Submitted by Gijsbert Groenewgen via Silver Arrow Partners,

Could zero/negative interest rates be the end of the fractional banking system and force deposit holders into gold and silver?



Would you give your money to a hedge fund that is 9x leveraged?



With the negative interest rates deposit holders might be opt for paper money (notes) instead of digital money (digital wallet, bank account)! Which could bring down the fractional banking system because as we know of every $100 you deposit in the bank $90 is subsequently loaned on. US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals! Banks have no reserve requirement at all for deposits by companies! Go figure.



Anyway the Required Reserve Ratio of 10% means that only a fraction or $10 of the $100 you have deposited at the bank is available for cash withdrawal. Your $90 that is loaned on is leveraged within the banking system to increase profits for the bank. A bank is basically a big 9x leveraged hedge fund. Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis. Under normal circumstance and normal debt levels the fractional banking system works though these are not ordinary times!



You have to ask yourself when interest rates are so low and don’t compensate you for inflation and with the risk that there could be bail-ins, considering the incredible derivative positions banks have, why keep your money at the bank.



All Governments have silently built in the “bail in” template for when the roof comes down. Where is the accountability of the politicians and bankers?



The US, UK, EU, and Canada have recently all built the new "bail in" template into their laws in order to avoid imposing risk on “taxpayers” (and politicians and bankers of course). All taxpayers have bank accounts and therefore the avoidance argument basically is only important to get the government officials and the bankers off the hook i.e. their accountability! Under the new "template" all lenders (including depositors) to the bank can be forced to "bail in" their respective banks. Most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. And most account holders don’t know that by law, when you put your money into a bank account, your money becomes the property of the bank. Your title “downgrades” from owner of your money to creditor of your money with millions of other creditors. You become an unsecured creditor with a claim against the bank. In other words if the bank goes bankrupt you share at pari (equally at fault) with other similar creditor/deposit holders. Great deal for the bank and bankers, no!



Deposit insurance is a fallacy with more than $1,000 trillion in derivatives



Before the Federal Deposit Insurance Corporation (FDIC) was instituted in 1934, U.S. depositors routinely lost their money when banks went bankrupt. These days your deposits are “protected” only up to the $250,000 insurance limit, and “only to the extent that the FDIC has the money to cover deposit claims or can come up with it”. The question then is how secure is the FDIC? The FDIC has only about $25 billion in its deposit insurance fund, which is mandated by law to keep a balance equivalent to only 1.15% of insured deposits.



See here, based on data reported on 2014-09-30, just the 5 largest US banks by total deposits amounting to roughly $4.8trn



Rank Total Deposits Bank Name

1 $1,377,661,000,000 JPMorgan Chase Bank



2 $1,202,846,000,000 Bank of America



3 $1,171,956,000,000 Wells Fargo Bank



4 $947,975,000,000 Citibank



5 $284,226,575,000 U.S. Bank





Do you really think that the FDIC will have enough money to bail out all the deposit holders at $250,000 a pop? I don’t think so! Especially when you also take into account the $1,000trn derivatives exposure that is hanging over the markets. Subsequently people could argue that the Treasury will come to the rescue. I doubt it; I think at that stage it will be too late anyway to rescue the currency. In other words when the bigger banks threaten to fall over don’t believe the authorities when they say that everything is under control because it won’t be. And when the banks start to fall over also don’t put too much faith in the FDIC or Treasury. It will be a lost case anyway.



Why would you still have a bank account with all its pitfalls?



Nonetheless my point is as follows. Why would you still have a bank account considering their zero return, high fees and abysmal services? Next to that we don’t know what kind of black swans (or whales as in JP Morgan’s case) are hidden in the banks operations and we always are the last ones to find out what the exposure to the incredible amount of derivatives has been. So as a deposit holder you are always one or more steps behind. Therefore the most logical step would be to withdraw “your” money from the bank. This in itself could be very interesting because as discussed here above at the most the bank is likely to have only 10% of your money in cash, remember the remainder has been loaned on the basis of the fractional reserve system - how many dollars a bank lends out compared to the amount of deposits it has on hand. In other words if more and more people would demand their cash, following its negative return, it would cause a run on the bank because the banks won’t have enough cash.



Remember a while ago when deposit holders with HSBC in London, England were told that they needed to have a valid reason if they wanted to take out £5,000 in cash from the bank and otherwise they were declined to withdraw the money from their own account! That in the end was quickly reversed but these things tell you a lot about the thinking and culture within the banks. And this was the situation whilst there was “no stress” in the system! When and if there is stress in the system they will say, “it is not your money”!



With increasing negative real interest rates gold and silver look more attractive by the day



Hence, based on the abovementioned, why I believe, considering the ultra low and even negative interest rates, that physical gold and silver look more attractive by the day. The ongoing free-fall in long-term interest rates has significantly reduced the opportunity cost of holding gold. Gold and silver keep their purchasing power in times of devaluations (as we are witnessing at present) and don’t run the counter party risks or bail-ins that you are exposed to as a creditor/deposit holder of the bank or as a holder of the currency (declining purchasing power). In my point of view silver will show the way, silver is a much cleaner chart see below! In the run up silver normally takes the lead as a result of which the gold/silver ratio should keep on declining from today’s high level of 72.5.



Chart: Gold/Silver ratio







Chart: Silver price







Chart: Gold price

