When you deposit money in a bank you become a protected senior creditor, but creditor nonetheleas, to the bank. The government insures the first €100 000 or $250 000 against losses, but that guarantee is only as good as the government.
Jeroen Dijsselbloem, president of the eurogroup, told the FT as the bailout was announced:
“If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, where you take the risks, you must deal with them, and if you can’t deal with them you shouldn’t have taken them on and the consequence might be that it is end of story.' That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take." [1]
If you want a dollar asset as close to risk free as possible, buy Treasuries. If you are afraid of inflation buy inflation-protected Treasuries, TIPS.
Not Bitcoins? No, not Bitcoins. The purchasing power of your savings has a higher probability of being retained when backed by the full faith and credit of the U.S. government than a cryptocurrency. This may very well change, but it is not the case today, particularly if you pay your bills and buy your food in dollars. Speculate in Bitcoins, use them to transact if you must, and perhaps participate them as a form of activism, but do not convince yourself that you are George Sorosing the global financial system.
No, don't buy treasuries. Getting back inflation destroyed dollars is not risk free, in fact you're getting defrauded because you're not actually getting your money back at all.
A quick check on what dollars will buy (the true judge of the value of a currency), spanning 10, 20, 30, 50, 100 years tells you everything you need to know about the destruction your capital will suffer while yielding almost nothing to offset the devaluation. And now the Fed is working harder than ever before to abuse the global reserve FRN standard.
Now is the absolute worst time possible to buy treasuries. The era of cheap money is coming to a close with a frantic flailing about of currency devaluations, binge stimulus, bailouts, and robberies. Anybody that claims hyper cheap money lasts forever, is selling a pipedream (which may be accompanied with the words: it's different this time).
That's plain wrong. You don't buy treasury bonds unless you know the interest rate. Even after all the bail outs, all the crisis and despite rising government debt there is no safer investment.
It's just usually not used as the sole investment, but rather the safest position in portfolio...
That's exactly my point. You can't even remotely earn enough interest on treasuries to offset the destruction in the dollar that is occurring as the Fed generates massive inflation (aka expands the money supply at a record pace). The M2 is expanding at 12%, and the M1 is expanding at 7.5%.
You don't have to take my word for it. The destruction has already occurred, and is getting worse. A 5 minute effort on calculating what your dollar will purchase today versus 10 or 15 years ago, proves that. Except now your treasury paper yields almost nada because the Fed is acting to destroy your 'return' by holding rates artificially low while devaluing the dollars you use every day to do so.
Treasury paper is as dangerous as holding your money in a Cyprus bank. The next decade is going to be a fiscal disaster for the US. The bill is coming due, and not only can the US not afford to repay its debts ever, but it can't afford any real interest on its debt (4% * $20 trillion = bankrupt US Government). This isn't going to happen in decades, it's happening now, which why the Fed can't raise interest rates, can't ever sell off its holdings, can't stop buying 85%+ of all the US Government debt being issued, and can't stop buying mortgages. Worse yet, they're going to increase their purchases again this year.
The argument about inflation really depends on what you have to do with the money besides putting it into investments, and what other investment options out there.
It is still consensus that the bond rate + inflation risk is understood much better than any other asset I can think of. I'm talking about the financial term 'risk' here, not the colloquial one that you are using. In financial terms, you can have a loss without any risk and still be happy about the position afterwards...
The only true and safe way to stay ahead with the rampant inflation of the money supply is: become a government contractor and get your hands on the money first before it's effects appear in the system.
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. It may be influenced by changes in the money supply, but is not defined by them. What evidence do you have to back up your assertion that "Fed generates massive inflation"?
Inflation is not a general rise in the prices of goods; prices going up is merely one symptom of inflation. Inflation is the expansion of the monetary base. Printing dollars, for example, is inflation. The increase in prices is a result of inflation, and there are numerous effects other than prices going up.
It's critical in economics to separate supply & demand of goods causing increases or decreases in prices, from monetary changes. Free market forces are not the same as central bank forces.
There's about 200 years of modern economic evidence for how exactly inflation works and how central banks create it.
I'll ignore the fact that the Fed has openly admitted it has devalued the dollar by 97% since its founding. I'll also ignore the fact that Bernanke recently said it was the goal of the Fed to generate asset inflation via QE aka debasing the dollar (see real estate skyrocketing 10% again, or 22% in Phoenix (a disaster market recently), see stocks at all time highs again ala 2007).
I'll also ignore the fact that Greenspan openly admitted the Fed has the direct ability to increase or decrease inflation, and can cause bubbles or pop them. He of all people should know.
It's not an assertion, it's a fact supported by extreme amounts of data.
If you increase the monetary base and money supply by hundreds of percent over a relatively short period of time, you're going to see a substantial increase in the price of goods in the currency in question.
If you 'print' dollars to buy trillions in mortgages and remove them from the market, you're going to limit supply of housing and cause approximately $3 to $4 trillion worth of inflation in just one year (what's happening right now). Not to mention simultaneously holding down mortgage rates via the government dominated mortgage market, by holding short term and long term interest rates artificially low by buying the paper that influences that. Then when consumers sell their homes, or take home equity loans, and then spend in any manner or buy anything else or loan their money to banks - the inflation gets discharged directly into the economy. This is one simple example, there are countless.
If today you have one trillion dollars, and tomorrow the Fed prints another trillion dollars, it's obvious what happens.
So not only do I have vast empirical economic proof not only do I have historical evidence for how it all works, not only do I have obvious math theory that is as simple as addition and subtraction, but I have the Fed openly admitting the scale of the inflation it has caused.
How many proof articles would you like on the topic?
Very first sentence: "In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time."
Yeah, it's Wikipedia, but if this definition was as obviously wrong as you portray it, don't you think someone would have fixed it? Or is Wikipedia also part of the grand conspiracy to take your money?
You're communicating a classic conspiracy theory, and like most conspiracy theories, it seems so compelling because it contains the truth. If a central bank expands the money supply in excess of demand, they will create inflation--true. The Fed has management goal of producing and maintaining mild, consistent inflation--true. The value of a dollar has declined greatly since the Fed was created--true.
But like most conspiracy theories it's not the whole truth, and thus leads to an inaccurate view of the world, one in which the importance of currency is greatly overemphasized. Is money supply the only factor that causes inflation? No. Has the inflation produced by the Fed harmed the economy? No. Living standards today are far higher than they were 100 years ago. Dollars are worth a lot less, but we have a lot more of them, and wealth (which is not the same thing as currency) has increased dramatically.
Inflation is not a general rise in the prices of goods; prices going up is merely one symptom of inflation.
Inflation is the expansion of the monetary base.
OK, so since we're discussing inflation as an economics concept, it only makes sense as long as we keep to the economics definition of inflation. If you want to use your own definition, you're free to do so, but then the discussion leaves the mainstream economics domain, and you should be clear about that.
http://economics.about.com/od/helpforeconomicsstudents/f/inf...
A similar definition of inflation can be found in Economics by Parkin and Bade:
Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability.
http://en.wikipedia.org/wiki/Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services.
Printing dollars, for example, is inflation. The increase in prices is a result of inflation, and there are numerous effects other than prices going up.
According to whom?
It's critical in economics to separate supply & demand of goods causing increases or decreases in prices, from monetary changes. Free market forces are not the same as central bank forces.
Doesn't seem relevant.
There's about 200 years of modern economic evidence for how exactly inflation works and how central banks create it.
This would be a perfect place to cite some of that evidence.
I'll ignore the fact that the Fed has openly admitted it has devalued the dollar by 97% since its founding.
That's fine; I'm not sure what any sort of 'admission' may have to do with an argument at hand.
I'll also ignore the fact that Bernanke recently said it was the goal of the Fed to generate asset inflation via QE aka debasing the dollar (see real estate skyrocketing 10% again, or 22% in Phoenix (a disaster market recently), see stocks at all time highs again ala 2007).
No one argues that Fed can influence money supply, which can (hopefully) have effect on inflation. The relation is far from direct, however. Think of effects of other factors, for example increases in savings rate or decreases in productivity.
I'll also ignore the fact that Greenspan openly admitted the Fed has the direct ability to increase or decrease inflation, and can cause bubbles or pop them. He of all people should know.
This pesky "admission" concept again -- what does it have to do with anything? Copernicus admitted that earth did not revolve around the sun, he of all people should know.
It's not an assertion, it's a fact supported by extreme amounts of data.
And that's another assertion, so far also unsubstantiated.
If you increase the monetary base and money supply by hundreds of percent over a relatively short period of time, you're going to see a substantial increase in the price of goods in the currency in question. If you 'print' dollars to buy trillions in mortgages and remove them from the market, you're going to limit supply of housing and cause approximately $3 to $4 trillion worth of inflation in just one year (what's happening right now).
Isn't inflation measured in percent, not in trillions of $?
Not to mention simultaneously holding down mortgage rates via the government dominated mortgage market, by holding short term and long term interest rates artificially low by buying the paper that influences that. Then when consumers sell their homes, or take home equity loans, and then spend in any manner or buy anything else or loan their money to banks - the inflation gets discharged directly into the economy.
Not sure what "inflation gets discharged directly into the economy" means.
This is one simple example, there are countless. If today you have one trillion dollars, and tomorrow the Fed prints another trillion dollars, it's obvious what happens.
Actually, it's far from obvious. Unfortunately, we'll never know what would really happen, as Fed is not in the business of printing trillions of dollars. In any case, here's analysis of what would happen that somewhat goes along your apocalyptic scenario: http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the...
So not only do I have vast empirical economic proof not only do I have historical evidence for how it all works, not only do I have obvious math theory that is as simple as addition and subtraction, but I have the Fed openly admitting the scale of the inflation it has caused.
So far all you had were words.
How many proof articles would you like on the topic?
"When you deposit money in a bank you become a protected senior creditor, but creditor nonetheleas, to the bank."
This might be true when you put your money in savings account, and are earning an interest on it. But what if you are paying the bank for keeping your money safe, and paying them recurring fees to operate a current account which doesn't earn any interest? Most businesses need an operating account to pay for day to day expenses. And current account should be treated like SAFES, as bank is actually charging money for them and not paying any interests.
When push comes to shove, the deposit guarantee may not protect your money.
"Back in December 2012 the FDIC and the BoE published a joint paper outlining their new approach for how to resolve any future collapse of one of the Too-Big-To-Fail banks...
'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[1][2]
...the new system raids the Deposit Protection scheme, gives it to the bank instead of you and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme."
"deposit guarantee schemes may be required to contribute to the recapitalization of the firm"
Saying the deposit guarantee scheme may have to contribute means the bank may not have sufficient assets to cover insured deposits and so deposit insurance funds may have to make up the difference. When your house in Staten Island gets razed by Sandy, the insurance company pays up. Similarly, if an insured bank is unable to come up with enough cash to cover insured deposits, the FDIC has to pony up.
The worst case for FDIC insured deposits is you getting a cheque from the FDIC. If JPMorgan Chase goes under with worthless assets and busts the FDIC, you're still in luck since the federal government backstops your deposit insurance, and unlike Cyprus, the U.S. can print dollars.
What's funny is that the FDIC is funded by the banks themselves, the same people who need the bail-outs in the first place. The FDIC insurance fund has about $30 billion, while total US bank deposits are around $5 trillion[1], and outstanding derivatives in the hundreds of trillions with JPMorgan Chase[2] holding $78 trillion worth. Who knows how much of this is toxic?
Working backwards, on your second point, if the FDIC ran out of money, the taxpayer might eventually have to step in, which might not be politically feasible if taxpayers have bail-out fatigue.
"During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress." [3]
On your first point, the full paragraph provides better context, where they are saying they want to use insurance funds to recapitalize the bank and prevent a bust from happening in the first place. Of course, the bank might need more money, leaving the insurance fund empty, and deposit holders at risk.
"34 The U.K. has also given consideration to the recapitalization process in a scenario in which a G-SIFI’s liabilities do not include much debt issuance at the holding company or parent bank level but instead comprise insured retail deposits held in the operating subsidiaries. Under such a scenario, deposit guarantee schemes may be required to contribute to the recapitalization of the firm, as they may do under the Banking Act in the use of other resolution tools. The proposed RRD also permits such an approach because it allows deposit guarantee scheme funds to be used to support the use of resolution tools, including bail-in, provided that the amount contributed does not exceed what the deposit guarantee scheme would have as a claimant in liquidation if it had made a payout to the insured depositors."
On the contrary, having the taxpayer step in if the FDIC runs out of money is politically feasible. In fact, it would be the kind of bailout that the "common" people ("Main Street," to use the term politicians love to use) are always being portrayed as demanding, in the sense that the money would be bailing out the bank accounts of millions of average, middle-class Americans.
Jeroen Dijsselbloem, president of the eurogroup, told the FT as the bailout was announced:
“If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, where you take the risks, you must deal with them, and if you can’t deal with them you shouldn’t have taken them on and the consequence might be that it is end of story.' That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take." [1]
If you want a dollar asset as close to risk free as possible, buy Treasuries. If you are afraid of inflation buy inflation-protected Treasuries, TIPS.
Not Bitcoins? No, not Bitcoins. The purchasing power of your savings has a higher probability of being retained when backed by the full faith and credit of the U.S. government than a cryptocurrency. This may very well change, but it is not the case today, particularly if you pay your bills and buy your food in dollars. Speculate in Bitcoins, use them to transact if you must, and perhaps participate them as a form of activism, but do not convince yourself that you are George Sorosing the global financial system.
[1] http://www.ft.com/intl/cms/s/0/68c9c18e-955e-11e2-a151-00144...