Get Your Money Out of the Bank

It’s bad enough depositing your money into a bank account and earning essentially zero interest on it, or in some countries, having a negative interest rate.

It’s even worse knowing that once you deposit your money in a bank, it’s not really yours anymore. You have turned over your property to the bank in return for a debt claim. You become an unsecured creditor holding an IOU.

Worst of all, there’s the “bail-in,” which we all became familiar with during the 2013 banking collapse in Cyprus. Some uninsured depositors got half of their money back, although, at one bank, customers received nothing of their deposits over the “insured” amount.

In 2014, the leaders of the Group of Twenty (G20) – representing the world’s 20 largest economies – declared the Cyprus model should apply globally. They did so in a mind-numbing tome entitled Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution.

Deposits in banks that are “too big to fail” will be promptly recapitalized with their unsecured debt. And… guess what? The largest chunk of unsecured debt is your bank deposits. Insolvent banks will recapitalize themselves by converting your deposits into worthless bank stock. This avoids taxpayer-funded bailouts that proved politically unpopular during the last financial crisis.

This behavior deeply disturbs the powers that be. In response, they’ve imposed stricter and stricter controls on cash. I wrote about those controls in this essay from 2015, and since then, it’s only gotten worse.

Of course, your friendly central banker will never tell you it wants to abolish cash so that you have no alternative but to keep all your money in a bank where your deposits can be bailed in at the click of a mouse. Instead, the motivations are loftier – specifically, to “fight crime” and “facilitate tax compliance.” For instance, former US Treasury Secretary Larry Summers wants a global ban on notes worth more than $50 or $100. He claims the linkage between high denomination notes and crime is totally convincing.

I must admit to feeling some sympathy for central bankers. In response to lagging economic growth worldwide, they’ve been forced to innovate in ways that have never been tried before. Negative interest rates and bail-ins are just two examples.

It hasn’t worked. Most people are rational and respond to adverse financial incentives (like negative interest rates) by doing whatever they can to preserve their capital. They hoard cash, buy assets like gold that can’t be bailed in, and move their money to the safest possible banks.

If you haven’t already done so, maybe you should consider joining them.

Reprinted with permission from Nestmann.com.

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