The financial crisis of 08' lead to the collapse of several major banks and caused widespread economic hardship. While many valuable lessons were learned from what happened, it's important to understand your options in the possibility of another banking crisis. You should know how to protect your finances and possibly grow your wealth in such a situation.
The Great Depression
The most prolific period in US history of economic turmoil was that of the Great Depression beginning in 1929. During this time, the Federal reserve faced criticism for failing to effectively manage the money supply and implementing policies which worsened the economic crisis. The result - widespread bank collapses, deflation and severe unemployment.
The Bank of England the Gold Standard
In the early 1900s, the Bank of England (considered at the time to be the world's central bank) faced a crisis that led to the collapse of the gold standard for money. The British government abandoned the gold standard to finance their war effort during World War 1 and when they returned to it shortly thereafter, it struggled to maintain the value of the pound. This led to abandoning the gold standard entirely in 1931 causing currency devaluations and economic uncertainty.
The Central Bank of Zimbabwe and Hyperinflation
More recently, the central bank of Zimbabwe in the late 2000s printed enormous amounts of money in order to cover government deficits. This decision led to extreme hyperinflation of the country's currency and ended up collapsing the currency's real value. Hyperinflation decimated savings and lead to severe economic hardship in the country.
Impact of Federal Bank Failures
When a federal bank fails, the consequences can be devastating. Failures often coincide with economic recessions or depressions, marked by rising unemployment, reduced consumer spending, and widespread business failures. Bank failures can lead to a systemic crisis where the health of the entire financial system is compromised and could lead to the failure of numerous smaller banks along with it.
What do I do?
Preparing for such a scenario is understandable, although to be clear, failures of this magnitude are rare. If the Fed were to fail and / or the US experienced a widespread banking collapse, there are a few options that have historically been best for investors:
Precious Metals: Gold and silver are typical safe-haven assets investors seek during times of economic uncertainty. Historically, they have retained their value and can act as a hedge against inflation and currency devaluation.
Cryptocurrencies: Cryptocurrencies have not been around for long enough to support a historical accounting on how they could perform during a bank crisis but, hypothetically, investors would turn to Bitcoin as an alternative store of value during a banking crises. Cryptocurrencies operate independently of traditional financial systems and some such as Bitcoin or Litecoin have finite supplies, similar to precious metals.
Foreign Markets: Holding foreign currencies, foreign bonds or stocks in foreign companies, especially from countries with stable banking systems, may be a way to protect your assets from a banking collapse in the U.S.
Physical Assets: Tangible assets like real estate and agricultural land could retain their value. Even though demand for real estate is seemingly falling, a pivot to even higher inflation and currency devaluation may send home values soaring.
Commodities: Physical commodities like oil, agricultural products, or industrial metals can be a way to protect your wealth. These commodities are typically essential regardless of the financial system's condition. Even with the advent of electric vehicles and push for green energy, the majority of the world still runs on fossil fuels. Not just in powering cars, but in everything from power generation to manufacturing goods.
Collectibles: Alternative investments such as art, wine, or memorabilia may retain its value or appreciate during periods of high inflation and currency devaluation. Collectibles, especially those not tied to global markets, may be a good option in such a scenario.
The risk of banks failing, especially a central bank, remains small. However, if such a scenario were to occur, it's best to know the possible options available now before it's too late. Given the country's growing fiscal crisis and poor economic projections, anything can happen. Stay vigilant!
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