Could the debt-ceiling debate endanger my deposits?
December 30, 2013
Q: In light of the recurring debt-ceiling issues facing our country, should I close my money market accounts and put them in regular savings, or cash out and put the money under my mattress?
A: The debt ceiling issue is serious, but it important not to let it panic you into doing something rash with your money. Certainly, banks are a safer option than your mattress. The following are some of the issues you should consider:
- Money market vs. savings accounts. It is not clear what you would accomplish switching your deposits from a money market account to a savings account, unless you are referring to a money market mutual fund. If you have a money market or a savings account at a bank, it should be equally covered by FDIC insurance, up to the $250,000 limit. However, money market mutual funds are subject to different risks, and are not covered by FDIC insurance, so switching from one of those funds to a bank deposit account could better safeguard your money.
- The source of FDIC insurance. Speaking of FDIC insurance, if you are concerned about the government's ability to meet its obligations, you may have concerns about this insurance. However, it is important to know that FDIC insurance is independently funded, via a levy on participating institutions. It is true that in the event of a widespread banking crisis help from the U.S. Treasury might be needed, but it should be noted that the FDIC insurance system survived the widespread bank failures of the last financial crisis.
- Banks vs. your mattress. Having a large amount of cash in your home exposes you to risks like fire and theft. It also does not protect you if the U.S. government managed to trash the value of the dollar through inflation.
- International diversification. Depending on how much savings you have, perhaps diversifying a portion of it internationally, via mutual funds that concentrate in foreign stocks, would be an effective way of reducing your financial exposure to the U.S. -- though this country's economy is always going to have a significant impact on markets around the world.
Your concern is understandable, and it is the type of thing every member of Congress should take note of before engaging in the next game of political chicken over the debt ceiling. If people in this country are fed up to the point of contemplating pulling their money out of the U.S. financial system, how do they imagine foreign investors feel? It seems only a matter of time before those investors start to shy away from investing billions in a country that is threatening to fall short of its financial obligations with increasing frequency.
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