IANAE, but this always struck me as... odd. How would the failure of the banking system stop people who really only use it for money storage and purchasing convenience from continuing to use hard currency?
Someone correct me if I'm wrong, but bank consumers only perceive it as "money storage". In reality all deposits (after a certain point) are loans to the bank which then get pushed along/through/down/into the financial system. That's why runs on banks are so bad - the money isn't there.
The economy is an interconnected system. If the banking system failed, then no one would be able to make over-night loans. If no one can make over-night loans, then large companies can't get the necessary funds for them to keep their regular operations running. If that doesn't concern you, consider that one of the largest companies in the country is General Electric. In simple terms, a failure of the banking system means the lights won't stay on.
Andrew Ross Sorkin talks about this in "Too Big To Fail" (http://www.amazon.com/Too-Big-Fail-Washington-FinancialSyste...). When things were really bad in 2008, and people were wondering what investment bank was going to go next, there was very real fear that eventually the biggest, most stable banks such as Goldman Sachs would go under. After Goldman, the next institution wouldn't be a bank. It would be GE.
Because most pensions are tied up in the market. So if the banking system deflates and resets, it drops the market value of pensions significantly.
The market essentially is a herd animal. Everything goes up or down together, in aggregate. Since wisdom in the financial market is to diversify, ie, hold in aggregate, a well-chosen portfolio generally does about as well as the market in the long term.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
Whether it is better to drop such people in the cold while things reset or whether it is better to keep the cushion going, I leave to another media form, as such discussions tend to be too inflammatory online.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.
However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.
Never really said I did. But the fact is a lot of people still use cash, and would continue to do so (regardless of actual value) after a banking system crash. At least, I perceive it would, unless governmental authority also broke down. Then we are back to a barter economy.
Where would this cash come from? Right now, banks get it from the mints, which print it on a demand basis. And even if you use cash for most of your transactions, if you keep your money in the bank...
My best guess to this would be the government would have to temporarily (or permanently) set up a federal bank that would get the cash out, perhaps giving back a larger amount than normal that year in tax returns that have to be picked up in cash from said bank. New problems would need new solutions.