A Brokerage Account Is Likely Safer Than Bank Deposits And CDs

October 14, 2022

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Most likely you do not understand your full relationship with your bank.

You might be shocked to learn that “your” money in your bank account is not actually yours. When you place money in a checking, CD, or savings account at the bank, you are actually making an unsecured loan to the bank.
Chris Martenson

Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.
Pierre-Olivier Gourinchas IMF

Only a few times every century do you get this kind of collapse in the US government bond market (see below). This bond collapse also comes with a decline in all asset classes. US dollar cash has been the only safe haven this year.

Economic and market volatility exists for a good reason, and is likely to continue. Make sure you have covered every angle for your financial security.

Chaos Continues in Policy Circles

In the UK, Chancellor of The Exchequer, Kwarteng says any fresh turmoil in markets would be “a matter for the governor.” Rather than take responsibility for the impact of fiscal policy and work with the Bank Of England, does the new Chancellor now expect the Bank of England to act as controller of the volatility of 30 year government bonds? Or does he desperately need a scapegoat?

This interaction coincides with the IMF meetings in Washington DC, where the need for coordination between monetary and fiscal policy is being stressed as highly important.

The current environment really stems from unresolved problems from the 2008 crash. Since that time sustainable growth never recovered despite record low rates, QE, and government debt financed spending. Money supply growth then also took off in response to the covid crisis, and then finally, inflation arrived and interest rates have been trying to catch up ever since.

Suddenly, the investment return crisis I talked about in January 2020 has materialized and all kinds of problems have been set off. Policy makers ignored the long term risks of the “extraordinary measures” put in place in 2008 that became permanent. Apparently this is still not widely understood as this week Ben Bernanke was awarded a nobel prize!

Most importantly, inflation is now far above the last two interest rate peaks. Interest rates are still well below inflation but with all the new debt in the economy, it is not clear whether financial stability will become an issue before interest rates have been able to contain inflation. If so the Fed will have to decide between addressing inflation or avoiding significant damage and further instability to markets and the economy.

The Federal Reserve’s financial position has also weakened significantly, and is now a negative contributor to the Treasury.

With $8.8 trillion in bonds averaging ~8-year maturity, year-to-date market losses of ~15%, and just $48 billion in capital, the @FederalReserve would definitely be insolvent if it needed to mark to market.
John Hussman

Certainly no hedge fund could continue with these financials carrying a loss which is over ten times its capital. The best case may be losses to the Treasury for a number of years, another side effect of the “extraordinary measures” of the last decade. This shows the increasingly fragile state of core financial institutions as well as the system itself.

Are Your Deposits Safe?

In this background, investors should be aware that the risks to their own bank deposit accounts are rising and it may be a good precautionary measure to review your exposure. The risks to your deposits may well be much greater than you realize. Deposits are unsecured liabilities of a bank, and your deposits rank below derivatives in seniority in a “bail in”. In a bank bankruptcy your deposits will be used to bail out the bank!

There is rarely any forewarning of bankruptcy, beyond the price behavior of the bank stocks, which are now trading near a two year low.

Make sure that you understand your position in a bank bankruptcy so that you avoid any bad surprises. The bankruptcy procedure and the security of your capital is not widely understood.

Chris Martenson explains why he has decided to take cash out of his bank account.

Brokers have a different bankruptcy procedure and it typically comes with higher protection and security. All my clients are SIPC insured, which is a different process, at Interactive Brokers. This is a much more straightforward arrangement, with no “bail in” and there are several pages transparently available in the link above explaining the procedure.

Summary

Market and economic events are moving fast at this stage. If you need a quick review of the issues that you may need to know about for your own circumstances, schedule a FREE consultation today.

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