The End of Savings Safety and the Beginning of Economic Understanding
Includes a Fun Assignment
When it comes to investing your hard-earned money for safety, there are four big players in the game. Banks offer savings accounts and certificates of deposit, while insurance companies provide options for annuities and pensions. Municipal bonds backed by state taxing authority and federal treasury instruments are also contenders, but treasuries take the crown for being the most secure. However, it’s important to note that the federal government’s power to print money can be a double-edged sword: printing too much can cause inflation and create its own set of problems. Investing wisely and understanding the nuances of each option can help ensure your financial security.
When it comes to holding your money, most people turn to banks as the safest option. Why wouldn’t they, when the FDIC has guaranteed depositors will be made whole if there’s ever a run on the bank? Established in 1933, deposit insurance has proven to be an effective solution to stabilize deposit outflows, but here’s something you should know; while banks still contribute to the FDIC, the reserve ratio currently sits at a mere 1.27% of all deposits. That’s a stark contrast to the 56.8% of deposits held at FDIC insured institutions as of December 31, 2022. While it’s great to have the FDIC as a safety net, it’s always wise to keep an eye on your assets and make informed decisions on where to put your money.
To enhance the insurance pool backing FDIC guarantees, some policy makers have proposed increasing the FDIC insurance coverage ratio on all deposits from 1.27% to 1.35%. However, even this small increase could mean another $104 billion in reserve builds. Even with a total expansion in insurance reserves of $230 billion, it still wouldn’t be enough to insure one large bank. That’s right, if all deposit insurance had to be used and the US government had to step in to fund the total remainder of the $18 trillion in deposits, it would represent an amount equal to 75% of US GDP. The question remains, will more reserves really increase the confidence of depositors? It’s a serious consideration for the financial industry. As I write today, Janet Yellen, Treasury Secretary, is convening an emergency financial meeting as the banking crisis expands in Europe.
Pragmatically speaking, the safety of deposits is largely due to your bank’s ability to manage cash flows, from assets and liabilities to their preference toward minimizing their overnight cash position in order to maximize the productive use of their capital. Too much overnight cash and profits go down. Too much risk and their liabilities expand. So, if maintaining the community banking structure in the United States is a priority for policy makers, with a higher threshold of deposit insurance, more regulators may be needed.
Once this management of assets and liabilities takes hold in the minds of savers who desire absolute safety, they’re going to want more understanding of who and what is supporting the safety of their hard-earned savings. Furthermore, the recognition of understanding what causes inflation, which leads to rate hikes, which causes banks to fail, causes the public to understand the United States is a nation of in need of discipline.
For example, in a world of comparisons, in today’s dollars it cost $4.7 trillion to fight and win WWII. The Biden administration has borrowed another $4.8 trillion in just the first two years. Most of this massive sum went to COVID relief payments, enhanced income tax enforcement, negotiated pharmaceutical discounts, and semi-conductor manufacturing infrastructure. The inflation that developed in the aftermath of Biden’s initiatives has caused some $700 billion in added interest on the federal debt.
The current inflation crisis has sparked troubling echoes of the tumultuous post-WWII period, when inflation surged to a staggering 20% in 1947. In response, the Fed has swiftly raised interest rates, which is causing major headaches for banks holding short-to-intermediate-term treasuries. Unfortunately, this has led to significant losses, as the value of these instruments declines in response to higher interest rates. One particularly unsettling example of the fallout from this situation is the collapse of Silicon Valley Bank, which was largely precipitated by the realization that liabilities were about to surpass assets. As one incisive social media commentator observed, the power dynamic appears to have shifted in recent years from voting to bank withdrawals, as individuals increasingly prioritize safeguarding their financial assets over political engagement. In this context, it is more important than ever to prioritize diversification and prudent asset allocation as sources of real safety, rather than relying solely on debt or equity. After all, this has been a cornerstone of financial stability since the New York Stock Exchange was established all the way back in 1792.
With inflation at a 40-year high and debt headed for record levels, substantial deficit reduction will be needed to put the United States on a sustainable fiscal course.
Have you ever considered the safety of your bank deposits? It may come as a shock to learn that none of your deposits are insured. That is, in the event of a banking system failure, the government would repay you using freshly printed US dollars which have little value. This is because deposit insurance is not the same as car insurance, where accidents are independent of each other. The FDIC risk is systemic and affects everyone. So, what can you do to secure your financial future? As a prudent individual, it’s crucial to act in your own best interest. Read on for a short and longer academic answer on how to protect yourself financially. Both versions are worth exploring to ensure you’re fully informed.
Welcome to the world of financial safety! Here are some simple rules to help you understand the key principles:
- Inflation can be a tricky enemy, but diversification and liquid ownership positions can help you stay ahead.
- Keep an eye on opportunity risk – sometimes having too little liquidity can be a danger.
- Taxation can be affected by federal and state policy changes, so stay informed.
- The old “buy-and-hold” strategies may not be enough – consider working with an experienced portfolio manager.
- In today’s fast-moving digital age, change happens quickly, so it’s essential to stay up to date.
- Monitoring your portfolio’s metrics can help build confidence and ensure success.
- Fighting inflation and taxes are crucial to financial well-being but be aware that deflation may also complicate matters.
- Strategic thinking can help you navigate the economic cycle. Check out our monthly letter for timely insights.
Remember, staying informed and proactive are the keys to success in the world of finance.
Did you know that economic peace and stability are closely linked to positive societal pillars in America? This may sound strange, but the Cooper Hewitt Museum in New York has a fascinating exhibit dedicated to this topic. By examining your attitudes towards these pillars, you can gain a deeper understanding of the impact of risk-taking on our economy and society as a whole. So, the next time you’re at the museum or simply reflecting on your beliefs, take a moment to consider the important role that economic and social stability play in our lives. It’s a thought-provoking and enlightening concept worthy of exploration.
It’s time to evaluate our societal categories, and we need your input. Assign a number between 1 and 10 to each of the following categories, without overthinking it. This is just the baseline for 2023, like a doctor measuring your blood pressure. Keep track of these scores and update them periodically. Remember, a score of 1 is the lowest, while a score of 10 is the highest. Here are the categories that need your attention:
- Well-functioning government
- Equitable resource distribution
- Free flow of information
- Good relations with neighbors
- Education, skills, and innovation
- Acceptance of the rights of others
- Low level of corruption
- Sound business environment
Your score can reveal more than just your financial confidence; it can unlock a future of financial success. A low score may feel daunting, but don’t let fear and disappointment hold you back. Instead, take the opportunity to learn and improve. On the other hand, a high score can give you the boost of confidence you need to take control and achieve your goals. Reach out to us with your score, and we’ll show you a surprising way to use it to optimize your finances.
Thank you for your trust and confidence.
Best Regards,
Vaughn L. Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
858-454-6900
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0285.