Wednesday, January 28, 2015

Insured Deposit Accounts (FDIC)

It seems that many folks these days confuse the presence of a promise with the ability of that promise to be kept.  Just because I tell you we're going out to lunch doesn't mean I can pay the bill.

A more commonly accepted-at-face-value promise is the FDIC, or the Federal Deposit Insurance Corporation. FDIC was created to negate panic triggered runs on banks.  Since all modern banking is fractional, if we all asked for our total deposits at one time, there would not be enough currency in circulation to pay everyone back.  To prevent this sort of mass hysteria, the government implement the FDIC, which at the time sounded like a good idea and in fact was a stop gap for consumers against banks failing.

However, the FDIC was in crisis mode just a few short years ago when a number of banks were on the cusp of failing.  It could perhaps absorb the failure of a few regional banks, and did back in 2008, but the strain placed on the system then led FDIC to establish stress-testing standards for banks of all kinds that places a further cost burden on those banks, forcing some of them to deleverage their fractional lending and reinforce their cash liquidity.   Meanwhile, the Fed has so retarded interest rates, notably the prime lending rate, that Banks can't pay any reasonable savings to depositors, and their margins on what they lend out are the slimmest they have been in some time, making their failure more likely, or at least diminish their ability to provide that cash to depositors.

Credit Unions are viewed as a better choice, but they have the same mechanism, a federally backed insurance program, the National Credit Union Administration.  Same program, same pitfalls, same guarantees.

But most people don't need to worry about this since your average person lives from one paycheck to the next, never setting aside any emergency funds of any kind.  Only the frugal and the farsighted need be concerned, and if you're one of those, you probably know enough not to put all of your proverbial eggs in one basket.  Diversify your wealth and any single tremendous upset will only perturb a portion of your estate.

A good personal plan for diversification, if your means allow would look like:

- Cash on hand: Enough to cover a month or two of living expenses at market rates

- Cash in the bank: just enough to cover your insurance deductibles and one months worth of bills.

- Physical commodities on hand - that which you or those in your immediate geographic area will need (and that you can use for barter).  Think beans, bullets and bandaids.

- Own your home, or some land, clear of any mortgage or lien if possible.

- Reliable foreign currency, preferably in cash.

If you choose to invest, you choose to gamble, which is foolish, but if you want to and can't think of anything else to do wiht your money, mix it up.  

- municipal bonds

- penny stocks if you want to day trade, fortune 500 if you want to invest for the long term

- sovereign debt

- commodity contracts

Some safe-guards:

Obviously, don't put it all in one place.

If you can't stand in front of it and physically defend it with a gun, you don't really own it, so anything fitting that description should be considered gambling if you choose to engage in that.

Don't mouth off about what you've got.  I only tell people what they can discover in public records. I own land, I almost own my home, I have bank accounts.  If you make it known you're a prepper of any description, you're making yourself a target.  Not wise unless you relish the prospect of the above.