Response to Banking Trouble

by | Nov 9, 2000 | Archives

Here is a question that can have an enormous impact on your future financial safety.

The answer to this eClub member's question below applies to all of us. I have also sent this question to our eClub banking experts Teddy Christiansen (Jyske bank), Peter Zipper (Anglo Irish bank Vienna), Richard Radcliffe (Anglo Irish Bank isle of Man), Andy Kaegi and Steve Rosberg as well and ask if they would give their thoughts on how to enhance bank safety. I'll pass on their replies as they are received.

Here is the question:

"Dear Gary,Thanks for the heads-up on our banking system. A few questions for you.Is this contained to the USA?What if your money is with a broker, like E trade? Do we have to worry about
their bank? Stick the cash under the mattress?Thanks again for your great reportingW.VT."

Here is my reply.

“These are good questions and the first answer is a little frightening because we now live in a global economic community. No country is immune to the problem. This is especially true with problems created by big banks like Citibank, Bank of America etc. If they get into trouble banks everywhere are likely to suffer. Every bank in the world that deals in U.S. dollars has a U.S. correspondent bank. The correspondents are the big banks. Thus if you have a U.S. dollar account in Austria or Switzerland or England or where ever, what you really have is U.S. dollars at a non U.S. bank backed up by a deposit held at a large U.S. bank. If the big banks can't pay your overseas banker, your banker will have a hard time paying you.

Let me hasten to add that I do not think your money in big banks is at risk. These banks are too big too be allowed to fail. The same is true of the federally backed mortgage companies. The government will bail out these banks and institutions, just as they did the savings and loans during their crisis. The administration in power when such a crisis hits will do whatever is necessary to keep the system going.

This means we are more likely to see a small and medium U.S. bank and U.S. dollar problem. Smaller banks that are trying to compete with the big banks may have been forced into the same stupid types of loans and investments as the big banks to keep up. If there is a bad economic slowdown and a banking crisis arrives, there could be a shift out of small banks to bigger banks. This could create a liquidity crisis beyond the ability of some smaller and medium bank's ability to survive.

The answer to this dilemma is to limit your deposits per account holder to the $100,000 FDIC balance. I am already moving this way. I love using small banks for their better service. I often have more than $100,000 at such banks but spread them into three or four accounts (personal, my wife, joint, corporate, partnership, etc.). This creates extra work at accounting time, but beats learning from your banker that your hard earn savings are gone.

To safeguard against the U.S. dollar problem start to slowly diversify from the dollar. Hold Euro and other currency deposits with large, well established banks abroad in the currency of the country of the bank. As an added precaution keep the deposits spread out and you may want to keep them below the limits of the government of that country's deposit guarantee . Note that many countries do not guarantee U.S. dollar or foreign currency deposits, but only deposits in the local currency.

Also keep your eye on gold. With the way Congress is spending money now based on our past boom, this crisis could create a big dollar problem during the sure to arrive bust. This could take place at the same time that the Euro and yen are also fundamentally weak. This would leave little avenue for protection except gold. If so the price of gold could rise substantially.

Let's hope that this dialogue is in vain, but the numbers suggest that we should be prepared.

If tough times do arrive it is most important of all, to have invested in yourself, your health, your attitude and your own business. Merri and I have been building up our farm and retreat center as fast as we can. We have places to host conferences, rental units, good organic food and perfect water. Plus we have enough gold to pay for our taxes and energy for years. A crisis does not scare us. We are ready. This is not to say that we are doom and gloomers. Our center here is set up and prepared to offer a first class sanctuary and retreat service in good times even better than bad.

Those who are solvent, debt free, diversified, flexible, mentally alert, emotionally balanced, physically resilient and ready to serve will be the big winners if this scenario unfolds. Money is a figment of our imagination, merely a social agreement that history shows evaporates from time to time. Our own steady energy and connection to reality are the only real assets any of us can depend on all the time.

This is why I have been sending you the course Inspired Investing FREE. I feel it is so much more important to have inner assets than outer assets because these are the ones that not only bring you wealth, but gives you confidence. This confidence is the key to peace of mind. How sad it is that I meet rich people (in monetary terms) that are unhappy, worried and insecure all the time.

Touching the Void

Touching the Void I am leaving for Ecuador tomorrow and am taking a wonderful birthday gift from our webmaster David Cross, the book, “Touching the Void” a harrowing first person account of one man's miraculous survival while climbing the Andes.

The story is about a man who after climbing a 21,000 peak in the Andes (near where Merri and I climbed into the sacred valley-For more on this visit- plunged off a vertical face of an ice ledge and broke his leg. Fighting darkness, a blizzard, starvation and severe frost bite he crawled three days back to base camp before his climbing partner had broken camp. This type of perseverance and fortitude mixed with the other assets I mentioned above are what make millionaires (and billionaires) during bad times.

I hope we'll get a chance to talk more about this at one of our weekend retreats here on the farm.

Until then, good global investing!