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The Fiscal Cliff is a Mole Hill Compared to This

Everyone is afraid of falling off the "fiscal cliff." But there's another dangerous countdown clock about hit to zero.

And no one is talking about it, even though it will spell even more financial problems for us all.

At midnight on December 31, 2012, the Transaction Account Guarantee (TAG) program will expire.

The TAG program was initiated at the height of the credit crisis when depositors were fleeing banks for fear they would go under.

To quell what was turning into a run on banks, the FDIC upped regular deposit insurance from $100,000 to $250,000 and under the TAG banner initiated unlimited insurance for all non-interest bearing transaction accounts.

It's the second part that's important because that's the piece that will soon come to an end.

When the unlimited insurance expires, corporations, businesses and depositors — whose soon- to- be- uninsured deposits, which total some $1.4 trillion, are likely to flee smaller banks — will rush into money market funds and seek the safety of short-term U.S. Treasuries.

This will create serious negative repercussions affecting our economic future.

The Unseen Perils at the Bottom of This Cliff

Here's how each of those actions will affect the economy and you personally.

First, the too-big-to-fail (TBTF) banks that created the credit crisis and spawned the Great Recession are much bigger now than they were in 2008, and are about to get even bigger.

Because the failure of any one of America's big five banks would implode the global financial system, they will never be allowed to fail. That makes them a fortress for depositors, regardless of expiring guarantees.

The same isn't true for the smaller banks that will start disappearing.

U.S. corporations are sitting on at least $1.75 trillion in cash. Most of those funds are being held in checking and transaction accounts.

When the unlimited insurance on their deposits expires they will move some of their money elsewhere. But, on account of large payroll and other transaction account services corporations are reliant upon, a lot of that cash will still be parked at the biggest banks.

Cash on deposit at other institutions, greater than what will be insured, which is $250,000 since that higher insurance guarantee was made permanent, will gravitate to the big banks because of their fortress status.

But, it's not just big corporations that will park their money at big banks. Most other businesses that have transaction accounts with balances above the covered $250,000 limit will start moving their accounts to the TBTF banks for the exact same reason.

The problem for the economy is that TBTF banks are going to have to make bigger and bigger loans and orchestrate far-reaching lending schemes that encompass wide swaths of the population (as they did with mortgages) to accommodate the greater economies of scale their huge size demands. That's going to lead to massive concentrations of risk, which the TBTF banks have proven has been, and will be, their downfall.

Personally, for you and me as small consumers of banking services, there will be less competition, and borrowing and transaction costs will rise.

Community banks will start disappearing. Access to credit at the local level will be replaced by impersonal lending factories, which as a result of their economies of scale will not likely be willing to bear the one-off risks of financing small business start-ups and small business' credit needs, at least not without charging significant "risk premiums."

Second, in the Federal Reserve no-interest rate environment, depositors were more comfortable leaving their money in insured accounts than chasing tiny yields on the short-term instruments available to them. With the expiration of unlimited guarantees many corporations and businesses will start looking for some yield on their idle cash.

The reason they will start reaching for yield is that companies, whose treasury managers are counted on to shepherd cash balances, will want to add income to their huge cash hoards and can no longer justify parking cash just to be safe.

Money market funds will be the preferred parking place for a lot of that cash. Even though money market funds don't pay much, they allow quick withdrawals and are considered a good substitute for non-interest bearing checking accounts at banks.

But, there's a problem with money market funds. They aren't guaranteed.

They were back when the Federal government was guarantying all financial parking lots at the time of the crisis, but no more. The Securities and Exchange Commission has been trying to get money market funds to set aside capital reserves, like banks have to do, but to no avail.

What's potentially problematic is that if billions of dollars of cash goes seeking some yield in money market funds, fund managers are going to have to put those new monies to work.

And where do a lot of money market funds go to buy short-term interest bearing instruments so they can offer the best yields to potential billion-dollar customers?

Too often they turn to European banks issuing short-term paper, unfortunately.

If money market funds see huge inflows as a result of cash coming out of uninsured checking accounts, they will start reaching for yield themselves. And we know where that can lead the economy.

Personally, for the rest of us starving for yield, some of those money market funds may start looking more enticing. But, they aren't insured and you may be heading into a trap.

Even More Unintended Consequences

Lastly, and this is as convoluted and complicated as it gets, a lot of the cash coming out of bank checking accounts is going to go into short-term Treasury bills and notes.

The unintended consequences of that happening are going to spread through the capital markets and end up causing economic problems on top of the ones we already have.

Right now the Treasury issues about $30 billion of one-month T-Bills every week.

If the majority of the $1.4 trillion sitting in banks in soon to be uninsured accounts heads into these most liquid instruments it would take a year of issuance to satisfy that demand.

Now, don't forget, the Federal Reserve is buying some $45 billion a month of Treasuries and agency paper. And, what about money market funds? If they get flooded with cash, they too will be buying the short- term issues spit out by the Treasury.

Not to complicate things, but what happens if there is actually some deal on the fiscal cliff that results in smaller deficits? Oh, the Treasury wouldn't have to issue as much new debt as it doe s now.

The demand for short-term Treasuries could very conceivably turn their yields negative.

What happens then? As if corporations, pension funds, and people aren't yield starved enough. Will the further implosion of yields and the continuing destruction of fixed income cause everyone to reach further and further out on the risk curve?

It's already happening. Junk bond funds are seeing record inflows as investors are clamoring for yield.

And just like what's going to happen with money market funds, issuers of junk are rushing to soak up the cash being waved at them by the funds trying to place their customers' new money.

Personally, are you going to get caught up in that rat race and end up in another trap?

There's no question that the fiscal cliff is on everyone's mind and certainly front and center in the financial news and press.

But, if we don't look hard and fast at what could happen, and probably will happen when TAG becomes just another legacy of the credit crisis, we may miss the naked truth that the flames of the next great financial conflagration are being fanned starting January 1, 2013.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Cath | November 12, 2012

    This is one of the most informative pieces you have written. Thank you for enlightening us and thank you for your continually great work. You are appreciated.

  2. john alexander | November 12, 2012

    why not call it The First fiscal responsibility law or something catchy instead of fiscal cliff ? spending has to go down and revenue has to go up.

  3. Robert Kuiper | November 12, 2012

    What is the problem. Just get your money out of the US and set up a brokerage account in HK, Australia, Singapore, etc. That is precisely what the US is asking you to do. Get into a better financial situation out of the US.

  4. Nabil Assir | November 12, 2012

    Looking forward to the next "positive", brighter note, newsletter!

  5. K. Purohit | November 12, 2012

    Please review the " Presidential Term Limit". FDR had his four terms, rest will have TWO terms maximum. SO I save on your other predictions, plase stove them these are secured

  6. Peter Mac Isaac | November 12, 2012

    Under Bill Clinton with pressure from Tim Geitner as a lobbyist the Glass Steigel Act was repealed opening the flood gates for the financial market meltdowns. The only person in America with a viable solution to the problems was Dr. Ron Paul. The Obama legacy will be one of total financial ruin inherited from the Bill Clinton actions of an earlier decade.The chickens have now come home to roost in America . You folks had your chance and may I say, blew it royally. Best of luck. You are going to need it.

    • Mike | November 12, 2012

      You're right, as far as your argument goes. Clinton's role in paving the way for the disaster is routinely overlooked, and therefore the Democratic establishment definitely shares reponsibility. However you fail to mention the role of the Bush-the-younger administration in pushing the country to the brink. They started two wars which they then waged without paying for them – This, and the bloated Pentagon budget supported by both parties has played, and continues to play a key role in undermining of the financial stability of the US.

  7. jim | November 12, 2012

    Is a credit union an alternative to my community bank if it fails? They farred well during the last downfall of the big banks

    • Southern Girl | November 12, 2012

      I would think credit unions are safer than banks. My husband plans to rollover his 401k into our credit union IRA. Credit unions do not invest in the stock market. Their (non)profits are derived from loans to members, which in turn are given back to members in the form of dividends.

  8. rick baldwin | November 12, 2012

    I think this will be a good thing,ordinary people will have to redistribute their money as I will & big money players will have to use their fortunes more intelligently.

  9. Jon Beck | November 12, 2012

    …so wouldnt all of this make good dividend payers like Consolidated Edison and Verizon even MORE attractive…????…..

  10. ruperto nambio | November 12, 2012

    If american banks, american corporate, american individual investors find your country not a safe place before and after TAG, I recommend to park your cash in my country, the Philippines, now considered the tiger of Asia in investment. Call our PSE (Philippine Stock Exchange) and SEC (Security Exchange Commision) or even our President Benigno Aquino III, to help you. There are 44 more days to take the move of all concerned,avoiding TAG

  11. H. Craig Bradley | November 12, 2012


    I don't believe the Federal Government will be able to fully cover future losses in insured accounts in the event of a systemic financial collapse. Capital controls would become necessary. Corporations and Pension funds, including government employee pension funds, must keep money in interest paying instruments to meet required monthly payouts. They may find themselves taking-on the extra risks you mentioned inorder to generate some needed income.

    However, if the risks turn bad, how will pension funds account for the loss of capital? They will become underfunded if they are not already. Future retirees or current ones, if they live long enough, may get their income reduced. Private pension funds that fail go to Federal oversight with a payout maximum of $50,000/yr. Government employee pension funds must go to the agency they serve and ask for more funds. Local entities would have to contribute more money and it has to come from somewhere. Where will it come from? It may not be available and a Greek level financial crisis would ensue.

  12. eric taylor | November 12, 2012

    Do you think some of the under insured money will go into hard assets, or overseas to find a better yield? The average American homeowner will likely do little, but insurance coverage will likely be restored, after a lot of gridlock!

  13. Jere Reid | November 12, 2012

    Shan What about the money market accounts for IRA's 401K's etc that investment companys put the extra cash??? Are these going to be affected as well? Maybe they are guaranteed. What about it?

  14. david | November 12, 2012

    This raising the ante from $100k to $250k is absolute liars' poker. FDIC(K) doesn't have the resources for even a tiny fraction of the $100k, and the raising to $250k is sheer bluff. But everything's a con game now. The important thing is public perception, e.g., inflation "expectations", not reality.

  15. D.W. Androusky | November 12, 2012

    This sorry article must have posted and maintained by a badly disgruntled REPUBLICAN….Now that there is stability and purpose in our government you want to dissrupt solidarity with more confusion. There are many other things to be concerned about other than Obama running for a third term. F.D.R. did it, and it worked very well…..By the way sir….I used to be a republican.

    • Robert in Canada | November 12, 2012

      I don't see any hint of political bias in this article.

      The article just states some facts then offers some thoughts about what might happen next.

    • Justin | November 12, 2012

      If increasing the debt by over six trillion in four years, increasing food stamp participation from 32 million to 47 million in four years, increasing the price of all goods by printing trillions of bailout dollars in four years (I blaim Bush for this as well) and pretending the economy is improving with high unemployment (though real unmanipulated data shows higher unemployment) with the trillions spent then you are the foolish optimist!!

  16. Doug Miller | November 12, 2012

    OK … So the unanswered question becomes where should the short term emergency funds actually go if the primary goal is safety and yield (if any) is of minimal concern? It's one thing to point out everything that will likely go wrong, but what is the corresponding intelligent course of action?

  17. Gregg K | November 12, 2012

    Fiat $$, yet another violation of our rights. The gov’t constantly violates our rights.
    They violate the 1st Amendment by caging protesters and banning books like “America Deceived II”.
    They violate the 4th and 5th Amendment by allowing TSA to grope you.
    They violate the entire Constitution by starting undeclared wars.
    Impeach Obama.
    Last link of “America Deceived II” before it is completely banned:

    • Paulo B | November 12, 2012

      Impeach Obama? GW BGush started the useless wars in Afghanistan and Iraq. Why didn't you call for his 9impeachment?

      • Christopher de Vidal | November 16, 2012

        Paulo, unless you have a time machine I suggest you follow Gregg's advice.

  18. Kevin Donnelly | November 12, 2012

    We are talking about all the cash that is on deposit at almost zero interest rates, because safety is paramount for people in the Real World as a consequence of the behavior of those in the Alternative Universe of the Politicians, representing Left wing or Right wing ideologies.
    A blind and wounded giant stumbles toward an abyss!

  19. Kevin Donnelly | November 12, 2012

    "Our blind and wounded giant stumbles towards an abyss
    Was it for this
    That good men died to set us free?
    And others found the ways to overcome visicitudes
    that would compromise the promises.
    For we are bound by them
    and with all Veterans, on this day, proclaim again
    Our giant must be saved.

  20. Lowell Grattan | November 12, 2012

    Our president was a Community organizer educated by Saul Alinnsky. He is an organizer and not a businessman. WE have reached the tipping pint where there are more takers than payers which he supports.
    Invest in Gold stored out of the country.

  21. Charles Willis | November 12, 2012

    I would like to ask a simple question…. I have been on this site for several months and as a small investor have started buying small amounts of gold jewelry at garage sales and in other places in very small amounts. Is this a waste of time or the way to go as well as larger amounts such as coins? Should the coins be small coins like 1/10 oz, and how about small coins that are silver, like dimes and quarters? I hear I should purchase 1 oz coins but is this correct?

  22. dom | November 12, 2012

    Good article, but 1 point i either disagree with or am not fully understanding.

    You say that TBTF banks will have to make ever larger and larger loans to compensate for the potential massive inflow of cash into their 'safer' checking accts after Jan 1 2013 rolls around. In a ZIRP environment, though, isnt that misguided because, since they are virtually paying out no interest on that new incoming cash, then they dont need to issue more loans to compensate that additional liability?

    Just my 2 cents, feel free to enlighten me, otherwise informative article.


  23. Lady Liberty | November 12, 2012

    Scroll down in comments and see how bad off the FDIC is right now here


  24. David | November 12, 2012

    It is a good idea to get a second opinion before investing. Mish's global economic trend analysis or The Big Picture would be a good place to get REAL financial news that is not dependent on one man trying to get your money.

  25. J | November 12, 2012

    I took all my money out of the stock market. It is now in guaranteed instruments earning 15%. There is no risk and a huge return. 15% will double my money about every four years and without chance of loss. Getting out of the stock market was the best thing I have ever done. My 401K earning 15% is far better and unheard of by most.

  26. Mike G. | November 13, 2012

    It should be fairly obvious to all by now, (at least after reading this article), that without a gold-standard, (or something other than "faith" in paper-printing), that the house-of-cards that we have created over the last 220 years in the USA, (or at least since we went off the gold-standard), is falling apart. No one seems to mention the reality of "law of diminishing returns", (or decreasing demand), for most of the durable goods produced in the world, and especially for goods produced in the USA. About the only "safe" thing now is real-estate, that is: if you can somehow keep making your mortgage payments…

  27. Reza mousavi jazayeri | November 18, 2012

    Dear mr.Robert Kuiper
    Ok, i agree with you ,regards transfer you can open an account for me in HK and sand back to me the accounts information by email .
    Dear Peter Mac Isaac
    Please ask my question from Dr.Ron Poul that i sand an PO to COMMERZ bank and i do not want to transfer the fund out of commerz but in other branchs but i do not new why transaction not done ,if you can help me then it will be apperacated.
    Dear Ruperto Namdio
    Please let me new for investment in Pelipine how can i contact with Mrs AQUINO for. Such. Investment
    With my best regards
    Reza Mousavi Jazayeri

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