Old-Timers and Their Rolls of Cash

Back in the 1950s, 60s and 70s, it was commonplace for men who had lived through the Great Depression to keep rolls of cash in their pockets. Many carried $200 or $300, equivalent to $1,000 to $2,000 today. Usually, these weren't wealthy men. They were ordinary men who had learned from experience that life is unpredictable, usually in a bad way. In their time, banks had failed, the stock and real estate markets had collapsed, unemployment had risen to 25%, families had fallen apart, young people felt lucky to have a job--any job--and prosperity returned only after the world survived the crucible of a horrendous world war. Cash was their insurance policy against all kinds of hazards, including the uninsurable. Cash felt good.

We're now in another era of uncertainty. While government safety nets, stimuli and other measures have kept us out of a Depression, the unresolved debt crises in America and Europe, as well as depressed real estate and volatile stock markets, continue to inhibit recovery. Another downturn may be in the offing. Federal deposit insurance relieves us of the need to keep large amounts of paper currency on hand. But the value of cash is strongly correlated with increases in market volatility, and cash is getting to be extremely valuable now.

Safety nets are wearing thin. Government benefits for many have run out and there's no room in the budget for more. Many are one paycheck away from homelessness. Illness, layoffs, disability, a new roof, a major auto repair, and other unpredictable expenses wait in ambush. Credit is tight. The only people who can get loans are the ones that don't need them. Keep 6 to 12 months living expenses in an emergency fund that's FDIC insured. Then set aside some more money to cover hell and high water expenses. The chances of another worldwide financial crisis swirl like a morning fog that may not lift. All the newfangled financial engineering hasn't made the world a safer place. The old-timers knew one thing: cash is the best port in a financial storm.

Where Is Financial Safety?

The debt ceiling deal was, more than anything else, an agreement to disagree. It had commensurate impact on the financial markets (i.e., nada). Because the deal resolved very little, Congress will continue to convulse over budget deficit issues. The stock markets, which are driven by politics as much as economics, will convulse synchronously.

Meanwhile, across the pond, the Euro bloc sovereign debt crisis is all the rage again, with Italy getting smacked around by the bond vigilantes. The EU doesn't seem to understand that its strategy of solving debt problems with bailouts that, net net, increase the amount of its debt will only lead to more instability. Because the EU has, in effect, collectively assumed liability for all of the debts of all Euro bloc members and all of their banking sectors, the aggregate amount of continental debt is what matters. The EU's relentless expansion of its liabilities, with each bailout diminishing its capacity for further bailouts, guarantees that the bond bandits will have a never-ending stream of dominoes to knock over. The average citizen, working on a brown bag lunch in a cubicle, will opine that reducing debt is the way to get out of financial trouble. But the hoi polloi, lacking sophistication, just don't understand that these things are complicated.

So, we can look forward to more stock market volatility. Where is there financial safety?

Swiss bonds have risen in popularity. But they don't have the liquidity of U.S. Treasuries. If you buy Swiss bonds, you had better like them because they won't be that easy to exit.

Japanese debt has also gotten attention, even though Japan's sovereign debt is about 200% of GDP, well above American levels. With almost all of Japan's debt held by its own citizens, it isn't likely to face serious capital flight. Indeed, the Japanese government seems to prefer a little capital flight. With the popularity of the yen pushing up its price, Japan's export-based economy is at risk. Even as we write, the Japanese government is intervening in the currency markets to push down the yen. If you buy yen-denominated debt, understand that you'll earn almost no yield and be at risk of currency losses from Japanese government yen smackdowns.

So what's left? Well, oddly, U.S. Treasuries. At least until the current debt ceiling is reached, probably in early 2013, U.S. government debt is safe. You may face some moderate inflation risk. But the long term picture for U.S. Treasuries--which isn't pretty--won't emerge for the next year or two. So, if you're worried about the stock market swan diving into a correction or bear market, Treasuries may be a safe place to hit the mattresses, at least for a while. Money market funds invested solely in U.S. Treasury securities are comparably safe, albeit exceptionally low-yielding.

FDIC insured bank accounts are also safe. The European debt crisis, in the worst case, could hit the U.S. banking sector pretty hard (because of interbank lending, derivatives exposures, and other bank interconnectedness). But the FDIC, with the backing of the U.S. Treasury, will protect insured deposits come hell, high water, plagues, swarms of locusts, loathsome diseases, or anything else. One hard lesson the government learned from the thousands of bank closures leading up to and during the Great Depression is that the loss of bank deposits wallops consumer confidence more than anything else. People don't look to their stockholdings or the equity in the house to cover next month's expenses. But if you take away their bank deposits, you create immediate household crises on a wholesale level. Make sure your bank deposits stay within insured levels (for more detail, see http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html).

We also discuss safe investments at http://blogger.uncleleosden.com/2010/07/safe-investments.html.

FDIC Insurance Coverage

Nothing's being resolved. The most recent flareup in the European sovereign debt crisis ended with Greece getting enough pocket change to tide it over for a couple of months, while the EU squabbles over the terms of a second Greek bailout. In other words, the can was kicked a short distance down the road, after Greece got a few hamburgers that it promised to pay for on Tuesday. But the prospects of a real solution are as bleak as ever.

The debt ceiling fight in Washington is getting louder and more strident. That could mean both sides are posturing for their supporters and preaching to their respective choirs for a while, before working out a last minute deal. Or else they might be heading for a showdown. The latter would be dumb, seeing as how it would flummox the financial markets. But then again we're talking about politicians, so dumb is s.o.p. The moody intransigence of today's politics makes it harder for politicians to compromise. The one hope we may have is the world's largest collection of hypocrites is in political Washington, and if driven by expediency, they'll readily go back on their words in order to save their glutei maximi.

Meanwhile, back at the ranch, the poor consumer has to figure out how to avoid having his or her own glutei maximi deep fried. The European sovereign debt crisis could trigger a financial crunch like 2008, except maybe worse. If the U.S. defaults on its debt, 2008 will seem like Party Central. When the going gets tough, the prudent make sure their bank accounts are FDIC insured. Here are the basics on coverage.

Each account "owner" gets $250,000 per bank. In other words, all of the owner's accounts are totaled, and up to $250,000 of deposits is protected. So if you have a checking account and a couple of CDs, their balances are aggregated and as much as $250,000 is covered.

Here's the fun part: you can be more than one type of owner, and each owner you become gets $250,000 of coverage. This isn't like the Internet where you might have multiple user names, and you don't need to have dissociative identity disorder. Just take on various different legal persona, and, presto, you get another $250K of coverage.

Start with you as an individual: $250,000 of coverage is provided for accounts in your name.

You as a joint account owner (such as with a spouse, parent or child): $250,000 of coverage for each joint account owner. So a joint account for a married couple gets $500,000 of total coverage.

You as the owner of an IRA: $250,000 of additional coverage for your IRA accounts.

You as the owner of a revocable trust account: another $250K of coverage per beneficiary.

You as the beneficiary of an irrevocable trust account: yet another $250K of coverage for all beneficial interests granted by the same person creating trusts (known to lawyers as the "settlor") at any one bank.

A corporation that you own: another $250K coverage, as long as you operate the corporation for an independent purpose (i.e., a purpose other than increasing your FDIC coverage).

Then, here's your ace in the hole: if the foregoing account types aren't enough to protect the enormity of your wealth, you can, until Dec. 31, 2012, get unlimited FDIC coverage for non-interest bearing transaction accounts. In other words, you can open a non-interest bearing checking account, and protect as many of your hard-earned shekels as you like until the end of 2012. If you hear some ringing that sounds like Hell's Bells, keep this in mind.

What are the chances that FDIC coverage will actually matter to you? So far, in 2011, 55 banks have been closed by the FDIC. In 2010, there were 157 bank closings. The number in 2009 was 140. Banks close when the financial system goes bonkers and the economy nosedives. If today's governmental debt crises keep metastasizing, more banks will fail, and holders of uninsured deposits will take losses. If your money is too concentrated for full coverage, spread it around.

In addition, if your money is an uninsured place, like a money market fund, you may want to move some or all of it into FDIC insured accounts. The European debt crisis has cast a cloud over money market funds holding commercial paper of European banks (which would be many of them; check to see if your fund holds it). The U.S. debt ceiling showdown could cause losses--probably minor, but you never know--for money market funds holding U.S. Treasury bills (many funds hold T-bills in varying amounts). FDIC protection for at least some of your cash may improve the quality of your sleep.

For more information on FDIC deposit insurance, go to http://www.fdic.gov/deposit/deposits/insured/index.html.

Safe Investments

[As updated July 11, 2011]

There are many reasons for wanting to keep money safe. You may be saving up a down payment for a house or car, bracing for next year's college tuition and board bills, putting together an emergency cash fund, seeking shelter from lunatic stock, real estate and other asset markets, or harboring plain old curmudgeonly mistrust of all the fast-talking salespeople ready to take your money. Even with all of today's uncertainties, there are a few safe places to put your money.

Bank Accounts. FDIC deposit insurance covers, at each member bank, $250,000 per customer (along with another $250,000 per co-owner for joint accounts and yet another $250,000 for retirement accounts like IRAs). All of your accounts of each type at that bank are combined when determining coverage. You don't have $250,000 of coverage per account. For example, if you have $240,000 in CDs in your name, $20,000 in your checking account, and $505,000 in a joint money market account with your spouse, $10,000 in your individual accounts is uninsured, and $5,000 in your joint account is uninsured. But $750,000 at that bank is insured. If you're approaching the FDIC limit at any one bank, move some money over to another bank to get additional deposit insurance coverage. For more information about FDIC insurance, go to http://blogger.uncleleosden.com/2011/07/fdic-insurance-coverage.html. There is a service called CDARS offered by certain banks which takes large deposits and splits them up among a number of participating banks such that your funds and the interest they earn are fully covered by FDIC insurance. For more information, go to www.cdars.com.

U.S. Treasury Securities. Direct obligations of the U.S. Treasury will be paid, even if the government has to print the money to pay you. So these investments are secure. You can buy traditional Treasury obligations, like 4 week, 3 and 6 months, and 52 week Treasury bills, 2, 3, 5, 7 and 10 year Treasury notes, and 30 year Treasury bonds. You can also buy TIPS, a type of Treasury security that offers inflation protection. There are good old U.S. Savings bonds, still alive and kicking, which come in traditional Series EE bonds, and also I-bonds offering inflation protection. One disadvantage of Savings Bonds is that you can buy only $10,000 of each type per year, $5,000 of which must be bought directly from a government service called Treasury Direct. So large amounts of savings can't be invested in Savings Bonds. For more information about buying directly from the government, go to www.treasurydirect.gov. U.S. Treasury securities can also be bought through brokerage firms (although you'll have to pay commissions and/or markups). U.S. Savings Bonds can be bought through banks as well as Treasury Direct.

There is no limit on how much you can invest in U.S. Treasury obligations (aside from the Savings Bonds limits). Every penny will be repaid by the government, so you get a greater amount of coverage than with FDIC insurance.

Money Market Funds Investing Solely in U.S. Treasury Securities. There are a few money market funds that invest solely in U.S. Treasury securities. For all practical purposes, they are as safe as U.S. Treasury obligations. Because they are money market funds, their returns are very, very, and let us emphasize, very low. But the money is safe. Not all such money market funds are open to new investors. But if you want the safety of U.S. Treasuries and the convenience of a money market fund, look for one that is.

If you crave safety, forget about gold. It's a speculation that booms and busts like stocks. Some foreign government bonds, such as those of Switzerland and Germany, may have very low credit risk. But they present currency risk, and that's not to be underestimated. In just the past few months, the Euro has fallen more than 10% against the U.S. dollar, making German government bonds losers (in dollar terms) for Americans who held them. If your native currency is the U.S. dollar, stick to the above-mentioned dollar-denominated investments for safety. They won't pay very high interest rates. But safety isn't free and the low interest rates are the cost of safety.