Tuesday, December 21, 2021

The Money In the Bank

When one thinks of all of the money in banks all over the world, it has to be the savings of individuals.   A lot of it is retirement savings. There are a lot of people borrowing these dollars, governments, investors, stockbrokers, etc. Banks, brokerages and investment firms are the conduit for these transactions.  The whole thing almost collapsed in 2008.  Congress came to the rescue and saved the banks.  Ever wonder why?  The United States government is the biggest borrower from the banks.  If they go under, the whole system collapses.  The government would be insolvent.

Back in the 1960’s, Congress was spending so much that the Social Security Trust Fund wasn’t generating enough cash for them to borrow from.  Well, they figured a way to get access to more money by passing the IRA and 401k plan.  It sounded like a retirement savings plan.  It kind of was.  The neat thing about it is that you could not withdraw the funds until you were 65 and then you paid taxes on it.  So, if something went seriously wrong, the saver could not cash out without a severe tax penalty. This meant that there would be no panic selling on Wall Street.   This restriction allowed the government to borrow hard dollars earned today and give back inflated dollars when people retired.  This was a lag time of about 40 years.

The thing I look back to in history is the Weimar Republic of Germany in the 1920’s.  People saved for retirement and then their monetary system collapsed.  The old were hit the hardest. These were the people with savings in the bank.  These were the people who were trashed.  They lost everything.  The real thing not realized is that when you get old, you become invisible. Governments know that old people are expendable when it comes to their savings, in 10 years, they are dead and soon forgotten.  These people saved and played by the rules and then in retirement, they get shafted.  No one will get voted out of office or go to jail for this crime. Nobody right now, comprehends how bad Congress has screwed up government financing. It has been going on for years.  We are talking at least 60 years.  This isn’t a Democrat or Republican thing; it involves all of Congress.

What you have to look at is this.  All of your savings could end up as a big zero.  Just like Zimbabwe, 4 billion dollars for a cup of coffee.  The 401K has no investment advantage in today’s world. It offers a negative return on investment over a span of 40 years.

Precious metals on the other hand, were not that great when interest rates were high.  Why buy metals when you other investment could return 10-20% interest?  Parking savings into precious metals has no downside at this time.   There is no interest lost from taking possession of precious metals, in today’s world. Inflation over time, is very cruel to people saving for retirement.  Bear in mind that a person’s age defines their present perception of inflation.  To a person entering retirement, inflation has stolen their savings. When they started saving, 50 years ago, interest rates were around 5 to 9%. A million-dollar nest egg would have provided $50,000 to $90,000 in interest every year. Not in today’s world, the interest is about $10,000 per year.  This is not what was envisioned when they started their IRA.  If you’re 25 years old, an IRA appears to be a fool’s dream.  There is no reward for saving money, compound interest is no longer the “8th Wonder of the World.”

Monetary survival of your assets is your goal.  With interest rates so low, precious metals have command of the playing field.  Governments over time cannot control the value of their currency.  Real estate is often used as a good store of value that survive the curse of inflation.  The trouble is, their high visibility to be taxed, not to mention rent control.  It still has had a very good return over a timeline of 20 years.  Gold, silver and platinum are my favorites.  If you hold all three, you can play the metals market. You can trade from one market to the other.  The nice thing about precious metals is that they are not visible to the banks or to government.  That can be to your benefit if you end up in a rest home.  I have my son and wife on our bank safety deposit boxes, only two keys. So, there is no probate problem in this case.

The reality of what we are looking at in the current financial markets is rather unusual.  Probably the right word would be absurd. No one is going to save money in a bank paying 0.05 % interest.  Are investors accepting a contradiction of economic principles?  I think not.  But the problem is this, the investor doesn’t know what to expect from this sort of convoluted banking, involving our government debt. This hot mess cannot be financed by zero interest rates without savings coming from somewhere.  We could be facing the biggest banking collapse in history. 

The only plausible source of funds that I can come up with is the 401K retirement plans along with other pension plans.  The real question to ask, is who is holding on to all of these real estate loans at 2% when the interest rate jumps to say 4%? The rule of 72 states, divide the interest rate into 72 to get the time it takes to double your money.  72 divided by 2% interest, is 36 years. That’s a few years short of retirement. 72 divided by 4% interest, is 18 years, means your savings could quadruple by the time you hit retirement age. What is not sold to anyone at the present time is that at 1% interest, you wait 72 years for your funds to double.  Nobody will accept those terms if it is pointed out to them.  If everyone was to spend their paycheck now for immediate gratification; the banking system goes poof.

The economic rules are in place, and the system violates every one of them.  I'm debating now, do I buy gold or platinum?  I'm not trying to make money; I am trying to keep what I have already earned.

Merry Christmas everyone and have a Happy New Year

Jim in San Marcos


Sackerson said...

Yes. It's worrying that so much of our income depends on State-controlled payments. They have us by the short and curlies. It's only your non-real-estate capital you can secure.

dearieme said...

Sacks, it can be even worse. We two have Defined Benefit pensions but when the stock markets crash - as surely soon they must - the pension schemes will be broke. They will then presumably join the (UK) Pension Protection Fund, which will pay us pensions with no inflation-protection.

And that's assuming that a gigantic DB fund such as our principal one won't ruin the PPF. Aaaaargh!

Merry Christmas, Jim, and a Happy New Year.
I'd send you a picture of my worthless Zimbabwe gazillion dollar note except that it's not you that needs the education.