Monday, August 27, 2012

Cash and “Digital” money during a Collapse

Hi Ferfal,
I have read a lot about bank holidays, limits on withdrawals and the like in Argentina. And I know that the financial collapse in Argentina happened over a decade ago when perhaps debit cards and online banking were not as prevalent. Having said that, can you tell me what method you and others used to pay for your rent/mortgage and utilities? There has been a lot written on paying for food and other physical purchases at the market, but not so much about basic housing expenses.
Our paychecks arrive in our accounts via direct deposit and we pay our mortgage and utilities using online banking. Very little of our money actually touches our hands. We rarely even visit our bank unless we need cash or have a check to deposit. In fact we hardly use cash at all but favor making purchases with our debit cards.
Please help me to wrap my mind around how financial conditions will most likely change in this regard. Will we not be able to pay or mortgage using online banking? Do you think there will be limits or problems with that? What about paying for utilities such as power, water and heating gas? Are financial limits limited to just cash withdrawals? Will online banking continue to function as it does now?
Thank you for your insight

Hi Stephen, even though the Argentine collapse took place a decade ago credit cards and online payments where much in use. Most people had credit cards as they do now and well, used them a lot too!
The problem is that they stopped being accepted as things went down. With bank accounts frozen the economy falling apart within minutes you saw “Cash only” signs going up everywhere. Even now you can see those signs in many stores, especially gas stations.
How did you get by? Using cash. You looked for it, tried to find a more secluded ATM that wasn’t out of money or waited in line early in the morning to get you money allowance, what little they allowed you to get of your own money per day.

This is why “cash is king” is especially true sometimes during the first stages of a collapse when credit cards are no longer accepted by many stores. If people are hungry for cash you can even land a few good deals taking advantage of the scarcity of cash. I landed a pretty good deal on a queen size bed because I had the cash for it at a time when most people didn’t. (I was getting married and needed to buy it anyway).

Helping you wrap your mind around this, a possible scenario would be:

*Accounts are frozen. You are no longer allowed to move your money around, especially not out of the country.

*You are allowed to make on line payments for mortgages and other bills, but theres a limit to how much cash you can get out.

*Some companies may not accept online payments and there may be problem on a per case basis. Maybe a guy can pay his power bill online or with his debit card, but another power company may demand cash only.

*You may still use your cards on certain brick and mortar stores too, but many stores may prefer to go for a cash only policy. In this scenario you’ll see clear discounts for paying in cash, money that can be kept out of the frozen banking system.

*Check in general may not be accepted due to a general fear of bouncing checks. Most banks will probably freeze those too.

*The basic idea here is, find a way of stopping the bank run, keep the money in the system and stop the flight, especially out of the country. Under these circumstances, inflation will increase significantly as the economy becomes weakened and the trust in the value of money decreases.
Join the forum discussion on this post!


Anonymous said...

If banks close and/or limit withdrawals, that does not seem like "inflation" to me.

The situation people face today appears different than that faced in Argentina post-2001.

Today there are trillions of $USD in claims on assets and cash flows (i.e. DEBT) and this counts today as "money." If those claims turn out to be bogus (and most of them must be), the most likely result should be a money supply collapse and a shortage of $USD.

In the US in the 1930's gold was fixed in price (it was legal tender) and so it skyrocketed in value as the quantity of credit collapsed. Today gold floats just like everything else, and the only physically-existent money is stupid little ink-stained pieces of paper.

If the quantity of credit collapses because its claims on current and future cash flows prove to be bogus, the most sure way to hold (or grow) purchasing power is to hold paper money. Sadly, until those claims prove bogus, TPTB are creating mountains of them and holders of cash appear to lose a lot of ground each year.

How ironic would it be, if people screaming to buy gold here at nearly $1700/oz are totally wrong, and that an ensuing credit collapse deflation in the money supply makes people so desperate for "legal tender" that gold's price collapses 50-90% and the guy with 17 one-hundred-dollar bills is able to scoop up from two to seventeen ounces of gold once the deflation bottoms?

Larry said...

"If banks close and/or limit withdrawals, that does not seem like "inflation" to me." -Anonymous

FerFal can correct me if I'm off, but that was only one thing going on at the time in Argentina.

- Argentina's credit rating got cut

- Argentina wouldn't balance its budget, and as a result

- IMF refused to loan any more money to Argentina.

This economic uncertainty probably went a long way to hurt the peso's value.

The bank runs started when people thought it would be better to have dollars instead of Argentine pesos in the economic crisis they were already in. They started withdrawing pesos to exchange them for dollars -and that helped to devalue the Argentine peso even more.

Larry said...

This just in:

BUENOS AIRES, Argentina (AP) -- Argentina just made it more expensive for its people to use credit cards outside the country, and more dangerous for cardholders who aren't paying all the taxes they should.

One measure published in Friday's official bulletin adds a 15 percent tax every time people make a purchase outside the country using a card issued by an Argentine bank. Another requires the banks to report every credit card purchase - home or abroad - to the tax agency.

TampaMark said...

Dear Anonymous,

You have some false assumptions; one that because the situation in Argentina and current US are different in that we will not face economic hardships like them. We faced the 'Dark Ages' in 2008 and if FED Chairman Bernanke did not act we would be in a situation not unlike Argentina has been for 10 years. Not that it will do any good in the long run as collapse will come, no matter what the Fed does.

Two; it is also false that 'gold floats'. Gold does not float, other currencies float in relation to gold. Fed Chairman Bernanke said the gold in Ft. Knox was an asset. Nowadays that is where you store your savings, in gold. Or you should!

As for money supply, the Fed will pump it up like it has been for the last 4 years (an more) because all the debts are guaranteed to the hilt. It will never let the money supply be cut off, it will inflate to infinity and beyond. So while ironic, it will never happen that there would be a deflation. The Fed will never allow it.

If and when the US Federal Government orders the banks perform corralito, you will need some paper money as cash will be king. That I will grant you. But not for long as the true value, when it is discovered, it will end up being like Confederate or Zimbabwe dollars - a curiosity.

Gold on the other hand will not be. Right now Central Banks in EU are accumulating gold as an asset. China is buying gold mines in South Africa and Australia. If you don't have any now there won't be any available when the US public wakes up to worthless dollars and restricted banks. I say keep your paper money and I'll keep my gold, thank you very much.