Should You Be Concerned About Bank Runs? Maybe
Friday October 07, 2016 12:51(Kitco News) - Sept 30 – Fears of a banking crisis and memories of the 2008 financial crisis are being whispered about on Wall Street today. Hedge funds are reportedly pulling billions out of the German bank Deutsche Bank amid concerns about the lender's stability this week.
Can Bank Runs Still Happen?
While a true bank run in the United States hasn't occurred since the 1930's, some point to troubled Wachovia Bank in 2008 that faced what bank executives called "a silent run" on deposits. On a Friday in 2008 large depositors began fleeing from Wachovia.
On September 26, 2008, Wachovia, which was then the
fourth-largest bank in the United States, saw a swift decline
in its assets –reportedly $5 billion in deposits.
Many of its large depositors -- businesses and institutions
pulled funds out of Wachovia, drawing their
accounts down to the $100,000 limit that was insured by the FDIC.
Government regulators were concerned the bank wouldn't have enough short-term funding liquidity to open for business on Monday. They put into a play a weekend squeeze to find a buyer for the ailing bank. Frantic weekend negotiations ensued. Government regulators quickly assembled a deal in which Citigroup purchased the flailing bank, with the assistance from the FDIC. Crisis averted.
Fast forward to today.
U.S. Paper Money versus M2 Money Supply
Here is an interesting comparison, that doesn't quite match up.
- U.S. currency in circulation $1.46 trillion
- Total M2 money supply Over $13 trillion
Some market watchers have wondered what would happen if even 15% of depositors tried to withdraw their money from the system. There doesn't appear to be enough paper money to back it up. Would this cause banks to shut down?
Source: www.federalreserve.gov
Total M2 money supply – this includes cash, checking and savings deposits
Source: https://fred.stlouisfed.org/
Paper money supply just keeps growing: "In the current fiat system, the central bank can create money without it being backed by any physical commodities. Since the early 1970s the U.S. dollar has no longer been tied to gold and has become a fiat currency. Between January 1972 and March 2016, the U.S. money supply increased from $718 billion to $12.6 trillion by the M2 money measure," wrote Jia Liu in an American Institute for Economic Research report earlier this year.
Since then, total M2 has pushed to above $13 trillion.
It's no wonder gold is up 25% year-to-date in this environment. Events like the Deutsche Bank debacle only hammer home the fact that gold is a hard currency, an asset that you can keep in your own home. No need to go to a bank.
By Kira Brecht, Kitco.com
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