People worry that they might lose money if their bank goes broke. Meanwhile, they ignore the steady drain on their wealth.
I easily lost 10% of my wealth last year without even trying. And I say that even as my various accounts mostly show increases in value, as the stock market inexplicably kept going up (until recently, that is). How could I lose money?
Well, with near 10% inflation going on, the spending power of that money is now 10% less - across the board. Everything from fuel to hamburger buns to vegetables to prescriptions to houses to cars to.... whatever..... is going up in price, has gone up in price, which means every dollar I have in my hand is worth 90 cents now - and will be worth less in the future.
Oh sure, inflation is always happening, except during deep recessions when deflation actually occurs. But in the recent past, inflation was hovering around 1-2% and was not that big a worry. Your dollar of last year being worth only 99 cents this year, didn't seem like much of a tragedy.
But it gets worse. As the worldwide recession takes hold, stocks and other investments (including homes) will decrease in value. Your $1000 of mutual funds may decrease to $600 in value, at least temporarily. Where is the anger, outrage, fear, and panic about that?
You don't hear about it because it is a slow-moving trend - much as inflation was - so it isn't "News" like a bank failure. Ditto for inflation - it is in the "news" but isn't a news event that happens all at once. You only realize inflation is occurring if you read about year-end statistics, or if you are an astute shopper and know prices of everyday goods (which you should). The average person knows the price of gasoline and little else. That is why people get into credit card crises - they order fast-food to be delivered, paying tens of dollars for a burger, then whine when they have to spend that much filling the gas tank on their car once a week. They hemorrhage blood from an artery, but worry about a shaving cut.
Of course, when they hear the words "bank failure" it is natural they get nervous about their money - if they have any. I guess that is one advantage of being broke - you don't worry so much about the stock market. When I was a stoner lab technician with a zero net worth, I didn't give the "financial news" much thought - other people losing money wasn't my concern. Of course, if I lost my job because of a recession, that would be different!
Funny thing, through all those recessions, I always had a job. 90% of the working population usually does, too.
But getting back to topic, should you be worried about your investments and money in the bank? Going to the bank and taking out all your cash and stuffing it in a mattress just sounds stupid. The FDIC insures bank deposits to $250,000 and if you have more than that in a bank account, you are missing out on great capital gains. Even during periods of "low" inflation, your money leaks out the door, bit by bit, due to inflation, unless you can invest it at a rate greater than inflation.
As recent events have illustrated, the Fed will honor those FDIC pledges to account holders - and even to companies that were not covered by FDIC insurance! The government, it seems, isn't about to let innocent parties be damaged by the poor choices of a few bankers (and the Fed's own raising of interest rates!).
But what about your IRA or 401(k)? Even if you did want to take the money out and stuff it in a mattress, this would boost you into the highest marginal bracket possible, plus a 10% early withdrawal penalty if you are over 59-1/2, and with State taxes could swallow up nearly 1/3 to 1/2 of your savings. Stuffing in a mattress just isn't an option.
Fortunately, there are some backstops in the system. The Securities Investor Protection Corporation is a federally mandated, non-profit, member-funded, United States government corporation created under the Securities Investor Protection Act (SIPA) of 1970 that mandates membership of most US-registered broker-dealers. They provide up to $500,000 in protection for securities held by your brokerage, including up to $250,000 in cash.
Now, whether this works in a total meltdown situation, remains to be seen. You may recall the Pension Benefit Guaranty Corporation serves a similar function with regard to pension benefits - but can pay out as little as 40 cents on the dollar when a pension goes bust. It's better than nothing, but then again, if you planned your retirement based on one number and then it is cut by more than half, you may be pissed-off.
You may also recall the PBGC threatened insolvency when the Teamster's pension plan went blooey. It was simply too big a fish for them to swallow. But Congress, sensing a lot of dissatisfied voters on the horizon, provided the extra cash to keep things going and rescue the pension. Sometimes Democracy works.
You don't want to be known as the guy who put retirees out on the street - which is why it is puzzling that Republicans have made "abolishing Social Security" and Medicare the centerpiece of their platform. They do know their number one source of Fox News Voters is the old people living in The Villages in central Florida, right? Oh, right, that's why they promise only to kill these programs for people "born on or after 1960" - screw the kids and grandkids, preserve Grandma's way of life! Of course, it is the kids and grandkids who are paying into the system that keeps Grandma's checks coming. People are idiots if they vote GOP - they want the system to fail, so they intentionally underfund it to make it fail.
But I digress.
Of course, the SIPC isn't going to make you whole if your Twitter stock goes bankrupt. It protects your assets, not their value (except cash, up to $250,000). With regards to stocks, they will recover your share certificates, even if they are worth only pennies - as an investor, you took that risk. The risk you didn't take was the CEO of fly-by-night brokerage house running off with all your investments.
Should we be worried about the future? Well, hell yea - and it was all preventable, if we had only stopped fucking around with this "cut taxes and spend yet more" plan of the GOP and instead provided a steady predictable tax environment. Similarly, years of near-zero interest rates are finally catching up to us in the form of inflation. It is like someone flooring their car with one foot firmly on the brakes. When you finally let go of the brakes, the car fishtails out of control and takes off like a rocket. The Fed is so good at doing too much - and then too little.
Just saying, maybe a little recession a few years ago would be better than a monster one, now. And it isn't like we didn't see this coming, after the debacle of 2008. Same shit, different decade. We primed the pump, convinced that endless growth was "good" and could go on forever. But eventually, something had to give, and all the funny-money loans being tossed around came due, and no one could pay them.
But whoever is in office doesn't want to be "the guy" in the hot seat when it all comes undone - because the plebes really do believe that the President is a king and sets gas prices with a big dial on his wall, every morning. So Politicians kick the can down the road, goose the economy a little further with a shot of ether down the throat of the carburetor. And as the engine overheats and sputters, they just hope they are not in office when it finally blows a head gasket.
People get the government they deserve!
