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Sunday, May 8, 2011

The Banking Vortex

The American banking system is based on pure faith. Usually when the topic comes up in conversation I will ask someone if they know what backs the green cash in their wallet. One of the common responses is “there is gold in Fort Knox” or another typical response is that it is backed by U.S. assets. Unfortunately both of these answers are incorrect. In fact all of our money deposited in the banking system is backed by the pure faith in our U.S. government. Now for decades this implicit belief was fine because we actually were a creditor and exporter nation. We also had a higher savings rate. Today we have a system where we continually spend more than we produce and expect this dynamic to somehow function long term as if we found an endless well of Kool-Aid. The Federal Deposit Insurance Corporation (FDIC) insures each individual account up to $250,000. Given that one in three Americans has zero dollars to their name and most others have a sum nowhere close to this amount, many go forward with an unstated faith in the system. However the FDIC Deposit Insurance Fund is largely running on fumes. This shouldn’t be such a big issue aside from the fact that the American banking system has over $7 trillion in deposits.

Banking in darkness – FDIC system insures over $7 trillion in deposits with a dwindling insurance fund. Americans are offered close to zero percent interest rates to stuff their money into this banking vortex.

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