Just as Janet Yelling is taking over the Fed from ‘Helicopter’ Ben Benanke, something is happening.
Last October, Chase Bank put a limit on cash withdrawals and international transfers. Banks generally do that to fend off a possible run on the bank, where depositors demand more cash than the bank keeps on hand, forcing the bank into insolvency. Banks have been sensitive to that since the condition wiped out many of them in the Great Depression of the 1930’s. The stock market is equally sensitive to it: the market dropped the day of the Chase story. But individual banks can face unexpected cash shortages, though it’s conceded to be bad management when it happens.
However, subsequently, a major Chines bank ‘temporarily’ put a hold on cash withdrawals. China is a special case but it is very much a part of the international financial system these days, as the Chinese economy is a major buyer and seller into world markets. And we know that China is, along with much of the world, under economic stress.
Then, HSBC, a major British bank put limits on cash withdrawals too. As depositors’ withdrawals were refused, the resulting furor forced the bank to back off. But as the lawyer put it: “The bell has rung; go ahead and unring it!”
And today, we heard that in Russia, My Bank, a major lender, has restricted cash withdrawals. Yeah!
We are fairly assured that some folk believe in coincidences, even in the international banking system. They’re entitled; it’s their money or at least, we hope that it is. Because we don’t believe in coincidences, especially in the international banking system.
So for what it may be worth, we point to a bit of history from the Great Depression: On March 6th, 1933, President Roosevelt shut down the U.S. banking system to stop an ongoing run on the banks that was pushing many into insolvency. From that day, no one could withdraw any money from an American bank. If you needed food, or gasoline, or medical treatment but lacked cash, sorry! No checks could be processed; the banks were effectively closed until March 13th. Today, that would shut down the credit cards too.
History famously repeats and just as famously, differs in detail when it does. That’s why generals are always in trouble for “fighting the last war” at the beginnings of new conflicts. So much has changed, the advent of credit cards and electronic payments particularly, that things will differ this time. But our politicians are fighting the war against economic depression with the tactics of a now, long dead economist, John Maynard Keynes. The results seem likely to be no better than those of the generals.
We don’t know what is happening; we believe that something is. We certainly don’t know what will happen; we believe that something will. And if you keep a couple or three week’s cash on hand (quietly) or as much more as your pessimism extends, it isn’t likely to hurt and may even help, depending. Who knows? Well, maybe Janet yellen…but she’s not talking!