Monday, May 12, 2014

Of banks, violence, and cold hard cash

I awoke this morning to find a panicked e-mail from a reader claiming that the banks in Ukraine were shutting down and no-one there could get cash any more.  Curious, I decided to check.

The source of my reader's alarm was this May 6th report by Martin Armstrong.

What is happening in Donetsk is by the classic book on how to wipe out an economy. The banking system has shut down. The banks simply have said it is too dangerous for their staff to work. The only way to get any money is using a bank card but that will soon run out ... This is a warning of what can happen in the middle of an economic crisis in the modern era. With everyone relying upon government handouts and the dwindling supply of actual real physical paper money (cash), we can easily end up in a situation of barter.

There's more at the link.

That sounds bad, all right, but upon further research one finds a rather different picture.  First of all, the 'banking system' hasn't shut down at all - just one bank.  Furthermore, that bank's owner, Ihor Kolomoisky (a billionaire oligarch whose personal and business ethics are questionable, to say the least) was appointed to head an anti-Russian militia by the Ukrainian government. He's publicly called Russian President Putin a 'short-statured schizophrenic', suggesting that his judgment is as suspect as his ethics - because pro-Russian separatists promptly targeted his bank for arson, robbery and anything else they could think of.  They have not targeted other banks in the same way, presumably because their owners and/or presidents had more sense than to make politically charged statements in so unstable an environment.

So no, I don't think the situation with PrivatBank in the Donetsk region is a harbinger of what might befall all banks, either there or here.  IMHO, that's alarmist and irresponsible propaganda.  However, Mr. Armstrong is quite right that if our banks were to shut their doors for other reasons, or government handouts were to grind to a halt, we might have to rely on cash to conduct day-to-day transactions.  If it's in short supply, we might indeed find ourselves in a world of hurt.  That's why I'm in the process of increasing my cash holdings (i.e. money held in a place of safety, not in a bank).  (It's certainly not worth keeping it in the bank:  when savings accounts pay you only a quarter to a sixth of the current rate of inflation, you may as well keep the cash yourself - you won't be losing much!)

Last year's EBT difficulties illustrated how fragile our economic peace has become - and those problems lasted only a day or two.  A week of that would probably engender widespread rioting, including the deliberate targeting of banks as the only places likely to have large amounts of cash on hand.  If that happens, I expect them to close their branches and move their money to safer facilities.  If you don't already have cash you'll have to go without the goods and services you need, because most shops won't accept checks or credit cards they can't process electronically (because the banking systems have shut down due to overload, or a lack of communication between financial institutions).

That's a worthwhile lesson, reinforced by current events in Ukraine.


1 comment:

Paul said...

And if the banks are down for a week I would hazard cash will lose its luster. Food and water will become king soon after.