Friday, June 6, 2014

Don't Have a Plan B Yet? Here's Why You Should Have One...

By Simon Black

Like most people, I love the beach. And Bermuda has plenty of really great beaches.

It's lovely here-- advanced, civilized, and friendly. But let's be honest, there are a lot of places in the world with great beaches. What really sets Bermuda apart-- what makes it unique-- is its favorable banking system.

In Europe and the United States, they seem to be going out of their way to destroy their banking systems.

The European Central Bank yesterday announced that they were even taking a key deposit rate NEGATIVE.

In doing so, they basically acknowledged that everything else they have been trying over the last several years isn't working. And now they're really desperate.

Just think of what this means

to banks in Europe.

Conservative banks hold substantial cash balances. As responsible custodians, they safeguard their customers' money by maintaining plentiful reserves.

Now, banks in Europe will be penalized for doing this, and instead have a massive financial incentive to deplete their reserves and destroy their balance sheets with risky loans.

And as if they weren't screwing depositers enough already, interest rates are now going to fall even more.

It's not much different in the United States.

The average rate on a 1-year certificate of deposit in the Land of the Free, for example, is 0.88%. And of course you have to pay taxes on that. At a tax rate of 25%, that leave an after-tax interest rate of 0.66%

But based on the Labor Department's most recently released figures, the April 2014 CPI data showed the annualized rate of inflation to be 2%.

So if you believe the government data, you'd have to make at LEAST 2% just to ensure your savings doesn't lose any purchasing power.

If you're only making 0.66% interest (after taxes), you are losing over 1.3% annually if you hold your savings in a bank.

This provides a huge incentive to be reckless. Why bother saving money if you're just going to lose? Might as well go blow it all on a new car.

Of course, that's precisely what they want you to do. They want you to go out and spend all your money in order to prop up the economy. They want you to borrow money so that you can spend even more.

These policies make for very dangerous banking systems.

Banks now have big incentives to stuff their books full of idiotic, destructive loans... just like they did a few years ago during the US housing boom where they were giving mortgages to dead people.

JP Morgan holds a dangerously low 2% of cash equivalents as a percentage of customer deposits. Citigroup has failed its Fed-mandated stress tests. And Bank of America has had to make embarrassing corrections to its overstated levels of capital.

Ironically, most people simply assume that banks are safe. They're regulated by the government, after all... so nobody questions the sanctity of their balance sheets.

Candidly, where you hold your money should be a major decision, and it certainly bears a modicum of analysis.

In today's world, you no longer need to hold your savings in the same place that you live. Geography is irrelevant.

Just as you might move to a new city for the employment opportunities or to put your children in better schools, you can move your savings to a stronger, better banking jurisdiction.

Here in Bermuda, the entire banking system is extremely well-capitalized... and very liquid.

On average, banks here maintain almost 30% of their customers' deposits in cash equivalents. And their margins of safety exceed 10% on average.

This stuff matters. Banks in the US and Europe are getting weaker by the month. And a prudent person would consider this trend, and the world of options available, when deciding where to hold his/her savings.

This, above just about anything else, is an essential part of having a Plan B.

You certainly won't be worse off for holding some savings at a stable bank overseas. But if the worst happens, it might end up being one of the smartest moves you've ever made.

Simon Black writes and is Senior Editor  at

1 comment:

  1. The government will not just let its phony monetary system die. I don't particularly like Mr. Black's advice in light of the reality of the situation.