I was in a drive up lane, I didn't fuss about it. Every time I go to a store, I hand them a $100 bill and then I take my change home and stash it.

Taz...who trusts the banks less than the gubmint!!

-- Taz (Tassie@aol.com), July 24, 1999.

Thanks for the clarification dw, I misunderstood your first post. :)

I agree with Taz and can relate as well!

-- Will continue (farming@home.com), July 24, 1999.

Actually, there is more than one dimension to the "cash" problem.

Federal Reserve appears to be able to make up to $200-250 billion available in extra currency by rollover. However, the banks do not have anywhere near this amount in liquid reserves, perhaps only $40 billion or so. Federal Reserve articles about paper currency supply are indeed assuring, however the banks themselves are in a pickle due to their habit of maintaining such low reserve levels.

The banks will have to borrow any money above their required reserve levels in order to perform cash disbursements, or else quit lending altogether, or maybe both. Federal Reserve has stated they will be willing to lend this money to the banking system, with interest, but the banks will have to bear the cost of borrowing it. So, of course, in order to minimize their costs, the banks will tend to downplay the perception that their clinetele might have need of cash as they approach potetntially uncertain times, even if the currency supply is adequate.

For economic reasons, the banks will attempt to stockpile as little cash as they possibly can. They will make annoyed faces, or they may impose or activate withdrawal limitation clauses. If so, they may be playing a very dangerous game.

-- Nathan (nospam@all.com), July 24, 1999.

Nathan --

Hope you're still on this thread...

I'm trying to picture the balance sheet effect of these transactions.

~ $40Billion in reserves allows them to pyramid to ~ 3Trillion in loans and maintain about the same ~3 Trillion in deposits, right? (I could look up exact figures, but for sake of illustration now, I won't)

The $40 billion reserve is either cash or Treasury securities (long bonds? short-term bills?) deposited with the Fed, on which they get no interest, right? (But do they get the interest on the Treasuries on reserve? which is why T's would be preferable to buy and deposit with Fed, instead of cash?)

If ~ 200 BD of cash is drawn out in cash after Fed delivers to banks (under whatever loan arrangement, as flexible as they decide to make it), that means banks' deposit accounts have dropped by 200 BD from previous levels.

How does that affect reserve levels? Did banks have to first CLOSE OUT nearly their ENTIRE $40 BD reserve to pay out the first 40 BD of cash, meaning their entire deposit base is now "un-backed" by even the nominal reserve requirement?

Or is the cash just "passed through" via a loan agreement with the Fed, and leaving the nominal reserve amount "untouched"? Therefore, the entire deposit base, (and national credit structure) remains largely unaffected -- maybe 200BD out of 3.5 trillion = about 6% out?

Looking for question of ECONOMIC realities impinging on this plan, vs. REGULATORY fictions that may or may not work, or can be temporarily passed over in a crunch...

I'll post this now, and think a little harder as I re-read and try to picture the flows from this....

-- jor-el (jor-el@krypton.uni), July 24, 1999.

They have to liquidate something to get the cash (unless it is loaned to them -- then it's like another "depositor" coming to them with a 200 BD "deposit"), or for ANY reduction in their depositors' total account level: call in loans, no new loans out, sell other assets like T-securities. That's why Fed would lends to them -- to prevent that sell-off.

But they can't (and probably don't need to) take out the reserves, I'd guess.

So it looks to me like it could largely bypass the reserves, and that's not the issue: It's the overall shrinkage of deposits ("loans" to banks) that contracts the system, (though not at the 100- 1 level some talk about, but probably at a more real-life 5 or 8 or 10-1, since new loans don't pyramid perfectly efficiently into immediate new bank accounts generating new lendable funds.)

But a cash-sparked credit contraction might snowball into a money supply contraction for all the other triggers we're watching build up (gotta go for couple hours -- back later)

-- jor-el (jor-el@krypton.uni), July 24, 1999.

jor-el,

I and a few others have wondered about the same things you bring up. Not being in the banking business, I'm not sure what the exact technical mechanism is that Federal Reserve is using to tide the banks over the cash demand period. We've seen the usual cryptic announcements along the lines of Federal Reserve readily "making available" loans to its member banks for this purpose, but not any real specifics.

My guess would be that Federal Reserve will make available as many of it paper transaction tokens (dollars) as is necessary to tide the system over, whatever that entails. But they will not do this without a cost to the member banks. So, the ball falls back into their court as to what extent they will "take advantage" of Federal Reserve's "generous" offer. And Federal Reserve must charge market interest rates on these theoretically short term loans, or the whole so-called system would fall apart.

The underlying assumption must be that this increase in liquidity to the member banks will be short term -- a one time only special event -- and therefore handled in as transparent a manner as is possible, much as you have suggested. i.e, the member banks are allowed maintain their reserve levels as if nothing has happened, if they so desire, and the bulk of these cash infusion transactions would be held as a separate, non-reserve-requirement account.

And that's all fine and dandy. However, what happens if before, during, or after the rollover things implode to any material degree. Now what happens to these special loans to the banks. Are they made long term and moved into the regular accounting structure? Does Federal Reserve end up owning all the banks? Does liquidity dry up for a decade? Or do we taxpayers stand by and watch the national debt double or triple due to FDIC bailouts? What happens if all the cash withdrawn doesn't make its way back to the bank from whence it came, or, at best, only returns slowly after 1/1/00? If so, sooner or later, some, many, or most of these borrowed, unreturned dollars MUST show up on the true balance sheet in terms of diminished reserves.

Apparently, all of this non-profitable, balance-sheet-disrupting sloshing around of funds is very dangerous for the system. Federal Reserve and its member banks will work to prevent or at least minimize its effects. Unfortunately, this effort will not be without its costs to the system in terms of profits, confidence, or both.

-- Nathan (nospam@all.com), July 24, 1999.

Your projection is more than just a little reminiscent of Japan, today.

-- Woodpile (whynot@zog.net), July 24, 1999.

Everyone, it is crystal clear that probably all of these will happen:

(1) CONTRACTION & CROSS-DEFAULTS: An enormous contraction of the international banking system (including the US banking system) with its corresponding, totally unprovisioned costs, cascading defaults, etc. When the Fed makes cash available to banks, it doesn't give it away for free, it loans it to them. This is an enormous cost which many banks can't bear under current fractional reserve banking mode. Furthermore, because of interconnected bank loans, foreign debts, etc., the minute anyone decides to leave his/her money in a US bank, actually they are betting that the INTERNATIONAL banking system is safe. There is no such thing as an isolated bank or group of banks (like US banks, for example). People don't know this.

(2) AVAILABILITY: Liquidity is not an attribute of the fractional reserve banking system. Please check

http://www.y2knewsw ire.com/cashcomputer.asp

(3) DISTRIBUTION: Printing the cash is part of the problem, including $5, $10, $20 bills. Distributing to physical points of demand is something else. In the event of bank runs and/or abnormal cash demand, simply there are not enough armored cars or equivalent vehicles fast enough and manned enough to run around replenishing constantly emptying ATM, branches, etc. The Fed doesn't quite have a plan B for this either. And as soon as you learn that people are waiting in line for their money, I guess anyone can imagine what can happen...

(4) OTHERS EXIST: And play. Like the rest of the world. Guys, cash demand will be worldwide, as the US dollar happens to be the world's 'store of value' currency. Abnormal cash demand and/or bank runs in cities throughout Latin America, Asia, Europe, Russia, etc., are unsustainable because they happen to be heavy-cash societies. In Latin America, Indonesia, and other countries, houses, cars, and many other expensive consumer items are paid in cash (local currency). The minute people there smell y2k's banking effects they most probably will cash in their local money for US dollars. Sum it all up and you get at least another hunk of cash equivalent to the US greenback demand, maybe more. Argentina alone, a medium size Latin American economy, has 50 billion dollars worth of 30 days CDs. As recently as 1990 Argentines would rush to the bank to get their money any time they didn't like front-page news. This culture is widespread elsewhere too. It's different from the literally cashless US culture.

Take care

-- George (jvilches@sminter.com.ar), July 24, 1999.

Good Heavens, maybe that Moslem Mystic was right...that Mankind would trust it's life and wellbeing to a SINGLE MECHANISM (aka Non Deterministic Finite State Automata) but at its core is a SIMPLE MISTAKE...thus The WORLD ENDS...

-- K. Stevens (kstevens@It's ALL going away in January.com), July 24, 1999.

Just cranked up the old, old computer, with all these "Favorite" threads still saved on it. Amazing stuff we went through, and learned about. And has that amazing individual, Greenspun, kept all this up here? This may be worth looking into, and getting over to my new, regularly-used system.

Thank you, thank you, and thank you, to one and all.

-- jor-el (jor-el@krypton.uni), July 06, 2003.