Blog

A "Banking Holiday" Described

Friday, October 10, 2008, 9:27 AM

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banks are suddenly revealed to be insolvent, and money begins to be withdrawn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 

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

9 Comments

Gaborzol's picture
Gaborzol
Status: Bronze Member (Offline)
Joined: Mar 24 2008
Posts: 38
Still struggling with inflation/deflation

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. 

rkopf's picture
rkopf
Status: Martenson Brigade Member (Offline)
Joined: Sep 4 2008
Posts: 29
Bank crisis scenario outside US

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

Zay294's picture
Zay294
Status: Member (Offline)
Joined: Sep 24 2008
Posts: 10
Re: A "Banking Holiday" Described
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. 
machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Think Like a Bankster

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.

jdb123's picture
jdb123 (not verified)
Re: A "Banking Holiday" Described
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.....
GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Re: A "Banking Holiday" Described

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.

GDon's picture
GDon
Status: Bronze Member (Offline)
Joined: Apr 2 2008
Posts: 86
Re: A "Banking Holiday" Described

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.

Pandabonium's picture
Pandabonium
Status: Bronze Member (Offline)
Joined: Aug 30 2008
Posts: 88
Re: A "Banking Holiday" Described

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."

 

tom.'s picture
tom.
Status: Gold Member (Offline)
Joined: Aug 18 2008
Posts: 345
Re: On the lighter side
Laughing good one.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments