Banks and Safety

Most banks are now insolvent.

Banks are insolvent because they have lent money to people who cannot repay it. It isn't just money that they lent, either, the debt market is a bit complicated but in essence debts are chopped up, put into parcels, and sold off around the world. Imagine pouring sheeps' droppings into a huge vat of liquid chocolate....you have no idea whether one or more droppings will end up in any bar of chocolate, anywhere in the world. There are a LOT of sheep's droppings.

Banks are also insolvent because their capital is partly in shares - their own, and other companies. Also, they use shares (and other assets) as collateral when lending money. So when shares fall their capital falls. Banks are required by law to have a certain amount of capital to support the business they do. When their capital falls below that, they have to stop trading. That's the law all over the world (think Iceland).

Governments have helped by buying up the bad debt and putting capital into the banks. They have also been guaranteeing depositors' savings to prevent a run on the banks. The problem is that the Government does not have unlimited resources. It can print money without limit, but in doing so it devalues the currency and weakens confidence.

Are the banks safe? They are as safe as the governments' finances. How safe is that? I don't know. Not as safe as we'd like, right now. You mean the Government could crash??? No, not like that. Treasuries would print money and issue new debt (same thing as creating new money) in their own currencies until the world at large lose confidence, then the currency crashes. UK, EU, and USA are heavily dependent on imports (especially for energy and UK for food) which would have to be paid in devalued dollars, pounds, euros, etc.

When could this happen? If it does happen, the currency will start to lose value over weeks to new lows and at a certain stage the 'dam' will burst, and the currency will crash. At a stroke, any holdings you have in that currency will be worth a fraction of what they were. For a few weeks the effect in that country will be limited, while stocks are used up, then the full effect will be seen in the shops, utilities, etc. At the time of writing the pound looks dangerously close to heading in that direction, unthinkable though that might be. The IMF has singled out the UK as one of the countries it expects to be hit the worst in this crisis.

What can I do about it? If you are liquid, spread your cash around different currencies. Swiss Francs, US Dollars, Euros, Canadian Dollars, and Yen. Your bank will probably open foreign currency accounts for you. With First Direct you can do it over the phone in seconds. Then, if the Pound falls badly you will still have most of your cash intact.

Consider buying gold. My buying guide is available at www.3r.co.uk/gold