Systemic Risk

April 25, 2013, by Ken Jorgustin

Systemic Risk

The term ‘systemic risk’ is usually a reference to finance, although it can be applied to many systems.

In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system.

Question: Do you think our financial system is vulnerable to systemic risk?


 
Systemic Risk

It refers to the risks imposed by inter-linkages and inter-dependencies in a system, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system.

Systemic risk has been compared to a bank run which has a cascading effect on other banks which are owed money by the first bank in trouble, causing a cascading failure. As depositors sense the ripple effects of default, a panic can spread with a sudden flight to ‘quality’.

Many have the opinion that the world’s financial system is currently at a high level of systemic risk, for a number of reasons.

The workings and dependencies of our financial system, and the inter-connectedness of banks, brokerages, central banks, governments, the Federal Reserve, Wall Street, the IMF, just to name a few… are highly complex, yet simple.

It doesn’t require much knowledge to know that the world is swimming in debt. It’s not just us here in the U.S., it’s everywhere.

While paper money is only paper, and digital money is invisible, most people have no choice but to go along with the requirement to value it. Therefore, most of us ‘work’ for it.

The problem is, with paper being just that… paper… (or digital digits) backed by nothing, policies have been in place which have allowed us (and governments) to borrow it and leverage it far too easily, to the extent that debt burdens have become so unimaginably immense that they will never be paid back.

Most thinking people realize that the financial system cannot go on for long in the condition that it is currently in, without drastic changes to address the problems that exist. And the word ‘drastic’ is an understatement.

There has been a sense that we’re nearing the point in time whereby the big players in the game of world finance are eying each other, to see who will blink first…

So many large entities owe so many other large entities large sums of ‘money’, that if there’s one miscalculation, one mistake, one misstep in the delicate dance, that the entire system may crash down.

Their are lots of financial ‘bubbles’ floating around and if any one of them pop…

The risks are much higher now than they were just before the crash in 2008. The debt balloons are much much larger. It is only held together by the money printing, devaluation, and manipulation to provide an illusion of recovery.

We are facing the possibility of systemic failure. We have no idea how bad that it could really be. This in itself is risky because most people have not prepared for such an event, and will be shocked and devastated if and when it happens.

What can you do about it? The risks can be reduced by avoidance and diversification.

Avoid being too reliant upon the financial system for your survival. Examine how long you could survive without the current system. Diversify your paper and digital money assets into tangible assets, especially those which will help you continue living your life. Discover the assets which will hold value in a time of financial collapse.

The key is to think about it. This will enable you to take the next steps to help yourself…