Why Keep Money in a Bank When Treasuries Pay Twice as Much

• Both fear and greed are currently motivations to move deposits out of banks. That’s “disintermediation.”
• Banks currently pay less than 2% while Treasuries pay more than 4%.
• When disintermediation occurred in the 1980s more than 1600 banks failed.

Ronald Ryan, president of Ryan ALM, published Disintermediation? (The Flight to Yields), reminding readers of what happened the last time the US Treasury rewarded investors with higher yields than banks –more than 1600 banks failed. 

The FDIC reports the following interest rates. As you can see, banks pay less than 2% while the US government is paying more than 4% — safer money is paying higher interest.

There’s no need to say much more than this table, other than both fear AND greed are currently being served by moving savings out of banks. Thanks for the heads-up Ron Ryan.

What’s next

The government’s zero interest rate policy, ZIRP, solved one problem but created a host of new problems, including disintermediation. Cheap money forestalled a 2008 economic meltdown and buoyed up stock and bond prices, but the price is serious inflation that the Fed is trying to fight, but can’t. The Fed is in a vicious cycle summarized in the following.

As I report in this article, the Fed faces great pressure to “pivot” away from its inflation flight, which will begin the cycle all over again.

Something will break. It’s already started. Our legislators mistakenly believe that any problem is solved by throwing money at it. They’re fighting the Fed with programs like Biden’s $6.9 trillion budget. Forcing the Fed to pivot brings even more money printing to overpay for government bonds in order to create ZIRP.

A possible sinister plot

The mighty U.S. dollar is threatened by a Thucydides Trap, the inevitable conflict that occurs when a rising power threatens to displace a ruling power. China is positioning to become the dominant world economy and might be executing a clever strategy that is similar to the tactics employed in the TV series Hustle where con artists exploit their “marks.”

In grifter jargon, China might be playing a “long con” on the United States (the mark) that takes years and patience. It’s conceivable that China is promoting MMT to encourage massive U.S. spending and money printing. The “convincer” is that MMT worked in the form of Quantitative Easing, so more is good. The “closer” in this hustle is COVID-19 emanating from China that necessitates unprecedented additional money printing plus the war in Ukraine waged by China’s partner,

In other words, the con is tricking the United States into devaluing and debasing its currency. China wins.

Conclusion

There was a commercial for margarine that said “It’s not nice to fool Mother Nature.” Manipulation of interest rates under ZIRP has distorted US economics. Stocks and bonds are not “worth” their current prices because those prices have been inflated by cheap money. We’ve had asset price inflation that is not measured by the CPI.

ZIRP needs to end so our economy can return to its natural state, but the path to recovery will be hard and painful.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.