The world is burning down. Actually, it has already burnt down. Politicians have just done a solid job at obfuscating reality.
Here is my disclaimer that despite consciously trying to write objectively and calmly, you should expect some of my emotions to trickle through. Plus, I don’t really know what I’m talking about. I’m taking the ideas of others, and trying to match the dots in a way that makes sense to me. Hopefully, my dot-matching resonates with you too.
The Problem
Banks are insolvent - Last week the Fed admitted that 333 banks are insolvent; and that’s just within the US. Multiple government agencies have known this since September, and whether for right or for wrong, they chose not to do anything about it. Until last week. So, hundreds of banks are insolvent and thousands are on their way. How did we get here?
In response to the COVID outbreak, governments took the decision to shut down their economies. They forced people to stay inside for months and prohibited businesses from operating as usual. That caused devastation and in an attempt to mitigate it, central banks decided to print unearthly amounts of money and inject it into the economy to stimulate business. North of 40% of all US Dollars were printed after COVID; and they’ve been printing them (freely) since 1971.
All this new money was given to the financial industry, in hope it would trickle to all factions of the economy. So banks found themselves with huge sums of cash that they didn’t expect to have. What did they do with it? They put it into the safest investment vehicle of the last half-century US Government Bonds; often called a riskless asset. Alas. In order to maximise their payout, they invested in 10YR bonds, as they usually yield more than monthly or 1YR bonds. In hindsight, we can see that this was a poor decision for a couple of reasons:
(1) Those billions of dollars are now locked for 10 years. If & when needed, those funds are tricky to access; setting the perfect conditions for a bank run.
(2) Central banks pivoted from their post-2008 addiction to low-interest rates and started hiking. By raising interest rates, central banks caused the market value of 10YR bonds to go down; as the newer issued bonds pay out higher rates.
So under the assumption that they would hold their value, banks (recklessly) converted customer deposits into 10YR treasuries. Then due to rising interest rates, 10YR treasuries lost value, banks incurred unrealised losses and now cannot honor their customers’ deposits. So governments around the world are doing everything they can to stop you & I from withdrawing our money. Once we do that, it’s over.
For proof of their fear, lets look at Switzerland. Credit Suisse is one of the world’s oldest and most prestigious banks. But for the past 2 years, they have been treading water. Now, they’ve depleted themselves and are underwater. The Swiss Annual Budget is $10bn; they’ve already used $50bn to bailout Credit Suisse (CS) and promised $100bn more. That’s 1500% of the Swiss national budget! They’re willing to let schools, healthcare, infrastructure and their military rot, in hopes of maybe salvaging their biggest bank.
The Solution
The response to this crisis is to print more and effectively lend banks unlimited sums of money. In order to protect depositors from a bank-run scenario, the US government announced its first bailout package, aiding the likes of SVB. Although nuanced, the total relief could reach $2tn. They went from limiting these bailouts from $25bn to $2tn in days! The first batch of funds were issued last week, totaling $300bn. In just one week, the Fed reverse roughly half of all the QT it accomplished over the last year. They are stuck in a perpetual loop where we’re all dependent on the relentless printing of artificial money.
That’s $300bn (potentially $2tn) of taxpayer money that gets rediverted to bailing out failed financial institutions. First, they denied it and claimed everyone was solvent. Then, they claimed it was only small-to-medium sized banks. Now, they’ve acknowledged that this is no small-bank crisis, it’s a global central bank crisis.
Last night, the Fed, the ECB, the BoE, the BoC, the BoJ and the Swiss National Bank announced “dollar liquidity measures.” You gotta love the semantics employed by financial crooks! What they actually meant was ‘we are going to co-mingle funds, so that everyone stays afloat. It is an international cooperative bailout of banks. Whoever is more under stress, we send them money.' When hearing of this news, I shat one. For they are acknowledging the pain they’re under and how susceptible they are to colossal contagion. Once one domino falls, they all do. Sadly, it looks like the first domino has fallen and the second one is beginning to tip.
To update this 2008 headline, insert “Credit Suisse” and “all central banks.”
The Implications
Well for starters, the response has reinforced how hellbent fixated central bankers are on modern monetary theory (the school of thought that believes the government can’t run out of money as they can always print more). Printing dollars to infinity to ensure every withdrawal goes through leads to the (hyper)inflation of the dollar. This would likely set alight a trend that has been cultivating for years - de-dollarisation. This is the process of moving away from the dollar, reducing its dominance and influence over global affairs. We might start to see oil purchased in another currency, debt denominated in another currency and national reserves allocated to other assets. It makes sense. If dollars can be printed at whim, and its issuers have no option but to keep devaluing it, it’s not an asset people would want to transact & store their wealth in.
So, what comes after the dollar?
Maybe the Renminbi (the currency of a dystopian communist nation plagued with evil) grows in influence. Historically, the Swiss Franc has been a safe-haven asset that thrives in times of turmoil. But as commented above, the Swiss banking system is not having its finest days so safe to say we can rule that out.
Maybe this paradigm shift triggers the deployment and adoption of CBDCs (central bank digital currencies). This would not be a revolution, but an evolution of the incumbent system that is failing us. Like their predecessors, CBDCs’ supply would be uncapped and controlled by a small group of unelected officials wearing suits. Due to being prone to QE and for dozens of other reasons, this is not the future I would like to see.
How about the re-emergence of the Gold Standard? I’m not an economist and haven’t studied economic history nearly enough to effectively consider the viability of this option. However, being the most battled tested and inflation-resistant money throughout human history, we can expect those exiting the dollar to consider Gold. It is the definition of hard money. But it would be very remiss of me to not mention that we also have a Plan ₿
There is an asset that evicts counterparty risk. Everyone is invited to use it, it doesn’t discriminate. It has a fixed supply and a transparent audit-trail. It is censorship-resistant, (sufficiently) decentralised, and is backed by mathematics & electricity, not politics. And I think those characteristics would be demanded in an environment where cash and virtually everything else is trash. If & when people’s wealth is being eroded every day, and the world is burning before our eyes, people will look for a safe haven. In the 20th century, options were limited, more so for your everyday jerry. But now with the internet and the birth of internet money, there is an alternative that every single human in the world has access to. I think Bitcoin could be the safe haven of choice for millions of people around the globe.
Closing Thoughts
After thinking about macro for the entirety of today, let’s finish off with some micro. I find it ridiculous that we don’t have self custodial storage tools for Fiat money beyond cash in a safe. We have to give someone else our money to store it. And we talk of freedom? It’s baffling, but then again, an inherent trait of the fractional reserve banking system. We can do better.