Bank runs are an ever lurking possibility in a fractional reserve banking system. From Lance Roberts at realinvestmentadvice.com:
With the collapse of Silicon Valley Bank, questions of potential “bank runs” spread among regional banks.
“Bank runs” are problematic in today’s financial system due to fractional reserve banking. Under this system, only a fraction of a bank’s deposits must be available for withdrawal. In this system, banks only keep a specific amount of cash on hand and create loans from deposits it receives.
The “stability/instability paradox” assumes that all players are rational and such rationality implies an avoidance of complete destruction. In other words, all players will act rationally, and no one will push “the big red button.“
In this case, the “big red button” is a “bank run.”
Banks have a continual inflow of deposits which it then creates loans against. The bank monitors its assets, deposits, and liabilities closely to maintain solvency and meet Federal capital and reserve requirements. Banks have minimal risk of insolvency in a normal environment as there are always enough deposit flows to cover withdrawal requests.
However, in a “bank run,” many customers of a bank or other financial institution withdraw their deposits simultaneously over concerns about the bank’s solvency. As more people withdraw their funds, the probability of default increases, prompting a further withdrawal of deposits. Eventually, the bank’s reserves are insufficient to cover the withdrawals leading to failure.
It’s never pretty when a big bank shuts its doors. From Tyler Durden at zerohedge.com:
For most people in America, the news that a ‘bank in Silicon Valley’ has failed will be forgotten quicker than a story about soaring shoplifting in their local supermarket.
Reality is that the contagion of the shuttering of the 18th largest bank in the US are widespread.
SVB is in fact the second largest (by assets) bank failure in US history after WaMu.
First things first, there is a long line of depositors who are over the $250,000 FDIC insured limit (in fact only somewhere between 3 and 7% of total deposits are insured). The following list, while incomplete, is approximately sorted by size of exposure:
USDC – Crypto Stablecoin run by Circle – Silicon Valley Bank is one of six banking partners Circle uses for managing the ~25% portion of USDC reserves held in cash. While we await clarity on how the FDIC receivership of SVB will impact its depositors, Circle & USDC continue to operate normally.
ROKU – Roku had 26% of its cash, $487 million with Silicon Valley Bank
BLOCKFI – BlockFi has $227 million in “unprotected” funds in Silicon Valley Bank, according to a bankruptcy document, and may be in violation of U.S. bankruptcy law.
RBLX – Roblox said 5% of its $3b cash and securities balance is held at SVB.
Do rising interest rates break inflation or the economy and financial markets first? From MN Gordon at economicprism.com:
Expectations were great. When 2023 started, there was a general sense that the stock and bond markets had turned over a new leaf. A repeat of 2022 was out of the question.
The primary assumption was that inflation would relent. After that, everything else would neatly fall in line. Specifically, interest rates would decline, and the next great stock market boom would bubble up just in time to bailout the meager retirement savings of aging baby boomers.
That was the general outlook when 2023 commenced. But instead, the opposite is now happening. Inflation is persisting. Interest rates are rising. And stock and real estate prices are headed down, down, down.
This week, for example, Fed Chair Jerome Powell, in his semi-annual Congressional testimony, clarified that interest rates would go “higher than previously anticipated.” He also noted that, if needed, he’s “prepared to increase the pace of rate hikes.”
In other words, the much-anticipated Powell pivot has gone on indefinite hiatus. You can fight the Fed and buy stocks if you must. But you won’t likely be very happy with the results.
Moreover, Fed rate hikes are only part of the story. To be clear, the Fed’s rate hikes are to the federal funds rate. However, they do, in fact, influence Treasury rates.
Since March 2022, the Fed has hiked the federal funds rate from a target range of 0 to 0.25 percent to a range of 4.50 to 4.75 percent. As a result, and over this duration, the 2-year Treasury yield has jumped from 1.75 to over 5 percent.
Ideas are the foundation of the brain standard, one of which is that only individuals have rights. This cuts through the collectivist dreck that passes for thought among most of the world’s so-called intellectuals. The variations of collectivism all disguise nothing more than brute force hiding behind propaganda. Their inevitable failures stem from their essential flaw: those that control the collective claim rights that negate those of the individual.
There are grounds for hope. From the ruins of impending collapse there will be some who reject collectivism and are committed to rebuilding on a foundation of individual rights. How they will protect those rights and whatever territories they stake out are what theoretical physicists sometimes call “engineering problems.” One advantage they’ll have, though, as the brain standard constituency—they’ll be smarter than their adversaries. Attention, imagination, and intelligence will be keenly focused on building from the ruins and protecting what they’ve built.
Here’s a thought experiment. Imagine someone invents a cheap, portable device that defends its bearer and his or her property from all violence from all sources, but has no offensive capability. The device is so cheap that virtually everyone can buy it, and charities are set up to donate it to those who can’t. The device is universally available and creates a world without violence.
How would such a world function? People would have to produce to survive, but absent mutual agreement no one would have an enforceable claim on anyone else’s production. There would be no coercive transfers of money or property. Disputes would be settled by negotiation and mediation. A body of civil law similar to English common law would develop. Surely such a society would figure out a way to deal with nonviolent crime.
The negation of violence would eliminate government’s nominal rationale: protecting citizens from violence. In the absence of government (and its violence), individuals and society as a whole would be free to advance as far as their capabilities will take them.
This extreme hypothetical offers a stark contrast with the absence of anything resembling freedom anywhere in the world today. Government and collectivism are top-down codependents based on violence and coercion. Their current manifestations are replaying the dreary and what should be the common knowledge lesson of history: they inevitably fail, often after a great deal of bloodshed.
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In the current jockeying among collectivist governments for the things over which they jockey, Russia’s and China’s are doing a better job than the U.S.’s. The former are the co-leaders of the Eurasian alliance and represent substantial politic and economic power. The latter is bankrupt, embroiled in yet another war it won’t win, and stands accused of sabotaging its most important European ally’s oil pipelines. At home, the U.S. government and its fellow travelers are in thrall to brain-dead ideologies that hasten the country’s disintegration.
Tom Luongo is not trying to be cute and his points and arguments are clear, which is not always the case. He takes a complicated set of issues and makes them understandable. This is one of his best. From Tom Luongo at tomluongo.me:
Live images flashing by Like windshields towards a fly Frozen in that fatal climb But the wheels of time, just pass you by -RUSH, “Between the Wheels”
In part I of this series I told you the war over the US dollar was over because the bane of domestic monetary policy, Eurodollar futures, lost the battle with SOFR, the new standard for pricing dollars.
The ignominious end of the Eurodollar system is a study in the evolution of markets, as a new system replaces an old one. Old systems don’t die overnight. We don’t flip a switch and wake up in a new reality, unless we are protagonists in a Philip K. Dick novel.
More than a decade ago I looked at the responses to President Obama cutting Iran out of the SWIFT system as the beginning of the end of the petrodollar system. The goal was to take Iran out of the global oil markets by shutting Iran out from the dominant dollar payment system.
Out of necessity Iran opened up trade with its major export partners, most notably India, in something other than dollars. India and Iran started up a ‘goods for oil’ trade, or as Bloomberg called it at the time, “Junk for Oil.”
The stick of sanctions created a new market for pricing Iranian oil and a way around the monopoly of US dollar oil trading. India, struggling with massive current account deficits because of their high energy import bill, welcomed the trade as a way to lessen the pressure on the rupee.
Iran needed goods. They worked out some barter trade and the first shallow cuts into the petrodollar system were made.
There are those that do and those that think. It’s not generally the former who screw up a society. From Jeffrey A. Tucker at brownstone.org:
Just this weekend, I spoke at one of my favorite venues, the Liberty Forum in New Hampshire, which is an annual conference center on the Free State Project. It’s designed to encourage people to pick up and move to the freest state in the country for community and to help protect the state from the fate that befell Massachusetts, Connecticut, and Rhode Island.
My first time speaking there was 2012, I believe, and I came away with an interesting revelation, which I can summarize as “Liberty is a hands-on task.” In my career until that time, the problem of economic and political matters were mostly matters of theory and I had spent most of my time reading and distributing high theory, a task I loved and still do.
But coming to this event in New Hampshire I found something else entirely; a group of people who were busy doing things in practice to live freer lives. They were small business people, real-estate agents, people with alternative currency systems, people raising and selling food on and from their own farms, organizers of houses of worship and community centers, homeschoolers and school entrepreneurs, and much more besides, including office holders focusing on laws and legislation.
It was here, for example, that I acquired my first Bitcoin, which in the early days showed great promise finally to recreate money in a way that government could not ruin. It struck me at the time as among the greatest inventions of the human mind. Tellingly, it did not come from academia (so far as we know) but from tinkerers who wanted to solve the problem of double spending on digital monetary units. It was genius. The economics journals ignored it for many years, of course.
As for politicians and political issues, there is always the risk of partisan bias and offending those who cling to only one perspective.
Fortunately, my take on the left or the right of current politics is fairly agnostic, as I view nearly all politicos as crooked as a dog’s hind leg.
Thus, as I turn my lens toward the state of California and its failed governor, I hope readers of the left or right can dispense with politics and just stick to math so that we can all get past the swamp of red vs. blue opinions and respect the objective facts of red vs. black balance sheets.
And when it comes to the State of California, she’s deeply in the red, and serves, ironically, as yet another broader yet applicable metaphor of the world economy in general and the United States in particular.
International Man: Webster’s Dictionary defines a useful idiot as a “naive or credulous person who can be manipulated or exploited to advance a cause or political agenda.”
Lenin is thought to have originated the phrase when referring to communist sympathizers in the West.
What is your take on this term? Is it still applicable today?
Doug Casey: Today’s make-believe democracies are overflowing with useful idiots. They latch on to one lame-brained notion after another, perhaps to give meaning to their confused and pointless lives. They’re a bit like cats chasing the red dot from their master’s laser pointer. The Ukraine, Covid, sex perversions, Trump, racism, climate change—it’s one thing after another.
Climate change is one of the central scams being promoted by the World Economic Forum as part of their Great Reset. It seems everything that comes out of the WEF—I can’t think of any exceptions — is antithetical to the traditional values of Western Civilization, prominently including free markets and personal liberty.
We’ve discussed the COVID hysteria and what looks like World War III starting in the Ukraine. But the biggest thing, with the longest legs, is climate change. Full disclosure: I believe in climate change. The climate has been changing constantly since the world came together about four and a half billion years ago. And it’ll continue to change.
The problem, however, isn’t climate change itself but the process of indoctrinating the public, especially young people, with the belief that humanity is destroying Mother Earth.
They’re given snippets of science, like the fact that the world has been generally warming since the mid-19th century. Well, sure, it has because the planet went through what’s known as the Little Ice Age from the 16th through the 19th centuries. It has cyclically been warming for the last 150 years. As a matter of fact, the world has been warming since the end of the last Great Ice Age, about 12,000 years ago.
The “global warming” people have found a great excuse for changing not just the economy but the way literally everything works. My view is that they’re basically anti-human—they actually hate and fear people. It’s why Yuval Noah Harari, the mincing court intellectual of the WEF, often refers to them as “useless eaters.” He may be right. But what’s insane is that someone like him could gain the power to make serious decisions.
The Japanese are giving a pretty good demonstration, to be followed by Europe and the U.S. From John Rubino at rubino.substack.com:
Gradually then suddenly (2024?)
The past few decades of unnaturally easy money have created a world of “moral hazard” in which a ridiculous number of people borrowed far more than they should have. Now, with money getting tighter, not just businesses and individuals but some governments are staring at the “suddenly” part of that old saying about bankruptcy.
Japan is the poster child for this slow walk towards – then quick rush over – a financial cliff. Here’s how it works for a government, in 10 steps.
Step 1: Build up massive debt. A bursting real estate bubble in the 1990s confronted the Japanese government with a choice between accepting a brutal recession in which most of that debt was eliminated through default, or simply bailing out all the zombie banks and construction companies and hoping for the best. They chose bailouts, and federal debt rose from 40% of GDP in 1991 to 100% of GDP by 2000.
Step 2: Lower interest rates to minimize interest expense. Paying 6% on debt equaling 100% of GDP would be ruinously expensive, so the Bank of Japanpushed interest rates down as debt rose, thus keeping the government’s interest cost at tolerable levels.
We’ve reached some sort of climactic upheaval and life for most people is about to radically change. From James Howard Kunstler at kunstler.com:
” If, however, as Pareto suggested… a governing elite is inevitable, then we are certainly under the wrong elites. Whether a circulation of elites can be completed in time to save the world economic system from ruin and the majority from destitution and veritable slavery is a question of no little urgency.” — Michael Rectenwald
Imagine that on an April evening in 1912, the captain of the RMS Titanic had announced a grand ball at which the male passengers were asked to wear their wives’ clothing and vice-versa…. That was approximately the condition of Western Civ verging on springtime in 2023: preoccupied with silliness while the iceberg awaits.
But who would have thought the sinking of civilization would occur with such fantastic comic ornamentation? Men, in more ways than mere costuming, pretending to be women… incompetence honored, feted, even worshipped… intellect reduced to anti-thinking… anything of value thrown overboard in some weird post-modern potlatch ceremony of twisted moral righteousness…? But the hour is late, the party is near its end, and the iceberg is struck. The rest of the story will be you holding onto a few valuables, including your life, while the lifeboats get lowered.
From here forward, things get pretty interesting. And from here on, nobody is really in charge. The vacuum of leadership we’ve been living in becomes impossible to ignore, and nature (it’s rumored) hates a vacuum. For the moment, circumstances are in charge, not personalities.
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