5 Threats to Your Cash, Savings and Retirement
As our national debt breaches the $20 trillion level, the thought on every American’s mind is, will there be another financial crisis? Numbers don’t lie. It is a fact that our debt is now twice what it was when the last crisis struck. When you consider how blind-sided we were by the last crisis, it now seems more reasonable to expect another crisis than to ignore the potential.
It is imperative for investors today to understand the threat of another crisis and the threats that accompany its arrival. Only then will investors be equipped to protect and grow their wealth in the face of disaster.
Impact of The Financial Crisis
The collapse of the housing market and financial crisis of 2008 was devastating to many American households. Better Markets, a non-profit for regulatory reform, estimates the real estate losses at
- $7 trillion due to tanking home prices
- $11 trillion in stock market losses and
- $3.4 trillion in retirement account losses
Those are only losses that can be quantified. There are other unseen, intangible losses we are still dealing with in derailed employment opportunities, stagnant earnings growth at best and general lost social mobility due to foreclosures and other repercussions that many Americans had to deal with as a result of the crisis.
While our economy is still picking up the pieces and slowly trying to heal, something permanently changed coming out of this past recession. The deep blow to our confidence has left many Americans with doubt and distrust. Why? Because the process that creates change is broken and the measures taken to solve the financial crisis only created a new set of problems; the escalation of our national debt has put us in a no-win position with our backs against the wall.
We aren’t really out of the woods; so, how should we be preparing and structuring our finances to defend against devastating losses again?
The Reality of Banking Regulation & Politics
Unfortunately, most of the regulatory “solutions” really only paper-over the problem in the spirit of “Doing Something” – never mind that the “something” we are doing is not particularly helpful. Yes, we passed the 2010 Dodd-Frank Act where we attempted to reform Wall Street and look for ways to better “protect” the consumer. And yes, we created a massive new government bureaucracy called the Consumer Financial Protection Bureau (CFPB) who enforces these laws. How effective do you think they’ve been? 1
The truth is the oversight and regulatory representatives in Congress overseeing the banking industry may have little to no professional knowledge or prior involvement in banking and finance. Those who serve on the relevant committees are largely educated on these matters by industry lobbyists who are not disinterested, unbiased parties, but heavy hitters with deep-seated agendas. Congressmen frequently employ highly educated, ethical staffers to assist with committee work; and sometimes they hire a friend or relative with limited knowledge of the issues.
We have to trust that Members of Congress are seeking impartial and factual information to balance the loudest Capitol Hill voice - aka the lobbyists who represent the financial sector and big banks. Do they understand real world economics and complicated financial instruments such as derivatives? We have to hope and expect that the agency regulators are unbiased, intelligent and capable of making correct choices.
Our present financial system has multiple vulnerabilities that are not immediately apparent to an untrained eye.
The fact is big money in Washington consolidates power and reduces transparency for the benefit of bigger and bigger banks, and away from consumer and taxpayer protection. These forces aren’t receptive to change. When legislation is passed, thousands of pages are written and the special interests weave their agendas in ways which don’t necessarily benefit the consumer.
Part of maintaining status quo is keeping up appearances on the regulatory side. If the regulators appear busy and serious, investors and consumers remain calm and docile. They want you to keep doggedly depositing those assets in the bank arena, buying stocks and trusting that regulation has circumvented another crisis. Their intention is to keep the picture rosy.
In the Aftermath of a Systemic Problem, Not Enough Changed.
Few of us have noticed that the fundamental views on monetary policy and the economy have not meaningfully shifted.
An example: Derivatives and Collateralized Debt Obligations (CDOs) are back and rearing their ugly heads. 2 These very complicated financial instruments were largely responsible for exacerbating the housing bust. While Dodd-Frank regulation requires higher levels of capital, there is little transparency on how these obligations are priced and risk levels assessed. In addition, bank stress testing doesn’t truly reflect the financial damage these securities can inflict because they aren’t counted as assets on bank balance sheets. 3
With low interest rates, investors continue to seek higher returns on their money. This time, the banks and Wall Street are packaging commercial real estate loans instead of residential. We are assured the risk profile is totally different with these new and improved CDOs because shopping malls never go under? Banks are also assuming they have smarter, more informed buyers where these investment instruments are concerned, but do they?
Too many assume and expect the best of the regulators. Given the current circumstances, the buyer beware lights continue to flash. For whatever reason, regulators who are allowing these investments to increase, and the too-big-to-fail banks who encourage them, gorge themselves and become overweight on similar financial instruments that devastated markets last time around.
The final nail in the Dodd-Frank coffin is “derivatives (bets banks have made in the Wall Street casino) have priority over your checking and savings accounts when it comes to paying off their debts.”4 The problem is the derivatives market is significantly larger than the amount banks have on deposit which is putting YOUR money at risk.
THREAT ONE – Another Crisis Looms
In the aftermath of the last crisis, the government showered some $23 trillion (with a T) into programs and bailouts, largely to perpetuate the system rather than fix it. What are these implications?
Has this action continued to enable Wall Street and the Federal Reserve to blow more bubbles?
Do we taxpayers have another $23 trillion sitting in our bank accounts ripe for the government to confiscate when the next crisis hits?
Is it possible that the next rescue strategy involve your pocket book instead of the governments?
How do you prepare for the latter? The monetary and fiscal decisions made since the 2008 crisis, only perpetuates desperate actions on the part of the government. The credit card is maxed out and there will be a price to pay.
How can you prepare? Are your binoculars in focus? What defensive measures have you implemented? First we must understand the landscape we find ourselves in and prepare for likely actions the banking system and government could take, and in fact, IS taking right now.
Banks – The Root Source of Another Crisis
To understand why the big bailouts kept the banks afloat, it is important to understand the structure of the banking system and how it has become so vulnerable. We have to start with the system of fractional reserves.
Banks only keep a fraction of their depositors’ money in house in reserves. The rest they lend to businesses and consumers. Interest charged on these loans generate profits. The quality of their portfolio of loans determines the stability of the bank. When lending standards get too lax, as they clearly were leading up to the 2008 crisis, they lose too much of their depositors’ money on bad loans and the bank fails. However, if they are “too” risk averse, they make no returns, and probably also fail. This balancing act defines the business of banking.
In the run up to the housing crisis, banks had begun lending with little regard for the ability to repay the loan. Consumer, on the other hand, believed that real estate prices would continue to climb and cover their debts. The government had been incentivizing, almost mandating looser lending practices with legislation like the Community Reinvestment Act and FHA loans. It had also taken on some banking risk in the form of loan guarantees and FDIC insurance, all as a way to keep more money circulating in the economy. Once lenders ran out of solid borrowers, the secondary mortgage market became hungrier. Lending standards became more and more lax while loan quality worsened and disintegrated.
When these borrowers defaulted en masse, the house of cards collapsed upon itself and the housing crisis was upon us.
Of course, one way to avoid an old-fashioned run on the bank is to have the government swoop in and “re-create” all the money loan underwriters lost. That is, in a nutshell, what happened with the big bailouts of 2010. The government bought up the “nonperforming” assets of the banks, shored up their balance sheets and created a lot more regulations. Who do you think really pays for this? Taxpayers.
There is clearly no more appetite for Wall Street bail outs, so what are other possibilities and how might they impact your savings?
To anticipate what the-powers-that-be might be planning to resolve the next crisis, we should take a look at other countries, observe how they handled their crises differently, and how those outcomes have been perceived by the financial world. Cyprus might just be the blueprint for what is to come in the US as our financial situation erodes and the house of cards builds itself up again.
THREAT TWO – The Bail-In
Cyprus pioneered the bail-in model other central banks and governments seem to be looking toward. Instead of putting losses on taxpayers, Cyprus put the burden on the banks’ customers, their depositors, who were suddenly converted to “investors”. And as investors in the bank, they took a major loss.
The “best” customers – the largest depositors - took the largest hit. In this day and age of class warfare, it was only politically feasible to put the lion’s share of the losses on the “rich”. Smaller depositors were kept whole, while depositors with over €100,000 in the Bank of Cyprus lost 40% of their money. Laiki Bank’s largest depositors lost 60%. Meanwhile, an extended bank holiday was declared and when it eased, there were strict daily limits of €100 on ATMs.
Could similar scenarios become more widespread? Can you count on the FDIC or SIPC insurance to save you in the event of a market catastrophe? Highly unlikely since these institutions are grossly underfunded. The cracks in those dams are already becoming obvious and the repairmen are quickly developing their euphemistic contingency plans…
Bail-ins and You
The International Monetary Fund published a discussion document (From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions 5) which could be a harbinger of what’s to come.
A bail-in basically flips the relationship between you and the bank on its head. You might think your bank statement is a detailed listing of the money you own at the bank, but that won’t be the case in this scenario. Basically, the unsecured debt, your deposits, get converted into bank equity so that the recapitalization of the distressed institution can swiftly be achieved. You become a shareholder and not a depositor, so the FDIC no longer insures your deposits. And what do you think your bank stock will be worth given the troubled balance sheet?
At all costs, Big Banks and Brokerage Firms can’t have disorderly liquidation of deposits so they need to find a way of preventing your money from leaving the institution or limiting your withdrawals.
THREAT THREE - Redemption Gates
Have you heard of a “redemption gate” which was enacted by the SEC, an agency of the government? Basically, it’s a legal mechanism for banks to lock you out of your account for up to 10 days if the bank determines it is in their best interests:
Redemption Gates – Under the rules, if a money market fund’s level of weekly liquid assets falls below 30 percent, a money market fund’s board could in its discretion temporarily suspend redemptions (gate). To impose a gate, the board of directors would find that imposing a gate is in the money market fund’s best interests. A money market fund that imposes a gate would be required to lift that gate within 10 business days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90-day period.
Read the SEC press release here https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542347679
Is this the tip of the bail-in iceberg? They’ve already made it perfectly, explicitly legal to lock prime money market fund holders out of their accounts for a time. Will this be expanded in the future?
More and more, depositors are expected to suffer the consequences and bear the losses of the institutions in which they put their money. They could be locked out of their accounts should things go haywire again.
THREAT FOUR - Bank Holidays: Restricting Your Access to Cash
The whole banking system is very fragile in that most of the money is digital and not physical. Should customers aggressively attempt to withdraw cash, the banks don’t actually have the money to give them. So, a good solution is to just shut the bank doors for a period of time until confidence can be restored with some other measure. Don’t think it could happen in the U.S.? Guess again.
In 1933, just after Roosevelt took office, the government issued a proclamation declaring a five day bank holiday because even the soundest banks didn’t have the money to give to the depositors. During the bank holiday, the government took measures to inject currency and stabilize the financial system.
Banks and Government Hate Cash
Can you see how physical cash is not a friend of the banks? Taking money out of the system poses risks to the very infrastructure. The fact that people still have options to keep wealth outside the banking system weakens it. Many people are slowly beginning to realize this and take defensive measures against the mess the banking sector has become. Keeping a stash of assets outside the bank, on hand in case of bank holidays and capital controls is becoming more and more popular.
What about the government? They want full visibility of your finances so they can tax at the maximum level possible. A significant chunk of cash transactions are not reported and can’t be tracked by the government, so they lose tax revenues from “under the table” businesses.
Thus, the subtle pushes for an all cashless society that you will probably begin to hear about more and more. They will talk about policy and measures taken against cash as anti-terror, anti-drug, financial security and even promote convenience, but make no mistake - the biggest reason to remove cash is because it is pro-bank and pro-government. It’s about control and taking away all privacy.
THREAT FIVE – Elimination of Cash
With this much instability in the financial system, will people physically hold more cash simply because the banks are no longer as safe as they used to be? If there’s a monetary crisis, is it possible to have your debit card blocked at checkout, despite having sufficient money in your account?
If cash was no longer available and we were all cashless, you couldn’t take your money out of the banking system. You could only move your money from one institution to another – meaning: it’s never really yours if you don’t have the option of physical cash.
Society is moving in a direction that is making citizens vulnerable to government and big corporate malfeasance. Little by little, the banks in collusion with government regulators are taking away your financial emergency exits, and you need these.
If you are ever locked out of accessing your money, cash on hand to cover expenses for a period of time with no bank access seems like a prudent move.
China Looking to Dethrone Dollar
Much has been written on the tenuous position of the dollar on the world stage. China has been selling U.S treasuries, hoarding gold and is looking to dethrone the dollar with the yuan which is now an approved reserve currency as of October 1st, 2016. What if something catastrophic happens and a bank holiday coincides with a currency shock? In the event of a dollar crash, what will you do? What will you have? How long can you survive?
Should You Have Some Gold and Silver on Hand too?
Gold and silver have functioned as money practically ever since the concept of currency was invented. And, as banks stockpile precious metals in their vaults, in a sense, our financial system still is based on precious metals, if indirectly. Should our brittle system fail, what will function as a medium of exchange to get you what you need?
Here’s the comforting news:
Gold performs well when there is a financial crisis or uncertainty. Just look at the 2008 crisis where gold moved from X to Y …
Gold has retained its value remarkably well for THOUSANDS of years. It’s the antidote against inflation.
Gold has never been worth zero.
Big banks, Central Banks and billionaires are accumulating gold. They know something is wrong with the fundamentals of the global landscape.
Allocating a portion of your portfolio to physical precious metals could act as a backstop against systemic failure. If the dollar is significantly devalued, gold and silver will be king. And, should the banks falter, it’s an asset that can be accumulated outside of the system. Not to mention, it’s easily transported.
Is a Portfolio Truly Safe or Balanced Without Gold and Silver?
An investment in gold or silver is truly unlike any other kind of investment available. It is not just some blip on a statement, or a line on a chart. It is tangible and heavy in your hand. It is “REAL” as Robert Kiyosaki says. It is right there in case you need it and can easily be liquidated. No government can simply print it into existence. It is rare and limited in supply. Gold has truly stood the test of time.
Bail-outs, bail-ins or simply more of the same, precious metals could be critical to the health and balance of your portfolio. Should a banking crisis strike again or bail-ins be deemed legal, you’ll have insurance against these acts. Unlike just having cash on hand, gold and silver have the potential to thrive in these situations like they have in the past.
As savers and investors work to preserve their hard earned wealth, new measures should be considered to hedge the inherent risk that has, unfortunately, befallen our banking system.
This is the power of saving in precious metals. This is the power Lear Capital wants for your family and your future. Call today to learn more about how to physically invest in precious metals.