The Raw Deal

We stepped out on our front stoop Wednesday morning and paused to take it all in.  The sky was at its darkest hour just before dawn.  The air was crisp.  There was a soft coastal fog.  The faint light of several stars that likely burned out millennia ago danced just above the glow of the street lights.

 

And this is what they saw watching the sky from Mt. Wilson that night…

 

After a brief moment, we locked the door behind us and got into our car.  Springtime southern California mornings are exquisitely pleasant.  The early morning drive to downtown Los Angeles, on the other hand, is exquisitely painful.

Nonetheless, we make the best of it like we make the best of a trip to the dentist – or a visit with our accountant.  If anything, it affords us the opportunity to do something most people rarely do.  In particular, it gives us time to think.  Before we knew it we’d reached our destination.  But not before uncovering half dozen unrectified incongruities.  The sorts of things that are futile to piece together.

One thing that stuck in our craw like a broken chicken bone is the raw deal main street depositors and lenders get from credit unions and commercial banks.  In short, the credit system is tilted against them.  The rules of the game favor the bankers.

 

Extreme Maltreatment

Perhaps the rules of the game have always favored the bankers.  Loaning out deposits at a higher interest rate than the yield paid is cornerstone to fractional reserve banking.  However, the extreme maltreatment of individual depositors and borrowers that has persisted following the 2008 credit crisis is a downright disgrace.  Where to begin?

The prime rate, if you recall, is the benchmark used by banks to set rates on consumer loans.  These consumer loans include credit cards, auto loans, and home equity loans among others. Obviously, the prime rate is reserved for only the most qualified clients.  These are primarily corporations.  Not individual customers.  Certainly, they’re not your typical credit card user.

 

Prime Rate vs. Federal Funds Rate (effective, daily). As its name indicates (nomen est omen), the prime rate is reserved for the best credits who have some leverage in negotiating conditions – click to enlarge.

 

Individual customers typically pay the prime rate plus a percentage above, based on their default risk.  When the Federal Reserve raises or lowers the federal funds rate the prime rate moves in tandem.  Similarly, the variable rate paid on credit cards and other lines of credit also moves up or down accordingly.

The prime rate, based on The Wall Street Journal’s consensus survey of the 30 largest banks, is presently at 4 percent.  For perspective, the typical credit card rate these days has an annual percentage rate (APR) on the order of 16 percent – or more. This is all well and good, of course.  No one’s twisting the consumers’ arms and forcing them to take on debt.

To the contrary, consumers are eager and addicted to the readily available credit card debt the banks offer. Still this doesn’t change the fact that main street depositors and lenders continue to get a raw deal.  This, indeed, is a fact.  There’s no guesswork or conjecture about it.  Rather it’s a matter of simple math.

 

Average assessed credit card interest rate since ~2000. Interestingly, these rates went to far lower levels in the 2001 – 2002 downturn, presumably because average consumer credit scores were still much better at the time. Note that the 13.86% average is as of February 2017, i.e. the figure predates the most recent rate hike. It’s also not what consumers pay typically – click to enlarge.

 

Simple Math of Bank Horse-Puckey

As noted above, the typical credit card APR for individual consumers these days is on the order of 16 percent.  But if an individual loans their money to the bank, in the form of a savings deposit, do you know what the bank presently pays in return?

 

Let’s not complain too much, they mean well!

Image credit: Honest Thieves

 

The typical annual percentage yield (APY) on savings deposits is not 1 percent.  It’s not even 0.1 percent.  Rather, it’s about 0.01 percent; which is effectively less than zero after inflation.

What’s more, if an individual loans $10,000 to the bank for an entire year, in the form of a certificate of deposit (CD), they’ll get an APY of about 0.35 percent.  No doubt, an APY of 0.01 percent on deposits and 0.35 percent on 1-year CDs in the face of 16 percent APR on credit card debt is an utter insult.

Conversely, the banks have never had it so good.  They borrow from the Fed at less than 1 percent interest.  Then they buy U.S. Treasury notes – currently the 10-Year note is yielding 2.24 percent.  After that they issue credit to consumers at 16 percent APR while paying 0.01 percent yield on savings deposits. Has there ever been a more questionable business that’s given every advantage under the sun?

 

Give us your money, suckers! The Fed’s rate hikes have clearly affected loan rates – the same cannot be said of interest paid on the deposits of the army of suckers who hold altogether USD 9.2 trillion in savings deposits at US commercial banks. Somehow, the banks failed to pass on the rate hikes in this case. We reckon this happy oversight translates into a fat net interest margin boost – click to enlarge.

Incidentally, Bank of American reported first quarter earnings this week of $0.41 per share, beating analyst expectations by a whole $0.06 per share.  How did they do it?

“Our approach to responsible growth delivered strong results again this quarter,” CEO Brian Moynihan said in a statement. What’s responsible growth?  Is it like responsible drinking, or an honest thief? According to the BofA website:

 

“Bank of America has transformed into a simpler, more efficient company focused on growing the real economy in a way that creates tangible value for our business, our customers and clients and the communities we serve.

Through our strategy of responsible growth, we are driving the economy in sustainable ways—helping to create jobs, develop communities, foster economic mobility and address society’s biggest challenges around the world — while managing risk and providing a return to our customers, clients and our business.”

 

One honest thief meets another… he probably shouldn’t have worried.

Cartoon by Peter C. Vey

 

What a load of horse-puckey.  Tangible value is only created for certain customers.  That is, shareholders.  Not depositors.  The point is in today’s fiat money financial system, where debt is money and money is debt, the house always wins.  Place your bets accordingly.

 

Charts by: St. Louis Fed

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • The Future of the Third World
      Decolonization The British Empire was the largest in history. At the end of World War II Britain had to start pulling out from its colonies. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.   The colors represent the colonies of various nations...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Why There Will Be No 11th Hour Debt Ceiling Deal
      Milestones in the Pursuit of Insolvency A new milestone on the American populaces’ collective pursuit of insolvency was reached this week. According to a report published on Tuesday by the Federal Reserve Bank of New York, total U.S. household debt jumped to a new record high of $12.84 trillion during the second quarter. This included an increase of $552 billion from a year ago.   US consumer debt is making new all time highs – while this post GFC surge is actually...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...
  • Bad Ideas About Money and Bitcoin
      How We Got Used to Fiat Money Most false or irrational ideas about money are not new. For example, take the idea that government can just fix the price of one monetary asset against another. Some people think that we can have a gold standard by such a decree today. This idea goes back at least as far as the Coinage Act of 1792, when the government fixed 371.25 grains of silver to the same value as 24.75 grains of gold, or a ratio of 15 to 1. This caused problems because the market...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com