Tesla and Twitter CEO Elon Musk has urged people to move their money out of bank accounts in the United States, citing a significant interest rate gap created by the US Treasury and the Federal Reserve. In response to a Twitter user who quoted hedge fund founder Hugh Hendry’s prediction that US citizens may have their right to withdraw money from US banks restricted due to capital flight, Musk argued that the Treasury and the Fed had created a “massive gap” between money market accounts with an interest rate of approximately 4.5% and bank accounts with rates of less than 1%. Musk called the interest rate gap a “massive incentive” for people to move their money out of bank accounts. This was not the first time Musk has warned of the problem. In May, he wrote in a tweet that it was illogical to keep money in a bank account with interest rates below 1% instead of investing it in a 4.5% Treasury Bill money market account.
Musk is not alone in sounding the alarm about US banks. Others have warned of an impending banking crisis in the US, with some predicting the further failure of US banks in a “vicious spiral”. The consequences of such a failure would be wide-ranging and potentially catastrophic, affecting numerous individuals and institutions with assets held in those banks. As we have noted, the US banking crisis has led to the collapse of several banks, with Federal Reserve Chairman Jerome Powell arguing that the banking system is “sound and resilient” in the face of widespread concerns. Last week, for instance, regulators seized First Republic Bank and sold the bulk of its assets to JPMorgan Chase. This represents the second-largest bank failure in US history since 2008.
Speaking about the situation in the US banking sector, Hendry described it as “real bad” and has warned of deposit flight from the banking sector resulting from capital flight. He has further warned of a possible federal or Treasury rule prohibiting individuals from withdrawing money from banking systems for up to 180 days.
US banks have successfully convinced depositors to accept low interest rates on their savings, while the banks have been able to make higher profits through investing in treasuries – made possible due to significant interest rate differentials. This has created an enormous interest rate gap that could lead to significant capital flight from the US banking system.
Musk and others’ warnings spotlight the ongoing problems and potential issues perturbing the US banking system. Coupled with wider economic concerns, such as trade tensions with China and North Korea, rising inflation, and the continued US government shutdown, concerns are rising over the state of the US economy. Thus, it may be wise for investors to consider diversifying their portfolios and considering alternative investment vehicles to mitigate the risks facing traditional banking and investment industries in the current climate.
