In Proverbs 22:7 we are told: "The rich ruleth over the poor, and the borrower [is] servant to the lender." In the early 1980’s the credit bubble began. Mortgage securitization also began in earnest. The following is the big picture:
1971 The elimination of the gold standard allowing for an unchecked increase in money supply (inflation)
1979-83 Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983 under Paul Volcker’s oversight at the Federal Reserve.
1983-2008 The massive credit bubble was created by providing artificially low interest rates and relaxation of lending standards (promoted by the Government.
1994 Long Term Capital Management, a hedge fund, was founded and failed. In 1998 it lost $4.6 Billion in four month, the first example of derivatives failure. Mathematicians used formulas to determine derivative risk probability… unsuccessfully.
In 2000, Credit Default Swaps became a tool for financial speculation when the Commodity Futures Modernization Act of 2000 specifically barred regulation of these trades.
2000-2008 Credit Default Swaps (de facto insurance of sub prime mortgage securities) were effectively endorsed by the ratings agencies who issued "AAA" ratings to toxic debt because it has Credit Default Swaps (CDS) insuring its value. Issuers never used the term "insurance" since it would then be subject to regulation and capital requirements. Thus if the issuer went out of business the worthless security would be re-valued at its underlying value- toxic debt.
When you borrow from the bank, you are a "servant to the lender". However, when the bank receives deposits from a customer, they are "servants’ to the lenders (depositors). When I deposit $1,000 into a bank, my $1,000 is carried as a liability on their books. In turn they will typically loan about $900 of that money to a borrower. Currently, they will charge about 7-9% and pay me 1-3%. Effectively they make 4 to 8% interest on the loan. The borrower will not use up all the loan so part of the money will go into his checking account. That money goes through the same process as above and it is called "the multiplier effect". When things are going smoothly the banks make a lot of money on "our deposits". What would happen if I pulled out my $1,000 and bought gold or silver with it? It is removed from the banking system and the system contracts in the reverse of the multiplier effect. This is why the central banks around the world are suppressing the price of gold and silver. They do not want the average depositor converting their bank deposits to gold and silver thus removing it from the credit system. Once out of the system, it is out of their control.
You now know why the U.S. Congress included the FDIC increase from $100,000 to $250,000 in deposit insurance. They have been told privately that there may be a "run" on the banks.
In volatile times how do you protect the wealth you have spent your entire life to attain? There is only one store of value that has no liability attached to it- gold (or silver). The U.S. Dollar is a Federal Reserve Note. A Note has a liability attached to it. Prior to Federal Reserve Notes, the U.S. Treasury issued Silver Certificates (backed by silver). Those are gone, taken out of circulation intentionally.
Executive Order 11110 was issued by President John F. Kennedy on June 4, 1963. The Order was for the Treasury to issue silver certificates against all silver held by the government which did not already have certificates against it. The Order was needed due to the passage of Public Law 88-36 which repealed the Silver Purchase Act and other related monetary measures. One result was that after the repeals, only the President could issue new silver certificates. The Federal Reserve System could replace the certificates, but only in larger denominations. The thrust of the Order returned the authority to issue new silver certificates (and specify denominations) back to the U.S. Treasury. He plan to issue $4.3 Billion which would have replaced the demand for Federal Reserve Notes and take back control of the nation’s currency.
Kennedy was assassinated on November 22, 1963. After Mr. Kennedy was assassinated just five months later, no more silver certificates were issued.
I recommend each family keep at least one to two month’s expenses in cash. If the large depositors (over $250,000) decide to move their money away from the U.S. banking system, a bank holiday (temporary closing of all banks) could be proclaimed until the leaders could figure out what to do about the crisis. Will it happen? Only Our Heavenly Father knows. If it does happen we must be prepared. Until these volatile times have passed, cash in hand is "king. You can always redeposit the cash after the crisis window has passed.