Understatement of the day……
“Looking at the big picture, when it’s clear that your government is broke, your deposit insurance fund is undercapitalized, and your bank is hazardously illiquid, it seems obvious that you shouldn’t hold 100% of your savings in that banking system.” Simon Black, Soverign Man
Think Cyprus. Yeah I know, but that is Cyprus. Their country was bankrupt. Their banks were bankrupt. The “deposit guarantees” were mostly unfunded and virtually worthless. The only thing that was real is that real people put their real money in the bank and saw their balances printed in ink or pixels on their bank statements. But when it came time to pay the piper for the excesses, the politicians had no choice but to freeze the accounts and slash the balances. Real money vaporized in moments.
Could it happen in your home country?
- The banking system is illiquid, and many of the banks are very thinly capitalized with minimal reserves
- The deposit insurance funds are grossly undercapitalized
- The banks lack the capacity to really guarantee the system
- The government that is supposed to stand behind it is effectively insolvent
Basically, as the first world countries have rushed headlong into more and more deficit spending, uncontrollable benefit programs and poor fiscal policies more and more countries are looking like Cyprus.
Maybe you live and have your assets invested in the United States or Canada or Europe…..
If you are in the US, maybe your bank accounts are insured by the FDIC. Maybe you are comforted that the FDIC is “backed by the full faith and credit of the United States. Well, maybe a few facts might be helpful.
The total reserves held by the FDIC to “insure” the safety of your accounts totals only about 2.7% of the potential losses. In other words they only have set aside $25 billion to protect against $9.3 trillion in potential losses. In the case of a bank run, as in Cyprus and other European and South American countries in the past, you might be lucky to get a few cents for every dollar you have in the bank.
I can hear some of you say… but won’t the government jump right in to cover any amount the FDIC can’t pay. Won’t I get a government “bailout” like those fat-cat banks, brokerage firms and car manufactures? DREAM ON. Despite the fact that the FDIC claims “FDIC deposit insurance is backed by the full faith and credit of the United States government”, there are no laws binding the U.S. government to make good on FDIC insurance liabilities. Further in perspective, the whole FDIC fund to cover ALL potential losses is only $25 billion dollars. A lot of money, right? Well not really. The FDIC only has $25 billion set aside to protect over $9.3 trillion of deposits. That works out to about 2.7 cents per dollar you have in the bank. Are you going to be happy getting back about 3 cents on the dollar? I doubt it.
Maybe you can get to the ATM or bank and draw out your cash before all heck hits the fan. Good luck with that plan if you are thinking that you can get there before the bankers catch on and are facing millions of other depositors just like you. That creates a bit of a problem too. In the US, for every $9.30 that the banks report that they owe depositors like you and me, there really is only about $1.10 of real printed money. In a bank run, just like in Cyprus, the only choice the banks and government will have will be to drastically restrict the amount of YOUR money that you can withdraw… at least until they get a plan worked out. And like Cyprus, the only viable plan is to vaporize a sizable portion of those deposits. So are you going to be happy being able to access only about 12% of YOUR money when the bank run starts?
And before you Canucks and Europeans get cocky, your financial system is just about as shakey.
So what is a rational person supposed to do in the face of a financial system in decay?
I wish I had a universal answer that worked for everyone, but unfortunately such a beast does not exist. I can share some common sense planning that has worked well for me and for other like-minded trend watchers.
The first rule of financial survival is diversification. Don’t have all your eggs tucked away in one basket. For me that means to diversify my bank, savings and investment accounts in various countries and different banks. True, when it really hits the fan all banks will be impacted, but I am betting that some will be hit harder than others and I do not want all my cash and liquid assets to be tied up in one hoping that they are the one to survive.
Part of my diversification strategy is to diversify between cash, paper investments, precious metals and real estate. Again I have chosen to spread my risks out not only into these different asset classes but also into various countries. Once again, I do expect all countries to be hit fairly hard in any significant collapse of the American banking system, but I do not expect the “pain” level to be the same. Countries that have a debt-heavy based economy will fare much worse than those ecomonies that have been largely cash based, as in the Dominican Republic.
I happen to believe that diversification of real estate holdings in multiple countries can also offer a good hedge in times of a bank/currency collapse. It doesn’t have to be a big investment, but some level of diversification can be a good idea. For me, I have always found that real estate with a low carrying cost in tropical areas, generally near the coast, tended to hold value better and bounce back faster from downturns. Of course, as with any real estate, a lot of your potential profit is made on the purchase. Find under-priced properties in the path of progress with above average appreciation potential. That is what I look for both in my own investments and for others.
Another part of the plan is to have at least a survival level of liquid assets in cash or other negotiable assets. When access to bank accounts is restricted as in the Cyprus scenario, at least for a while cash will be king and in very high demand. And these days you are not giving up much to move some of your cash out of banks with a paltry one to one and one-half percent interest rate. Placing some cash or negotiable assets aside in a “hidey-hole” for a rainy day makes sense today.
One more important part of the plan is to buy a little insurance in the form of a second residency or even better a 2nd passport. This will give you a pass to move around no matter what restrictions are placed on you home country passport. As was so plainly pointed out in Nazi Germany, the freedom to move across borders at times of collapse can be a critical, life saving part of any Plan B.
Looking forward to seeing you on one of our free North Coast Discovery Tours.