0% Interest On Your Bank Account?

The numbers below are 30-day and 90-day T-Bill rates. Take a look:

rates

What number is most common? “0.00”. To someone who understands T-Bills, this number should be significant. To someone who does not understand T-Bills, read the description here.

There have been fluctuations, but the the rates have been mostly at or near zero for the past month. What does this mean? It means that the government is borrowing money for free.

Investors are barely, if at all, receiving a profit on their T-Bills. This is basically akin to borrowing money form a bank interest-free. No bank will do this, because there is no profit in it for them. Normally, you’d think no investors would do it either. But in this economic climate, some will if it means a guaranteed return on the money. The profit lies in the security, not in the money.

Rates go down when investors buy in. During recessions, investors historically pile into T-Bills looking for a safe haven to stash money in.

I think we will have another recession within approximately 2 years. At that time, hedge funds are going to pile into T-Bills. This will drive rates negative, if you can believe that. This means they will be paying the U.S. government to borrow money from them. Why? Because they are buying a guarantee of return.

Multi-million dollar hedge funds are too large to be securely kept in FDIC insured banks, which only insure accounts up to $250,000. Hedge funds will be willing to pay to lend money to the U.S. government in the form of T-Bills if it means a guaranteed return on investment. They will be terrified of leaving money in large multi-million dollar bank accounts not insured by the FDIC. If the bank were to go down, the hedge fund would lose everything. So, investing in T-Bills will look attractive.

What does this mean for the average joe? This will drive down interest rates; expect bank accounts at 0% interest. You will not make any money by keeping your savings at the bank. The bank will be providing security for your money, but that’s it.

It may not end there. Interest rates at banks could go negative, meaning you might have to pay the bank to hold your money. But this could be a sticky issue. It has never happened before. The FDIC explicitly insures account holders against any loss of money while held in a FDIC-approved bank account. This may require banks to go no lower than 0%, which I think is the most likely outcome.

When bank accounts go to 0%, know this: there will be bank runs. A lot of people are going to decide they’d rather hold onto more cash. The small banks are not going to go under, because the FDIC will be able to bail them out; but there will probably be restrictions implemented against withdrawing currency. It will be tough to get your money out.

The large banks servicing accounts too big to be insured by the FDIC could really suffer. Hedge funds are going to flee. This is the same situation that brought down some of the major banks in 2008. At least, it brought down the banks that could not jockey for a bailout.

At that time, cold hard cash will be king. Anyone who can pay for things with cash will be in a good position to snag great deals.

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