A "Banking Holiday" Described

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In a few comments, readers have specifically asked, "What do you mean by a banking holiday?"

This is a fair question and I can answer it easily. A banking holiday will consist of a period of time where your bank's doors are closed and you will have limited access, if any, to your funds.

"What are the possible impacts of a banking holiday?" Now this is a harder question to answer. In reviewing the Argentinian experience, the most direct impact is that a large portion of trade will shut down, leading to a rapid depletion of consumer goods from store shelves.

Trade will still happen, but at the glacial pace imposed by a direct cash/barter economy. In Argentina, there were stories of farmers buying cars from dealers using soybeans. Presumably the dealers then traded the soybeans off for something else they wanted.

If a banking holiday ensues, things will be very confusing for a while.

Below is a snippet from the September 19 Martenson Report where I try to illustrate the progression of a banking holiday using a scenario format.

+++++++++++++++++++++ Bank Crisis Scenario +++++++++++++++++++++

Day 1: Four major banks are suddenly revealed to be insolvent, and money begins to be withdrawn from these banks at increasing rates. That night, foreign investors quietly begin to retreat from a stricken US banking system, and the withdrawals spread beyond the four stricken banks. As bank servers begin to log more and more withdrawals, alarm bells go off, and late-night emergency meetings are convened.

Day 2: The next morning, US government and banking officials assure the world that everything is fine and that a new program has been put in place guaranteeing the solvency of the US banking system. Behind the scenes foreign money continues to flee as wealthier individuals and institutions with a better view of the real state of affairs retreat to the safety of their home countries.

Days 3-7: The expatriated money is converted into anything other than dollars, resulting in a dollar slump that confuses all but the most astute of observers. Simultaneously, US interest rates begin to climb, as US bonds are sold off in preference for non-US assets.

Day 14: Fearing a massive run on the dollar and a collapse of the capital markets, the US imposes an emergency order, requiring a 2-week delay in money flows out of the country. This is, of course, nothing more than a capital control, a favored but ultimately inflammatory tactic of countries suffering a currency run. Around this time, a growing proportion of domestic bank account holders realize that, because of the interlocked nature of the banking system, simply moving money from one bank to ‘a better one’ is not a fool-proof strategy.

Days 15-21: Over the next week, cash is demanded with increasing frequency, exacerbating the troubles of an already beleaguered banking system. A cash shortage rapidly develops, leading the Treasury Department to make a high profile show (on television, of course) of armored trucks pulling up to banks with large bags of cash. Assurances are made that everything is fine and that there is enough cash for everyone. Commentators on television make snide comments about the people lining up for cash, suggesting that they are over-reacting. But the Treasury is caught off guard, and even a 24/7 printing regimen cannot keep pace with cash withdrawals.

Day 25: Currency controls are announced over the weekend, limiting cash withdrawals to no more than $250 over every 48 hour period. A few days later, the government announces that the US banking system, and, by extension, the US stock markets, will be closed for a period of two weeks while the situation is “evaluated” and solutions are identified.

Day 50+: A month later, the markets finally open up again, with the Dow down several thousand points, the dollar worth 50% of its pre-close price, and people everywhere suddenly trying to convert their cash holdings into things. Rampant inflation ensues. The dollar continues to fall.

+++++++++++++++++++++ End of Scenario +++++++++++++++++++++

Obviously, there are a lot of different scenarios - I only wrote this one up as a means of helping to make it seem more "real." I regularly use scenarios as the means to test out my ideas and plan my actions.

I will be the most surprised of all if the scenario above is how things actually unfold.

I hope that helps.

Chris

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-banking-holiday-described-2/

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As I am reading these points the second time, I see how much better my understanding of it is from mid-September. But I understand even less the relationship between available dollars and available goods. Will a banking holiday (or our current overspent situation) impose a strong limit on available dollars, or will there still be enough of it to be competing for a shrinking pool of goods, pushing prices up? Can there be large discrepancies between the different areas of the US (e.g. sugar or petrol or water is hard to get thus expensive in Arizona, while fruit is cheap in CA because of transportation difficulties of the fruit to elsewhere?) How does the money-pool get affected by foreign investors removing their holdings from the US bank system/money-market? Is it paper or electronic money they are removing, or actual cash in hundred or fifty-dollar bills?

The overall scene Chris describes does sound to me a little bit taken from the past, maybe because we didn’t have anything happen lately in a country where so much of the exchange doesn’t depend on physical money, but rather money in electronic form. I would think a banking holiday also stops the working of debit cards. I even doubt credit cards will be accepted in the ensuing chaos, even if electricity production and the Grid is still intact. Being aware of the six steps of making peace with a situation will be even more important in loaded times like a banking holiday.

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Chris (or any other bright person here),

You decribe a run on the US dollar. I think this means, that peoples and businesses exchange their cash into other currencies in fear of inflation or being illiquid during the banking holidays. But as we see, the crisis is worldwide. Does a move into other currencies actually make sense in such a scenario, since the situation is everywhere the same? Or is it US-specific regarding the fact, that so many foreigners hold dollar reserves?

Again, thanks a lot, much appreciated!!
Robert

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It’s amazing how patient you are in keeping your language neutral. If you werent, this would just be a run of the mill conspiracy website. Clearly you understand the way the media, politicians, the central banks, etc manipulate the masses, yet you refrain from targeting and insulting anyone. That takes a higher level of thinking.

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From a monetary point of view, the purpose of a bank holiday is to stop the deleveraging process which occurs when deposits within the banking system as a whole are withdrawn from the system in cash. Because of the "money multiplier," when the system as a whole loses reserves by paying out cash, loans must shrink by as much as 10 times the lost reserves. Such deleveraging was a major cause of the horrifying deflation during 1930-1932.

Checks are not a problem, because checks simply move money around within the banking system. Even during Frank Roosevelt’s March 1933 bank holiday, some commerce was still occurring using checks. In today’s economy, checks likely would continue to be cleared, even if bank branches did not open their doors for business.

What the system does NOT want is a large-scale withdrawal of cash. So, as was the case in Argentina, cash withdrawals would be limited. Foreign remittances have the same effect as cash withdrawals, in terms of removing reserves from the domestic banking system. They would be another target of such policies.

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Thanks for "making it real"…I would only offer that day 3-25 in your outline may take place in 2-5 days…when this thing unravels—it will happen so fast it will make even the most astute of observers head spin at the rapid decline and inseuing fall out…keep up the good work—and YES–if CNBC calls–you Have to go…waying all the cons—if you help 10 people ( and it will be Much–much more ) realizing you may be set up…is a non-issue—you will just need to be very calculating—while still saying it straight and hard…take my advice for what you paid for it…

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Chris -

A well-described scenario.

However, while I generally agree with the sequency of events as you describe them, I suspect that, given "digital velocity", that the events would progress at a faster pace.

While bank runs have occured numerous times in history, in various locales, the velocity of events was usually dampened by the "top speed" of paper transactions.

As a result, instead of 25 "days to holiday", this might come much faster now.

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sorry jdb123 - I posted my comments without noticing yours.

Looks like we’re basically saying the same thing RE the speed of events.

And YES - Chris should definitely take the invite, if offered.

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On the lighter side (sometimes humor helps in stressful times), a report from here in Japan…

"Recent reports indicate the Japanese banking crisis shows no signs of
improving. If anything, it’s getting worse. Following last week’s news
that Origami Bank had folded, it was today learned that Sumo Bank has
gone belly up. Bonsai Bank plans to cut back some of its branches.
Karaoke Bank is up for sale and is going for a song.
"Meanwhile, shares in Kamikaze Bank have nose-dived and 500 jobs at
Karate Bank will be chopped. Analysts report that there is something
fishy going on at Sushi Bank and staff there fear they may get a raw
deal."

 

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Laughing good one.