How to protect your savings from monetary threats like devaluation. Why high yield savings accounts exist and are they worth it.
Topics covered include:
- Why Lebanon defaulted on its national debt and announced it will devalue its currency by 57%.
- Why some depositors in Lebanon will probably lose some of their bank savings.
- What investors can do to protect themselves from currency devaluations.
- What are stablecoins and why are they useful.
- Why some online banks pay above-average interest rates on savings accounts.
- Why banks need to attract new deposits even though they create deposits when they make a loan.
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 297. It’s titled, “How to Protect Your Savings.”
On this show, we spend a lot of time talking about money. What is it? How is it created? What is the role of commercial banks, central banks, federal governments? We need to understand how money it works and how to invest it in order to protect ourselves against monetary threats, like inflation, deflation, hyperinflation, or currency devaluation.
If there’s anything we can learn from this pandemic is that nothing is certain. Anything can happen. That doesn’t mean we need to be alarmist or overly fearful, but it does mean we need to consider our exposures. That we have allocated our assets in a way to avoid ruin. That includes our monetary assets.
In an episode earlier this year titled, “Money is Debt,” we discussed how cash is a perpetual non-interest-bearing liability issued by the central bank. It is debt. Money is debt backed by debt.
Central Bank Insolvency
A couple of episodes ago, in episode 295 “Can Central Banks Go Insolvent?” I quoted Ricardo Reis, he’s a professor at the London School of Economics. He said, “insolvency of the central bank is not just theoretically possible, it is also frequent in practice across the world as attested by the multiple currency reforms that have taken place.”
Central bank insolvency is equivalent to hyperinflation, which happens often all over the world. “Insolvency then means that reserves and currency denominated in the old unit of account become worthless, or that there is hyperinflation and/or currency reform.”
I didn’t give, really, any examples of that as we kind of walked through the process. But I thought it would be helpful to share an example of a country where the central bank is effectively insolvent, due to currency reform. It will lead to inflation of over 50% this year. It’ll lead to bank depositors losing some of their money in what is known as a “bail-in.”
We’re going to look at that country in this episode. Also, we’ll revisit a topic from last summer on Stablecoins, a cryptocurrency forum that is one potential option to protect our monetary assets. We’ll also look at high-yield savings accounts, why they exist. In an era where interest rates are close to 0, how is it that banks are willing to pay 1.5% to depositors in a high-yield savings account?
An Example of Central Bank Insolvency
To start off, the country where the central bank is effectively insolvent is Lebanon. It’s a country with about 7 million inhabitants. It lies on the Mediterranean coast. It is north of Israel and south of Syria. Lebanon became independent of France in 1943. And then there was a lengthy civil war that lasted from 1975-1990. An estimated 120,000 individuals died in that civil war.
Before the civil war, 1 U.S. dollar was worth 3 Lebanese pounds. But during the civil war, the value decreased rapidly until 1992, 1 dollar was worth over 2,500 Lebanese pounds. And then it increased in value and in December 1997, the pound, the Lebanese pound, was fixed to the dollar. There was a dollar peg. 1,507.5 pounds equals 1 dollar. That has been in place for over 20 years until this year.
The purpose of the peg was to show stability in the economy, to attract foreign capital. It was an effective dollarization of the economy. The Economist points out that receipts, when you went to a store in Lebanon it would print out in both the dollar and the pound. Shopkeepers would make change using dollars and pounds. They were very, very much interchangeable.
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