Where do PPers park their short term/emergency funds?

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AdamA
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Re: Where do PPers park their short term/emergency funds?

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fnord123 wrote: Interesting!

I guess that works for TreasuryDirect holdings.  I don't think Vanguard/Fidelity/whatever broker will necessarily make such special arrangements.
It will work for those funds (in theory) as long as they are treasury only money market funds.  Vanguard and Fidelity both have these, but I think they are either currently closed or have a very high minimum ($100K).  American Century has one with a more reasonable minimum ($3K).  You can write checks from it (minimum $100). 
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Re: Where do PPers park their short term/emergency funds?

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Wow, this conversation has gotten interesting.

I can't tell whether I'm wading into a pool of euphoric diversification or senile paranoia, but I like it.
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Re: Where do PPers park their short term/emergency funds?

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With I-bonds do you get a piece of paper that actually states your claim to the money??  Would these maybe function as cash in a very limited cash environment?  Or any other instrument of that type?
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Re: Where do PPers park their short term/emergency funds?

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Adam1226 wrote:It will work for those funds (in theory) as long as they are treasury only money market funds.  Vanguard and Fidelity both have these, but I think they are either currently closed or have a very high minimum ($100K).  American Century has one with a more reasonable minimum ($3K).  You can write checks from it (minimum $100).
The part that might not work is turning your brokerage treasury holdings/treasury MM into cash in hand.  Either you have to write a check (but if banks are closed/FDIC is failing, who is going to accept your brokerage checks?) or you can ACH your funds from Vanguard/Fidelity/etc to your bank account (but your bank is closed).
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Re: Where do PPers park their short term/emergency funds?

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moda0306 wrote:With I-bonds do you get a piece of paper that actually states your claim to the money??  Would these maybe function as cash in a very limited cash environment?  Or any other instrument of that type?
I-Bonds come in two forms:
  • Paper - these have your name and the value on it and can be redeemed at banks for cash (err...)
  • Electronic - these are held at TreasuryDirect.gov in electronic-only form (no authoritative piece of paper available afaik)
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Re: Where do PPers park their short term/emergency funds?

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To back up a bit and take a forest view, the point that Harry Browne made in preferring treasurys over bank deposits for the cash portion of the PP was simply that in any crisis FDIC claims are going to be in line behind holders of t-bills.  In other words, the Treasury would presumably never default on treasurys in order to pay out FDIC claims, but it is entirely conceivable that treasurys would be paid out promptly, while bank depositors would be paid out piecemeal over time, possibly in partial amounts.  I can also easily imagine banks imposing a per depositor withdrawal limit in times of crisis (I think some banks are actually doing this right now).

The key is to understand that bank deposits carry risk that treasurys do not.  This risk may be entirely theoretical, but it is a risk that needs to go into the decision-making process. 

That's the only point, really.  Once you fully digest that risk, you can make your own decisions about how to proceed.

Great discussion.
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Re: Where do PPers park their short term/emergency funds?

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So let me get this straight, my P2P lending account is a good substitute for a treasury MM account?
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Re: Where do PPers park their short term/emergency funds?

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I wonder how the psychology of fiat money would manifest itself in a "closed banks" environment.  What kind of claims of cash (even if not immediately convertible to greenbacks since banks are closed) would be used?  Would I-bonds function as money?  Other s-t bonds in paper form?

It seems to me that there would have to be some kind of market substitute into other contracts that, while not actually cash, could be redeemed for cash once banks open again, and therefore would function a lot like it during the crisis.  Can the dollar really be both strong (huge demand for greenbacks) and weak (no demand for st bond paper instruments or checks) at the same time?  The huge strength of a dollar during a crisis of that sort would imply that treasury-backed substitutes in paper form would emerge, would it not? Maybe gold would do well during this time, or at least hold its value.

All that said, are maybe some st treasury bonds (ie, paper i-bonds) that are in paper form (can they even be transferred?) a nice diversification within cash that could give you something physical to trade without having to actually store cash at 0% in your safe?
Last edited by moda0306 on Wed Mar 23, 2011 2:53 pm, edited 1 time in total.
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Re: Where do PPers park their short term/emergency funds?

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MediumTex wrote:The key is to understand that bank deposits carry risk that treasurys do not.  This risk may be entirely theoretical, but it is a risk that needs to go into the decision-making process.
I agree, and the only thing I would add is that there is no 100% safe vehicle for holding greenbacks other than holding greenbacks (actually, this isn't safe either - people can break into your safe).  People should always think about risk-adjusted return. So if short term treasuries are yielding 0.1%, but FDIC-insured accounts are yielding 1%, then one might prefer mostly treasuries if one thinks the FDIC is 10x or more likely to fail to pay than treasuries, or prefer mostly FDIC-insured accounts if one thinks the FDIC is only 4x more likely to fail to pay than treasuries.  
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Re: Where do PPers park their short term/emergency funds?

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At .1%, I'd rather hold it under my mattress and give the middle finger to anyone trying to get it for that cheap.  The risk-adjusted return at that point is awful even with treasuries IMO.
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Re: Where do PPers park their short term/emergency funds?

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I-bonds are non-transferrable and most people wouldn't even know what they were.  I-bonds will not be used for cash in an emergency.

I imagine credit cards would be a more popular choice, with merchants taking down the information and processing the charges after things stabilized.

It's hard to say how these things would go down, though.

ATM machines would be the first casualty I imagine as people attempted to draw out as much cash as possible.  As I recall, this was the pattern in Argentina when things got ugly there.
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Re: Where do PPers park their short term/emergency funds?

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moda0306 wrote:All that said, are maybe some st treasury bonds (ie, paper i-bonds) that are in paper form (can they even be transferred?) a nice diversification within cash that could give you something physical to trade without having to actually store cash at 0% in your safe?
MediumTex wrote:I-bonds are non-transferrable and most people wouldn't even know what they were.  I-bonds will not be used for cash in an emergency.
Yes, Moda0306, that does sound like a good way to keep some "near-cash" and still get interest... I actually got my tax return last year in I-Bonds, out of curiosity  ;D
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Re: Where do PPers park their short term/emergency funds?

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I just have to think there would be a nice way to get a transferrable 1 year bond or something in paper form to make some of your "mattress cash" interest bearing... this is probably much more worthwhile in high interest rate environments.
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Re: Where do PPers park their short term/emergency funds?

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moda0306 wrote: I just have to think there would be a nice way to get a transferrable 1 year bond or something in paper form to make some of your "mattress cash" interest bearing... this is probably much more worthwhile in high interest rate environments.
Your thinking along the lines of those old school "bearer bonds" that they used in the first Die Hard movie.
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Re: Where do PPers park their short term/emergency funds?

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MediumTex wrote:Your thinking along the lines of those old school "bearer bonds" that they used in the first Die Hard movie.
That was the best Die Hard imo.  I think they were used in the movie Heat too.

They are very rare nowadays, it is doubtful people would be able to find many, and even if they did, most people would not know what to do with them. Reference: http://www.investopedia.com/articles/bo ... r-bond.asp

In a bank closure scenario, cash is king, with gold likely being a poor second place.  Read the sections on the gray/black market and gold for a firsthand account on how things went for emergency funds in Argentina: http://www.rapidtrends.com/surving-arge ... -part-1-3/
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Re: Where do PPers park their short term/emergency funds?

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moda0306 wrote: The huge strength of a dollar during a crisis of that sort would imply that treasury-backed substitutes in paper form would emerge, would it not? Maybe gold would do well during this time, or at least hold its value.
I think this actually may be what's happening right now.  In a bad deflationary environment, the dollars that survive are very valuable, it's just that not a lot of them survive.  People figure that treasurys are the safest place, but in the event of a really bad event wherein there's trouble cashing in on those, gold is a great thing to have.

I think this is the argument for why gold does well in deflation as well as inflation (the inflationary argument is just easier to understand until you really think about what can happen to cash IOU's in a deflation).  
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Re: Where do PPers park their short term/emergency funds?

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fnord123 wrote:
Adam1226 wrote:It will work for those funds (in theory) as long as they are treasury only money market funds.  Vanguard and Fidelity both have these, but I think they are either currently closed or have a very high minimum ($100K).  American Century has one with a more reasonable minimum ($3K).  You can write checks from it (minimum $100).
The part that might not work is turning your brokerage treasury holdings/treasury MM into cash in hand.  Either you have to write a check (but if banks are closed/FDIC is failing, who is going to accept your brokerage checks?) or you can ACH your funds from Vanguard/Fidelity/etc to your bank account (but your bank is closed).
It might not, but I think this guy's theory seems to be that if you have a check from the Treasury which is in fact what you get (or can request) in a treasury only money market fund (again according to the author), which you could then cash at one of these alleged designated banks.  

A lot of if's, but, again, it's just one guy's thought.
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Re: Where do PPers park their short term/emergency funds?

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I could see a check from the treasury functioning as money.  Since MT crushed my dreams of trading i-bonds with cash-strapped civilians during a banking panic, I suppose this will have to do.

Die Hard is the best action movie, ever.  I would watch it tonight if it were on tv.

"Now I have a machine gun.... ho..... ho.... ho."  Alan Rickman... classic.
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Re: Where do PPers park their short term/emergency funds?

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Adam1226 wrote:It might not, but I think this guy's theory seems to be that if you have a check from the Treasury which is in fact what you get (or can request) in a treasury only money market fund (again according to the author), which you could then cash at one of these alleged designated banks.  
A practical drawback on treasury money market funds just came to mind: They have terrible terms and/or you cannot get them.
  • Vanguard closed theirs in 2009 - you cannot use a Vanguard treasury money market unless you already have one open
  • Fidelity's requires a $25K minimum, currently pays 0.1% to 0.0% interest, and has a 0.49% expense ratio.  So to use them, you will be losing (!!) half a percent a year just to hold onto your money.
Does anybody know of an open treasury money market with reasonable terms?
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Re: Where do PPers park their short term/emergency funds?

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fnord123 wrote: Does anybody know of an open treasury money market with reasonable terms?
American Century has one with a minimum of $3K.  Return is .01% with an expense ratio of .48.  

The lousy yield should be a clue to you that dollars are in demand.  I think the safety here is worth taking the small loss.  Reaching for yield can get you into trouble.  
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Re: Where do PPers park their short term/emergency funds?

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Why not just hold onto the greenbacks if you're going to get negative return... am I missing something here?
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Re: Where do PPers park their short term/emergency funds?

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moda0306 wrote: I could see a check from the treasury functioning as money.  Since MT crushed my dreams of trading i-bonds with cash-strapped civilians during a banking panic, I suppose this will have to do.
Using our stockpiled VP leather chaps is always an option.

In a SHTF scenario, I am certain their value would skyrocket.
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Re: Where do PPers park their short term/emergency funds?

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MediumTex wrote:
moda0306 wrote: I could see a check from the treasury functioning as money.  Since MT crushed my dreams of trading i-bonds with cash-strapped civilians during a banking panic, I suppose this will have to do.
Using our stockpiled VP leather chaps is always an option.

In a SHTF scenario, I am certain their value would skyrocket.
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Re: Where do PPers park their short term/emergency funds?

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Adam1226 wrote:The lousy yield should be a clue to you that dollars are in demand.  I think the safety here is worth taking the small loss.
I'm afraid the lousy yield is only a clue about the Fed's current discount rate. In the following image (assuming I get it to work), the first is the Fed discount rate from 1994 to 2011. The second is the 3mo UST rate:
Image
As you can see, they are basically identical.  The Fed sets the rate, the UST follows it.
Reaching for yield can get you into trouble.
I have always thought of this phrase as being incomplete at best.  We always reach for yield - if there was a treasury MM that had a 2% expense ratio and one that had a 0.5% expense ratio, all else being equal, any rational person would pick the 0.5% one.

Reaching for uninformed, risk-unadjusted yield will indeed get you into trouble.

Reaching for informed, risk-adjusted yield will keep you out of trouble.  Pick your risk level, then find the instrument that offers the greatest yield at that level.
Last edited by fnord123 on Wed Mar 23, 2011 5:29 pm, edited 1 time in total.
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Re: Where do PPers park their short term/emergency funds?

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I think when people refer to the danger "reaching for yeild" they're not referring to someone shopping expense ratios for otherwise equal funds.  They're talking about the slippery slope that can come from accepting "just a bit" more risk for higher yeild: Treasuries, FDIC savings, Munis, Corporates, Junk.  Pretty soon you're getting extremely tax-inefficient return from something that is the worst of both worlds between stocks and treasuries.
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