It is only a matter of time before the global banking system unravels. For those of us planning for life after such an event, it is time to think what might replace fractional reserve banks and the paper money that is their stock in trade, but first we must understand why modern banking is certain to fail.
The seeds of the banks’ destruction lie in the fractional reserve system, whereby banks lend out many times their capital. The problem with fractional reserve banking is that if a number of a bank’s depositors decide to withdraw their money at the same time, the bank might only be able to satisfy a fraction of the demands. This is the permanent state of modern banking.
In our hearts we know this, but we have confidence that bank runs will not happen. In the current financial climate this view is dangerously complacent. The five to ten per cent of core capital in each of the large international banks is badly impaired, with these impairments swept under the carpet by accounting standards designed to conceal the true position instead of inform creditors. Again, we all know this.
However, it is increasingly clear there will be a global slump in business activity, as higher inflation kicks in and interest rates inevitably rise. Banks will face an escalation of bad debts as a result of higher interest rates that will eliminate much, if not all, of their remaining capital. Unfortunately, the abilities of governments to back-stop the banks are now very limited, because of the unprecedented deterioration in government finances since the first banking crisis.
The international nature of modern banking exposes even relatively sound banks to risks from bad debt contagion, if not at first hand, then through interbank relationships that were previously sound. The collapse of Irish, Portuguese or Spanish banks has the potential to undermine British, French or German banks, and therefore all their counterparties elsewhere. There are many chains of risk like this, respecting no borders. While there is much that can be done out of the public’s sight, it will be very difficult for governments to foist a second banking rescue on their electorates, because they have unwisely encouraged everyone to believe banks and bankers are evil and do not deserve public support. For this reason the only option central banks have is to continue to flood the financial system with new money to compensate for the deflationary effects of contracting bank credit. This new money in the central banker’s mind can be directed to supporting the weaker members of the banking system, and in the Keynesian mind, provide vital economic stimulus. But since successive tranches of new money are having less effect, the amount required continues to escalate.
This is why central banks are unable to stop issuing paper money, because to turn off or even to restrict the flow of the money-tap would fatally undermine the commercial banking sector. For this reason central banks have no option but to deny that inflation is a growing problem, otherwise they have to stop printing money and let interest rates rise.
So put simply, the future we face is that the entire banking system will sink, along with the purchasing power of paper money. Fractional reserve banking has been with us too long, so we have to consider what will replace it, having no working knowledge of any alternative. In doing so, we also have to consider what we want the bank of the future to do...
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http://beforeitsnews.com/story/492/254/How_Precious_Metals_Will_Replace_Fiat_Money.html
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