Wacky Way to Save Money #6: In the Mattress

It is a fact that banks fail.

In fact, banks are failing all over the place--Bear Stearns is just the one currently in the news. So why is the Fed (in the form of a $2-a-share JP Morgan buyout) bailing out Bear? Why is this such a big deal?

[Granted, this is a complex subject. Technical analysts, hedge fund honchos--try not to laugh at me. My job is to simply give the best "housewife" analysis I can, to try to cut through the crud and tell you how it's gonna affect your family's bottom line. The stupendously detailed analysis is going to have to give way to a quick-and-dirty this time. You can thank me in the combox;)]

The deal is, our whole banking system is shot. You think you have money in the bank. Your statement comes in the mail or you call and the bank tells you you have thus-and-so. You go to the ATM and pull out $20 or $40 at a time. You go buy groceries and swipe your card. Your employer sends your "paycheck" over the wires--and it's supposed to land (chink-chink-chink) in your bank "account". Theoretically you could go and ask for the whole balance and they'd have to hand you a stack of cash. Right?

Uh-oh.

If people started doing that tomorrow, the scene down at your local branch would resemble a mill strike more than It's a Wonderful Life. Fact is, the money's not there. How can a bank that is billions in debt hand you your measly thousands? Maybe they could do it for the first couple dozen people. But the vaults would quickly empty out. What then?

That's basically what happened to Bear. Its creditors (other banks and private investors) saw the blood in the water...they called and tried to get their money out. As word got out, the tide kept going out faster and faster...until on Friday Bear Stearns suspended its redemptions, which can only mean it's going broke--it's "vault" was practically empty. Now it's Sunday night, which should be a dead zone for financial news, and the wires are lit up with news of this Fed buyout/bailout. What does it mean for you?

Banks have been allowed, since the 1990's (thank you Mr. Clinton), to sweep out deposits on a nightly basis and lend them out for profit--and in at least 241 cases, rampant speculation. They don't have to keep any of the money on hand that you supposedly have access to. That's the big swindle--"fractional reserve lending." That's why you have $300 daily withdrawal limits at the ATM. You may think you have X amount in the bank but the truth is, what would you do if your debit card no longer worked and the ATM's were down?

What about FDIC? Mish thinks deposit insurance is a moral hazard. It makes every bank seem equally safe, and people just pick the ones that offer the highest returns. Trouble is, a bank that chases yield often makes pretty risky bets. If the Fed isn't big enough to bail out Wall Street, is the FDIC big enough to bail out Main Street? If bank failures increase from a trickle to a flood...the short answer is no.

You should consider hiding a wad of cash somewhere just for emergency running money (maybe not in the mattress). Just stuff it somewhere and forget it. One of the last real deals in "banking" is to get free withdrawals ("cashback") when you buy something. Discipline yourself to pull $20 extra when you go to the store ('cuz of your tightwad ways you have a little extra, right??) and stuff it in an empty can in the pantry. Or tape it to the underside of your bedframe. Or put it in a fireproof safe in your crawlspace. Point is, don't trust your family's daily/weekly operational budget to a bunch of hacks who couldn't care less.

There is only one pharmacy in town that can mix the drug that my son, Tom, needs to keep from throwing up. I went there to pick it up and the gal behind the counter launched into an apologetic speech about how their debit card reader was down...until I pulled out cash. "Oh, you are an angel," she said. No, I'm just a mom who wants to make darn sure my kid gets his medicine.

Not to be paranoid here, but all anybody needs to do if they really want to mess up the world is to create a virus that disables debit card readers. Our vulnerabilities are really frightening, if you stop and think about it.

***

Your money is only as good as your currency. A country's currency is kind of like its "stock." If the country's in good shape, balance sheet's in the black, factories are humming, and people are investing...it shows. Its currency will rise on the world market, and pay more interest to those who invest in it. The downside is, it costs more to borrow a strong currency, and the exports of a strong-currency country are more expensive in weaker currency countries.

If you've heard the dollar is losing value, you've really had your ear to the ground. But it's more likely that you've only just felt it...like looking out on a sunny day, but it feels cloudy. Everybody says they want the dollar to be strong. But you go to the store to buy a loaf of bread...and instead of 1.39, it's 1.79. Milk and cheese cost more. Braces cost more. There's sticker shock at the gas pump almost every day. Wages continue to dwindle, while everything that matters--meat, medicine, gas, heat--goes through the roof. Yeah, you can still get a cheap gadget at Wal-Mart...but for how much longer?

Some economists call it "stagflation". Some just call it deflation. What it means is that you're poorer than ever...while things cost more than ever. And it's all coming down so fast--what happened? We had a strong currency in the late 90's. The strongest we've seen in this country since Nixon took us off the gold standard (the mongrelized gold standard). Then, in order to head off what seemed like a serious recession following the tech boom...the Fed cut interest rates--i.e. they cheapened the dollar--and encouraged banks to lend money like crazy to keep people spending and head off a recession. Well, guess what? They did. They bought houses and cars and big-screen TV's and every stupid thing you can imagine. And the dollar went down...and kept going down. It's hard to measure, but according to some estimates I've read, you could have bought 30% more with a 2001 dollar than with a 2008 dollar. Cheap imports from China disguised the loss in value...but $110/barrel oil and $1000/ounce gold tell the story.

So what do you do? If you've been diligently cutting your expenses and paying off your debts, you might have a nice start on your 6-month emergency account. Take the trouble to protect it from a fall in the currency. It took some quick action on pur part last fall to avoid the 10% haircut we've taken in the dollar in the past six months. Only 1/3 of our emergency account is left in the bank. One third is in gold and silver. The rest is in foreign currency.

You can pick a "safe" money market (like Vanguard Prime Money Market Fund--supposedly "bulletproof", according to Money magazine). You can seek out a good, solvent bank that offers at least a 4% interest rate on deposits or CD's (good luck). You can buy silver dollars at the junk shop. My advice is to just spread it around...dig around and look for things that will keep pace with or exceed the inflation rate, which is around 4%. I feel pretty stupid for keeping so much money parked at WaMu for a measly .24%. But I can't really get around the fact that I need to have some money in a place where I can go and make a wire transfer or write and deposit checks. That's basically what banks are good at--moving money around. Too bad they're butterfingers when it comes to lending and "investing" it.

One caveat...do your homework. Don't put money where you're not confident you can preserve it. If in doubt, just keep it in the bank--but don't go over the FDIC limit. While you're at it, gather all your valuables and important documents and just get a little dinky safe from Wal-Mart and keep all that stuff in there. Fireproof is best, but secure and portable has its advantages. I personally don't want it to look like I have Fort Knox in my basement.

***

Realize that currency isn't money. "The long-term value of all fiat currencies is zero," says Bill Bonner, the very Catholic editor of The Daily Reckoning. And whatever I may think of his religious leanings, he's been proven right by history. When Jesus walked the earth in Judea, the Roman empire was being rocked by currency devaluation. It always causes social unrest and economic hardship. It's always the refuge of a panicked, insolvent empire on the verge of collapse.

"There's a war on the middle class," you might hear--on Fox News or elsewhere. What does that mean? When your wages are stagnant or falling, and your taxes and expenses keep going up while your savings, stocks, and real estate are going down, you're being bled. Someone is getting the money...but it isn't you. Somehow you find enough to live on, but it seems like less every year. That's because it is. The numbers all seem right, but it doesn't add up. That's the curse of inflation. Everything's just fine, say the government, banks, and advertisers. Go ahead and buy...no interest, same as cash. Lowest mortgage rates in years. They say that because they're the first to benefit from a devalued currency. But there's a trickle-down effect. By the time inflation trickles down to the little guy, his income might have risen a little bit...but his expenses have risen more than his wage. The stock market seems alright, but when you price it in gold, it's going straight into the toilet.

A paper currency is only an IOU. It's at the mercy of a central bank that can raise or lower interest rates at will, strengthening or weakening the currency as they deem the situation requires. You are better off with a weaker dollar, they say, than with a recession. Your wages may be smaller, but at least you still have a job. You may, as a taxpayer, have to bail out Bear Stearns...but that's better than enduring the financial winter that may set in if all the big banks fall like dominoes.

Gold and silver have always been the only real money. Up until the 60's, in this country, our coins were 90% silver and a dollar bill said "silver certificate" instead of Federal Reserve Note. Once upon a time we had American gold coins, that clinked and chinked in people's pockets along with their peace dollars and Indian head nickels. A sound monetary system--that's what our prosperity was built on. Not fixed interest rates and Federal Reserve notes. We had real prosperity because gold was a demanding mistress--she demanded we balance our budgets and pay our debts. And she threw us out on our ear when we didn't. People decided this last part was just a bit too painful. But I wonder what they would say now.

There are many ways to own precious metals, depending on what you're comfortable with. This isn't a technical guide so much as a philosophy (for details and further research, you can check out American Gold Exchange). It isn't too late to own gold. But plunking down $1000 for an ounce is a bit intimidating at this stage in the market. I wouldn't recommend that. First, I would just say, learn a little bit about money and the history of money. Bill Bonner, Mish, and Michael Hodges know a little about it. Do your darnedest to save and cut expenses. The more cheaply you can live, the better you will fare if things really get bad (how many people will drive an hour to work at a $10 an hour job if gas hits $5 a gallon? $6?).

Consider investing in a few silver dollars here and there (they may seem expensive, but you're spending "play money" and getting real money). You can find them at pawn and junk shops. There are places on the Net that sell "junk silver," old coins from the '20's, '30's, '40's, and '50's. If you have a chunk of change you need to park somewhere, consider Everbank and their MarketSafe CD's. They've been offering 5-year CD's tied to the price of gold and silver, that are FDIC insured. If you're into stocks, the gold ETF (GLD) has been doing very well. Mining stocks are still undervalued, if you're after bigger gains. But these are more speculative. I think, for the housewife who's just trying to take care of her family, the three-to-six month food pantry is an excellent investment on its own. After all, you can't eat gold and silver coins. These are just things you can do if all your other bases are covered.

Even as we contemplate all the places we can store wealth, let us remember to have a spirit of poverty. That wealth is ostensibly there for your family's security, not to buy new furniture or take vacations in retirement. The more money we have, I hope the more we would give. The more secure we feel, I hope the more joy and generosity will shine out. If we sleep soundly at night, I hope it is in the peace we find after praying the Rosary, not thinking about the Ben Franklins taped to the bed. My focus is practicality, but my only peace lies in prayer. A blessed Palm Sunday to all.