Cashing in on Fear: Deposit Guarantee Conundrum — the Follow up

The conspiracy theorists and gold bugs fired up over my Rum Rebellion article last Friday, 2 August 2019…‘Cashing in on Fear’.

The cause of their angst was my declaration of…

your money in the bank is safe up to the $250k deposit guarantee.

The responses came thick and fast…

What rubbish.

The banks and government are in cahoots to confiscate our money. Government guarantee is not worth the paper it’s written on.

What’s their solution?

The ultimate protection against a bank failure is to withdraw funds from the banking system and buy gold.

Before people get the impression I’m anti-gold, here’s an extract from page 121 of my book The End of Australia

The aim is to ultimately transition our cash holdings [during the next debt crisis] into the Model Portfolio asset allocation.

As a reminder, the asset classes are:

  • Cash and fixed interest
  • Australian shares
  • Australian listed property
  • Emerging Markets
  • Gold

In the August 2015 issue of Gowdie Family Wealth, I recommended an allocation to gold…when the price was under AUD$1500/oz.

On the current AUD price of $2220, we’re sitting on a paper profit of almost 50%.

Exclusive Investor Report: ‘How to Pick Winning Gold Stocks’. Click here to learn more.

When reading the conspiracy theories about confiscation, I’m reminded of this quote…

In theory there is no difference between theory and practice, while in practice there is

Benjamin Brewster 1882

The theorists point to the fact that the legislation (as it currently stands) limits the government guarantee to $20 billion per ADI (approved deposit taking institution).

The deposits held by the big four, five and six banks easily exceed this limit, so the government guarantee won’t be enough to cover these institutions.

That’s true.

Also, the government has not set aside any funds to pay depositors in the event the guarantee is activated.

That’s true too.

The banks are changing the terms and conditions of their deposits accounts…giving them legal immunity from any capital controls or bail-ins.

Again that’s true.

Fiat currencies have never lasted. But gold has endured.

Can’t deny that.

In theory, the scaremongers have an open and shut case — withdraw all your cash and buy gold and/or cryptos.

It’s in practice that this theory just doesn’t add up.

The one thing the fear merchants and I agree on is we’re building towards a debt crisis that’ll make 2008/09 look like a Sunday school picnic.

I’m also of the view that capital controls (limited access to physical cash) could be introduced to prevent bank runs.

While cash might be restricted, we’ll still be able to transact electronically…internet banking, debit and credit cards.

Where we differ is on how government is likely to respond to the pressures this looming crisis will place on our banking system.

When trust in our banking system erodes…

Society functions on an orderly basis when there’s trust and confidence. Absent these two components, we have anarchy.

Hong Kong is a prime example of what happens when the people no longer trust those in power.

If push comes to shove, and trust in our banking system is eroded to the point where public confidence becomes fragile, government will not sit idly by…that’s not the nature of populists politicians.

The cry ‘to do something, anything’ will be too loud to ignore.

Firstly, the government has the power to change the legislation. With a declaration of ‘the ayes have it’ the limit of $20 billion can be crossed out and replaced with unlimited.

But there’s no money set aside to cover an unlimited guarantee? Ever heard of the printing press? The RBA owns one.

The days of printing money (quantitative easing) being the refuge of Zimbabwean despots is long gone.

As reported in Business Insider on 22 May 2019 (emphasis is mine)…

In the absence of some fiscal assistance from the government, something the RBA continues to call for in order to help achieve those goals, it’s little wonder why speculation is mounting that the RBA may need to follow in the footsteps of other major central banks and adopt unconventional monetary policies such as quantitative easing (QE), negative interest rates or even more experimental measures.

As we’ve seen in Japan, Europe and the US, what was once deemed to be ‘unconventional’ has taken on the mantle of ‘conventional’.

Doing whatever it takes to maintain stability and confidence is the modern day central bank mantra.

While history is firmly on the side of gold outlasting fiat currencies, the modern day money system is far more sophisticated than those of olden times.

The US dollar, the British pound, the Japanese yen, the euro, the Chinese renminbi. These are all used to transact domestically and in international trade.

Countries will not give up the control of their sovereign currency (and the ability to print it) without a fight…especially the US.

To paraphrase Mark Twain, ‘the reports of the death of fiat money are greatly exaggerated’.

The so called solution…‘The ultimate protection against a bank failure is to withdraw funds from the banking system and buy gold’…is self-serving nonsense being whipped up to increase bullion sales.

If we take, at face value, the claim that all deposits — even those under $250k — are at risk of total confiscation, then let’s explore how this might impact society.

In good times and bad, we all need to buy groceries…food, toiletries and other essentials.

One of Australia’s largest retailers is Woolworths.

The following is a screen shot from page 91 of Woolworths 2018 Annual Report showing ‘Cash and cash equivalents’ of $1.273 billion.

from page 91 of Woolworths 2018 Annual Report showing ‘Cash and cash equivalents’ of $1.273 Billion - 9-08-19

Source: Woolworths Annual Statement

[Click to open in a new window]

That cash is presumably set aside for things like wages, rents, payment to suppliers and the tax office.

Meeting these obligations is essential for Woollies to remain in business…thereby enabling us to buy the basics in life.

If you believe the scaremongers, Woolworths (and all the other major corporations in Australia) should seriously consider ‘kissing goodbye’ to its cash holding.

Can you see where I’m going with this? Without the means to settle accounts, the dominos begin to fall and the whole system collapses…trust and confidence is gone.

Qantas…gone.

Wesfarmers…gone.

Telstra…gone.

Really?

It’s just implausible to think the corporates will meekly allow this to happen.

Look at the mining industry’s concerted (and successful) campaign against Swan’s mining tax.

Boy oh boy what sort of campaign would be unleashed by corporate Australia if their very existence was threatened by the total confiscation of the lifeblood of their businesses?

And on a micro level, I presume the bank accounts of those who deal in precious metals will also be emptied to re-capitalise the banks.

So how do they settle up when someone wants to cash in their gold? By offering to buy it back with gold?

Perhaps corporate Australia will be spared and only personal deposit holders (the quiet Australians) will have their accounts confiscated to re-capitalise the failing bank/s.

Good luck with that.

Any politician who thinks they can spin that to a very angry public is in serious need of psychiatric assessment.

The notion of government allowing matters to descend into these farcical scenarios is even beyond my cynical and distrusting imagination.

While government may say ‘we won’t use taxpayer money to bail-out banks’, just remember that taxpayers are also deposit holders and voters.

What was said in times of relative calm and reflection, can easily be unsaid in times of crisis…something like ‘due to unforeseen and extenuating circumstances, we, the government, have invoked emergency measures to guarantee the savings of all Australians’.

Politicians doing a backflip with a double twist is far more believable than the concept of them letting the system fall into a state of utter chaos.

The one sure thing you can count on with politicians is…self-interest.

Not all that different really to those who stir up unnecessary fear with scenarios that are only slightly less plausible than an Elvis sighting.

Regards

Vern Gowdie,
Editor, The Rum Rebellion

PS: Which is better – Gold or Bitcoin? In Selva Freigedo’s latest special investor report, you’ll discover which is the better investment for 2019. Click here for your free report. 


Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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