The Global Financial Crisis - new events unfolding

Two years ago, Citigroup was America's largest bank. Last week, the government moved to guarantee close to $300 billion in troubled assets. But Citigroup is not the only crisis that must be dealt with - there are the three huge automakers: GM, Chrysler and Ford who are also at the Fed's begging bowl.

This is only the beginning. Factor in the terrorist attacks going on right now in Mumbai, demonstrations throughout Thailand, fighting in Afghanistan, earthquakes, floods and all kinds of natural distasters and you can see that the world faces extremely uncertain and worrying times. 2009 will be one of titanic shocks and changes to the world order culminating possibly in the demise of the US dollar.

What could this mean for the everyday person?

I think that you should seriously consider the possibility of a shutdown of the global banking system. I hope this will not happen, but it is best to be aware that it is a distinct possibility.

Let's examine my reasons for this statement:

- despite the US government's massive Citigroup bailout, it is going to be very difficult for the global banking system to survive the shock to confidence for very long
- even if insured depositors do not withdraw their funds from the banks, uninsured institutional investors are likely to run with their money thus threatening to bring the system down
- even if you have your money in a "safe bank" with full FDIC coverage (in the US), or a government guarantee in many other countries, you could still be adversely affected.

Indeed, if everyone decided to pull out their monies at once, how could the governments avoid going bankrupt - or at the very least, how will we escape hyperinflation?

Why is a banking meltdown possible?
Here is a statement made by the Managing Director of the IMF (International Monetary Fund) on October 11th 2008:
"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown."

You cannot get much clearer than that for a severe warning of how serious this crisis really is.

At some point, governments around the world may have no other choice but to declare a global banking holiday - a shutdown of nearly every bank int he world, regardless of size, country, or financial condition.

What could happen in the banking holiday? In the past, there have been some financial shutdowns that eventually helped resolve the crisis. And there have been others that have made matters much worse. Often, savers are forced to leave their money on deposit, giving up a substantial portion of their interest income for many years. In other cases, the only way they can get their money back sooner is by accepting an immediate loss of principal. But no matter how it is resolved, when banks have made huge mistakes and suffered large losses, it's the multitude of savers that ultimately pay the biggest price. No one else has the money.

Many people are probably thinking:
"If the deposits are insured - why would anyone want to withdraw them?"
The reason is that most bank runs are not caused by the insured depositors - people on the street who invest their hard-earned savings into banks and financial institutions.
No, instead they are caused by the exodus of the large, uninsured institutions who are usually the first to run for cover at the earliest hint of trouble.

During the banking failures in the 1980's and 1990's, the story was similar: we rarely saw a run on the bank by individuals, rather it was the uninsured institutional investors - the banks, pension funds and ohters - that jumped ship long before most people even realised the ship was sinking.

I am telling you here and now, the ship is sinking!!!

All you savers out there, wake up and listen - because a banking holiday would hurt you the most. The first hardship is that you could be denied access to most or all of your money for an indefinite period.

What about the government agency guarantees you might ask?
Well, a large proportion of those guarantees, unfortunately would have to be suspended in order to give banking regulators the time they need to sort out the mess.

It is simply not reasonable to expect that governments will have the resources to immediately meet the demands of thousands of institutionsa nd millions of individuals if they all want their money back at roughly the same time.

They are likely to tell you that your money is still safely guaranteed, but you cannot have it right now.
Imagine how frustrating that would be! So I urge you to take at least six months living money out of the bank or financial institution and have it somewhere on hand. All banks are frightening right now and none of them can be trusted - so at least cover yourself by having six months cash on hand.

The other possibility is that by the time you do regain access to your money, you will suffer losses. The governments may offer you a couple of options. For example:
If you opt into their programme by leaving your funds on deposit at your bank for an extended period of time, earning below-market interest rates. The bank is then allowed to use the extra interest that you are forfeiting to recoup its losses over time - that is income that should have been yours.

You may be given an option to opt out of the government's programme and allowed to withdraw your funds immediately. However, you might have to accept a loss that approximately correponds to the actual losses in the bank's investment and loan portfolio.

Neither opting in nor opting out will be a good option for you.

You either suffer a loss of income or a loss of principal.

To avoid many of these risks, I recommend seriously considering the following:

1. Get some cash on hand
2. Buy some gold and silver one ounce coins
3. Buy some short-term US treasury securities (or treasury securities from your own country)

The reason I suggest treasury bonds is that even in the worst-case banking scenario, the Treasury will do whatever is necessary for you to get your money.

Watch this space for more recommendations as the crisis unfolds.