The money in your bank account is not yours, not money, and not there

A recent tweet from Anil on X reveals a startling reality: "The money in your bank account is not yours, not money, and not there." This statement may seem alarming, but it reflects the fundamental operations of modern banking. Let's delve into why your banked money might not be as secure or accessible as you believe.

Why Your Money Is Not Yours

When you deposit money in a bank, it legally becomes the bank's property. In return, the bank promises you can withdraw the equivalent amount. But in reality, there are limits. For example, you might have a $10,000 savings account, but the bank may limit you to withdrawing $500 per day. If you want to spend a large amount, like $5,000 on a car, the bank might block the transaction and ask for an explanation, saying it's to prevent fraud.

Imagine you’ve saved for years and finally have enough to buy a used car. You go to the dealership, but your payment gets declined. You call your bank, and they tell you they need to verify the transaction for your protection. Good luck if it happens during a weekend! This delay can be frustrating, especially in emergencies, showing that the money isn’t really under your control.

Why It Is Not Money

Before 1934, individuals in the U.S. could exchange dollars for gold. However, the Gold Reserve Act of 1934 ended this practice, and the Bretton Woods Agreement in 1944 established a system where only international transactions could be converted to gold. In 1971, the Nixon administration suspended this convertibility, marking the end of the gold standard. Since then, the dollar has been "fiat money," which means it’s valuable because the government says it is.

One of the key aspects of money is that it should be a good store of value. This means that the value of money should remain relatively stable over time, allowing you to save and use it in the future without losing purchasing power. However, fiat money, like the dollar, is not a good store of value. Since it is not backed by a physical commodity, its value can decrease due to inflation and other economic factors.

For example, in 1971, you could buy a new car for about $2,500. Today, a new car costs around $40,000. That means the value of money has decreased significantly. If you saved $1,000 in 1971 and didn’t invest it, its buying power today would be much less. This loss of value over time makes fiat money a poor store of value, impacting savings and purchasing power.

Why It's Not There

People often think their money sits safely in the bank. However, banks only keep a small fraction of deposits on hand and lend out the rest. Since 2020, banks aren’t required to keep any of your money in reserve. This means your money is used elsewhere—loaned out multiple times, invested, or used to back other financial instruments.

Let’s say you deposit $1,000 in your account. The bank might only keep $100 on hand and lend out $900. They might even lend out that $900 several times over, making profits from interest on these loans. This system works well daily but can be risky during financial crises. If everyone wants to withdraw their money at the same time, the bank wouldn’t have enough cash available, leading to a potential financial disaster.

The Illusion of FDIC Confidence and the Financial Engineering Tricks

Many believe their money is safe because the Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000. But the FDIC only has enough funds to cover less than 1.5% of all deposits. In a major banking crisis, this wouldn’t be enough to cover everyone’s losses.

For example, if your bank has $1 billion in deposits, the FDIC might only have $15 million to cover losses. In a widespread banking failure, this fund would be quickly depleted. This problem also affects other accounts like brokerage and retirement accounts, which rely on the same banking system. Even these accounts are subject to similar risks, highlighting the overall vulnerability in the financial safety net.

During the bank runs in April 2023, the Federal Reserve employed several financial engineering tricks to stabilize the situation. One notable measure was the introduction of emergency lending facilities, which allowed banks to borrow money using a wider range of assets as collateral. This was aimed at providing banks with the liquidity needed to meet withdrawal demands without selling off their long-term investments at a loss.

For example, if a bank had significant investments in long-term bonds that had lost value due to rising interest rates, they could use these bonds as collateral to borrow money from the Federal Reserve. This provided the banks with immediate cash flow to handle withdrawals while avoiding the need to sell the bonds at a depressed price. This maneuver temporarily calmed the panic but highlighted how fragile the banking system can be under stress.

Conclusion

The idea that your money is fully safe and accessible in the bank is more of an illusion. Whether it’s your checking account, savings account, or investment accounts, all are part of a system with significant risks. Understanding these risks makes us realize the importance of exploring alternatives like Bitcoin, which offers different ways of owning and controlling value.

Bitcoin operates on a decentralized system, meaning it doesn’t rely on banks. Your Bitcoin is truly yours, controlled by you, and not subject to the same limitations and risks of traditional banking. As we navigate the modern financial landscape, it’s crucial to understand these dynamics and consider more secure alternatives for our financial future.