Why the bank holidays is a very possible event in the future.

(天下無馬)
Modern banking system is a fractional reserve system. That for every one-dollar deposit, banks will lend out 9 dollars. You see, debts (or loans) are the money to bankers. Once they receive one-dollar deposit. They can turn around to borrow 9 dollar from primary bank at lower interest rate then lend out at higher interest rate to make a few bucks in rate differences.Therefore, loans are money to the bankers. They want to lend as much as banking reserve guideline allowed to maximize the profit. (The ultimate beneficiary is the FED reserve system, which print money with little cost and receive interest payments at no or little cost.)

So to bankers, modem electronic banking is a preferred method. A couple of keystrokes to lend electronic money out, interest payment will flow in. Nice!!

This electronic lending system has one distinctive advantage and one distinctive disadvantage. The advantage is that there is no cost for the money not even paper and ink, other than the computer system. The disadvantage is that because it is electronic money, when there is a bank run, it happens so fast that it may not be able to be controlled. It did happen in last Sep, 2008 in the peak of financial crisis. See this video with Rep. Paul Kanjorski:




Now why it is a very possible event in the future?

A large percentage of US dollar is circulated as Euro Dollar, therefore the demand for the paper currency circulated in the US is very small since Reserve Banking System operates in belief that only small amount of people will withdraw money at any given time.

Most money is in deposit accounts that require no paper money to back them up. So the total paper money in US domestic circulation is only about $200 billions or so (per www.shadowstatistic.com)

In hyperinflation scenario happened in other countries, such as Zimbabwe, people use alternative currencies such as USD for exchanges of goods and services. Local currency has no appealing to them in hyperinflation environment.

If the same hyperinflationary or USD collapse scenario happen here (needs not to be collapse, just panic of bank run), there is no alternative currency to be used since USD itself is the reserve currency. People here will not use RMB or Canadian dollar for exchange of goods. When people line up at bank door step, there will be no paper money to be distributed so banks has to declare banking holiday and very possibly to close the foreign exchanges.

A personal experience in 2008: at the height of financial crisis, rumor says my bank will collapse. So I rushed to the bank to withdraw a reasonable large amount of cash. The female clerk stared at me with disbelief and claimed: None of our branches has that kind of money. (In fact, I know that was not true). You would have to plan it with our manager and schedule a time to take the cash. I thought: yeah sure…I looked at her with disbelief also so I said, could I still do wire transfer? She said, yes. So I wired the money overseas, in effect an electronic bank run!

The moral of this story is, 1) one should have a foreign bank account, however the balance is small. It will only be needed when wind turns against you. 2) a bank run was averted in 2008 does not mean it will be averted in the future. A bandage puts on a worsening wound will only make matter worse next time.A financial industry insider once said, when every senator has a foreign bank account, there will be a bank run. I bet they are setting it up those days.

P.s. one has to declare the foreign bank account per IRS/treasury rule.