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Thread: Systemic risk

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    Default Systemic risk

    I would like to ask Melonie and others, knowledgable on the subject, to explain to us what a systemic financial risk is, and what happens to the system if all the dominoes fall. Do we get runs on the banks, a stock market crash, your brockerage goes belly up and you can't liquidate your stocks, your bank funds get frozen and you can't take money out of your account or limited to how much you can take out? Does food not get delivered to the supermarkets because the farmers can't get paid? Can one not pay bills or buy an air ticket because your credit card won't be accepted? Do the gas stations run out of gas and you can't get to work? And even if you do get to work, you can't be paid 'cause there's nothing to pay you with? What would the implications be to the infrustructure: electricity, water?

    Let's assume some or all of the above happens at a certain moment. What would trigger that? What the warning signs would be? And most importantly, how can one protect themselves in a situation like that one? Thank you.

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    Default Re: Systemic risk

    ultimately, the answer to this question would boil down to the choice of actions taken by the US gov't / US Fed. As recently shown by the Bear Stearns bailout, the gov't can magically cause tens of billions of dollars to appear in an instand if it chooses to. Thus the real question is what type of institutions the US gov't will CHOOSE to bail out in such a situation.

    There is a far greater risk of systemic failure in a different sense i.e. the electronic funds transfer network. If that network goes down everything grinds to a halt unless customers have cash bills in their pockets.

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    Default Re: Systemic risk

    Quote Originally Posted by Adelina View Post
    I would like to ask Melonie and others, knowledgable on the subject, to explain to us what a systemic financial risk is, and what happens to the system if all the dominoes fall. Do we get runs on the banks, a stock market crash, your brockerage goes belly up and you can't liquidate your stocks, your bank funds get frozen and you can't take money out of your account or limited to how much you can take out? Does food not get delivered to the supermarkets because the farmers can't get paid? Can one not pay bills or buy an air ticket because your credit card won't be accepted? Do the gas stations run out of gas and you can't get to work? And even if you do get to work, you can't be paid 'cause there's nothing to pay you with? What would the implications be to the infrustructure: electricity, water?

    Let's assume some or all of the above happens at a certain moment. What would trigger that? What the warning signs would be? And most importantly, how can one protect themselves in a situation like that one? Thank you.
    The real answer is nobody knows. At the most people can point to history.

    But history rhymes not repeats.

    There are lot of things that are fundamental in the universe and there are a lot of things that gets changed and is only applicable to that period.

    The real way to learn from history is to separate the fundamentals from things that are relevant to that period

    If you look at the tabloid blogs predicting hyperinflation and other doomsday scenarios, they almost always make the idiotic mistake of not separating things

    In times of real distress, does US households hoard on Gold (made sense in the Kings era) or will they hoard products from "Procter & Gamble" and "Kelloggs"(Make sense in the modern era)?.
    If that is the case, stocks PG & K, are much better protected against inflation than Gold.

    But since there are more idiots than smart people, and due to herd mentality, you never know which assets get inflated and which will not. So, you really can't be prepared. Your survival would be purely on luck based on random events that happen during those times

    If you are prepared for doomsday scenario X, then there is equal probability of scenario Y, where Aliens will eat everyone holding Gold Bullions and spare people who have Kelloggs cereal in the basement. If you hoard up Gold and Kelloggs, you'll get hit by an asteroid.

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    Default Re: Systemic risk

    Quote Originally Posted by Adelina View Post
    I would like to ask Melonie and others, knowledgable on the subject, to explain to us what a systemic financial risk is, and what happens to the system if all the dominoes fall. Do we get runs on the banks, a stock market crash, your brockerage goes belly up and you can't liquidate your stocks, your bank funds get frozen and you can't take money out of your account or limited to how much you can take out? Does food not get delivered to the supermarkets because the farmers can't get paid? Can one not pay bills or buy an air ticket because your credit card won't be accepted? Do the gas stations run out of gas and you can't get to work? And even if you do get to work, you can't be paid 'cause there's nothing to pay you with? What would the implications be to the infrustructure: electricity, water?

    Let's assume some or all of the above happens at a certain moment. What would trigger that? What the warning signs would be? And most importantly, how can one protect themselves in a situation like that one? Thank you.
    Systemic risk is risk that cannot be eliminated through diversification. In reality, there is very little systemic risk (other than the risk of a nuclear terrorist attack, or other super-catastrophic events). However, some investment goods react to systemic risks differently than others. If you feel there is a major depression on the horizon, you may wish to buy t-bills or bonds, gold, or invest in a mutual fund that bets against the market (perhaps a hedge fund). These perform better in bad times. The t-bill is the base against which all other securities are graded; it is considered default risk free.

    There is no way for all of the dominoes to fall in the United States (absent nuclear attack, or something similarly catastrophic). Even in the absolute worst of times, there were still food deliveries, gasoline, and paved roads. The sun came up every morning from 1929-1940, and set every night. The only places that we see problems like this are undeveloped third world African nations and places with big wars going on.

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