Category Archives: Economy

Sergey Glazyev: ‘The road to financial multipolarity will be long and rocky’, by Pepe Escobar

It’s not easy putting together monetary arrangements that will be accepted by nations comprising over half the world’s population. (SLL maintains that it will be impossible.) From Pepe Escobar at thecradle.co:

In an exclusive interview with The Cradle, Russia’s top macroeconomics strategist criticizes Moscow’s slow pace of financial reform and warns there will be no new global currency without Beijing.

The headquarters of the Eurasian Economic Commission (EEC) in Moscow, linked to the Eurasia Economic Union (EAEU) is arguably one of the most crucial nodes of the emerging multipolar world.

That’s where I was received by Minister of Integration and Macroeconomics Sergey Glazyev – who was previously interviewed in detail by The Cradle –  for an exclusive, expanded discussion on the geoeconomics of multipolarity.

Glazyev was joined by his top economic advisor Dmitry Mityaev, who is also the secretary of the Eurasian Economic Commission’s (EEC) science and technology council. The EAEU and EEC are formed by Russia, Belarus, Kazakhstan, Kyrgyzstan, and Armenia. The group is currently engaged in establishing a series of free trade agreements with nations from West Asia to Southeast Asia.

Our conversation was unscripted, free flowing and straight to the point. I had initially proposed some talking points revolving around discussions between the EAEU and China on designing a new gold/commodities-based currency bypassing the US dollar, and how it would be realistically possible to have the EAEU, the Shanghai Cooperation Organization (SCO), and BRICS+ to adopt the same currency design.

Glazyev and Mityaev were completely frank and also asked questions on the Global South. As much as extremely sensitive political issues should remain off the record, what they said about the road towards multipolarity was quite sobering – in fact realpolitik-based.

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Heaven and Hell, by Bill Bonner

Bill Bonner’s grandson got the right grandpa. From Bill Bonner at bonnerprivateresearch.com:

From banking crises to our chapel on the ranch, a look at solid foundations

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina…

As predicted…when the fight gets tough, the Fed takes a dive.  

That is what we are watching now…in slow motion.

After the crisis of ’08, the feds insisted that the banks hold more reserves. They were told to buy safe, government debt – T-bonds. The Treasuries were supposed to be financial ballast, designed to keep them safe in a market squall.  

Oh, if only Mother Nature, in all her guises and disguises, would cooperate!  

A storm blew up last week. Now loaded up with Treasury debt, banks are much more solid – on paper – than they were in 2008. But what happened? The ballast sank. And two banks sank with it.

Foxes in the Henhouse

The California bank, Silicon Valley Bank, has a CEO, Greg Becker, who was also a director of the San Francisco Fed. The New York bank, Signature, has none other than Barney Frank, who, along with Elizabeth Warren, actually wrote key parts of the 2010 bank regulations.

But neither regulators nor regulations saved them. As interest rates rose, fixed-return assets, notably bonds, were not as valuable as they had been before. Two years ago, you could get only a 1.5% yield from your 10-year Treasury. Today, the yield is 3.7%. The income stream from the old bond is now worth only half as much as it was. Which means, the value of the banks’ reserves – their balance sheets – fell. As this continues, more banks can be expected to get into trouble. And the Fed will have to bail them out. Or give up its interest rate hikes altogether.

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Why the Banking System Is Breaking Up, by Michael Hudson

Inject enough liquidity into the financial system and you get inflation, which means rising interest rates, which means lower financial asset values. Eventually something’s got to give. From Michael Hudson at unz.com:

The collapses of Silvergate and Silicon Valley Bank are like icebergs calving off from the Antarctic glacier. The financial analogy to the global warming causing this collapse of supporting shelving is the rising temperature of interest rates, which spiked last Thursday and Friday to close at 4.60 percent for the U.S. Treasury’s two-year bonds. Bank depositors meanwhile were still being paid only 0.2 percent on their deposits. That has led to a steady withdrawal of funds from banks – and a corresponding decline in commercial bank balances with the Federal Reserve.

Most media reports reflect a prayer that the bank runs will be localized, as if there is no context or environmental cause. There is general embarrassment to explain how the breakup of banks that is now gaining momentum is the result of the way that the Obama Administration bailed out the banks in 2008 with fifteen years of Quantitative Easing to re-inflate prices for packaged bank mortgages – and with them, housing prices, along with stock and bond prices.

The Fed’s $9 trillion of QE (not counted as part of the budget deficit) fueled an asset-price inflation that made trillions of dollars for holders of financial assets – the One Percent with a generous spillover effect for the remaining members of the top Ten Percent. The cost of home ownership soared by capitalizing mortgages at falling interest rates into more highly debt-leveraged property. The U.S. economy experienced the largest bond-market boom in history as interest rates fell below 1 percent. The economy polarized between the creditor positive-net-worth class and the rest of the economy – whose analogy to environmental pollution and global warming was debt pollution.

But in serving the banks and the financial ownership class, the Fed painted itself into a corner: What would happen if and when interest rates finally rose?

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If SVB is insolvent, so is everyone else, by Simon Black

Financial crises stem from too much debt and too much financial interconnection. From Simon Black at sovereignman.com:

On Sunday afternoon, September 14, 2008, hundreds of employees of the financial giant Lehman Brothers walked into the bank’s headquarters at 745 Seventh Avenue in New York City to clear out their offices and desks.

Lehman was hours away from declaring bankruptcy. And its collapse the next day triggered the worst economic and financial devastation since the Great Depression.

The S&P 500 fell by roughly 50%. Unemployment soared. And more than 100 other banks failed over the subsequent 12 months. It was a total disaster.

These bank, it turned out, had been using their depositors’ money to buy up special mortgage bonds. But these bonds were so risky that they eventually became known as “toxic securities” or “toxic assets”.

These toxic assets were bundles of risky, no-money-down mortgages given to sub-prime “NINJAs”, i.e. borrowers with No Income, No Job, no Assets who had a history of NOT paying their bills.

When the economy was doing well in 2006 and 2007, banks earned record profits from their toxic assets.

But when economic conditions started to worsen in 2008, those toxic assets plunged in value… and dozens of banks got wiped out.

Now here we go again.

Fifteen years later… after countless investigations, hearings, “stress test” rules, and new banking regulations to prevent another financial meltdown, we have just witnessed two large banks collapse in the United States of America– Signature Bank, and Silicon Valley Bank (SVB).

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Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun, by Brandon Smith

Liquidity crises have a way of soon turning into solvency crises. From Brandon Smith at alt-market.com:

By Brandon Smith

There has been an avalanche of information and numerous theories circulating the past few days about the fate of a bank in California know as SVB (Silicon Valley Bank). SVB was the 16th largest bank in the US until it abruptly failed and went into insolvency on March 10th. The impetus for the collapse of the bank is tied to a $2 billion liquidity loss on bond sales which caused the institution’s stock value to plummet over 60%, triggering a bank run by customers fearful of losing some or most of their deposits.

There are many fine articles out there covering the details of the SVB situation, but what I want to talk about more is the root of it all. The bank’s shortfalls are not really the cause of the crisis, they are a symptom of a wider liquidity drought that I predicted here at Alt-Market months ago, including the timing of the event.

First, though, let’s discuss the core issue, which is fiscal tightening and the Federal Reserve. In my article ‘The Fed’s Catch-22 Taper Is A Weapon, Not A Policy Error’, published in December of 2021, I noted that the Fed was on a clear path towards tightening into economic weakness, very similar to what they did in the early 1980s during the stagflation era and also somewhat similar to what they did at the onset of the Great Depression. Former Fed Chairman Ben Bernanke even openly admitted that the Fed caused the depression to spiral out of control due to their tightening policies.

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Bank Runs. The First Sign The Fed “Broke Something.” By Lance Roberts

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.

Reserve banking is not problematic as long as everyone remains calm. As I noted in the “Stability Instability Paradox:”

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.

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“Expect Mass Layoffs…” – The Real-World Impact Of SVB’s 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.

It shouldn’t.

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.

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What Comes After the Great Liquidation, by MN Gordon

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.

What to make of it…

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The Brain Standard, Part Two, by Robert Gore

Three steps forward, two steps back; so humanity advances.

Part One

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.

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The War for the Dollar is Over Part II: The Fly or the Windshield? By Tom Lungo

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.

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