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19 comments on The Finance Round-Up: September 7th 2007
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Hi Stoneleigh,
Thanks for the great roundup articles on finance.
I've noticed you raise the spector of bank runs on more than one occasion. Can you expand on that. Do you expect people to go and pull out possibly hundreds of thousands or millions in cash? What would a bank run look like?
-Don
I expect people to try to withdraw cash, and to find that it is not possible to do so, beyond the first few anyway. I doubt if banks have even as much as 1% of their depositors money to hand back to those who ask for it, and deposit insurance won't be worth the paper it's written on if the problem becomes widespread.
Bank runs are self-fulfilling prophecies in that fear of not being able to cash out drives more people to try to cash out at once, and it is that which causes the bank to close its doors. In the 1930s, banks did not close until 1933 when the market bottomed, but I doubt if we will have that long to wait this time.
Hi Stoneleigh,
In 1933 personal transactions were all in cash or check, now there are cash cards (debit cards) how do you think this device will be affected by or effect a bank closure? Did check transactions still work in 33?
BTW what the H. do you plan to do for Halloween? It will have to really go some to top the past month's economic stuff.
Then again, maybe that will be easy as falling off a log jam#:)
Stoneleigh, another question if you please:
If I hold a solid metal loony what fluctuations in buying power will it have, in your estimation, over the next twenty years? Maybe consider it in the purchase of a Coke? Right now the local Gasateria sells a bottle of it at about 2 bucks, so that's about half a bottle for my dollar now. How is my bottle going to look in retrospect during those fluctuations, half empty or half full?
I would expect money to increase in value relative to goods and services during a deflation, so your loonie should do well initially. If you are one of the few who sill have money during a deflation, then an awful lot of things will seem very cheap. During the depression, people were forced to sell all manner of assets to pay debts and living expenses, and with so many things offered for sale and so few buyers willing to part with precious cash, prices fell off a cliff.
After the deflationary phase things get considerably murkier. No one can give you chapter and verse on purchasing power over the next 20 years. My guess is that deflation and a derivatives meltdown will eventually destroy the current system of global financing. If the propspect of international financing of government budget deficits no longer exists, then governments may well be tempted to fire up the printing presses (as opposed to manipulating the cost of credit in order to stimulate borrowing and lending as they do now). At that point the dollar would go the way that all fiat currencies go eventually. We could see deflation followed some time later by hyperinflation (my guess would be about 10 years later, but that's pure speculation).
I think there's a significant potential for disruption of most kinds of transactions. In a full-blown credit crunch, I wouldn't expect to be able to use either credit cards or debit cards, or to be able to access funds in a bank, beyond perhaps a small maximum amount per week. Exactly how bad the worst of the disruption gets and how long it continues for is anyone's guess at this point. I would suggest you have some cash on hand to tide you over - probably enough for several months if you can manage it.
I don't expect things to return to what we presently consider normal even once the dust has settled. Easy credit the like of which we have become accustomed to (and dependent on) is an exceptional historical anomaly. Manias that produce these kinds of conditions are very rare and I wouldn't expect to see another one in my lifetime.
Thank you very much Stoneleigh,
I am digging a hole under the old apple tree as I type, all I got to do then is find the fiat to throw in it:(. Had a Fiat once, I didn't have to dig a hole for it, it did it itself. But that's another story the likes of which I wont see in my lifetime again. Painted a sort of picture of it and called that 'The final Ride of the Last Candy Apple Red Convertible'. Yes I know it's a long title but the picture was largish too and as far as cars go I gave it that long title as I rather liked it. I think mainly because when you leave the top off a car it is sort of like being in the great out of doors, real cowboyish and so not half bad.