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Thread: food for thought - Bank Deposits are NOT a Riskless Form of Saving

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    Default food for thought - Bank Deposits are NOT a Riskless Form of Saving

    This is what we now have by way of government: a self-serving elite who cannot be trusted, operating to a timetable defined by, and limited to, the electoral cycle.

    This liberty deficit is possibly more severely damaging than the supposedly intractable fiscal one that lies beneath it. Yet whatever emerges from the disaster, Cyprus has reminded us of a couple of awkward truths:

    1.A deposit in a bank is not a riskless form of saving.
    We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week:

    “Banks are not vaults. They are thinly capitalised asset managers that make a promise– to return depositors’ money on demand and at par– that cannot always be kept without the assistance of a solvent state.”

    2.When states become insolvent, the piper must ultimately be paid. Fatal, embarrassing insolvency is not a problem that can be perpetually or painlessly deferred.

    Cyprus matters not because of the size of its economy or because it is (for the time being) a member of the euro zone.

    It matters because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

    CLSA strategist and financial market historian Russell Napier writes as follows:

    “The key impact will be long term as the citizens of the Euro, like the citizens of the Soviet Union or the American colonies before them, eventually reject the sacrifice of political rights necessary to support the system.”

    “When the history books are written, the Brussels-imposed sequestration in Cyprus will be seen as the tipping point when the citizens of the Euro system realized that the socio-political sacrifice needed to sustain a single currency was just too great.”


    Actions have consequences. Cyprus may end up being a storm in a teacup. Like Russell Napier, we fear it may well be the start of something altogether more sinister.

    If you have yet to consider the sanctity, stability, ‘store of value-ness’ and true safety of the paper currency you hold within the banking system, now might be a good time to start."(snip)

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    Meanwhile in Cyprus http://vimeo.com/43762138
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    ^^^ while the South Park clip was 'entertaining', the banking issues unfolding in Cyprus certainly points to the possibility that 'history' can indeed repeat itself. Not wanting to lean political, but for a fact Franklin Roosevelt set the precedent for bank closures and de-facto 'seizures' of a portion of depositors' bank balances to deal with potential national bankruptcy. In Roosevelt's case, the 'seizure' of a portion of depositors' bank balances in the 1930's took place by stealth ... i.e. an instant devaluation of the US dollar's purchasing power by some 40% while banks remained closed so that depositors could not access their money prior to the devaluation taking place. However, since readjustment of domestic US retail prices didn't immediately follow the official US dollar devaluation, the impact of Roosevelt's actions was obscured in the eyes of most Americans at the time.

    Where Cyprus is concerned, the de-facto 'seizure' of a portion of depositors' bank balances is well publicized ... a new 40% 'tax' on Cyprus bank deposits over 100,000 Euro. Since Cyprus has no way to devalue the currency other than leaving the Euro, there are also undisclosed capital control measures being implemented that severely restrict the ability of Cypriot bank depositors to access their money going forward ... with a 100 Euro per day withdrawl limit for 'average' bank depositors already having been officially announced.

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    In my books, the danger for the wider Eurozone is contagion. If noone can be confident of a risk-free rate in certain countries, then this affects the price of everything. Is the government going to seize 10% of the money or 90%? So what is the price of bread in one month? Same as now or 10 times now? That can cause whole financial systems to seize up.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
    - Dr John Zoidberg

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    ^^^ that's 2/3rds of the issue, person. There is indeed increasing reason to worry that money sitting in bank accounts, or for that matter in retirement accounts or investment accounts, is 'fair game' for new 'wealth' taxes. There is also increasing reason to worry that the 'purchasing power' of money sitting in bank accounts, retirement accounts etc. can decline faster than the rate of passive interest or dividend earnings. But the 1/3rd that you haven't mentioned is 'capital controls' i.e. not being allowed to access money sitting in bank accounts, retirement accounts etc. AT ALL for some time period, and/or having daily transaction amounts limited to the point of just barely being able to pay bills.


    From

    (snip)"The country's crippled banking system was effectively closed down on March 16 while the terms of the 10bn euro (£8.5bn) bailout were agreed and implemented.

    Large depositors face losses of as much as 40% of their savings as part of the deal, leading to fears that customers would attempt to withdraw large amounts of money when the banks reopened.

    As a result, strict capital controls include a withdrawal limit of 300 euros (£253) a day and a ban on cashing cheques.

    Travellers leaving the country can only take up to 1,000 euros (£845), or the equivalent in foreign currency, with them in cash - significantly less than expected."(snip)


    and from

    (snip)""I anticipated, not this to happen, but I anticipated issues last year, when Greece had a question of whether it will remain in euro and the consequences of that," said Athos Angelides, who runs a business importing and distributing hair salon products. "So luckily we transferred money in the middle of last year over to the UK."

    Although the banks have opened, customers are severely limited in access to their accounts. Capital controls, imposed to prevent worried savers and businesses rushing to withdraw all their money, include limiting cash withdrawals to 300 euros ($383) per day per person and limiting payments abroad to 5,000 euros.

    No checks can be cashed, although they can be paid in, and people leaving the country can only take up to 1,000 euros, or the equivalent in foreign currency, with them in cash."(snip)


    Hopefully, the 5,000 euro limit on 'outside the country' payments isn't going to have an impact on StreaMates ... whose servers are based in Cyprus.
    Last edited by Melonie; 03-28-2013 at 07:03 AM.

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    Banks are kind of ponzi schemes in disguise, don't you think? Because, if everyone withdrew all their cash, well... there wouldn't be enough cash for the bank to give back to people. Unless they printed more of course. But that's an idiot move.

    Honestly, cash/bank savings scares the shit out of me. So does real estate investments. Both could technically disappear at any point in time.

    What's the safest thing to invest in besides gold and silver? Is there something?

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    ^^^ gold and silver are potentially subject to 'confiscation' by gov'ts as well. Remember that in 1933, a stroke of Franklin Roosevelt's pen caused the value of gold owned by Americans to drop by 40% ... at which point those Americans were also required to sell the remaining 60% of their gold's original purchasing power in exchange for US federal reserve note currency ... which had and has no precious metal backing whatsoever.

    As far as finding a 'safe' investment these days, in reality there aren't any that are totally safe. Even the supposedly FDIC/ NCUA insured deposits in banks and credit unions are only as good as the insurance payouts possible, and at the moment both insurance funds are essentially broke due to previous bank and credit union failures. Thus from a standpoint of realistic options, the only way that the FDIC / NCUA could quickly 'make good' on supposedly insured deposits would be to receive huge new appropriations of US taxpayer money. However, with 40 cents of every US gov't dollar spent already being borrowed or printed, it remains to be seen how realistic the appropriation of trillions of additional taxpayer dollars for bank / credit union bailouts would actually be.
    Last edited by Melonie; 03-30-2013 at 09:02 AM.

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    also, it appears that Canada is also aware that Canadian taxpayers are the only real backstop against bank failures right now, and has thus just enacted a Cyprus-esque 'bail-in' policy ... per Reggie Middleton at

    (snip)"As part of the 2013 budget in Canada, the Minister of Finance tabled the Economic Action Plan 2013 which included the newest buzzword 'bail-in'.

    Page 145
    “The [Canadian] Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants. Systemically important banks will continue to be subject to existing risk management requirements, including enhanced supervision and recovery and resolution plans.

    This risk management framework will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are ‘too big to fail’.”

    A depositor is an unsecured creditor to a bank. The Canadian government presents its position to be one of shielding the taxpayer from the need to pay for bailing out a failing bank. As a taxpayer that is comforting. However as a depositor, the phrase “rapid conversion of certain bank liabilities into regulatory capital” concerns me. My deposit is the bank’s liability. Could depositors’ funds fall under the definition of ‘certain bank liabilities’? I searched the entire 442 page document and I cannot find where the term ‘certain bank liabilities’ is defined.

    The prudent approach I believe would be to assume that under certain conditions, certain bank liabilities will include depositors’ funds; at least those funds in excess of CAD 100,000 which is our so-called insured amount.

    Even if it has noble intentions now, under a credit and derivatives collapse scenario, it is conceivable that the Canadian government could be coerced or bullied by external agents into grabbing depositors’ funds just like what is happening in Cyprus.(snip)

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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    Quote Originally Posted by Melonie View Post
    As far as finding a 'safe' investment these days, in reality there aren't any that are totally safe. Even the supposedly FDIC/ NCUA insured deposits in banks and credit unions are only as good as the insurance payouts possible, and at the moment both insurance funds are essentially broke due to previous bank and credit union failures. Thus from a standpoint of realistic options, the only way that the FDIC / NCUA could quickly 'make good' on supposedly insured deposits would be to receive huge new appropriations of US taxpayer money. However, with 40 cents of every US gov't dollar spent already being borrowed or printed, it remains to be seen how realistic the appropriation of trillions of additional taxpayer dollars for bank / credit union bailouts would actually be.
    FDIC has never been adequately funded. When community banks fail, national banks takes over the deposits. That has been the trend the past few years. FDIC just pays for the transition. The problem becomes what if a large national bank failed and no one wanted to touch their deposits?

    If people have to use banking services they should be at a community bank or credit union. There are a million reasons why but if you are talking about insured funds........ national banks are too big to insure.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    Quote Originally Posted by Melonie View Post
    Even if it has noble intentions now, under a credit and derivatives collapse scenario, it is conceivable that the Canadian government could be coerced or bullied by external agents into grabbing depositors’ funds just like what is happening in Cyprus.(snip)
    What many people who i have spoke with doesnt seem to grasp about Cyprus is the fact it is a testing ground. They can give a million excuses as to why they are doing it. But they are still doing it. They are paying close attention to the reactions around the world. They know its coming. It wont be just Cyprus either....
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: food for thought - Bank Deposits are NOT a Riskless Form of Saving

    ^^^ indeed, there are very high theoretical risk levels now in existance because the 'assets' supposedly backing potential loan losses / investment losses etc. are not real assets at all. Instead they are debts ( in one form or another ), whose real world collateral value is only as good as the debtors' actually ability / willingness to repay. From AIG to Iceland to MF Global to Greece, it has become amply apparent that said ability / willingness to repay has become a pipe dream ... due at least in part to the lack of real world consequences if repayment does not / cannot happen.

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