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Dec 252012
 
What happens if your credit and debit cards stop working?

What happens if your credit and debit cards stop working?

The concept of a banking system failure is often thought of generically, together with other concepts such as, at the present, the ‘fiscal cliff’, and past things such as the S&L crisis, the mortgage crisis, over-paid greedy investment bankers, and other vague and hard to completely comprehend concepts that while clearly not good, generally have no immediate impact on us directly.

Yes, it is true that all of these issues represent downsides to our current financial system, but few of them are, of themselves, potentially catastrophic.  So let’s instead consider a risk which could indeed be catastrophic, and depending on its duration, could plunge the nation into a situation that might start at Level 1 but which could quickly become Level 2 (hopefully not reaching Level 3) (definitions here).

Think about this – what would happen if your credit and debit cards stopped working?  How much cash do you have in your pocket?  How would you get some more?

What would happen if the computers controlling the nation’s banking system were attacked and disabled?  With all banking records and processes now being computerized, there’s clearly the potential for disaster if the computers stop working, and who wants to be the first to say that would be impossible?

The immediate problem would be that we’d all run out of cash.  How much cash does your family have in total?  How long would that last you – a couple of gas fill-ups, a few trips to the supermarket, and that’s probably much of it gone.

Maybe you think you could write a check.  But who will accept a check when the bank is unable to accept it, process it, and transfer the money from your account to someone else’s account.  Without their computer systems up, the bank won’t even know how much cash is in your account, so neither you nor someone you paid with a check could walk into your home bank branch and ask for it to be converted to cash while waiting.

So, at an immediate level, commerce would grind to a halt.

The Problem Extends All the Way and Back to You Again

Now, let’s think about the derivative levels.  It is one thing for you to run into difficulties when trying to buy $50 worth of gas or groceries.  But what happens when the gas station or supermarket then needs to place an order from their suppliers for $50,000 of product?  How do they pay for that?

This question repeats up the distribution chain, and then loops around right back to you.  Your employer somehow makes money by delivering a product or service to someone else.  When that someone else can’t pay your employer as they usually do, how can your employer in turn pay you the weekly/monthly wages/salary you normally get?

For that matter, even if they could pay you, how would they do that?  With a bank auto-transfer?  Not possible when the bank computers are down.  Maybe with a check?  That’s not going to do you much good either, is it!  Could you take your $3000 check to the gas station and say ‘take one tiny corner of my check to pay for a tank of gas’?

And what happens when the farmers don’t get paid for the crops and livestock, and can’t afford to then buy new seed, animals, food, fertilizer, and so on?

What happens when the oil refineries no longer have money to buy raw oil from the Middle East or wherever?  When we can’t even pay for natural gas from Canada?

Part of the problem is that our economy is essentially cashless these days; indeed, cash has become so obsolete that many financial institutions have stopped reporting on or analyzing the actual amount of currency in the economy.  This measure – referred to as M0 – has been an ever decreasing percentage of the total ‘virtual’ money that our economy uses – here’s an interesting chart showing the increasing discrepancy between M0 and broader definitions that include successively more and more virtual money.

global_money_supply_trend

The difference between M0 and all the other types of ‘money’ is that only M0 has a physical form – banknotes and coins.  The rest is nothing more than entries in computer systems, perhaps duplicated in the form of fancy ‘certificates of deposit’ and such like.

An outage of the banking system computers means an outage of the rest of this money, too.

Is This Likely or Unlikely?

So, how likely is it that the banking system could suffer a sudden catastrophic failure?  As a random event from nowhere, very unlikely.

But as an outcome of a skillfully designed and directed computer hacker attack – that is an appreciable risk.  Don’t just take our word for it.  Instead, consider this article which quotes US Defense Secretary Leon Panetta who says, in October, that foreign hackers have the potential to take down our nation’s power grid, financial networks, and transport systems.  He said that such an attack could ‘paralyze and shock the nation’, and further pointed to exploratory attacks against banks earlier in the year.  He terms this a potential ‘Cyber Pearl Harbor’.

His solution is, in part, to seek authorization to mount pre-emptive attacks against potential cyber-aggressors.  Maybe that is a good thing to be able to do, although we’re actually not too sure about that.  Most of the major cyber-terrorism sponsor countries (ie Russia, China, Iran, North Korea) are nuclear powers, and depending on what form our pre-emptive attacking might take, these nations could choose to respond in ways that could have even worse consequences than a cyber attack.

In addition, how do you pre-emptively attack when the source of the cyber-aggression isn’t a nation/state, but rather a shadowy group of individuals, possibly living in our very midst, or else distributed randomly throughout the rest of the free world.

Remember, there’s no such thing as distance when it comes to attacking computers on the internet.  It is as easy to take down a computer (electronically) from the next room as it is from the far side of the planet.  And – paradoxically – mounting a cyber-attack is a very low-tech process.  All the hacker/attacker needs is a simple laptop computer and a modem or internet connection.

So, much as Secretary Panetta might wish otherwise, the reality is that he most likely either won’t or can’t do anything to pre-emptively take-out cyber-aggressors prior to them in turn taking out our computer-based infrastructure.  And the only surefire defensive measure is to isolate the computer systems that are being attacked.  But that ‘cure’ is worse than the problem – isolating the computer systems means no more external sources of inputs and no more external outputs, either.  No more computing network.  No more banking system.

How to Prepare for a Banking System Failure

You might think that the obvious solution is to keep a large supply of cash on hand.  But that is not an adequate solution, because it only addresses one part of the problem.

Just because you can pay the gas station $50 for the tank of gas you need doesn’t mean that the gas station can in turn pay the refinery the $50,000 it needs to pay for its next shipment of gasoline.  The same at the supermarket, and everywhere else.

Rather than stock up on cash, your solution is better to stock up on goods, so that you can survive for an extended period without needing to spend money, in any form, on additional supplies.

You also need to assume your utilities will deteriorate in service – raw materials will be hard for the utilities to source, and if they can’t pay their employees, they’ll start to suffer absenteeism, made worse by the need for employees to start to focus full-time on their own immediate survival needs.  Similarly, the food and other essential supplies at your normal retail purchase points will become in gravely short supply or disappear entirely.

If the banking systems aren’t up and running again within a day, we’d view the situation as making it prudent and sensible to bug out entirely to your retreat.

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David Spero[suffusion-the-author display='description']

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