The festering cesspool that is our banking system (and the world’s) has not passed the danger point. Massive bailouts have not saved the banks or the financial system. The banking [...]
insolvent
Dec 052011
In March of 2010, I discussed the possibility of another bank holiday. We had one during the Great Depression where banks were ordered to close:
One of the first New Deal legislative acts was the closing of the banks, known as a national banking holiday. Banks were closed for about a week. Neither deposits nor withdrawals were allowed.
The nature of our fractional-reserve banking and the current state of the financial markets make such an event more likely now than it was in early 2010 when I first warned about it. To understand banking mechanics and how they enhance the possibilities of such an event, I suggest you read the earlier article.
With the situation in Europe deteriorating and the increasing recognition that there is no solution, capital will leave these banking systems as well as flee the countries involved. If you fear bank failure, you take your cash out. If you fear currency failure, you put your money into safer currencies, preferably outside of the country.
Some European pundits have talked of a bank walk rather than a bank run. That is, there are signs that some people are beginning to remove funds from the banking system. Panic is the biggest fear of fractional reserve banking systems because they don’t have enough money to redeem but a small percentage of deposits (probably 5 – 10%). Thus, any fear renders banks illiquid and unable to honor withdrawal requests.
Will this happen in Europe? I suspect it will and much more. If this panic hits in Europe it is apt to start a bank walk or worse in the US. The Economist deals with these possibilities.
For those who are fortunate enough to have savings left, it might be prudent to keep a month or two of expenses in cash outside the banking system. The opportunity cost for doing so is virtually zero because you do not earn any return on cash in the banks. It might provide a reasonable resource, should our banking system be forced into another bank holiday.
Long-term, as most regular readers know, I am not a fan of cash because I think fiat currencies will be driven to what Voltaire described as their intrinsic value — zero.
Jul 192011
The video below is probably the best reporting I have seen on CNBC for a long time. It puts the financial system of the world in perspective.
The rating agency, Egan-Jones, is not beholden to the US or any other government. It works solely for clients with the purpose of protecting them and their assets.
The European and US situations are disastrous. H/T to The Market Ticker for the following, including the video:
The Market Ticker – US Downgraded: Egan-Jonesby genesis
Here it comes… yeah, I know, Egan-Jones isn’t one of those firms people think is important.
Oooook!
It should be noted that this downgrade comes after Weiss Ratings reduced the US government to “near junk,” a “C-” rating. An analyst from Weiss stated:
the U.S. has debt and deficit problems whether or not the debt ceiling is raised.
The debt ceiling issue is merely a sideshow. Resolving it, does not resolve the underlying problem with the US.
Jul 152011
John Rubino comments on the woeful state of the world:
- This was inevitable because “extend and pretend” is by definition a temporary strategy. It works for a while but only for a while. And now it’s ending everywhere, all at once.
- We’ve entered a new phase of the global financial collapse that began in 2000. Any one of these capitulations — a Greek default, followed inevitably by either more PIIGS defaults or EU bailouts of surreal size, the admission that the US government will run trillion dollar deficits essentially forever, and a massive new Fed stimulus plan — would by itself be enough to destabilize the global economy. Toss them all into the mix at once and you get chaos.
- “Chaos” in this case would mean spiking prices (oil is up today and gold and silver are soaring), wild interest rate volatility as bond vigilantes finally wake up and do to the US what they’ve recently done to Greece and Portugal, and crashing economies as rising uncertainty leads businesses to stop hiring. Welcome to the end of the Age of Paper.
Apr 232011
Bob Murphy discusses Paul Ryan’s proposed budget. According to Lew Rockwell’s test for judging budget seriousness, it is woefully inadequate:
The politically painful budget slashing is deferred to the future. As Lew Rockwell has said of any would-be budget hawks, tell me how much you want to cut spending this year — not ten years from now when someone else will be in office. (On that score, Rand Paul’s proposal is far more serious than Paul Ryan’s.)
To be fair, Murphy acknowledges that Ryan’s attempt is much better than the competing proposal:
S&P’s downgraded outlook for US debt is one of many objective signs that those of us warning of a fiscal crisis aren’t crazy. The federal government is digging itself deeper and deeper into debt at an alarming rate. Although the budget proposal put forth by Paul Ryan is better than that of President Obama, it is nowhere near a solution.
The sad part is that we have no room left for good intentions and political compromise. We need dramatic action NOW! We should be removing $4 Trillion in four years, not ten!
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The Almost Forgotten Problem
Welcome To The End of The Age Of Paper
Dollar Going Down
Political Turnaround Specialists Needed
The Dismal Dollar
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