Money in the Bank

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Should you have a large portion of your money in the bank?

Forget for a moment, if you can, about the very low interest rate you are getting from your bank...

And try to forget about the rising fees that banks are charging—even to the point of “negative interest” where the bank charges you just for the privilege of keeping your money with them—as you try to “save” extra money to make up for losses in other asset classes.

Just think about what happens to money in the bank when the interest rate does not keep pace with inflation…

Money in the bank quickly becomes money down the drain.

So I ask you again…

Should you keep much of your money in the bank?

Is Inflation coming?

It may be a simple question, but it may not have such a simple answer…

Because if you don’t keep a lot of your money in the bank, where would you keep it?

Are the above facts strong enough reasons not to keep your money in the bank? The goal of putting your money anywhere is first, not to lose it, and second, to increase it over time.

If those are the criteria, then you know putting a lot of money in the bank may well cost you…money.

Low interest rates and high fees are already pushing income seekers out of their banks and into higher yielding investments…

But this pace will quicken if inflation gets worse.

Historically, inflation has been the biggest threat to people’s wealth.

As we have seen in recent years, when there is high risk, people will sacrifice yield for security…they will even pay for it.

But even that trade-off has its limits.

In the Weimar Republic in Germany during the 1920’s, inflation became rampant as the German
Government printed huge sums of Deutsch marks as a way to devalue their currency and make German goods cheaper abroad in order to induce foreign investment …

Which is very similar, in part, to what the Federal Reserve is doing with the dollar today…

There are differences of course, but the basic concept of currency devaluation’s threat to bank deposits is clear, sound, and still applies today.

During that time of hyperinflation, those Germans who kept their money in banks were the biggest losers. They were wiped out virtually overnight as hyperinflation made their life savings worthless.

But, asset prices were not as risky. Those who kept their money in the stock market at that time saw their investment values rise with inflation…for a while, at least.

Eventually, though, as hyperinflation reached its peak, the German currency collapsed.

Today, in the US, inflation is already on the rise. Core inflation, which does not count food and fuel prices, is around 2%...

But inflation for food rose 3% in the past 12 months and gas prices went up 9%. Gas prices have gone up by almost 100% in the past 3 years.

Have food and gas prices peaked, or will they continue to rise?

The short answer is that they will continue to rise, too; but by how much and how fast it will rise is not yet clear.

Take fuel, for example. Fuel prices will continue to be high for the simple reason that oil is bought on the world market at world market prices.

And, as I have said before, because oil is bought in dollars, as the Fed keeps adding dollars into the world markets, the value of the dollar falls.

Assets on the world market sold in dollars will go up in price in response to a devalued dollar.

Also, greater demand for oil from China and India also help keep the price high…

Is there anything that could prevent them from going higher into the summer?

There is...it's called a presidential election.

The administration will do whatever it takes to keep prices at the pump lower this summer.

But even if they’re successful, it’s a short term fix.

Other prices will continue to go up as well.

But will food and fuel inflation lead to hyperinflation?

According to our John Frederick Carter, one of our sharpest observers on the market, rampant
inflation—if not hyperinflation--is on its way...sooner than later.

Conservative investing means losses

A drop in demand for the US Treasury long bond means that investors see risk in long term fixed rates…

Does that mean that investors also do not see as much security as they once did in US Treasury notes?

Is this pullback from US Treasuries a response to the quantitative easing policies, which have flooded the world with trillions of dollars?

Not necessarily. The demand for inflation-indexed US Treasuries is surging, which means that investors fear inflation more than US default, despite US debt levels and quantitative easing.

Or could it be also be due to the nascent trend for buying commodities like oil, with gold?

Quite possibly, all of these factors indicate a rising inflation rate.

So is it wise to be holding cash in large amounts in a bank account?

To do so is a “conservative” position, right?

But a deer freezing in the middle of the road in the path of an oncoming truck is also a conservative position…

The fact is, the world is changing rapidly. A paradigm shift is underway which will challenge and punish long-held beliefs and positions…

Just as Germany’s hyperinflation of the early 1920’s punished conservative savers in fixed accounts…

It also favored those in assets that could adjust with the inflation.

In a world of change and uncertainty, it just may be that flexibility and risk are the most conservative positions to take after all.

Something to think about.

And those are…The Gorrie Details.

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