Published on The Doomstead Diner on December 7, 2016
Discuss this article at the Economics Table inside the Diner
One of the main questions those of us who have been observing collapse since the 2008 Financial Crisis have always tried to answer is just how a banking collapse would play itself out? Lately, there have been ever more clues on the shape it will take as it moves around the globe.
The first indication came with Cypress and the "bail-in" of the depositors there, and Greece shutting it's ATMs down and then only allowing small daily withdrawals of cash. In the last month, we've seen India declare all it's old "large" denomination Rupee notes declared void, issuing out new Rupees to take their place. Ahead of us, we have the imminent failure of the Italian banks on the horizon along with the possible failure of Germany largest bank, Deutchbank. Coming at some point even IF somebody loans more money to the Italian Goobermint to bail out Monte dei Paschi di Siena over the weekend.
A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. A bail-in is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayers money. Typically, bail-outs have been far more common than bail-ins, but in recent years after massive bail-outs some governements now require the investors and depositors in the bank to take a loss before taxpayers.
Now, in the 2008 crisis in the aftermath of Lehman, the solution was a "bail-out" of the banks by pulling out Hank "the Skank" Paulson's "Big Bazooka" and charging it all up to the Taxpayers, as opposed to bank depositors in a Bail-in. Of course, none of the taxpayers are too happy about that, so at least in Eurotrashland rules were set in place to do bail-ins.
Once you deposit your money in a bank, you have made an UNSECURED loan to the bank. They're supposed to pay you back on demand, but of course if they go belly up and don't have the money and can't borrow it from someone else, your money essentially vanishes to the same place it came from, thin air. Obviously, depositors who have this occur to them will be even more pissed off than the taxpayers, since your tax bill is spread out incrementally over time. You don't instantly lose everything overnight, you just go broke more or less gradually as your taxes keep going up.
What bail-ins also do though besides pissing off a lot of depositors is they take a whole lot of money out of circulation, which of course is highly deflationary. Similarly, the exchange of the Rupee notes also is highly deflationary, because Da Goobermint is planning on taxing or confiscating the money that is deemed "suspicious". That means the Indian whose money was taken no longer has it to spend on goods and services in the economy.
So rather than the inflation so feared by folks like John Williams and Speedy Gonzalo Lira back in 2008, it now is looking more like an end game of deflation as both banks and goobermints confiscate money in order to try and balance their unbalanceable books. Even if they confiscated all the money in circulation and on deposit in digibits though, the whole system is still net negative due to the interest charges that have accrued and there are so many NPLs (non-performing loans) out there. Italy is in the worst shape there, with something like 20% NPLs, which is why their banking system is likely to topple first.
The problem after that becomes one of CONTAGION, because the Italian Banks are indebted to mainly the German banks, so if they go belly up the assets held by German banks are no longer assets, and they also become instantly insolvent. Well'they're already insolvent, but at this point it becomes undisguisable with fraud and accounting rule changes.
If the ECB won't print fresh Euros to recapitalize the Italian banks, where's the money going to come from for this? "Investors" (aka other TBTF banks) aren't going to buy $5B worth of equity and bonds, because they have already lost $BILLIONS$ down that rat hole. So will there be an 11th hour Stick Save by the ECB to bail OUT again these banks, which generally puts the bill for it on the backs of the German taxpayer? That's not very politically acceptable in Germany these days, they'd rather see the Italians go down the toilet, not really grasping they will follow the Italians shortly thereafter, possibly within nano-seconds.
Anyhow, given this rather deflationary trend and the likelihood that "your" money currently in your checking and savings account will get confiscated in a bail-in, it's pretty hard to see why any typical Italians right NOW at least are keeping any Euros in the banks in Italy. The Italians also currently have the very real threat that once Beppe Grillo's 5 Star Movement (M5S) gets into power, they have vowed to return to the Lira. If you have Euros in an Italian bank, POOF, overnight they magically convert to Liras, and then quickly devalue against the Euro and Dollar, while those currencies are still standing anyhow. The ew Lira currency would be close to worthless for buying anything from outside of Italy, most importantly imported energy. I would bet on a 50% devaluation within a month, and maybe 10 cents on the Lira in a year.
So as logical as it seems to take your money and run now, this is not so EZ for the typical Italian. Setting up an account in another country is tough even if you are a Eurozone member, and then making your daily withdrawals and deposits not so EZ either. If you are a small biz owner and have payroll accounts and such, using a foreign bank is also impractical.
On a small enough level of savings, say a few 1000 Euros, for the individual stuffing this in your mattress seems like a safer idea than leaving it in the bank at this point, but as the Indian example shows your paper Euros could be made worthless overnight and you would need to exchange them for "New Euros". However, you still have the issue that it is not practical to pay many of your monthly bills in cash, around here they won't even TAKE cash at the power company. They also won't take cash for my rent either. All these payments MUST be done through the banking system.
So where does this leave you with trying to protect "your" wealth in a serious banking crash and sovereign debt crisis? For this, many people believe Gold is the safest way to store your wealth, particularly "Possessible" gold like collectible coins and tiny 10 gram slips. "Paper Gold" is not looked on much better than Fiat Money since it is essentially the same kind of Ponzi scheme.
The problems this has are very similar to your paper money though. First off, it's not very good for currently paying your bills. I couldn't go over to the leasing office and pay my rent in Gold Coins any more than I could go in and pay in cash. If I was running a small business, I couldn't pay my employees in Gold either. You then also have the problem that every time you exchange Gold for some cash to go buy food at Safeway, you first have to stop in at a coin dealer and you have to pay a transaction fee of some amount. Finally, your coin dealer himself actually has to have the cash to give you in return for the Maple Leaf or teensy-weensy Gold Chip.
There is a further critical problem with using gold as money, which is that over the millenia it has become highly centralized. It began as deposits sprinkled out all over the earth and was gradually mined up, for ornamental jewelry and then used for coinage. Over time, generally by some form of theft like the Spanish Conquistadores ripping off the Aztecs, all this gold got hoarded up and ended up going right back where it came from, in a hole in the ground. Now though, the gold was "owned" by a few people, in the olden days a few Monarchs and a few Banksters. Nowadays it's Sovereign Wealth Funds, TBTF Banks and a few filthy rich Hedge Fund managers who are also Gold Bugs. Then you have another small cadre of people who have gold in the form of coin collections, and some with jewelry. Most of the population though has no gold whatsoever. So if you want to use it as money, what is the mechanism for getting it out of the hoarded piles and back into circulation for the population at large?
The answer to this dilemma often proposed is that the Banks then issue Notes on the gold, which would then be used as money. The problem there is that unless the gold is redeemable for the note, the note is not really "gold-backed", thus you are right back to the fiat money problem. In such a system, banksters ALWAYS print more notes than they actually have in gold bars in the safe. That's the principle behind fractional reserve lending and also modern rehypothecation, where the same pile of gold is used as collateral for layers of loans on top of it.
At some point these Ponzis based on gold always collapse, and a few people get gold back for their notes and the rest are left with a piece of paper. In general, the ones who end up with the gold are the guys with the combination to the vault. Back in the mining towns of the Old West, this happened all the time. The miners would go and have their gold assayed, then deposit it in the local bank where it was supposed to be safer than keeping it in your mining shack or carrying it in a pouch on your belt. In return, you would get notes from the bank that you could use to go buy a haircut and a bath, a nice steak and bottle of whiskey at the saloon and spend the night in Miss Kitty's Cat House. Then one morning you wake up and the local bankster has skipped town with the gold, and all you got left in your pocket are worthless notes.
All in all, this makes a system utilizing gold proxied by paper notes no better than the fiat system. Unless you actually are using the coins themselves as currency, then all the same problems of bankster dishonesty remain. If you do hoard your own gold at home and carry it around as currency, then you are vulnerable to theft from the other end of the spectrum, the highwaymen.
This is just your issues at the consumer level though, the much bigger issues come at the wholesale level, because once the banking lockup hits, stores can't pay their suppliers, suppliers can't pay the shippers etc, so whether you have either Cash or Gold, the products simply don't make it to the shelves to buy with money of any type. If the problem goes on for any length of time, people start to get desperate, as has occured already in India as people raid warehouses for food. That's only a one time solution though, because once the warehouse is emptied, it won't get resupplied until some new system is dropped into place. Anything more than a week long "Bank Holiday", and you are in the Deep Doo-Doo..
Most places in the world still highly dependent on cash are hard pressed to get any kind of new currency regime going, again India is the Canary in the Coal Mine for this. To get a complete exchange done takes a month at least, and meanwhile tons of people have no money whatsoever to work with. Farmers can't get seed, truckers can't get diesel, electric companies can't buy coal, etc.
Here in the FSoA where most exchange is all digital now and most people have some kind of plastic card, debit, credit or a SNAP card, as long as it was pre-planned and ready, an alternate regime could be dropped in place overnight. What this might entail would be a nation-wide bail-in of all depositors, taking 50% of everyone's savings and then using that to recapitalize the banks. This of course is also highly deflationary. It also would be EXTREMELY unpopular and you would be sure to see the Pitchforks and Torches surrounding Trumpty-Dumpty at the White House.
Besides that though, it wouldn't really solve the problem, because in fact even after doing this these banks would still be insolvent. Since the people just had half of their money stolen, now they don't have this money to pay their car loan and mortgage which means more NPLs and less assets for the bank. Real Estate prices drop precipitously as people no longer have the money to buy the McMansions and more people go into foreclosure. Rinse and Repeat.
The only advantage to this type of solution is it might allow the economy to function a while longer without complete breakdown that a paper system has to deal with on a virtually immedite basis. So rather than complete havoc occuring within a week or two it might take a few months. Maybe.
Returning to the individual, what can you do here to in some way prepare for this eventuality to occur? Well, as always you should be Prepped up with enough food to last through what hopefully is a temporary disruption of a few weeks to a couple of months. You should have a reasonable amount of cash, again a couple of months worth of your bills, and hopefully they will take your cash at the gas company office if the banking system is down. If you have enough money left over after this and think Gold is a good store of your wealth, go ahead and buy some. Personally, I would not start buying Gold as a Hedge until I had at least 6 months in Cash and Food Preps, but 2 months is a minimum here.
Far as your digibit money in the banks is concerned, Credit Unions are probably somewhat safer than banks, but not by much. Definitely keep the money in Federally Insured account and don't have more in any account than the insurance limit, which I think is around $250,000. That's a lot and most people do not have near so much, in fact most people are lucky if they have one month of bills in savings. Also, splitting up your savings to a couple of different banks might be a wise precaution. How well the FDIC progam will work in a systemic crash is open to question of course, but it's better than nothing.
The other digimoney many people support as a way to store your wealth are the Crypto-Currencies like bitcoin. I don't recommend those at all. In a systemic banking crisis I think those digibits will be worthless and not exchangeable for whatever the new currency regime is in your neghborhood. Besides that, in all likelihood after a month of disruption, the Internet will go Dark and none of your cryptomoney will be available.
Now, if you are really loaded, there are only 3 other places you might try to preserve your hoarded wealth, the traditional investment vehicles of Stocks, Bonds and Real Estate. In this type of deflationary crash, it's hard to imagine how any of the paper investments would hold much value, and they also generally suffer from the problem of being extremely illiquid. It would be hard to sell them to get any new cash being offered up by Da Goobermint, certainly you could not unload them fast enough to use the proceeds for hopping at Walmart for more Preps..
Real Estate presents probably the best of these investments for the well-to-do, but you definitely don't want to be buying it with credit on a mortgage. In a deflationary crash, it's likely to be underwater rapidly and you probably will lose your job and be unable to pay the mortgage. So you need to have enough money to buy the property in cash, and few people have enough to do that, at least no more than a few acres of raw land in a cheap area of the country anyhow.
To wrap it up here, there aren't any real fullproof solutions to preserving all that much wealth in a systemic monetary crash, particularly one which goes global. This crash will come at some point, the system has been patched together with spit, duct tape and bailing wire for almost a decade and it is teetering on the edge of the precipice. Keep your fingers crossed that the "Smartest Guys in the Room" have a Plan B here to keep things running a while. If not, we'll see the End of Industrial Civilization occur over a very short period of time.
Finally, why do you think this problem devolves FIRST to Monte dei Paschi di Siena, the OLDEST bank there is in this system, chartered even before Columbus
discovered invaded Amerika in 1492? Monte dei Paschi start date 20 yers earlier. Buehler?
If nobody comes up with a good rationale on this, I will pitch mine out. To me, it is obvious, but do not know how others see this. So I ask for some speculation here.