Monday, April 23, 2012

FDIC rate caps guarantee loss of purchasing power

The FDIC imposes rate caps on member banks to prevent them from offering rates too high just to attract capital. The rate caps are published on the FDIC web site here.

With a maximum savings rate of 0.85% and official CPI-U inflation running at 2.7%, savers at FDIC banks are guaranteed to lose 1.85% of their purchasing power each year. The national average rate is 0.1% so the average saver is losing 2.6% of their purchasing power each year. That's some fine financial repression!

What if you go with a long dated CD, can you at least break even? Not even close. The rate cap on a 60 month CD is 1.86%, and even on jumbo CDs, the cap is 1.87%. So, the best you can possibly do at a bank is lose 0.83% of your purchasing power if you are willing to commit $100,000 to a bank for 5 years.

Despite forcing savers into negative real interest rates, the velocity of M1 money supply has been crashing since the 2008 financial crisis. This looks like a sure sign to me that we are still deeply in crisis, three years after the recession was declared over.

Wednesday, April 18, 2012

Debt, private property, and relationships

I am about half way through the book, "Debt, the first 5000 years".

It is sprawling, sometimes meandering, anthropological work covering concepts of debt from 3000 BC to the present. I say meandering, because much of the book, so far, is spent on non-financial topics. However, that is probably the point. Debt and credit systems appear to have arisen before money systems, with barter always more of a fringe activity, as opposed to the primary means of trade.

Despite the effort required, I ran across quite a few illuminating observations. One has to do with private property, codified in Roman law, and how humans relationships to private property. The concept really is not so much about the relationship of people to things, as it is a relationship of people to everyone else on the planet with respect to things. It is a three way relationship that prohibits everyone else but the property owner from determining the disposition of said property. This was a novel way of looking at it to me. It also created conflicts with and highlighted the inconsistency of slavery.

From the book,
This is why I developed the concept of human economies: ones in which what is considered really important about human beings is the fact that they are each a unique nexus of relations with others.
If you think about it, a debt is also just a relationship between people (if you include the way the Supreme Court or Mitt Romney define people). Debts and private property both define relationships between and among people and things. Neither debts or private property, as concepts, are tangible. Only certain objects, those that form part of the private property relationship, are tangible.

Another interesting tidbit I found was the deep historical link between the word "debt" and "sin" in many religious and philosophical writings. Think of the dual meaning of forgiveness (of debt and of sin), of redemption (of bonds and sin), and payment (of a monetary debt or a debt to society).

Just interesting food for thought.

Thursday, April 5, 2012

SPG Madonna, IOU You Wanna?

The ECB long term refinancing operations (LTROs) stuffed Euro banks with a trillion in fresh cash to help them roll their own bonds and buy sovereign bonds that whose interest rates were heading skyward. By all appearances, it has been wildly successful, so far.

As Spain's economy continues to weaken, interest rates are starting to creep on the SPG 10 year again. Mish posted about it today, saying he expects it to reach 6% again soon. With unemployment at 23% and one sovereign default in the Eurozone books, it might be a bit risky to buy Spain today. You wanna?