Monday, November 28, 2011

What Happens When Fiat Currencies Die?

The Bank Run

What happens when the system goes into wild panic mode and everyone wants their money back? What is a bank run?

A bank run isn't a sponsored half-marathon run by your local bank as an advertising stunt. No, a bank run is something far more negative for the banks profile. A bank run is when a whole bunch of depositors get so anxious that their bank is about to go out of business that they start to all try to take out their money in a short period of time.

I say, 'try' because banks are required by law to only have a around 5% of deposits available in cash. This means that they are leveraged 20:1 with actual capital available. They have been able to, legally, lend out 20x the amount deposited. Therefore, it only takes a 5% drop in the value of the assets for there to be absolutely no money left in that bank.

Bank run at Northern Rock, England, 2008.
The UK Governemnt had to step in and guarantee
deposits as there was no money available to depositors.

If you go down to the bank today and ask for your money, they would probably give it to you. They may make it difficult if it is a large amount of you want to send it to another country, but you could get it. But if all the depositors tried this they would have to shut the bank down

By the way, some in the business world are seeing a market niche to start banks that always keep your deposits as ready cash (or backed by gold) and just make their money by charging a fee. A good idea?

The Europeans are waking up big-time to the fact that their money may not exist anymore in their banking system. The 'smart money' shifted their cash out of Europe many months ago. All that is left is highly leveraged banks with figures on their balance sheets that don't exist in reality; and hard working people who think their money still exists.

This whole banking mess is another reason to buy physical gold. It is money, and you can touch it. Gold is the ultimate insurance against bad banks and bad government.

Gold in New Zealand dollars: $2269.14 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $41.84 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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