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26 comments on The Finance Round-Up: October 2nd 2007
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Hi Stoneleigh, You say during widespread bank runs,. Does that mean that at some future point, after the panic, it would be possible to access ones funds in some sort of orderly fashion? Or is it as you say a confidence trick and all bets are off; and on that question, how so?
Canadian deposit insurance is through a Government Corp, which would indicate to me, in my blind faith and trust of our government, that up here we would not fare as poorly as the Texas GreyZones could? If that is so, would they be able to bank with a Canadian bank in Texas for similar security?
It's all about scale, CR. That and the mood.
If 100 people demand their $100.000, there is no problem, though it may take some time to physically gather it.
If 100.000 people demand their $100.000, there is a big problem, and it makes no difference what deposit insurances have been given. If 1 million do so, the doors will be closed. As Stoneleigh says, the money is simply not there. It would have to be created, and that is not going to happen.
At least 95% of our money doesn't exist physically. But in a bank run, that's exactly what people will demand: physical money. A transfer to an account at a different bank will not be accepted.
Waiting till after the bank run panic to access your funds is not useful; chances that the bank will be open for business as usual are slim at best.
Argentina's solution was to limit withdrawal to, I think, about $100 a week, in local currency, and no access at all to USD or other foreign currency (that probably included gold). That still sounds to me like something banks and governments here might consider.
Taking your money out of bank accounts now, before -scores of- others start doing it, looks like a pretty safe thing to do at the moment.
Thanks ilargi, you have brought me most of the way to dock but for the sake of discussion and a bit more clarity, if you have time?
We pay our bills, property taxes, utilities etc. through our bank accounts and never see so much as a silverless dime of it. I have a bit of a hard time understanding why these paperless transactions would be affected. We buy most of what we need, food etc., using electronic transfers (debit card)and other than change for a parking meter (and even there there are is often 'pay by card' metering) why other than for small cash purchases should I need concern myself about throwing my body at the bank doors? (though I do plan on having a couple of months of lolly stashed under the nearest rock, just in case I am completely wrong in my thinking).
I can see mood being a factor here, as well as, if or when, one is in a position where paperless transactions are not available ie no card or bank machine, but after that my thinking gets muddy. Help! help!, so near the jetty of enlightenment yet I flounder in the sea of basic financial ignorance.
If you can only take X$/mo out of your bank accounts, no one will take anything other then cash for many goods and services. Two separate economies develop overnight. The official stuff you do with keystrokes. Food? Gas? that sort of thing, not a chance in hell. About a year ago they had a bit of a gas shortage here locally because of a problem with a pipeline. You had to wait for the tanker to show up or get in line if you found a station that had gas, they only sold you $100.00 worth max and you had to pay cash. I just mention it to preempt the "it can't happen here".
In Argentina in those days the U$S was king, not the Peso/Austral. Here there is no popular culture of having a hard (well it used to be hard then) currency running semi underground in parallel.
In the US maybe 1% of the population knows what a Euro looks like or what it is worth. That's why as a whole we will get hit much harder. Believe it or not, even in a place like Mexico City the people on the street are much more sophisticated then here when it comes to dealing in foreign currency or PM. They had huge currency devaluations there in the 70's.
I have seen the drill personally 3 times, Mexico City, Buenos Aires, Moscow. I know how it worked then, gives one little head start even if it is comparing Copacabana with Fallujah.
Correction, it probably was more like three years ago as I still had the PU truck then.
Thanks for that musashi, The disconnection was just that which you mention of there being two economies, one for the rich and one for the survivors:). Street level hustling, I can dig that. I will have to look into how things went in those crashes you mention. I should also re-read Dimitri Orlov, http://www.fromthewilderness.com/free/ww3/060105_soviet_lessons.shtml http://energybulletin.net/23259.html
I still miss my Toyota pickup after 7 years and it is near impossible to find anything small and useful today, just those beasts so high one needs a stool to stand on to load the manure ....stupid things. The only things I ever see them carrying is beer. Maybe that's the draw there?
For the moment it looks like the Canadian loonie would be a collectible? What do you think will be the currency of future choice? Cowry shells to go with soft summer nights were my pick but with global climate change that market might be flooded.
It isn't two economies, one for the rich and one for the survivors. It is two economies for everyone. The very rich are only able to function for as long as they can hire help as they are too obvious a target. The dumb and the sheep never do well regardless. The activists are cannon fodder. Maybe the trick is to be able to function everywhere while keeping a low profile.
No idea how it plays out, sometimes you get parallel universes and different realities play side by side, all you can do is watch and try to read it.
One thing that doesn't make any sense, but if you consider the lack of main street knowledge re hard currency and PM's, is that maybe even if the U$S is destroyed internationally the U$S still is used internally for lack of anything better.
Forget the guys who preach BS to make a buck or further an agenda. Just like you can have inflation and deflation at the same time depending specifically for what, maybe the dollar is worth more or less depending precisely for what.
That's a question for the smart people here, I'm just thinking loud.
musashi, I really have to watch out how I say things that was supposed to be tongue in cheek about an economy for the rich and one for the poor, that is merely disparity. But I do think that a lot of the poor will fare better than one might think as they have had to depend upon each other closely for survival, they have had practice..
It was nice to know you have no idea how it will all play out as I could use company there. The whole situation is much too massively complex to do other than lend support to those about you and maybe get it when you need it.
Take a look at the Toyota Tacomas, both new and used, depending on whatever you can buy without credit, of course. If you stay away from the jazzed up "macho" versions, you will find that Toyota still also makes a version of the Tacoma that is 4 cylinders, normal height, and has a decent payload capacity. I know that the newer 4 cylinder Tacomas can get as high as 28 mpg, so while it is no Prius, it sure beats driving one of those monster SUVs, especially if you have regular hauling needs. I've been borrowing my son's Chevy Silverado 6 cylinder frequently and it has way more capacity than I've ever needed so I may decide to jump for a used Tacoma soon. Also check out the Nissan Frontier, another nice small truck. You have to sift through all the option packages but it's another truck with potential to be a decent hauler with solid mileage otherwise.
"The greatest shortcoming of the human race is our inability to understand the exponential function." -- Dr. Albert Bartlett
Into the Grey Zone
CR,
You made me laugh there.
It's not that obvious at all why the virtual money system couldn't continue to infinity and beyond. Modern day fractional banking has left very few, if any, reserve requirements in place. However, you are talking perpetual motion here: down the line that would mean anyone can open an internet bank, and everyone can live forever without working an hour in their lives. If I put it like that, it sounds ridiculous. What's even more so, though, is how close we are to that situation.
What kills your devious ideas is that banks still do need to fulfill a number of requirements at the end of every day. That's why there's such a lot of talk about interbank lending practices. But it's the Ponzi part of the scheme that both makes them turn huge profits, and threatens to do them in. That mortgage you signed 5 years ago for $250.000 has been leveraged into a $25 milllion investment windfall for your lender, who sold it to a hedge fund, who sold it back to the lender etc.
There is no problem, it's all smooth sailing, until the growth stops, and/or until you fail to pay the monthly fee. Especially if you do that 6 months in a row. Then the question pops up what that mortgage is really worth, and, moreover, what your home is really worth, if they would have to evict you and sell it.
Say the resale value has dropped to $200.000, then that would mean the whole leveraged charade built on top of it would lose 100 times that amount, or $5 million. Your bank would be required, when trying to make ends meet with interbank loans, to show what its assets are worth. If it has 100 or 1000 no-good CR's in its books, or even commercial paper issued elsewhere hurt by CR's no-goodness, at a certain point the other banks will say: you ain't getting a dime from me today.
Reason: because all this stuff is traded under the table, make that under the floor, no bank knows how much another is invested and exposed to this toxic mold. They have no gaurantee they'll get their dough back.
Short, banks will check if you are good for your money. If you can write a check for your electricity, you can also write me one for 90% of what's in your account. That's fine with the bank, until your whole family and circle of friends start doing the same, and that starts a reverse Ponzi scheme.
Read the book Maxed Out by James Scurlock, forget the movie (it sucks), he lays it all out very plainly. People who pay back their debts in time are called dead-beats. Those who don't, and thus get into higher interest rates, are their favorite clients. Why? Because as long as they're in the books, those debts can be used to borrow 10-100 times what they aree owed to the company.
See Money as Debt, buy a whole bunch of copies, 10 copies $135, the best $13.50 X-mas gift you can give anyone these days, bar none. It's an animated movie, give it to any kid 14 and older.
We're talking about a Christmas special here for it, try and save as many people as we can from ruin.
iligri,
You make me laugh too.
You say... What kills your devious ideas ... and then ...
100 or 1000 no-good CR's in its books ... my wife has enuogh trouble with one no good CR in its cups.
All this because I wish to continue to pay my bills? Help! help! I am floundering at the end of the jetty and iligari is trying to pour water up my nose!!
Seriously iligari I really do not see the difference between a paper banknote and one that is formed on a electronic memory on a harddisk. I go to work I make some lolly and I go to the bank and deposit my check, I then have the choice of taking paper currency out and paying bills or going home and transferring those same dollars electronically to pay my bills.
As far as one being virtual and the other paper and real, I would say that both are virtual as neither are real wealth but merely representations of the same. The Bank may not be able to store enough banknotes to give me mine on request for the sheer physical problem of doing so. As far as giving me my money electronically I do not see the problem there.
About as money being made as ponzi dollars,if someone is clever enough to take his gains that way into the bank and deposit them in an account just like I did with my hard earned bucks then this is a moral problem and not a financial one. The musical chairs at the ponzi party will be removed and eventually that party will end, but I would imagine the dollars on the table that are left while not being real wealth will represent real wealth. The thing is not to be part of something that does not represent real wealth. (room here for elaboration but it is past my bedtime and I flag)
About future wealth creation, after the collapse of that house of cards, I really don't want to think of it (anyway I will be too busy working in my garden I think). I would agree with you guys that the smart move is to move any savings into as close as possible to real wealth and into real wealth itself when dollars euros or pounds begin to loose their savour.
Electronically denominated virtual money is prone to evaporating at inconvenient times once the virtual value that underlies it is shown to be a mirage. With the products of financial alchemy still marked-to-model rather than marked-to-market, that value theoretically still exists, although it is being treated with increasing suspicion (hence the interbank lending problems). Once those assets are marked-to-market at auction anywhere in the world, whole asset classes are likely to be abruptly revalued - drastically downward if such an auction generates only pennies on the dollar.
In contrast, your paper dollars are far less ephemeral and should retain 'moneyness' (act as a store of value or medium of exchange or a standard against which to value other things) for far longer than the electronic variety. The money supply is composed of many levels in an inverted pyramid, in which each successive level is a broader definition of money than the one below (ie has a more tenuous connection with underlying real value).
The products of financial alchemy commonly referred to as derivatives, which make up a large proportion of the effective money supply, are very far removed from underlying real value. In a deflation, investors proceed from the broad top of the pyramid to the narrow bottom, crossing off the list successive levels of broader money - removing the quality of 'moneyness' from different asset classes as they go. At the narrow apex of the inverted pyramid you would find cash, implying that it will hold the quality of 'moneyness' for longer than almost anything else.
Of course eventually fiat currencies all end the same way, but that doesn't mean such as currency cannot first have a value revival because it looks pretty good in comparison with, say, credit default swaps, as a store of value. People understand what cash is and are very inclined to trust it for the time being. I can't tell you exactly to what extent non-cash transactions would be disrupted by what time, but I would say that disruption is to be expected and it's better to be safe than sorry. If banks close their doors it is IMO very unlikely that the balances left behind will be accessible again to any meaningful extent, even if authoritative-sounding assurances to the contrary are given.
Thanks Stoneleigh for putting things so clearly, I will put your comment here into my notebook to pass on. Maybe this will convince my brother and his wife now.
I am retired myself and I would think there are many others in the same boat who have some part of their retirement funds self invested. Making sudden moves can be difficult depending on how they have invested. For instance someone investing in a back loaded mutual fund could face up to an 8% loss to move directly to Cash dollars. With a bit of planning an orderly retreat like moving those funds to a money fund within that mutual fund family. That is no cost would be safer than a market exposure.
My position at the moment has been to move as much to safety as possible (devils are above and as well below) ranging from cash on hand, T-bills and money market. I have made arrangements that would liquidate those money market funds if the weather gets too nippy. My market exposure is limited to one small holding in a wind company and another in a hydroelectric company. I think the hydroelectric company anyway would hold as well as my cash dollar.
I think everyone has to look to their own positions and judge for themselves what is necessary. It does help when there is information like yours to help make those decisions. I would like to hear others talk about how they are preparing for change. The better prepared everyone is for the changes the easier it will be for all when we down shift into a more basic economy.
A different position is the one my brother is in where he is living in a suburb in a major Canadian city with no mortgage and a year from retirement. In his position I would be listing my house and looking for the small holding in the country, planting fruit trees and garnering ducks as quickly as possible. But he so far shows not a smite of interest in that, but as I mentioned above maybe your words will convince him.
Thanks to both you and illargi for the help.
It will be much worse then in Argentina even under the same rules.
In those days in Argentina you could walk the main upscale shopping streets in the city and find individuals openly trading foreign currency on street corners. Just like here they trade drugs in the ghetto, except no one got whacked over their head.
Different places, different times.