Greece Faces the Threat of a Bank Run

As Greece’s new government struggles with the EU to determine the fate of their debt, businesses and citizens are worried that the country will default and be forced to withdraw from the European Union. As explained in this article, smart people are taking their savings out of Greek banks so that they will still have Euros to spend if Greece should be forced to revert to the its own currency, possibly issuing the drachma once again.

With uncertainty clouding the immediate outcome, cash is likely to keep pouring out of Greek banks over the next few days. About 70 percent of the outflows can be attributed to Greek corporate accounts. And most of that is rushing out of the country via electronic transfers to bank accounts elsewhere in the euro zone, Switzerland or the United Kingdom.

But many Greek citizens—who account for about a third of the deposit outflow—seem to be taking their cash out of the bank and placing it in safe deposit boxes or even just taking it home and literally stashing it under their mattresses. Burglaries, not surprisingly, are on the rise.

Runs banks are self fulfilling prophesies that can quickly turn into death spirals.  Let’s say that 2 percent of the population worry that their money is at risk, so they go to the bank and start withdrawing all their cash.  They line up at tellers and ATMs.  People whoa re not concerned see this and wonder “Hmm, maybe I should be worried.” They decide to take some of their money out, just in case.  This leads to longer lines and to empty ATM machines, which causes even more people to worry.  In a matter of a few short days, banks run short of cash and have to limit withdrawals, which in turns creates more panic.  Before long, everyone wants to withdraw their money, but not only is their a shortage of cash, but the banks in a failing economy don’t have the credit they need to borrow more and they cabn;t liquidate their assets fast enough to cover the withdrawals.  They have no FDIC to reassure small savers, and the government can’t come to the rescue with Euros because it has none.  We may see this recipe for disaster in Greece over the next few days.

How can you protect yourself in a similar situation?  The key is to be early; make your withdrawal or transfer funds before the banks or the government puts in place rules, regulations and restrictions.  Here are other suggestions:

  • Have cash on hand to weather a bank holiday or other period in which you cannot access your money.  Keep in mind that your credit cards, debit cards and other electronic payment methods my be “turned off” in an economic collapse.
  • Have some assets such as real estate, precious metals or hard goods that will retain their value regardless of the currency of the day.  The ultra rich often invest in art, knowing they can auction it off to raise millions in whatever currency they want.  We many not be able to afford that, but you can tuck away some silver coins, gold, or investment grade gemstones.
  • Don’t rely on a bank’s safe deposit boxes as they may restrict access or governments may even try to confiscate goods.  Buy a safe, lease a vault from a non-bank third party, or take other actions to protect your valuables.
  • Have goods you can use for barter.  At a time when no one wants to accept your cash — be it Euros, dollars or drachmas — your goods can be traded for other goods or services, sold for sold or silver, or sold after the situation has stabilized.  (There are plenty of online lists of things for battering, including medicines, guns and ammo, alcohol, tobacco, coffee, batteries, fuel, health and beauty items, etc.  In general, you want things that will not deteriorate, spoil, or lose value over time.)
  • If you have significant assets, invest in a diversified portfolio of stocks of large, global companies that are likely to weather a localized economic disaster.  Your share of the company will have value regardless of what currency it is denominated in. And even if your country’s stock market closes down a global company may trade on other bourses.

Most importantly, learn from the past.  Keep an eye on what happens in Greece and watch for warning signs.  Fortunes can be made and lost when an economy collapses; Take steps to come out on the positive side.

As Ruble Falls, Russia Plays with Fire

When your currency drops 20 percent in a single day, you might be experiencing a currency collapse.

When you raise the interest rate you pay for deposits from 10% to 17% overnight, you might be getting desperate.

When your currency buys only a third of what it could purchase on the world market a year ago, you might be experiencing inflation.

When suppliers from other countries re-price the goods they sell in your country every few days, you know your currency is in freefall.

When the rich transfer their funds into dollars or Euros and the middle class seek out ATMs that dispense dollars and Euros, you know that not only is your currency is experiencing severe problems, but your people’s faith in your government is diminishing.

When people line up to buy cars, appliances, and other hard goods, it is because they lack faith that the money in their bank accounts will retain it’s in the future, you know it’s going to get worse before it gets better.

This 5,000 Ruble note is worth less than $900.

This 5,000 Ruble note is currently worth less than $90.

All of these things have or are happening in Russia, right now, right this week. We get a chance to watch, over a period of days and months, as the Ruble goes from being with 3 cents, to 2 cents to a single penny. We get to watch as their economy goes from robust to recession. And we may get to see a bank run and to observe what capital controls the government institutes to prevent good money from fleeing a bad environment.

If you are at all worried about fiat currencies and what a financial collapse will look like, you can look at Russia and the Ruble as a learning experience. If you watch with your eyes open, you might be able to prepare for how things could look in the U.S. one day in the future when people finally realize that our dollars and debt is a Ponzi scheme. (Keep in mind, Russia only about 1/25th of the debt that the U.S. carries.)

Here are a few lessons we can learn from them and from this situation:

  1. If you are holding a failing currency, convert it into a stronger foreign currency or precious metals as early in the downward spiral as you can. If that isn’t possible, buy hard goods that 1) have a decent shelf life, 2) will retain their value, and 3) people will want or need if there are no stores open. This could be basics such as food and diapers. It could be items like alcohol and tobacco. It could be antibiotics and other drugs, both legal and illegal. It could be tools, guns and ammo. If the problem persists long enough, it could be things like nails, screws, batteries, generators, fuels, wood stoves, firewood, etc. If you have lots of money and enough warning, invest in real estate – especially farmland – which has proven to be a good hedge in previous periods of inflation.
  2. Keep alert for warning signs such as a sharp rise in interest rates. If the Fed raises rates half a point, no big deal. If they jump it up more than two points at one time, look for an exit strategy, quick.
  3. Beware of bank withdrawal limits. During a bank run, banks may limit how much money you can take out at a single time. Banks or governments may prevent you from wiring money out of the country. The government may declare bank holidays in which the banks to no open and you have no access to your money. So keep some money available in cash, just in case.

    One possible way around this is to have accounts at multiple banks, like a big-name bank, a regional bank and a local credit union. If you withdrawals are limited, at least you can make a limited withdrawal from three banks, rather than a single withdrawal from one. That will get you your money faster.

    In Russia, there are recently tales of people who line up at ATMs and use very card in their wallet to withdraw the maximum they can in Euros or Dollars.

  1. Don’t put in a safe deposit box anything you might need to survive during a period of currency collapse or inflation because you may not be able to get it out or the bank may insist on inspecting its contents. Instead, buy a safe and hide it in your home or rent a safe deposit box at a non-banking institution that is not subject to Federal banking laws.

A Frightening Future

Russian President Vladimir Putin is not an economist and he apparently does not listen to economists. While the Ruble may stabilize for a few days or weeks, their economy will likely go into free fall in 2015, and this could result in a death spiral of job losses, bank failures, and collapse of companies and institutions.  This could tip Russia over into another collapse.

Putin is a bully, a liar and a blamer. He lies to his citizens, he lies to the United Nations, he lies to the European Union, he lies the U.S., and he lies to the media, many of which simply parrot his words with no fact checking. Often, tied up within his lies, he blames someone else, like telling the media that Russia had nothing to do with shooting down the Malaysian Airlines jet over Ukraine, but that it was Ukrainian forces . Like saying Russia not involved in the conflict in the Ukraine, even when faced with evidence that many of the so-called “rebels” are actually Russian soldiers.

Russia still has  large army.

Russia still has large army.

And one day, the lies will come tumbling down, the blame will become laughable, and then all we will have left is a bully. A bully with a large military and nuclear weapons. And no one knows what Russia will do then.

If Russia is smart, Putin will be removed from power before this happens. If Russia is not smart, it will find itself at war. Putin may well start a war simply to distract his people and to give him an enemy to blame for their misfortunes. War will not help their economy, and it will further alienate Russia from the rest of the world. Putin may think to use it to build his popularity, but in doing so, he will be tearing down everything he has built in the past 15 years.

We can expect Russia will enter a significant recession in 2015 because the price of oil is unlikely to soar back to $100 in the next six or 12 months,. We can imagine that they might default on their debt or at least threaten to do so and bluster seeking better terms. We can imagine they will distract us with fighter jets, bombers and submarines. But no one knows what they will actually do. And, even more unfortunate, no one knows how the U.S. will react. And that makes this a dangerous situation.

Much of this is out of our hand as preppers. We can’t change policy decisions, but we can prepare. I urge you to do so.

Here’s a few articles to read up on:

Russia Risks Soviet-Style Collapse

Ruble Rout Means Capital Controls Could be in the Cards

This is What a Currency Collapse Looks Like

Ready for Inflation? Here it Comes

 

Ever since the Federal Reserve started qualitative easing, or QE, I have been wondering when it would cause inflation.   I think the answer is “right now!”

Thanks to the government changing the way in which they track inflation, I do not have any proof that inflation is starting, unless you count my grocery bill or the reports from Shadow Stats. Based on purely personal and anecdotal evidence, however, I believe we are starting to see early warning signs of rising inflation. Here are just a couple pieces of evidence:

  • According to this article from the Wall Street Journal, ground beef was 10.4% higher in May 2014 than it was a year ago. Pork chops went up 12.7%.
  • The same article argues that restaurants are not raising prices, but my experience is the opposite. A local burger place where I grab a basic meal every week or so, the cost of my standard fare has gone from $4.95 to $5.35 to $5.49, all in the space of a year. That’s a 10% increase.
  • And food is not the only thing increase. Electricity costs are higher than ever, according to this article.

Inflation, High inflation and Hyperinflation

We almost always have some inflation, but it is usually “under control,” meaning it is low. Governments prefer a little inflation because it means they can pay off old debts with money that is worth less than it was when they borrowed it.

Inflation Going UpHigh inflation is more dangerous. Experts consider an annual rate of inflation between 30 and 50 percent to be high. For the record, I consider that to be too freaking high, although rates in that realm have been seen recently in Venezuela and Argentina, (along with civil and political unrest and other troubles). In my opinion, anything over about 6 percent (as we count it now, or 12 percent if we still used the old government formula) will be painful enough to send the country into an economic tail spin. The Fed must agree with me, because they want to keep inflation at around 2 percent, maybe 3 percent at the outside.

What’s so bad about inflation? Well, inflation will drive up the cost of everything, including food, fuel, utilities, housing, and healthcare. This puts the squeeze on everyone who lives paycheck-to-paycheck or is on a fixed income. Even for those who are better off, there is less money to spend on discretionary items, leading to lower company earnings and a subsequent devaluation of the stock market. When costs go up, wages usually lag, meaning people will have less money to eat out or go on vacation. They hold off on buying new vehicles, repair the washer instead of buying a new one, and defer spending. This will lead to business closures, layoffs and rising unemployment. Consumer spending is the driving force of our economy. Without it, we will slide back into a recession.

Inflation will also make sustaining the $17 trillion U.S. debt much more expensive as the country’s borrowing costs rise and will result in higher taxes and a cut back of services. I see this as are largest threat as it could lead to the U.S. defaulting on its bills or using the Fed to create even more money out of thin air. In a high inflation scenario, the government could not tax or confiscate enough money to pay the interest on its past debts.

Hyperinflation is generally considered to be an inflationary rate in excess of 50 percent per month, which is the equivalent of 12,875 percent per year. I’m no expert, but I think they set the bar too high. Anything over 50 percent a year is frighteningly high and will probably spiral out of control.

To put this in perspective, think of a burger that costs $5. At 100 percent inflation, that burger will cost $10 in one year. In inflation like Germany experienced in 1922, where prices doubled an average of once every 28 hours, that $5 burger would cost $10 the next day, $20 the day after, and about $160 at the end of the week. Now imagine that your hourly range remains unchanged and you see the extent of the problem…

What is usually the cause of hyperinflation? According to Wikipedia, it is nearly always “caused by government budget deficits financed by money creation.” Hmm. Sound familiar?

By the way, the Wikipedia entry has lots of interesting historical information on hyperinflation and if you are worried about this, it’s probably worth a read.

Inflation Devalues MoneyBy the time hyperinflation hits, it’s really too late to do anything about it. It is too late for individuals to prepare, and too late for governments to change their ways. It’s already a crisis that is spiraling out of control and the hole will quickly be so deep you cannot climb out of it. The best you can do is to hunker down and try to get through it alive. Expect bank runs early on and ineffective rules to prevent them. Expect soaring prices and price controls that achieve nothing but cause shortages. Expect that government programs will not keep up with inflation and everyone on food stamps, welfare, social security and a pension will be unable to afford food. Expect protests and civil unrest. In short, be prepared for a massive collapse of the financial situation and everything that relies on it, including our society.

Warning Signs

  • If you see the price of something you buy regularly (whether it be a gallon of milk, cup of coffee, or a Diet Coke) start to cost more every few months, you are probably living in inflationary times. When you see it increase weekly, it’s too late to do anything about it.
  • When the price of gasoline hits new highs, over and over again, and the price never dips, you are probably living in inflationary times. When it costs more to fill up the tank than you paid for the car, it’s too late to do anything about it.
  • When the Fed raises interest rates by 1 percent or more outside of a regularly scheduled meeting, you might be living in inflationary times. When the interest rate for a 30-year mortgage is over 10 or 15 percent, it’s too late to do anything about it.
  • When you can no longer afford your normal beer and have to buy a case of that cheaper brand, you may be living in inflationary times. When a single bottle costs as much as a case used to, it’s too late to do anything about it.
  • If you start to see lots of news coverage about inflation, you may be living in inflationary times. If they start to describe it as “soaring” and then move on to “galloping,” it might be time to clean out your bank account, buy some supplies, and head for your retreat.

 How to Protect Yourself

During high or hyperinflation, you do not want to hang on to your cash; you want to spend it as soon as it hits your account. You are better off liquidating your savings account and buying hard assets that will retain their value.

If you have cash on hand and you start to see those warning signs, consider converting it into goods that you 1) will eventually need, consumer or use, or 2) can easily sell or barter, such as: canned food, dried food, over-the-counter medications, alcohol, cigarettes, diapers, guns, ammunition, tools, etc. (And note that all of these items would be useful in a survival situation.)

If you really don’t need that much canned food, then buy gold or silver. I personally recommend “junk silver” or American Eagles. (We’ll do a post on this subject in the future.) Just remember: You can’t eat gold.

You can also preserve your spending power or “wealth” by buying and holding real estate (especially farm land and single-family homes), high-end jewelry or precious stones, fully-automatic firearms, and other assets that can be sold after the crisis is over for “new dollars” or whatever currency is being used. If you are mega rich, invest in artwork; if you can’t cash it in, at least you can enjoy looking at it.

Once inflation kicks in, don’t lend money to anyone and spend your cash on hard goods as soon as you get it.

If you can, transfer your funds into a more stable currency, such as one backed by gold or commodities. (This is much harder than it used to be.) Usually, the U.S. Dollar is the currency in which people living in countries with high inflation wish to invest, so we’ll have to look at the Canadian dollar or the Australian dollar. I expect currencies tied to our and from countries that have large investments in U.S. debt and/or depend on us for an export market will suffer along with us. This includes the European Union and China.

Take advantage of the inflation by paying down any debt you had from before inflation hits. If you have a mortgage or school loans, wait until inflation has been high for a while and it will be very easy to pay them off.

Take steps to protect yourself from a societal collapse. If you plan to bug out, leave before things collapse. Read Captain Dave’s Survival Guide or some of our recommended books for more information on how to prepare.