Thursday, March 21, 2013

Cyprus Depositors Lose $5 Billion - American? $400 Billion: Per Year

The following is a very simple conversation with Jim Rickards and Laurn Lyster, but it is a concept that is crucial to understand. As people becomes outraged over the $5 billion that will soon be removed from the savings accounts of Cyprus citizens (we will soon find out exactly how they will calculate the theft), they are quickly comforted by the fact that such a thing could never happen in the good old United States.

Rickards explains that through interest rate manipulation, Ben Bernanke is extracting $400 billion, per year, from the citizens of the United States and handing it over to the banks. He explains the concept quickly, so let me take a step back before you watch the video to put a foundation in place on the discussion.

When you walk down to the local bank and deposit $100 into an account, you have just lent the bank $100. The bank has the right to then take your money and instantly reinvest it somewhere else. In order to have this right they agree to pay you a standard market interest rate on your savings.

Let's say that when you first deposited that money 10 years ago you were getting a 3% return on your savings. Although that is low historically, it was still a return on your money above inflation in an investment you knew was safe.

Fast forward to today and that money in the bank is most likely providing you a return that is very close to 0%. The 3% difference that they were paying you before and not having to pay you know is an addition to the banks income every year. By not paying you that money, they just keep it. On the other side of the balance sheet you have now lost that 3% per year income. 

What is this on your $100 savings account?  Only $3 per year.

What does Rickards calculate the entire wealth transfer is from the citizens of the country to the banks?

$400 billion - every single year

This money that would be in citizens pockets for saving, spending, or reinvesting is spread out across massive banking salaries and enormous banking bonuses. A lot of it is put into highly speculative assets like the stock market to gamble.

As Rickards says, during a normal point of "recovery" that everyone says that we are in, interest rates would be at least 3% and rising. This money would be transferred back to savers and retirees, instead of debtors and speculators.