Welcome to our Friday mailbag edition!

Every week, we get great questions from your fellow readers. And every Friday, I do my best to answer them.

This week, readers demand a more in-depth explanation of “reverse repos,” which I wrote about last month.

I also address a common question: with all of the problems in the banking system, where’s the safest place to keep my money?

Let’s dive in…

I do not understand what you wrote about reverse repos. If banks are selling Treasuries to the Fed and then purchasing them back a day later, then the banks must pay the Fed interest on the overnight loans.

Why do you say that the Fed is paying the banks interest on the loans? Instead, is the Fed selling Treasuries to banks and then purchasing them back a day later?

– Steven R.

Hi Steven, thanks for your question. The process is not entirely straightforward.

I spent 15 years as an investment banker before I walked away from Wall Street for good. So it’s easy to forget that this is a part of the financial system that Wall Street likes to keep hidden.

I should have unpacked the reverse repo steps a bit more. Let me do that here.

First, let me explain what a reverse repo is for readers. It’s short for reverse repurchase agreement.

It is a short-term agreement to sell securities in order to buy them back at a slightly higher price a day later.

In a reverse repo between the Federal Reserve and banks, here’s what happens.

The Fed sells a security to a bank, with an agreement to repurchase it at a later time for a higher price. That security is typically a U.S. Treasury note. The Fed then uses the “money” from the sale to buy back the Treasuries from the bank a day later.

It’s really a glorified accounting gimmick.

The purpose is to make it look like liquidity is being drained from the system. That’s because if banks “give” the Fed money for that Treasury, technically they have less to loan to borrowers. That has the effect of tightening the money supply for that amount and brief period.

That transaction causes a loss for the Fed.

The loss occurs because the Fed is paying a higher repurchase price for the securities than it will receive in interest on them during that day.

And recently, the Fed has been paying a higher interest rate on its reverse repos than it has been earning on its excess reserves. Many of which were purchased when rates were much lower.

This goes back to something I’ve written about before: The Fed is operating at a loss. I did a deeper dive on this last year, so I won’t rehash all of it here (you can read that here).

But I will say that my advice for all of my readers remains the same. Diversify your portfolio into hard assets like gold. Sprinkle in a finite asset such as Bitcoin. And select commodities and stocks in sectors that provide real, lasting use value – such as in the energy sector.

Nomi, do you have an opinion on holding actual cash money vs. deposits in a bank?

– F. Marshall

That’s an excellent question. It’s one many readers have asked.

Now, I can’t give you specific advice. Where anyone keeps their money comes down to their personal situation. How much liquidity do they need? What are their personal financial circumstances?

However, to all my readers, I can say this.

There are advantages and disadvantages to think about. That’s the case if you choose to hold actual cash. Or if you choose to make deposits in a bank.

Let’s dig into the pros and cons of each.

Holding Cash: The Pros

  1. Immediate Access: If you hold physical cash, you have immediate access to your money. You can buy something without taking out your credit card or smartphone. In that way, cash is convenient.

  1. Privacy and Security: You don’t have to worry about your personal information being compromised or shared between banks and third parties. You have total control over how you use your cash and your information.

  1. No Fees: In general, when you make cash purchases or payments, you don’t have to pay credit or debit card fees.

Holding Cash: The Cons

  1. Limited Liquidity: You can’t exactly go traveling about with a briefcase full of cash. It’s just not practical. If you need to access large sums in transit or in emergencies, it’s harder to do with cash.

  1. Safety Concerns: Keeping cash at home can pose security risks. It runs the risk of being stolen. And if it is lost or stolen, it’s harder to get back relative to, say, a credit card.

  1. Limited Growth Potential: The purchasing power of your cash could decline over time due to inflation. That brings me back to the purpose of your cash. If it’s for long-term growth, then a mix of cash and other inflation holding assets, like gold, might be a better strategy.

Now, let’s move on to banks.

Readers know that no matter what, if you keep any money in banks, you should spread your money around to multiple banks. That’s to avoid bankruptcy or bank failure risks.

That aside, let’s unpack the biggest pros and cons of keeping money in a bank.

Deposits in Banks: The Pros

  1. Liquidity: Bank deposits can be more liquid than physical cash. They can also be easier to access. (Though this can depend on how much money we’re talking about.) They allow you to easily withdraw funds, make electronic or long-distance transfers, and access your money through various channels.

  1. Interest on Deposits: Bank deposits can earn interest, adding an extra source of fixed income. Thus, they provide a modest return on your savings. That said, it’s important to keep your money with banks that pay good interest for it. I use bankrate.com to keep track of the best ones.

  1. Safety and Security: Banks do have extensive security measures to protect your deposits. Plus, they have insurance to reimburse you in case of fraud or theft.

Deposits in Banks: The Cons

  1. Risk of Bank Failures: As I mentioned, bank failures can happen. We wrote about last spring’s failures here. If a bank fails, you could lose access to your funds for an extended period of time. Or until insurance from the Federal Deposit Insurance Corporation (FDIC) kicks in.

  1. Transaction Fees: Banks can impose ATM fees, overdraft fees, or monthly maintenance fees on your deposit accounts. These charges can add up. So, it’s important to keep your account at a bank with low fees. Monthly maintenance fees are the equivalent of you paying interest to the bank for holding your money.

  1. Confidentiality Concerns: Look, no matter how much they say they don’t or won’t share or sell your personal information, there is always the possibility that your private data can be breached or sold at a bank.

In the end, it’s always prudent to hold some cash if only for emergencies. And to keep it in a safe but accessible place. I hope that helps.

And that’s all for this week’s mailbag! Thanks to everyone who wrote in.

If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.

I do my best to respond to as many of your questions and comments as I can.

You can write me at [email protected]. Just remember, I can’t give personal investment advice.

Happy investing… and have a fantastic weekend!



Nomi Prins

Editor, Inside Wall Street with Nomi Prins