Bank Failure

Bank Failure

What would our world look like after a financial collapse – a world where bank transactions could no longer be performed due to systemic institutional failure? Could a national bank holiday be declared?  For a weekend? For a few weeks or longer?

Many argue that this could never happen, but more and more voices are raising the alarm that this is a very possible scenario.  With all the towering derivatives and collateralized debt obligations in the financial markets at risk of cascading into full default, all it takes is one significant financial failure of a bank to set the dominoes falling. As these debt instruments unwind quickly, it will be revealed that there is not enough money in the system to settle all the claims.  Once the music stops, money will have evaporated into very few hands. At that point the dollar would be worthless.

Currently the Fed is trying to flood the system with more fiat paper money to avoid this outcome, but the recipient banks are making few loans and instead hoarding it to prop up their balance sheets. It is not entering the economy in a high enough volume to sufficiently increase liquidity for the capital markets. All it is doing is leading to a dangerous flirtation with inflation and its nasty cousin, hyperinflation.

If money and credit stops circulating adequately, business would grind to a halt.  No longer would there be the necessary credit lubrication needed for exchanging goods and services. On the other side of the coin is hyperinflation resulting in the same outcome – a collapse of the currency.

The populace would suddenly be struck with insolvency except for what people had on hand – paper money, precious metals, and any other hard assets perceived to have value.

This means that production and distribution of all kinds of goods would be interrupted due to an inability to link sellers and buyers through a convenient medium of monetary exchange.  Any food and goods still in the stores would be stripped from the shelves, available for sale only to those with cash. Our just-in-time inventory systems mean that re-stocking would be limited to whatever is in the pipeline and nothing more until credit transfers were reestablished.

In short, we would be thrown back on our local resources, and many people would panic.  This is the acute phase of societal breakdown.  If people were fearful, hungry, and angry, this could develop into a full-blown social crisis.

In this event, government would mobilize and martial law would be declared.  It’s likely there would be complete lockdown to avoid civil unrest.  Feeding people becomes the number one priority.  For those that have ‘prepped’ for such a possible catastrophe, there will be some solace in not going hungry and not needing to go out in public and vie for government handouts with those that are destitute.

This acute phase will pass, but a more chronic condition might take its place if the system doesn’t come back on line.  In such a chronic situation, the national government will likely issue a new currency or reinstate a devalued dollar. No matter the degree of success of this effort, it will be chaos.  Whatever new regime gets established people will end up being disenfranchised with much of their paper or digital wealth gone. They may only own whatever they can defend and have near their person, i.e. house, land, equipment, gold, silver and other hard assets.

In such a scenario we will be forced back onto our local reality.  The national government will not have the means to support the people other than militarily (a double edged sword), and the state government will also find its ability to contribute severely limited. However, our local county or town will mobilize and will be the main public entity that will be able to make a difference.

This means that we are very much on our own.  For a time, society may completely change and its meaning become transferred to our neighborhood and surrounding area.  This may occur for many months or spread out into years if there is difficulty in implementing a new system.  In the meantime, survival issues are paramount.  Priorities will change completely and people will need to be intimately involved in securing local food and energy sources. Out the window go celebrity worship, reality shows, and national sports.

This article presupposes not only a breakdown in the supply chain, but a high degree of wealth destruction as a dollar devaluation kicks in. However, no one can really predict the outcome of such an event. It is only a calculated guess.  The purpose of this article is to point to an extreme version of systemic failure to help motivate each of us to consider that ‘prepping’, whether physical or psychological, is an important safeguard.

 


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