Safeguarding your Wealth - Understanding Systemic Risks
Systemic Risk - What is that?
From Wikipedia: “In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system.”
One important understanding about systemic risks is that the taxpayer (you and me) will always have to pay the bill. A bank goes bust and bailed out: Taxes rise. A bank goes bust and bails-in: We lose our deposits (in part or full, depending where you are located).
Safeguarding against systemic risks should be a vital part of every investment portfolio structure and set-up. Let’s have a look at current systemic risks.
Negative Interest Rates
First, above all are negative interest rates. The taxpayer is paying the bill actually three-times since 2008. It is an ongoing expropriation of savers. There is no more return on savings accounts, all standard plans do not work anymore. As a result you’re leaking revenue. That’s #1.
#2 is rising taxes and state expenses. After the big bail-outs taxes and government deficits increased. Governments continue to find new hidden ways to tax citizens.
#3 is the “hidden” inflation in form of ever rising health insurance and food prices.
European Deposit Insurance Scheme
Draghi announced the „European Deposit Insurance System“ is no longer needed as the system is stable enough. https://ec.europa.eu/info/publications/commission-proposal-european-deposit-insurance-scheme-edis_en Currently the European Deposit Insurance System covers a maximum of 100,000 EUR:
- per institution, not „bank“
- per individual account holder
Example Ireland: Ulster Bank and RBS is owned by UK Financial Investments (State owned). The Irish Government owns: AIB, Bank of Ireland and Permanent TSB
Example Germany: Deutsche Bank owns: Deutsche Bank, Postbank, Norisbank, Berliner Bank and DSL bank.
“A liability is a future debt or performance obligation that one party owes to another at some future date in time. It is commonly settled through a payment or performance of a service. An Unfunded Liability is used to describe any liability that does not have savings set aside for it.” From generationscrewed.ca
Forbes reported there’s $210 Trillion in unfunded liabilities. We see unfunded liabilities in all developed nations in the national health and pension system. This also includes corporate pensions. These unfunded liabilities are addressed by decreasing services and rising the cost for the individual. The fund managers also increases risk in the portfolios by adding stocks and real estate.
This is not currently a major a threat to systemic stability as it is an adaptive mechanism. If you ever wondered why you always have to pay more out of your own pocket, the above is the explanation.
Over 10 years after the financial crash in 2008, the derivative exposure again exceeds $600 Trillion. Deutsche Bank alone carries 46 Trillion Euros in derivatives. The Financial stability board performs stress tests and oversees systemic risk for the major financial institutions.
Any of those institutions -if in distress- will cause disruptions to the overall liquidity of the system. Bail-outs are out of question, bail-in is the new game in town.
It should be common knowledge by now: All currencies on the planet are fiat currencies. All the Euros and Dollars are created out of thin air. Fiat is latin and means “let there be”. So our entire global financial system is faith-based. The two Harvard professors that wrote “This time is different - Eight centuries of financial folly” stated: Hyperinflation can only occur in fiat-currency systems.
I say: hyperinflation starts when trust goes out of a currency. Faith is a deeper level of trust. Our global currency-out-of-thin-air-faith-based-system is a bit like religious faith. People don’t believe in god because it’s obvious. People believe in god because it’s mysterious. Mysteriously when getting up in the morning we somehow believe the Euros, US-Dollars are worth something.
Luckily the myths about the global financial system are easy to uncover. Should this be new to you, then start reading up. Wikipedia is good point to start:
History of Government Failure
Governments have a 100% track record in letting people down, they only serve themselves. If you’re a billionaire this is not of your concern. If you’re a millionaire then, yes, this should be of your concern, especially when you’re approaching retirement.
The book “This time is different - Eight Centuries of Financial Folly” is considered to be one of the top 5 influential books in modern economics. You will find a short summary in the link at the end of this article. It is a highly recommended must-read.
What governments have done in the past to confiscate wealth
- Currency devaluation by 99% - Usually caused by hyperinflation (1 - see link at the bottom)
- Judgment creditors mortgage - A governmental mortgage put on peoples home to be paid off to the government
- Bans and
Light at the End of Tunnel: Safeguard your Wealth and Allocate Outside the System
There’s three ways to allocate outside the system, all three options have their unique properties:
Cash can be stored outside the banking system. It is recommended to have a cash reserve of at least 3 months of your monthly expenses. It can be stored safely in a safety deposit box.
Gold and Silver
Gold and Silver - when owned in physical form- do not carry any counterparty risk and can be redeemed in any currency around the globe. Gold and Silver can be bought anonymously for cash. See link (2)
Crypto currencies have a lot of properties but is not suitable as a store of wealth at this moment in time. It is still an investment, but not to be missed in any portfolio. The biggest advantage of Cryptos is, you can easily take it with you to any country. But 95% of cryptos will go the way of the dinosaur. Only the physical precious metals have a long history of wealth preservation. ; Also most cryptos are not really private and fungible. Do your own research.
So sum up on systemic risks:
- We cannot change the system but we have enough freedom and power to create an alternative reality.
- We need currency in order to make a living and be part of the marketplace.
- We can allocate a fraction (higher or lower, rule of thumb is 20%) of our investment portfolios into “outside the system” assets, such as cash, gold and crypto currencies
- When the outside world changes, we will always have options
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