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A “Banking Holiday” Described

user profile picture Chris Martenson Oct 10, 2008
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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banks are suddenly revealed to be insolvent, and money begins to be withdrawn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