'Risk-Free' Is So 2012
So you've got this pile of cash and you're not sure what to do with it. Nice problem, as problems go, but definitely not trivial, especially if you're more concerned with keeping what you have than trying to make it grow.
Time was when you could simply deposit a few hundred thousand dollars or euros in your bank and relax, secure in the knowledge that even though your balance was above your country's deposit insurance coverage limit, it was still pretty safe because your bank was, well, your bank. And no one loses money on a bank account. Even in the darkest days of the 2009 financial crisis, account holders at Citigroup and JPMorgan Chase were never seriously threatened.
That pleasant delusion ended on Sunday night when the EU forced tiny, previously insignificant Cyprus to charge large depositors for the cost of bailing out its overextended banking system - and eurozone officials hailed the plan as a template for future crises. As Britain's Economist Magazine put it:
ON THE subject of euro zone fragility and the impact of the Cyprus incident on broader confidence in the single currency, an exhibit. Fresh off negotiating the Cyprus deal Jeroen Dijsselbloem, the Dutch finance minister and head of the "Eurogroup" of euro-zone finance ministers, said in comments to Reuters and the Financial Times that:
A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors...
In other words, Cyprus is absolutely a unique case, BUT if trouble should come to banking sectors elsewhere in the euro zone hitting uninsured depositors would seem a sensible way to go. Alternatively: rich Spaniards, Italians and so on should perhaps think about moving money in excess of deposit guarantee limits elsewhere.
And with that, equities flipped from positive to negative on the day, and European bank stocks tumbled. It could just be that traders are antsy today. But euro-zone officials should at least consider the possibility that the barrier holding back a raging contagion from Cyprus might not be particularly thick.
At any rate, one has to respect the European commitment to ensuring journalists don't put too positive a spin on things.
The Cyprus saga contains at least two broadly-applicable lessons: First, by initially going after all bank accounts rather than just those large enough to be uninsured, Europe's leaders gave a rare glimpse of how they really feel about private property, which is that it's only private until the state needs it. That they backtracked in the face of public outrage (and the prospect of continent-wide bank runs) doesn't change the fact that they'd have done it if they could have gotten away with it. Second, the revised "template," by sparing small accounts, puts an even heavier burden on large accounts, which in some cases might be wiped out like any other unsecured creditor of a failed borrower.
So we're left with a very different sense of what it means to have money in the bank. Small savers now know that their government will take their accounts if some future crisis makes it politically feasible. Large depositors now know that they're unsecured creditors of extremely shaky institutions. In other words, a bank account yielding 1% is actually both riskier and lower-yielding than a portfolio of dividend paying stocks - or even a portfolio of junk bonds.
This turns the traditional risk/reward calculus on its head. Which, make no mistake, is a good outcome for the world's governments and central banks. Cutting interest rates to zero and aggressively lowering the value of the dollar, euro and yen are intended to cause savers to become investors and investors to become speculators. The further out we all move on the risk spectrum the greater the chance that the old, indebted economies will "grow" through the next election cycle.
But turning savers and retirees into growth stock and junk bond investors means that the next 30% stock market correction (now long overdue based on charts like these) will be catastrophic for people who actually need their money. Meanwhile, in the bubbly here-and-now the same process will starve even well-run banks of deposits, since their CDs and savings accounts are now high-risk/low-return and thus not worth the trouble. The near-certain result: more banks will need bailouts, more savers will be expropriated, and more money will migrate towards risk.
The other unintended consequence of all this is -- does it even have to be said? -- a migration out of paper and into real assets. If there was ever a time to load up on physical gold and silver, this is it.