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Thursday, July 16, 2015

The Truth About Banking

The above cartoon from the mad genius Scott Adams illustrates the truth about banking in Western civilization (and probably the other civilizations as well).

You see, when you put your money in a bank, what you are effectively doing is loaning the bank your money on their terms (why do you think it’s called a “Debit” card?).

That doesn’t seem so bad, until you realize that their in the business of making loans and you’re just a rank amateur when it comes to their business.  You see, they are masters of making making loans and selling debt.  If they weren’t, they’d be out of business, assuming that the government doesn’t bail them out.

The point is that the banks use the money you’ve loaned them (it is no longer your money when you deposit it) and loan it out to other people, businesses, and governments in order to turn a profit on the interest they charge.  This is how they invest.

So when you are depositing money into your bank, think of it as investing in them to make good investment decisions.  But most customers don’t give a damn about the big banks they have their money tied up in.  They look at banks as a generous company who is willing to hold on to your assets for free.

I say you invest in local banks and make sure you keep up to date on who or what they are loaning money to.  Otherwise, you may wake up one day and find that there is no money in your checking account and the FDIC is flat out broke.

It sucks that this is the way it is, but it is important that you treat them like a financial investment firm and not like a free money holdings firm.  Because the latter doesn’t exist.