Originally posted on inflationeducation.net:
The 2nd and 3rd biggest US bank failures of all time just happened, and there’s more fireworks to come. This is the predictable result of our centrally managed economy, where the Fed suppresses interest rates causing wild speculation, only to jack them up to combat the inflation they caused.
Boom, bubble, bust. Wash, rinse, repeat.
One of the most confusing lessons in college economics is the inverse relationship between bond prices and bond yields. If interest rates are higher, shouldn’t a bond be worth more? No, because the comparison is to market rates, and a bond’s interest payment – or “coupon” – is fixed at issuance.
As prevailing market rates rise, existing bond prices fall so that their previously fixed coupon payment and redemption amounts match current maturity yields.
Quick example: In mid-2020, 10-year US Treasury rates bottomed at 0.5%, so a $1,000 bond paid an annual coupon of $5, a whopping five simoleons to lend your Uncle Sam a grand.
Recently though, as the Fed jacked up lending rates to fight inflation created by their own easy-money policy, the US 10-Year yield hit 4%. That means an annual coupon payment of $40.
What does that do to the market price of the 2020 Treasury with the $5 coupon? To match a 4% yield to maturity, it’s present value must decline by over 20%.
That’s a big loss on a supposed ‘risk-free’ asset. Bonds of all kinds – corporate, municipal, even mortgages – endured similar losses. And all these assets are sitting on the balance sheets of banks, insurance companies, and pension funds everywhere.
The result is the banks no longer have enough financial assets at today’s prices to match liabilities. In simple terms, there’s not enough money to support deposits.
If too many people withdraw – like It’s a Wonderful Life – the whole system goes up in flames.
Sure, Silicon Valley Bank (SVB) should have ‘hedged’ the interest rate risk, but that just means someone else hiding the losses. It’s a giant house of cards – everyone owes everyone else – and the unrealized losses triggered an old-fashioned bank run, one that can now move at the speed of light.
The President, the Treasury Secretary, and the Federal Reserve Chair all panicked, stepping up to guarantee deposits at ‘systemically important’ banks.
But this genius move (sarcasm alert!) was the signal for economic actors to withdraw from smaller banks that may not be considered ‘systemically important’.
In other words: Cue more bank runs.
When the latest “Committee to Save the World” as they have actually been called by Time Magazine (during previous self-inflicted crises, as they bumble around feasting on the carcass of the US middle class) figures this out, they’ll have to guarantee depositor funds across the banking sector.
The result is more of the same from 2008 – privatized profits, socialized losses, moral hazard encouraging bad behavior at the expense of taxpayers and currency holders.
Perhaps more relevant to your family, this means more price inflation. Rather than marking the impaired assets to market prices, they’re creating new money from nothing to value everything at par (so that 2020 bond with a $5 coupon is marked not to $788, but right back to $1,000).
In one foul swoop, they’re undoing all attempts to fight the inflation we’re seeing.
Worse, they’re picking winners and losers, rewarding the well-connected with free money while small businesses, homeowners, and consumers remain burdened with higher interest rates.
This is not an America our forefathers would recognize.
It’s plainly obvious: When they stop printing money, our debt-based fiat money system implodes. It’s a feature, not a bug. Expect this trend reversal in base money to continue upward like a hockey stick-
That these clowns – Biden, Yellen, and Powell – could simultaneously (a) hold this much power to ruin our economy, crushing job and retirement prospects from Mount High, and (b) not see any of this coming is, frankly, alarming. I’m a regular guy and have been warning about it for years.
An even bigger concern is that all of this happens against a geopolitical backdrop where the BRICS nations (Brazil, Russia, India, China) along with the Middle East, most of Asia and Africa, are collaborating on an alternative currency system to reduce dependence on the US Dollar.
The latest shoe to drop is the Saudi’s agreeing to accept Chinese yuan for oil, creating a crack in the petrodollar backing that saved the US Dollar in 1974 (after we abandoned gold-backing in 1971).
All of this means a global monetary reset is coming; it may not be a slow and sustained inflation from predictable rates of money-printing. It could be a tipping point that happens quickly.
Consumer prices are driven by two components: (a) money supply, and (b) money velocity.
The latter is psychological, and nonlinear.
If confidence is lost by foreigners or a viable alternative is presented that isn’t losing purchasing power at 10% per year, the flood of US Dollars back to American shores could become a tsunami.
We’ll likely see the signal first in gold and silver, so watch those prices (and keep some on hand as insurance). Bitcoin, too, is a nice speculation that could serve as an escape valve (self-custodied).
Is Capitalism failing?
No, dear friends, capitalism is not failing. There are no government bailouts in capitalism. There’s no such thing as ‘too big to fail’. Stuffed shirts in DC don’t get to pick winners and losers.
True capitalism would require an abolishment of the Federal Reserve. The price of money – interest rates – should be set in free markets, between borrowers and lenders.
What’s failing us today is a broken, crooked, debt-based fiat money system in its dying throws, a giant beast thrashing around on it’s deathbed, crushing everything in sight before it goes limp.
In summary, the Fed caused this crisis by lowering rates and printing money, enriching the rich, encouraging borrowing, and causing wild speculation – the ‘everything bubble’. When this finally caused consumer prices to rise, they raised rates and broke the banking system, stuffed to the gills on all the debt-issuance. That’s now risking widespread bank runs and systemic failure.
They don’t have the stomach for that, so the result will be more inflation.