By Angry Old American
Copyright Angry Old American, May 10th, 2023. All Rights Reserved.
In the previous article we addressed the roll-out of the new Digital Dollar, or Central Bank Digital Currency (CBDB). We also explored Inflation, and the origins of the worst Financial Crash in US history in the 1930s. This article will explore more financial history, and why we are in far worse shape today.
When new money is printed and distributed, the effects of inflation are not felt til later as it “Trickles-Down” to the consumer who exchanges them for goods. So, those that get the money first can spend it at the same value of the non-inflated dollars that existed before. The first pigs at the troth when Central and Regional Banks print and distribute the money are Wall Street Investment Banks, Sovereign Wealth Funds (Governments), Institutional Banks, Retirement Funds, Mega-Corporations, Insurance Corporations, Mutual Funds and Hedge Funds, who borrow $Billions and get their money at “Prime” interest rates. The rest of us normal riff-raff must settle for what rates the banks will loan at. When interest rates neared 0%, the fat cats were given money freely, while the rest of us paid 2% or more.
Just like you and I must offer tangible “Collateral” to secure a loan, National Treasuries must offer “Bonds” as collateral for their “Sovereign Debt.” The collateral to the Federal Reserve for newly printed dollars are “Treasury Bonds” or “T-Bills” which are offered on the market to investors to back the new currency. The investors get a specified interest yield correlating to their expiration date when they are paid back in full. Interest rates and yields of T-Bills increase when there are too many dollars to offset risk and attract more investors.
The Bond Market also includes Municipal Bonds issued by Cities to build sewers and parks, and a wide array of Bonds issued by State Governments and Utility Companies to build highways, bridges, aqueducts, harbors, dams and power plants. Because bonds are backed by tangible infrastructure or government promissory notes, they are considered a very safe investment. Yet the yield on bonds is small, so when interest rates go up, the value of bonds sink.
In order to maximize the power of the US Dollar’s reserve currency status, US Corporations moved their manufacturing facilities overseas to exploit cheap labor. As our manufacturing base moved to China and other third world countries, the USA became a “Service Based Economy.” Food and other commodities flowed from the USA to other countries, and Multinational Corporations based in the USA posted their income here, while displaced American workers flipped burgers for one-another. Annual incomes, or “Gross Domestic Product” (GDP) for foreign countries was based on exchange of tangible commodities and manufactures to the USA. Our GDP of sales to other countries continued to shrink.
As the Federal Reserve “loaned” more and more money for our Treasury to print, our National Debt began to skyrocket from $Billions to $Trillions. What happens if the US Dollar loses its status as World’s Reserve Currency because it is devalued by inflation? All those US Dollars in foreign vaults return to the USA. Gradually, our currency will be watered-down by all those returning dollars.
Saudi Arabia recently abandoned the US Dollar and now trades in Chinese Yuan and Russian Rubles; both backed by gold. Oil producers in OPEC are joining the BRICS energy producing nations in refusing trade in US Dollars. Why? “Faith and trust in the US Treasury” has been lost because of reckless money printing and inflation.
As other nations follow this trend of abandoning the US Dollar; foreign produced commodities and manufactured goods will become more expensive. More dollars equates to less value here in America.
Beginning in May 2023, the USA is seeing an avalanche of large bank failures. This is not a new phenomenon. These bank failures are a replay of the 1980 Savings and Loan Crises. Over 4,000 Savings and Loan institutions held over over 50% of all home mortgages on their books. The government encouraged the Savings and Loans (S&Ls) to loan at low interest rates. When interest rates rose, investors dumped their low interest notes, and depositors fled the S&Ls for higher yields.
To stimulate the US Economy during and after Covid, the Federal Reserve allowed a flood of cheap near 0% interest dollars to be printed. As domestic businesses failed, laid-off Americans borrowed to pay rent, cover everyday expenses, and buy foreign produced goods online. Too many dollars were chasing too few goods. To “Curb consumer borrowing, spending, and inflation,” the Federal Reserve has increased interest rates.
Banks were encouraged to purchase T-Bills at low interest rates in order to stimulate the economy during and after the Covid Pandemic Stimulus. T-Bills, like bonds, are normally considered a safe investment. However, banks are now stuck with mountain of low yield T-Bills while interest rates are increasing. Depositors are once-again transferring their deposits from banks that offer little or no interest into Money Market Funds that yield higher interest. Foreign Investors are also withdrawing their cash in order to buy tangible assets like real estate or precious metals.
To compound the banking crises, businesses are failing and stocks collapsing. In 1998, during the Clinton Administration, the Glass-Steagall Act was overturned and Banks once again invested in risky Wall Street stocks. This is when “Derivatives” started to hit the scene. Derivatives are a class of bets that underlie an asset. Take for example “Credit Default Swaps,” that essentially bet on foreclosures on loans. . Banks often insure mortgages in case of default. Real Estate Loans are bundled into “Tranches” valued in the billions of dollars. As the loans default, then the owners of the Credit Default Swaps collect the insurance money. Unfortunately, greed sets in, and the issuers of these Derivatives created more than actually existed. This is similar to the common practice of Gold and Silver funds selling paper shares in excess of what they have in the vault.
Derivatives are not only issued on Real Estate, but also Stocks, Bonds, Currencies and every obligation under the sun. The total value of the Derivatives market is over one quadrillion dollars; or over one thousand $Trillion. To put this in perspective, the value of the entire US Stock Market is only $40 Trillion.
During the subsequent 2008 Financial Crises, the FDIC was not able to meet their obligations and the Federal Government printed hundreds of billions of dollars to “Bail-out” banks and private corporations considered “Too Big to Fail.” After the 2008 Financial Crises, new banking rules emerged. Banks were still allowed to make risky investments; but deposits in a bank became the property of the bank. Should the bank fail, it would be “Bailed-in” by confiscating deposits. A Treasury Department team would shut the doors and audit the failed bank, sell its assets to another bank, and provide funds to depositors from the FDIC. The FDIC was limited to cash on hand to reimburse depositors for the bank’s losses.
To insure the solvency of a bank, they are limited by their “Loan to Deposit Ratio.” The lower the ratio, the more stable the bank; or so the story goes. The average Loan to Deposit Ratio for banks is 62%. Every dollar withdrawn from a bank by depositors equates to over two dollars of assets that they must offset or liquidate to remain solvent.
Interest on loans is not the only way banks make money. Banks also invest deposits into Bonds, Money Markets, Stocks and Derivatives. Loans to Commercial Businesses are going sour. During the Covid Pandemic, consumers abandoned retail shopping and bought online. Many small businesses closed, leading to layoffs and decreased spending on luxuries. The US Commercial Sector began a steady collapse. Retail stores, manufacturers, and service businesses like theaters and fast-food chains failed, leading to a glut of commercial real estate. Much of that commercial real estate was offered as equity to banks who loaned at high pre-pandemic values. The value of that real estate dropped, and that pushes banks Loan to Deposit Ratio even closer to default because the value of their balance sheet dropped. Many banks also speculated in the Commercial Sector on Wall Street, just as they did prior to the Great Depression of the 1930s. If investments were leveraged with Futures or Buying on Margin, then their bets could sink them quickly. If they hedged their bets with Derivatives, then they face the same position as 2008, will they get paid?
As for us, the average Joe and Jane, methods have been employed to discourage the withdrawal of paper currency from banks. Cash withdrawn from your bank is already limited by rules established by your financial institution. Some of those rules emerged to limit money laundering, and cash used for terrorism and criminal enterprise. For nearly a decade, many banks have questioned depositors about their intended use of withdrawn currency. Possession of cash makes it fair-game for law enforcement confiscation. Large amounts of cash at home, in your car, or on your person would merit probable cause for “Asset Forfeiture” and criminal investigation. If drug sniffing dogs alert to traces of drugs on a single note, the owner would lose their money, which would be shared between local law enforcement and the Federal Government. The owner of the seized cash might also face IRS investigation and audit. Note that Banks are not required to inspect currency for drug contamination, and they both accept and issue tainted currency on a daily basis.
So, it seems like all of us are facing a financial shit-storm. Regardless of whether we invested in the financial markets, we will be effected. Our governments, banks, pension funds, and 401Ks are largely invested in the Big Casino. If you have money in the bank, own real estate, rent from a landlord, work for a living, collect a pension or pay taxes; you are in a world of hurt much worse than the Great Depression of the 1930s.
What next? The final part of this series will explore the probable outcome for the common people when the Titanic sinks. We will also explore how the new Digital Currency, CBDBs will come into play.