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The Federal Reserve's Latest Scam

Gold or Poverty: Your Choice

Written by Geoffrey Pike
Posted December 2, 2013

It has been reported that banks may consider charging customers for keeping deposits in the banks, if the Federal Reserve (the Fed) changes its policy of paying interest on bank reserves.

Yes, you read that correctly...

In other words, if the Fed changes its policy, you may have to start paying a monthly maintenance fee to your bank — just for the privilege of having a checking account.

You see, with the discussion of the Fed possibly reducing its rate of monetary inflation (currently at $85 billion per month), also called “tapering,” the Fed is indicating it will consider other options for offsetting the effects of tapering.

One suggestion is that it might cut the interest paid on bank reserves. This really would be offsetting, and perhaps worse...

If the banks decided to start lending out more money and taking more risk with deposits, this would have a high inflationary effect. A reduction in excess reserves would mean more money multiplying through the system; it would lead to a dollar that depreciates in value at a faster rate.

There are questions as to what the Fed’s new policy would be, if it did make a change. There's not much room to cut from an interest rate of .25%. I suppose the Fed could cut the interest payments in half, but it's hard to see the point in that.

The Fed would likely reduce it to zero, stopping all interest payments on bank reserves.

Again, we can’t be sure how much this will affect bank lending. On the margin, it will make a difference. It is just a question of whether or not we will see more than $2 trillion in excess reserves come pouring out of banks in the form of risky investments.

Banks in a Free Market

If the Fed does stop paying interest on bank reserves, the banks are threatening to start charging depositors, as it would actually cost the banks money to hold cash from depositors.

If a bank pays depositors an interest rate of 1%, but can loan out most of the money for 3%, then there is no problem — as long as the loan stays solvent. The bank makes a profit on the spread.

However, if the bank is unwilling to lend out the money, or can’t find anyone to borrow, then the bank can’t pay interest to depositors.

And if the bank stops receiving the .25% interest from the Fed on reserves, then it would make sense that banks would have to charge depositors so as to avoid a loss.

Ironically, in a true free market, this is probably what would and should happen.

If you are depositing your money in a bank and you have an agreement with the bank that it can’t loan out your money, then the bank is likely going to charge you a fee. You are basically using the bank as a storage facility.

If the bank can’t lend out your money and make a profit on it, then it will lose money if it provides services for you — like this storage — and doesn’t charge a fee.

So if you are going to get upset at the big banks, I'm not sure if paying a monthly maintenance fee on your checking account should be at the top of your list of things to be mad about...

You should be more upset about the constant bailouts and the government guarantees that encourage risky behavior with your money — and for which you are forced to pay for through taxes and inflation.

If the Fed’s Plan Works

Let’s say the Fed decides to reduce its rate of quantitative easing (monetary inflation). And let’s say the Fed tries to offset this by stopping interest payments on bank reserves...

We'll assume this entices banks to dramatically reduce their excess reserves, thus lending out bank deposits.

If this happens, then you will have a whole lot more to worry about than paying a $5 monthly maintenance fee to your bank.

You had better start worrying about massive consumer price inflation. It could make the 1970s look tame by comparison.

The reality is you won’t be thinking about your monthly maintenance fee at the bank when you're paying twice as much for groceries and $10 for a gallon of gas for your car.

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What You CAN Control

You have a long list of reasons to be angry at big banks.

The government and the Federal Reserve have encouraged risky behavior and have bailed out the banks when things go wrong. The Federal Reserve’s number one mission is to take care of the big banks, even if it doesn’t explicitly state this.

From a personal standpoint, you should worry most about what you can control.

If your bank is going to charge you a fee for having a checking account, there probably isn’t much you can do about that (and again, the fact is this is too minor to worry about)... But if the Fed changes its policy of paying interest on bank reserves, and the banks respond by loaning out more and reducing their excess reserves, you should be prepared for high price inflation ahead.

You should position yourself in hard assets that will do well with a depreciating dollar. This could include gold, oil, stocks, real estate, collectibles — or almost anything that you can physically touch.

It would not include such things as cash, bonds, and annuities that will decline in value with a depreciating currency.

You will want to reduce the amount of money you have sitting in the bank, but not because of the maintenance fee you may have to pay. You'll want to reduce your cash-related holdings so that your money doesn’t sit there and constantly lose its value.

Until next time,

Geoffrey Pike for Wealth Daily

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