Financial Safety


Well just a few days ago I wrote how FDIC should have raised their insurance coverage limit from $250,000 to $350,000 to adjust for inflation since the last time it was adjusted was in 2008 with the last financial crash. Here we go again.

I hope they raise the limit because I’ve already pulled cash out of the bank for that very reason. Now that I see this video has been posted on the internet, I can only surmise that there is a slow bank “crawl” rather than a bank run but who knows.

In any event, here is the video.

I tried searching for reports on reserves for some of the big health insurance companies and I had trouble finding them. If I understand how most insurance companies operate, they take in premiums, invest those premiums in bonds and equities to generate returns and use those funds to pay claims that are filed by their customers.

With the stock market crashing and the bond market in turmoil and the potential for insurance claims to soar as people get sick, is this the perfect trifecta to crash the health insurance market?

According to this news report, a woman who got coronavirus and was treated, ended up with a $35,000 bill. The report doesn’t offer too many details but if that is the average bill and health insurance companies end up getting inundated with 100,000 claims then that’s a staggering $3.5 billion per 100k claims. If we end up with 1 million sick that’s $35 billion and 10 million sick, it’s a whopping $350 billion.

So are health insurance companies even solvent at this point? I don’t know the answer to that question but it is frightening to think that the health coverage I think I have may not even be there if I need it.

Plan accordingly. Stay home and stay healthy.

Well here we are again 11 years after the last financial crash and there is talk of bailouts for airlines, cruise lines, banks, hotels, restaurants and on and on and I have yet to hear a single person demand FDIC insurance be funded to prevent insolvency,

I wish that were the only problem but the second one is that FDIC coverage hasn’t increased from $250,000 since 2008. It seems I am one of the few people that can do a net present value calculation so let me give you the numbers. The $250,000 amount from 2008, adjusted for inflation at 3% interest for 10 years should be around $335,000 but let’s just round it up to $350,000 or better yet $400,000. See you in 2030.

If congress fails to act, I’m gonna pull all my money out and then the banking system will really be hurting.

So I recently purchased a new 27″ iMac fully loaded for a nice chunk of change and I looked back on my blog to figure out how long I had waited.   It turns out I had initially intended to buy it in 2008 but held off then in 2009, I got sacked because of the financial crisis and it’s now been two years and a month since that time and I’ve finally restarted to make large purchases.

To be fair, financial confidence actually happened sooner with a nice vacation to the east coast this summer but it’s interesting that financially prudent people really don’t dive into big expenditures until cash reserves and emergency reserves are fully replenished before taking a plunge back into the consumerist lifestyle.    Things are very different for me though because I’ve paid down almost all debt including mortgage and now have excessive cash reserves so it’s seemed appropriate to spend some cash.

This year I’ve taken two nice vacations, purchased an iPad and iMac and just purchased another iPad as a gift for someone special ;).   So where does that leave us now?   If we do hit another recession or dip deeper into more malaise then there possibly can’t be any economic boom until at least late 2013 or even 2014.  In the meantime, cash keeps tumbling in on my investment activity so I’ll keep chugging along.

This Wall Street Journal article points out what I’ve been suspecting for years: Pre-paid college tuition is a scam!  It’s a scam or rather “ponzi” scheme just like social security, medicare and any other government program with similar characteristics.

This poor woman has contributed $100,000 under the false assumption that her grand kids college education would be taken care of but now the state is struggling to keep up and finding all sorts of loop holes to not fulfill their obligations.  Hmmm…..sound familiar?

Patti Lambert wanted to pay the college tuition for her eight grandchildren. So for the past 16 years, the real-estate agent signed onto the state of Alabama’s prepaid tuition program. She invested more than $100,000—a daunting amount but a good deal because the prepaid plan promises to cover tuition no matter how much it increases.

Or so she thought. Facing a severe funding shortfall, Alabama is trying to renege on its promise to foot the whole bill. Instead, the state wants to pay the average tuition rate, potentially forcing schools and families to make up any difference.

When my wife and I first got married, we went through our finances and my wife showed me some contributions she was making to a similar program for her younger sister.  I immediately told her to quit paying it and request a refund.  She got all of her money back and we put it in savings.   I told my wife that when the time came, we would help her out as much as we could but that ultimately the plan wasn’t going to work.   A few years after the state froze the program and significantly modified the plan, making many people unhappy.    My sister in law graduates this May and my wife’s been helping her along the way with tuition and other items.

I’m still waiting for the day when the exact same thing happens to social security and at the current rate of disintegration that should only be a few years away.

It seems like all revolutions start on college campuses and this time won’t be any different.  From California, it seems unbearable tuition hikes were the final straw…

The UC regents are expected to put the final seal today on a hefty 32 percent tuition increase as students resume the protests that shut down their board meeting three times Wednesday and required campus police in riot gear to maintain calm.

Students, furious at the increase that will bring their yearly fees above $10,000 for the first time, rushed the UCLA building where the regents were meeting, throwing food, sticks and vinegar-soaked red bandannas meant to look like blood.

UC police arrested 14 people for disrupting the meeting and resisting arrest.

Wednesday’s vote by the regents’ finance committee was also protested at UC Berkeley, where about 1,000 students, faculty and university workers filled Sproul Plaza for a noontime rally. About 300 protesters turned out at UC Santa Cruz. The full board is to vote today.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2009/11/19/MN9O1ALCKG.DTL#ixzz0XM5ip14U

So how far and fast is spreads from there is up for question but I won’t be surprised to see a grass roots movement spiral out of control.

I keep getting weekly offers for 0% APR balance transfers but after all the bank shenanigans can you really trust them?   I have to say that what is really keeping me from them aside from the possible rate jack is the ridiculous 4% balance transfer fee.   Borrowing 50k at 4% is essentially $2,000 in balance transfer fees and that is too steep a price to pay in this deflationary environment.

I called a major credit card company a few days ago to activate a new card they had sent me to replace an expired one and the agent on the phone was probing to find out how they could get me to use my card more often.   I explained that I primarily use my Costco Amex card and get a generous rebate on my purchases and they immediately offered to switch me to another plan with 1% cash back but that still doesn’t beat Costco’s Amex program so I told them I wasn’t interested.

A few days later, I get a new credit card in the mail touting the new rewards on the card which I specifically stated that I didn’t want.   If I can’t trust these guys NOT to send me a new rewards card, how can I trust them on a balance transfer offer?

According to the Federal Reserve System there is approximately $600 billion in cash circulating around the world. usprintedmoney

According to the US Treasury, approximately $750 million dollars of US currency are printed annually primarily to replace aging/damaged/worn currency

During fiscal year 2007, the Bureau of Engraving and Printing (BEP) produced approximately 38 million notes a day with a face value of approximately $750 million.

What can be derived from these two pieces of information?

We can posit that Americans generally “consume” approximately $750 million in cash yearly.   By “consume” I mean “wear out” the currency to the point where it needs to be replaced.  If there are 300 million people in the US trading dollar bills in the amount of $750 million then on average $2.50 is traded yearly between people.   That’s sound a bit odd doesn’t it?

If we look at the population demographics:

  • 0−19 years: 27.4% (male 42,667,761; female 40,328,895)
  • 20−64 years: 60.1% (male 89,881,041; female 90,813,578)
  • 65 years and over: 12.6% (male 15,858,477; female 21,991,195)

We can make some assumptions, the 0-19 will likely not have too much cash on hand so the remainder of the populous will be dealing with mostly cash transactions which gives us aboute 113 million people.   Doing the math again we get roughly $6.60 per transaction.

How can this puny amount be correct when you know you spend at least $10 on lunch, $20 on gas, and $5 on Starbucks every other day?   The answer is that the remainder of the transactions are done with CREDIT and not cash.   If these transactions were being conducted in cash, the amount of currency in circulation would need to grow exponentially.

So let’s take a leap of faith, what happens when the CREDIT disappears?   How will these transactions be conducted if they are still necessary?   The only solution is to utilize cash.   Where do most people keep their cash?   At the bank!   What happens when banks run out of credit to give and have a sudden and huge demand for cash?

As for the other cash circulating around the world, it’s doing just that, circulating around the world in respective countries to conduct business transactions or to use as a store of value.

It’s not too difficult to figure out, all you have to do is follow the money and do the math.

Note that I’ve used various assumptions, get out your spreadsheet and run the numbers any way you like and you’ll be able to figure out more or less when the bank runs will begin, it’s not rocket science it’s basic math.

I’ve been warning people over and over again but the complacency persists but now you can hear it from the FDIC chair’s mouth:

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

I’ll refer you to this post I wrote back in October.

I’ll reiterate: When people realize that the money they thought they had in the stock market is gone, when they realize that their credit lines have been cut and when they have no cash on hand left to pay for fuel, groceries or medicine there will be a stampede at your local bank.   The first ones to get there and pull out some or all of their cash will get their money; the lazy, the ignorant, the socialized, the optimists, and the clueless will be left cashless.

Continuing on yesterday’s discussion about what to do in the post economic collapse (ecopalypse), my friend wants to return to a gold standard.  While I own physical gold and agree it’s prudent to own some, it’s not the panacea that many people think it will be to return to a gold standard.

For starters, if gold increases to $2000/oz you can bet that there will be more armed robbers chasing after women’s (and men’s) wedding bands and gold jewelry.  You’ve already seen those cheesy “Cash For Gold” commercials and how long before outfits like that become the defacto pawn shop for criminals?

I just finished Kim MacQuarrie’s The Last Days of the Incas which gives a great overview of the Spanish conquest of the Incan Empire and it helped remind me that there was a great deal of suffering in the world because of the lust for the yellow metal during the colonization period.

Imagine if gold increased in value to $5000/oz.  What do you think would happen to society at that point?  Walking around with gold jewelry of any kind would be the same as flashing a giant neon sign with, “I’m Loaded, Rob Me!” right over your head.

While I occasionally have been infatuated with gold, I clearly understand the danger it represents if the price for it gets out of control.

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