Don't Hold Too Much Cash in the Bank

 

 

 

 

 

 

 

 

 

 

Every financial crisis is different. COVID 19 is different from 2008, which was different from the dot.com crisis of 1999.  

 

One thing that most crises have in common is the Pavlovian response of central banks to these crises. They cut interest rates in the hope they can electrocute the economy back into coherence. Cheaper money nudges consumers to borrow money to finance their buttocks augmentation surgery and the post-operation Louis Vuitton butt pillow. As interest rates move closer to zero in some countries and deeper into negative territory in other countries, the return on your bank cash savings starts to look uglier than your hairy aunt Mavis after a late night of poker and gin with the girls.  How many times have you heard the advice that you need to save a portion of your salary every month and put it into a savings account? Let me outline 3 reasons why this is a losing strategy:  

 

1) Cash is a paper asset that has no intrinsic value

Ever since the world moved off the gold standard in 1971, cash stopped being an asset and turned into a liability. Before 1971, you could take your bills to the central bank and exchange them for the equivalent value in gold. Now, if you go to the central bank, they will just give you newer paper of the same value. This paper is nothing more than an IOU backed by the full faith and credit of that bank, and one thing we learned after the 2008 financial crisis is that high-quality banks can fail.  

 

2) Interest rates are at record lows

We are living in a world in which interest rates are at record lows. More than 1 trillion US dollars of bonds were paying NEGATIVE interest rates in 2020. A negative interest rate means that if you invest 101 today (for example), you will receive 100 when the bond matures. This is nuts – it means that you are paying the bond issuer to look after your money.    

 

3) Missed opportunities

When you lock your money into a savings account, earning record low returns, there is an opportunity cost (in addition to an inflation cost).  So instead of saving money, look to invest the money and make that money work for you. Warren Buffett, possibly the greatest investor ever, became one of the world’s wealthiest people through investing – not through saving.