The Atlanta Fed wants to know what would happen if a solar flare hit the earth and all the lights went out.
And the answer, basically, is we’d use cash.
Also, it would be complicated.
Staffer Steven Cordray, writing on the Atlanta Fed’s “Take on Payments” blog on Monday, explores how the US might deal with an event like the 1859 geomagnetic solar storm known as the Carrington Event.
If a similar event happened today, then it’s estimated that 20 million to 40 million Americans would lose power for something ranging between 16 days and two years. This could cost the economy an estimated $2.5 trillion.
Cordray writes that contingency plans for continuing business activities following an event on the scale of Hurricane Katrina or Sandy likely aren’t enough to solve the problems posed by a solar-type event causing a huge power outage.
And at the heart of this problem is the increased “electronification” of our banking and payments system. Cash, like gold, has now become something of a relic.
So for how we’d handle another Carrington Event-like storm, Cordray says two questions need answering:
How does one ensure that sufficient cash is on hand during an emergency? How is cash going to be distributed and accounted for along the supply chain with ATMs and bank offices and their core systems inoperable because of no electricity?
“Addressing these questions and others involves a monumental effort, and I don’t have a ready answer,” Cordray writes.
He continued (emphasis added):
Fortunately, cash solves the problem for small-scale, low-value payments during a long-term power outage. That is, during the immediate, in-person exchange, it is an instrument that doesn’t require electricity, communication networks, or computers.
This and other major calamities have always made me concerned about the push in some quarters for a full transition to electronic payments at the expense of payments less reliant on electricity and our communication networks. As an engineer by training, it is in my nature to wonder what can go awry if failsafe systems aren’t in place when the unexpected happens.
This concern, we note, is not entirely dissimilar from fears expressed by billionaire hedge fund manager Paul Singer in a 2014 investor letter, which pondered the possibility of a terrorist attack carried out by an electromagnetic pulse (EMP).
In that letter, Singer called the chances of a Carrington Event occurrence “far greater than most people think.”
Cordray writes that the chances of such an event occurring within the next decade are about 12%.
Singer wrote that an EMP “stands all by itself” in terms of a societal risk. And a similar solar event doesn’t seem to stand too far off.
So while Cordray’s picture of an economy slowed by a massive power outage is a bit grim, I’d agree that more time spent thinking through seemingly goofy hypotheticals is probably warranted over continued nail-biting about whether the next 10% move in the S&P 500 is up or down.