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Friday, September 16, 2016

Not Everyone Went Down With The Titanic

It’s one of the most dangerous myths most people believe…

Boobus Americanus thinks cash he deposits into a bank is a personal asset he owns.

But that’s not true.

Once a deposit is made at the bank, it’s no longer your property. It’s the bank’s.

What you own instead is a promise from the bank to repay. It’s an unsecured liability. That’s a very different thing from owning physical cash stuffed under your mattress. Yet, 99.9% of people conflate the two.

Cash deposited into the bank technically makes you a creditor of the bank. You’re liable to get burned should the bank make a bad bet and get into trouble. The risk is not insignificant. Most banks gamble with their customer deposits on risky investment fads like mortgage-backed securities.

Government deposit insurance schemes are a false sense of security. With their current reserves, they could only cover less than half a penny for every dollar they supposedly insure.

People in Cyprus had to find all this out the hard way a few years ago. People awoke on an otherwise normal Saturday morning to the horror that the cash in their bank accounts had vanished.

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1 comment:

Anonymous said...

Joe,
Thanks for posting this article.