What Are These Central Banks After?


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Recent news from Europe prompts a quick offer of perspective.  The president of the European Central Bank (ECB), Christine Lagarde, recently announced plans to launch a digital version of the euro. The Banks of England, Japan, and Canada quickly made similar announcements, as did the Swedish Riksbank and the Swiss National Bank.  All this follows an announcement late last year that the People’s Bank of China (PBOC) would launch a digital yuan.

The word “digital” tends to dazzle many people and make them feel as though any such effort is welcome –– that it would be more modern and better than what had existed.  But that is not what is going on here.  The banking systems in these countries, including China, already do a fine job of digitizing business and individual transactions with all the modern speed and convenience people associate with the word “digital.” The central bankers’ real reason for a digital currency is not modernity or safety or convenience, or any other of their stated explanations: their real reason is control.

These central banks want to drive out paper currency because it is the last method by which people and businesses can perform their transactions anonymously.  If digital alternatives to paper money can do that –– and they can –– then the authorities will have the ability to track everybit of business, no matter how innocent or small.  Existing arrangements already facilitate much government surveillance.  Banking, even before it was digitized, left a record that could be made available to the authorities.  Credit and debit card transactions certainly do the same.  Even the so-called “shadow banking system” –– on-line lenders that are separate from the established banking institutions –– leaves an electronic record of who is doing what.  Only paper currency leaves no trail to follow.

Aside from any government’s seemingly constant desire to know all and control all, there are legitimate reasons to get rid of anonymous transactions.  For one thing, they often support criminal activities, including the worst sin of all as far as governments are concerned: tax evasion.  Anonymous transactions allow people to hide their spending, making it hard for the authorities to compare it with their declared income.  Anonymous transactions might also allow people to send assets out of the country when the government would rather they did not.  Still, this recent quest to surveil leaves an uneasy feeling –– if not a down right creepy one –– that the digital payment system(s) will reach the point where one cannot stop for a cup of coffee or tea or buy a snow cone for a child without an official electronic record of the transaction.

Perhaps the need to snag tax-evaders and those committing other crimes is worth the loss of privacy.  This would not be the first time that people voluntarily gave up something for the sake of some collective interest expressed by the authorities.  But the press by these central banks, especially the ECB, carries no little irony and hypocrisy when set against Brussels’s histrionic outrage about the dangers to privacy from technology platforms like Google and Facebook. At least with the private platforms, people have the option of walking away.  They won’t be able to do that from a completely digitized currency.


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Of late my inbox has filled with suggestions from my bank that I transfer some of my savings account into certificates of deposit (CDs).  The e-mails from my bank correctly point out that, because the rates on conventional savings accounts are lower than the rate of inflation, I am actually losing purchasing power on the money I leave there.  They suggest that the purchase of CDs paying a higher rate can remedy my situation. Some readers and friends have received similar messages and have asked me how to respond.  The short answer is that the banks could have a very good idea. But as I have pointed out often in these posts, it all depends on your personal needs and plans.

The decision must involve more than just comparative interest rates.  Because CDs involve the commitment of a sum of money for a set period of time, the first question to ask yourself before buying one is: “How much money do I need in ready cash that I can get at a moment’s notice?”  That amount should remain in your savings account. The number, of course, will depend on your personal circumstances.  Aim to hold between three and six months worth of expenses in ready savings to deal with emergencies –– most especially if you lose your job. Where you fall in that three- to six-month range depends largely on your answers to two questions:

  1. If you have a spouse or partner, do they have a paying job? If they do, you probably need less. The three months of expenses should cover emergencies, such as having to replace a roof, or at least give you a good start on covering such expenses.  If you lose your job, this other income can cushion your household from that loss, reducing your need for ready cash.
  2. Is your job secure? If you are a civil servant or belong to a strong union, you are less likely to suffer a job loss than, say, if you work on Wall Street or in industrial employment, where slowdowns can lead quickly to layoffs.

The other consideration on a buying a CD depends on your personal plans.  You may have built up your savings account to make an investment move or to make a large purchase of a car, for instance, or a new kitchen or even a house. If you want to do that in the very near future, then the CD will not suit you, because most CDs require that you tie up the money for several months.  But if you expect you won’t need the money for at least a year, then a CD can earn you more and you can accumulate savings at a faster rate.

There are all sorts of CDs, and they have all sorts of provisions.  Once you have decided you want to buy, you will need to consider these and understand how banks quote the rates of return on various CDs.   This earlier post outlines those options.


Certificates of Deposit

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With short-term interest rates above their lows, the popularity of highly liquid, insured accounts has returned.  Bank savings accounts are an option.  An earlier post focused on these and their like.  Because banks and other financial institutions pay a higher rate the more money you are willing to commit and the longer you are willing to leave it, certificates of deposit, (CDs) present an attractive alternative.

CDs commit you to leave a set amount, for a set time, with the financial institution for an agreed interest rate.  Because the financial institution can better plan what to do with the money than with a savings account (where the institution cannot anticipate how much and when you may withdraw), it is willing to pay a higher interest rate.  Financial institutions sell CDs in amounts of $1,000, $5,000, $10,000, up to $100,000, and sometimes more.  Like bank accounts, the FDIC insures these up to $250,000.  Some brokers also offer CDs.  These are not FDIC insured, but often the issuers make insurance arrangements with a private insurance company.

If you decide to buy a CD, make sure you can leave the money for the entire term, because there’s usually a penalty for early withdrawal. Some banks offer “liquid CDs”  –– these allow the withdrawal of funds without penalty before the stipulated term, but they usually pay lower rates than conventional CDs.  If you buy your CD through a broker, you may have the option to sell it back before its term expires, but this almost always lowers the interest rate.  (That broker will then resell the CD on what is called the “secondary market.”)

Some CDs offer flexible rates that rise if market interest rates increase. Typically, these guarantee that the rate originally quoted to you will not be lowered. Some banks will also let you set the terms of your CD.  These so-called “designer CDs” can be useful for savings aimed at college tuition, for instance, or other expenses where you know the approximate date you will need the funds.  These, too, often pay a slightly lower rate than conventional CDs, though typically not as low as liquid CDs.   Note that these flexible and liquid CDs have become less common in recent years.

Shop around.  CDs vary considerably from one institution to another, and rates can differ by as much as a full percentage point. The Internet offers the saver a great tool for making such comparisons.  All bank websites have information on all their services, including the rates on CDs and the associated conditions on term, early withdrawal, and the like.  Be careful: marketing often make things look more attractive than they really are.  Here are a few points to consider:

  • The tease: Some CDs offer a relatively high interest rate up front but after time pay a much lower rate.  Know how long the higher “teaser” rate will last.
  • How the bank/broker treats maturity: Will you receive timely notice when your CD is about to reach term and can you then roll it over automatically into another, similar CD, or can you stop the process?  Be sure you understand the rate offered by such a “rollover.”
  • Calculation of interest: Know whether the interest rate quoted is simple or compounded.  The best you can do with a simple rate is what is quoted up front.  A compounded rate, However, will calculate the interest periodically and post the interest to your account.  Because each interest calculation will include the interest previously paid, you will effectively earn interest on the interest, as described in several earlier posts –– a far more attractive arrangement than receiving simple interest alone.  For instance, a one year a CD that compounds daily will pay you 0.15 percentage points more for each 1 percent of quoted interest.  When compounded that way, a one-year CD quoting, say, 1 percent would effectively pay 1.15 percent.  A CD quoting 2 percent would effectively pay you 2.31 percent.  Though it might not seem like a lot, a $50,000 CD quoting 2 percent interest, would earn an extra $155, enough to justify making sure you’re getting the compounded rate.


The Mysterious Allure of Bitcoin

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Bitcoin has had a wild ride.  It entered 2018 roaring up more than 280 percent from a little over $4,500 a coin late in 2017 to $17,429 by the first week of the new year.  By week two, it had fallen some 35 percent to $11,403.  From there it fell farther, some 48 percent, to $5,903 by late June, not much above where it was toward the end of 2017.  It then climbed some 42 percent to $8,424 by late July and then fell some 27 percent to $6,184 by the middle of August. It has bounced around near that price since.

The initial 2018 gain sparked much interest.  The word, Bitcoin, seemed to be on everybody’s lips.  CNBC reported on it almost hourly.  It was the first question from anyone who knew I was in the investment business – friends, relatives, the man behind the counter at the Madison Restaurant on Manhattan’s East Side, where I go for breakfast, the fellow at TSA who asked my profession.  I gave everyone the same warning, not about this particular investment but rather about anything that soars as fast as Bitcoin.  I also asked if they knew what Bitcoin was besides something that had gained value very fast.  When it became apparent that no one had the slightest idea, I could offer another warning: never invest in something you do not understand.

What is Bitcoin

Some say this is a new kind of money.  Some journalists call it a crypto-currency, apparently because it is created through an encrypted algorithm.  The U.S. Treasury classifies it as a commodity, though unlike tin or gold or wheat, it is created entirely through its algorithm.  I suppose we could call it a synthetic commodity.  It certainly behaves more like a commodity than money: During periods of enthusiasm, its price skyrockets only to fall precipitously in response to investor doubt.

Bitcoin and other similar but less famous creations are products of a remarkable mathematical innovation.  Referred to as blockchain, it can control the supply of something made entirely by people.  Its algorithms also allow participants to verify trades as well as Bitcoin ownership even as they ensure anonymity.  This is why the system is also often described a distributed ledger.  (The mathematics behind this system are complex, and even if I could master them, this is not the place to go into their intricacies.)

Suffice it to say that because of these characteristics Bitcoin and its blockchain competitors are described and often offered as substitute money.  The prospect of them as money has appeal to many.  Until the advent of blockchain, the only way to control the supply of money and verify ownership came through the centralized record keeping of the banking system, which in the United States includes the Federal Reserve, the Treasury (which itself includes the Office of the Comptroller of the Currency.)  These institutions might not know just who has cash in hand or what he or she is doing with it, but they do know to the penny how much exists and they control that amount of currency in circulation.  At the same time, the banking system knows who owns which account and how much is in it.  Blockchain, with its unique distributed ledger, offers an anonymous alternative. 

Its Use and Its Future

 Because Bitcoin and other crypto-currencies offer this anonymity, they are especially attractive to those who would rather not have their dealings recorded in any government-related system.  Blockchain currencies are untraceable, like $100 bills or gold bars, but they’re even more attractive because they have none of the clumsiness (or possible drama) of a suitcase full of bills.  They can move in the millions even billions through the Internet — an impossibility with paper money and gold bars, at least not with anonymity. It speaks to these qualities that Russian and Venezuelan officials have expressed hopes that such virtual currencies will enable their countries to end run American sanctions.

Many people forecast that Bitcoin and its kin will soon replace today’s national currencies – dollars, pesos, pounds, euros, and so on.  Bitcoin(s) could become money as long as everybody is willing to accept payment in them and believes them to be “safe.”  At the very least, that day will have to wait until Bitcoin leaves behind the wild price swings that have marked it so far.  To become a dominant currency Bitcoin must also jump significant political hurdles. Governments have no desire to lose control over their ability to create and verify the ownership of money.  Several countries, fearful of just such substitutions for their currencies, have already banned the use of Bitcoin and other crypto-currencies.  The United States, Japan, and the European Union have not gone this far — yet.  But should a day of reckoning arise, it’s a good bet that governments will impose control, and Bitcoin, whatever its future as a synthetic commodity, will fail as a substitute for money.  For the investor, then, Bitcoin becomes another potential addition to his or her portfolio, but one with more risk than many, and less predictability.



Alternatives to Commercial Banks

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In an earlier post, I offered guidance on choosing a bank for your savings.  Even the smallest investors, however, have alternatives.  Savings banks, though fewer than they once were, might suit some people better.  Credit unions can also take small deposits and support larger ones, too.  This post considers these two alternatives.  (A later post will take up how the U.S. government offers secure savings bonds and will also touch on the growth of exclusively on-line banking.)

Mutual Savings Banks

These resemble commercial banks.  You need to examine much the same issues as discussed in my September 2, 2018 post on commercial bank savings.  (Use the above link if you want a refresher.)  Otherwise, savings banks have fewer lines of business and they focus more on the saver.  Effectively, all they do is collect savings deposits and then lend them out — usually to mortgage borrowers.  They do not have stockholders as do commercial banks.  Rather, depositors in effect have an ownership stake in the bank proportional to the size of their deposits.  After expenses, the managements of these banks pay out in interest to their depositors all the returns from their lending.

Such arrangements appeal to many.  These depositors feel they’ll get better treatment and earn more than they would in a commercial bank, where the first obligation of management is to its stockholders and not to its depositors.  But other considerations may offset these advantages:

  • Though figures vary, most savings banks do not pay higher rates on their deposits than commercial banks.
  • Because savings banks tend to be smaller than commercial banks, they are less convenient, having fewer ATM stations, for example, and less of a presence elsewhere in the country, and certainly abroad. Many savings banks allow access to the same ATM networks as commercial banks, but that arrangement forces you to use another institution’s ATM. Find out if any savings bank you’re considering has such networking arrangements and what fees are involved.
  • All these drawbacks are particularly applicable when it comes to foreign exchange transactions.
  • Because savings banks otherwise tend to be smaller institutions, safety considerations cut both ways: Their smaller size suggests they have more limited resources to meet difficulties, but at the same time, they are less likely to encounter the problems that might face broad-based commercial banks when they venture into more exotic activities.
  • Because savings banks do not trade on public stock exchanges, it is harder than with commercial banks to get information on the strength of their finances.  Credit rating agencies have little interest in them.  However, such information is available from the Federal Deposit Insurance Corporation (FDIC) at http://www.fdic.gov.  Also, Veribanc (veribanc.com) includes ratings on savings banks and will provide them to you for a fee.

Credit Unions

Credit unions appeared in the early 1900s.  They were designed to help working people who couldn’t qualify for loans at commercial banks.  Members of the credit union pooled their funds to establish not-for-profit cooperatives with the aim of lending to one another.  Because credit unions lack any concern for profit and stockholder return, they typically paid a little more on deposits than commercial banks, though the returns vary from union to union.  This difference has grown less significant of late.

By law, credit unions must form themselves around what the authorities call a “common bond,” usually employees of one company or government agency or members of the same church or club or even people who just live in the same neighborhood.  Depositors, rather than establish an account, as they would at a commercial or savings bank, buy shares in the union.  The value of their account is expressed as shares, though, practically speaking, these are much like bank deposits.   In smaller credit unions, member volunteers do most of the work, while larger unions maintain paid professional staffs.

As with savers at mutual savings banks, savers at credit unions say they feel more comfortable than at commercial banks.  They anticipate higher rates than at for-profit institutions, and they like the sense that, as members, they are the main focus of the union, especially compared to a large commercial bank.

There are drawbacks, however, especially with smaller credit unions, and they are similar to those of savings banks. Credit unions cannot offer the range of services available from commercial banks and they also lack the convenience of having many locations and a broad network of ATMs, as well as relationships with other financial institutions.  Smaller unions, run by inexperienced volunteers, may feel inadequately staffed.


 Most mutual savings banks have FDIC insurance under exactly the same terms as commercial banks: each depositor is insured for up to $250,000.  Make sure the savings bank you are considering is a member of the FDIC.  Although credit unions cannot participate in FDIC arrangements, they can acquire insurance through the National Credit Union Insurance Fund (NCUIF) run by the federal government’s National Credit Union Administration (NCUA).  It offers depositors (shareholders) insurance on deposits up to $250,000.  State-chartered credit unions may use the NCUIF or have state or private insurance for their depositors.  If you are considering a credit union, find out which insurance, if any, it carries.

Aside from insurance questions, assessing the finances of these institutions is a bit more difficult than with commercial banks.  As in the case of savings banks, credit rating agencies have little interest in evaluating unions because of their mutual character – that is the absence of stockholders. You can find out about credit union finances on the NCUA website.  www.ncua.gov.