JWR’s Introductory Note: Today, in lieu of our regular bi-weekly Economics and Investing column, I’m presenting an update to an article that I wrote for SurvivalBlog, back in June of 2012, titled: 20 Reasons Why America’s Next Bank Holiday Will Be a Nightmare.
If anyone compares this with the original edition, you will see that I’m standing by the majority of my 2012 predictions and recommendations. If anything, nine years later, the threats that we’d face in a banking crisis will be even greater, because of increased reliance on electronic payment systems, power grid reliance, Internet reliance, and the larger scale of the tech-based economy.
I should mention that one of the key metrics that I cited was Money Zero Maturity (MZM) money supply. Back in 2012 it was around $7 trillion. It has now more than tripled, to more than $22 Trillion. Humpty Dumpty is now headed for a much bigger fall — that is, one that will not just devastate the financial markets and retail banking, but also the Dollar itself.
Here is the updated article:
The world has returned to the brink of a global credit crisis that could be far worse than the tumultuous events of 2008-09 and 2012-13. The sovereign debt crisis of 2012-13 in the southern reaches of the Eurozone seemed to indicate that bank runs could escalate and spread in a global contagion. Thankfully, that crisis was stemmed. But with interest rates now rising, I can see that a similar situation may return. The recent collapse of Germany’s Greensill Capital is troubling. Though European banking managers and regulators are calling the Greensill collapse “contained”, it is having far-reaching consequences. Mark my words; Greensill may not have been just an isolated glitch.
Interest rates have been kept artificially low since 2007. What we are witnessing now (in early 2021) is an understandable rebound. Some analysts suggest that it might herald a repeat of the 1945-to-1981 interest rate wave. That wave was triggered by currencies and banking detaching themselves from precious metals. (First silver, and then gold.) The 1971 to 1981 period, in particular, was quite traumatic. A similar, but a probably much smaller wave of interest rate hikes will be triggered by global financial markets detaching themselves from the U.S. Dollar as a reserve currency, and adopting sovereign digital currencies.
If interest rates spike, then there will be huge consequences for interest derivatives, corporate finance, sovereign debt, automobile loan rates, residential mortgage loan rates, and much more. Watch the financial news closely!
Bank Holiday Implications
Under a bank holiday, virtually all deposits could be frozen and irredeemable for days, weeks, or even months. I urge SurvivalBlog readers to be proactive, to stay “ahead of the power curve.” While the Generally Dumb Public (GDP) wakes up some morning to hear news of a bank holiday, you will have long hence prepared yourself.
Digits Lost in the Ether–Redeemable Mañana?
Most people don’t realize that printed U.S. currency and minted coins amount to only $2.05 trillion, worldwide. That is just one-tenth of the aggregate Money Zero Maturity (MZM) money supply that now exceeds $22 Trillion. So 90%+ of what is in your bank account is just electronic money, and there is absolutely no way that even a fraction of depositors could get physical cash to redeem the digits in their accounts. If there is a bank holiday declared, there will undoubtedly be severe restrictions on cash withdrawals when banks re-open. Given the precedent of the limits on withdrawals of a few institutions during the Savings and Loan crisis of the 1980s and 1990s, I predict that withdrawal restrictions could go on for many months.
Here are 20 reasons why America’s next bank holiday will be a nightmare:
- A bank holiday will create a virtual blackout of information on not just checking and saving accounts, but also automated mortgage payments, CDs, and more. Our presently quite transparent banking system will suddenly become opaque. Your bank balance will become invisible. Your handy-dandy online banking web page will be replaced by a “Service Temporarily Unavailable” notice. The willingness to accept checks will evaporate in less than a day. The FUD factor (Fear, Uncertainty and Doubt) will be overwhelming.
- Most businesses will no longer honor personal checks, corporate checks, or bank money orders. Showing a merchant your most recent bank statement isn’t likely to sway him toward accepting your check. Again, the FUD factor will rule.
- All checks in the U.S. are cleared through the Federal Reserve Banks‘ automated clearing house (ACH) service and the Clearing House Payments Company (Payco)‘s Electronic Payments Network. Most of this network is inside of banking system firewalls. Many Federal, State, and local tax payments are also handled through ACH. (A similar network exists for European banks–the Pan-European Automated Clearing House (PE-ACH), under the Single Euro Payments Area (SEPA) system).
- Credit cards might not be accepted. The FUD factor will dictate that anything even peripherally related to the banking system will be suspect. (Even though the credit card companies have their own credit clearing mechanisms that are only attached to the banking milieu.)
- Except for a very few grandfathered recipients, Social Security payments are now made exclusively via bank direct deposit.
- Military monthly pay, housing allowances, and ration payments are now made exclusively via bank direct deposit, in CONUS. That is true virtually across the board (Active component, Reserve, and National Guard.) Ditto for monthly military retirement payments.
- Many State and Federal employees no longer get physical paychecks. They too, are trapped in the “direct deposit only” world.
- Most Americans are now very dependent on bank debit cards. In fact, many people don’t even carry any cash in their wallets. If our world suddenly goes “cash only” then most people will suddenly be out of cash.
- ATMs, debit card transactions, and online banking can be shut down in minutes. This huge vulnerability of banking customers has already been evidenced by a few minor glitches.
- Online payment systems like PayPal will be sharply degraded, because they rely on their ability to move funds to and from banks. More importantly, online payments are inextricably tied to credit card processing. If credit card processing is suspended, then online payments will be “dead in the water.” Meanwhile, the effects in the private crypto world are difficult to predict. But I can safely say that it will probably be a rollercoaster ride.
- Many regular monthly payments such as mortgages, insurance premiums, and some utilities are automatically debited from checking accounts. These will all come to a screeching halt.
- SWIFT and SEPA wire transfers will probably be suspended, freezing a good portion of global commerce. Similarly, International ACH transactions (IATs) will also be shut down, since they access the U.S. ACH network.
- The ability to process credit card payments will be dubious, at best. Many merchants will wisely “just say no” to credit cards, even if their countertop POP terminals are still functioning and show available credit. And the fact that many credit cards are now just debit cards in disguise will only add to the reluctance of merchants to take any credit cards.
- Point of purchase (POP) processing of credit and debit cards at gas stations and supermarkets has become ubiquitous. Nearly everyone now uses their cards instead of cash. Gas and diesel could become “cash only” transactions. So could groceries.
- Most American families keep less than $100 in cash at home at any given time, including their kids’ piggy banks. For most families, that wouldn’t cover even one week’s rent.
- Formerly distributed as “Food Stamps”, the USDA‘s Supplemental Nutrition Assistance Program (SNAP), provides benefits to low income families through Electronic Benefit Transfer (EBT) card payments. These cards look much like credit cards. And like checks, EBT payments are all routed through the ACH network. Again, this is a network that is inside banking system firewalls. If the banking system goes into holiday mode, then it may take days or even weeks to get EBT processing back on line. If the EBT payments stop, we can expect riots in metropolitan areas in less than a week.
- Gift cards will be “iffy.” There are now two types of gift cards: “open loop” (or “network”) cards and traditional “closed loop” cards. Open loop cards are issued by banks or credit card companies and can be redeemed many places. It is likely that only closed loop cards will be honored by the issuing stores, because merchants will fear that open loop cards might have been zeroed out elsewhere. (If they can’t confirm the available balance, the card will be refused.)
- Most Internet vendors are almost entirely dependent on credit card, PayPal, or Payza processing. If that processing system is disrupted, then mailorder firms will either have to cease operations, or have them slow to a snail’s pace, and be restricted to only non-bank money orders.
- Reversion to U.S. Postal Service money orders (commonly called “PMOs“) will only be partially viable solution. This is because many small town post offices don’t keep enough cash in their tills to be able to hand you $1,000 when you go to cash a PMO. You may be thinking, “Oh well, I’ll just ask them to write me a blank PMO, in exchange. Nope. A 2010 change to postal regulations designed to curtail money laundering banned money order-for-money order issuance. Bummer. And if you are considering asking for “Forever” postage stamps, then hold your horses. Under a hygiene regulation published in the Domestic Mail Manual (DMM), postal clerks are not allowed to cash out (“buy back”) stamp booklets unless they are still in their sealed clear plastic master packages. And now, in The Age of COVID, even those might be rejected. So it might take decades for you to use up your Forever stamps, or you will be forced to liquidate them on the gray market at a loss.
- Bank safe deposit boxes will probably be inaccessible during a declared bank holiday. Plan accordingly.
Some Observations and Mitigation Steps:
Because so many pay and retirement benefit systems are now handled via bank direct deposit only, we could easily live through a frustrating “Roach Motel” period of several months when “Dollars check in, but they don’t check out.” Be prepared to ride through that period.
If a banking crisis looks imminent, then immediately visit your company’s payroll office, and ask to be removed from their direct deposit system. This change might take a couple weeks. With a paper paycheck, you can probably cash it elsewhere, even if your own bank closes its doors–perhaps even at your local grocery store.
Keep plenty of well-hidden cash at home. Since it won’t be earning interest, some of this cash might as well be in $2 rolls of nickels. That method will also give you a hedge on inflation, and also serve as insurance against a currency reform. (Where a zero could be lopped off the Dollar, overnight. That would make each nickel worth the equivalent of 50 cents.)
Be prepared for times when anything other than greenback cash or perhaps silver coins will be eyed with suspicion, or rejected outright. Even USPS PMOs and drug store money orders may be refused. In the era of bank holidays, cash will talk. So keep plenty of it on hand. Oh, and needless to say, don’t store your cash in a bank safe deposit box. You probably won’t have access to it during a bank holiday.
Be wise and circumspect in storing cash at home. Don’t tell anyone other than your spouse about that cash. See the SurvivalBlog archives for suggestions on building secret hiding places, like this one.
A good portion of your “stash of cash” should be in the form of $1, $5, and $10 bills. This is because during a banking crisis, many people will not be able make change for small transactions. And if your local power, water, and phone companies refuse checks, then you will need to be able to pay them the exact amount of your monthly bill. (They probably won’t have much “change”, either.)
Apply for at least one gasoline station chain charge card. In turbulent times when they won’t take your check or your VISA card, they might still take their own chain card.
Keep Regulation D in mind. There is a difference between checking accounts (traditional “demand deposits”) and deposits in Money Market accounts, or deposits at your local Savings and Loan. In a major banking crisis, you might have access to funds in your checking account, but you probably won’t have access to more than a dribble of allowable withdrawals from your other accounts.
If you have to pay your utility bills in cash or by PMO, do you know exactly where their business offices are located? And consider the sort of neighborhood where those offices are located. (Unless you live in a free state for open carry or Constitutional Carry, do you have your CCW permit, and have you kept current with pistol practice?) For safety, it might be wise to form a neighborhood posse to go pay those bills in a group of five or six people, once a month.
Your local supermarket may declare “cash only.” This is yet another reason why it is vitally important for every family to have a comprehensive food storage program. By the same token, fuel storage also makes sense, if your local fire code allows it.
At the tail end of a banking crisis–when the bank doors do re-open–the Federal Reserve will certainly have to crank up the printing presses. Even people that never kept “mattress money” will want some. All this new cash will increase the velocity of money, locally. This will be inflationary, even at the same time that at the macro level, we will witness a huge dollar deflation. (This is because the multiplier effect of every dollar on deposit will work in reverse, as withdrawals are made.)
These will be strange times, indeed. If you start to see any evidence of mass inflation kicking in, then be ready to spend your dollars as quickly as possible to parlay them into practical, barterable tangibles. Don’t be the last one standing in the game of Dollar Musical Chairs.
The threats of credit crunches, bank runs, and bank holidays are not new. No society is immune from them. We’ve been fortunate here in the United States to have not suffered any substantial limits on bank withdrawals since the Savings and Loan crisis of the 1980s and 1990s. But don’t expect this stability to be permanent. We live in a dynamic world with rapidly changing threats to our lives and livelihoods. Prepare for the worst and hope for the best. – JWR