“How Long Would a Global Banking Shutdown Last?

No one can say with certainty. But based on other banking holidays in modern history, it’s safe to conclude that it could last for quite some time and cause severe hardship for hundreds of millions of savers around the world.

The first and most obvious hardship is that you could be denied immediate access to most or all of your money for an indefinite period. What about government agency guarantees like FDIC insurance? A large proportion of those guarantees, unfortunately, would have to be suspended in order to give banking regulators the time they need to sort out the mess.

It is simply not reasonable to expect that governments will have the resources to immediately meet the demands of thousands of institutions and millions of individuals if they all want their money back at roughly the same time.

“Your money is still safely guaranteed,” banking officials will declare. “You just can’t have it now.”

The second and more long-lasting hardship is the possibility that, by the time you do regain access to your money, you will suffer losses. In this scenario, the government would likely create a rehabilitation program for the nation’s weakest banks, giving depositors two choices:

* Opt in to the program by leaving your funds on deposit at your bank for an extended period of time, earning below-market interest rates. The bank is then allowed to use the extra interest to recoup its losses over time — income that, by rights, should have been yours.

* Opt out of the program and withdraw your funds immediately, accepting a loss that approximately corresponds to the actual losses in the bank’s investment and loan portfolio.

Needless to say, neither the opt in nor the opt out choice is a good one:

If you opt in, you take the chance that the government’s rehab program may not work on the first attempt and that it will be replaced by another, even tougher program in the future. Moreover, even if it works out as planned, you will suffer a continuing loss of income and access to your cash over an extended period of time.

If you opt out, instead of lost income, you suffer an immediate loss of principal. Moreover, in order to discourage savers from opting out, the government would typically structure the program so that everyone demanding immediate reimbursement suffers an additional penalty.

Again you ask, “What about government guarantees?” By rights, in a fair plan, insured depositors would suffer less severely than uninsured depositors. And if the plan is structured properly, those in strong banks should come out whole, or almost whole, while those in weaker banks should suffer the larger losses. That’s how it should be handled. But there’s no guarantee that’s how it will be handled.

To avoid all of these risks, I recommend seriously considering moving (a) nearly all of your bank deposits and accounts, plus (b) a modest portion of the money you currently have invested in securities to the safest and most liquid place for your money in the modern world:
Short-Term U.S. Treasury Securities

Martin Weiss, Money Markets

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