Tag Archives: Economic Collapse

America’s empire is bankrupt

Posted on by
Reply

The dollar is finally being dethroned

Credit: JOEL PETT

By John Michael Greer

Source: UnHerd

Let’s start with the basics. Roughly 5% of the human race currently live in the United States of America. That very small fraction of humanity, until quite recently, enjoyed about a third of the world’s energy resources and manufactured products and about a quarter of its raw materials. This didn’t happen because nobody else wanted these things, or because the US manufactured and sold something so enticing that the rest of the world eagerly handed over its wealth in exchange. It happened because, as the dominant nation, the US imposed unbalanced patterns of exchange on the rest of the world, and these funnelled a disproportionate share of the planet’s wealth to itself.

There’s nothing new about this sort of arrangement. In its day, the British Empire controlled an even larger share of the planet’s wealth, and the Spanish Empire played a comparable role further back. Before then, there were other empires, though limits to transport technologies meant that their reach wasn’t as large. Nor, by the way, was any of this an invention of people with light-coloured skin. Mighty empires flourished in Asia and Africa when the peoples of Europe lived in thatched-roofed mud huts. Empires rise whenever a nation becomes powerful enough to dominate other nations and drain them of wealth. They’ve thrived as far back as records go and they’ll doubtless thrive for as long as human civilisations exist.

America’s empire came into being in the wake of the collapse of the British Empire, during the fratricidal European wars of the early 20th century. Throughout those bitter years, the role of global hegemon was up for grabs, and by 1930 or so it was pretty clear that Germany, the Soviet Union or the US would end up taking the prize. In the usual way, two contenders joined forces to squeeze out the third, and then the victors went at each other, carving out competing spheres of influence until one collapsed. When the Soviet Union imploded in 1991, the US emerged as the last empire standing.

Francis Fukuyama insisted in a 1989 essay that having won the top slot, the US was destined to stay there forever. He was, of course, wrong, but then he was a Hegelian and couldn’t help it. (If a follower of Hegel tells you the sky is blue, go look.) The ascendancy of one empire guarantees that other aspirants for the same status will begin sharpening their knives. They’ll get to use them, too, because empires invariably wreck themselves: over time, the economic and social consequences of empire destroy the conditions that make empire possible. That can happen quickly or slowly, depending on the mechanism that each empire uses to extract wealth from its subject nations.

The mechanism the US used for this latter purpose was ingenious but even more short-term than most. In simple terms, the US imposed a series of arrangements on most other nations that guaranteed the lion’s share of international trade would use US dollars as the medium of exchange, and saw to it that an ever-expanding share of world economic activity required international trade. (That’s what all that gabble about “globalisation” meant in practice.) This allowed the US government to manufacture dollars out of thin air by way of gargantuan budget deficits, so that US interests could use those dollars to buy up vast amounts of the world’s wealth. Since the excess dollars got scooped up by overseas central banks and business firms, which needed them for their own foreign trade, inflation stayed under control while the wealthy classes in the US profited mightily.

The problem with this scheme is the same difficulty faced by all Ponzi schemes, which is that, sooner or later, you run out of suckers to draw in. This happened not long after the turn of the millennium, and along with other factors — notably the peaking of global conventional petroleum production — it led to the financial crisis of 2008-2010. Since 2010 the US has been lurching from one crisis to another. This is not accidental. The wealth pump that kept the US at the top of the global pyramid has been sputtering as a growing number of nations have found ways to keep a larger share of their own wealth by expanding their domestic markets and raising the kind of trade barriers the US used before 1945 to build its own economy. The one question left is how soon the pump will start to fail altogether.

When Russia launched its invasion of Ukraine in February 2022, the US and its allies responded not with military force but with punitive economic sanctions, which were expected to cripple the Russian economy and force Russia to its knees. Apparently, nobody in Washington considered the possibility that other nations with an interest in undercutting the US empire might have something to say about that. Of course, that’s what happened. China, which has the largest economy on Earth in purchasing-power terms, extended a middle finger in the direction of Washington and upped its imports of Russian oil, gas, grain and other products. So did India, currently the third-largest economy on Earth in the same terms; as did more than 100 other countries.

Then there’s Iran, which most Americans are impressively stupid about. Iran is the 17th largest nation in the world, more than twice the size of Texas and even more richly stocked with oil and natural gas. It’s also a booming industrial power. It has a thriving automobile industry, for example, and builds and launches its own orbital satellites. It’s been dealing with severe US sanctions since not long after the Shah fell in 1978, so it’s a safe bet that the Iranian government and industrial sector know every imaginable trick for getting around those sanctions.

Right after the start of the Ukraine war, Russia and Iran suddenly started inking trade deals to Iran’s great benefit. Clearly, one part of the quid pro quo was that the Iranians passed on their hard-earned knowledge about how to dodge sanctions to an attentive audience of Russian officials. With a little help from China, India and most of the rest of humanity, the total failure of the sanctions followed in short order. Today, the sanctions are hurting the US and Europe, not Russia, but the US leadership has wedged itself into a position from which it can’t back down. This may go a long way towards explaining why the Russian campaign in Ukraine has been so leisurely. The Russians have no reason to hurry. They know that time is not on the side of the US.

For many decades now, the threat of being cut out of international trade by US sanctions was the big stick Washington used to threaten unruly nations that weren’t small enough for a US invasion or fragile enough for a CIA-backed regime-change operation. Over the last year, that big stick turned out to be made of balsa wood and snapped off in Joe Biden’s hand. As a result, all over the world, nations that thought they had no choice but to use dollars in their foreign trade are switching over to their own currencies, or to the currencies of rising powers. The US dollar’s day as the global medium of exchange is thus ending.

It’s been interesting to watch economic pundits reacting to this. As you might expect, quite a few of them simply deny that it’s happening — after all, economic statistics from previous years don’t show it yet, Some others have pointed out that no other currency is ready to take on the dollar’s role; this is true, but irrelevant. When the British pound lost a similar role in the early years of the Great Depression, no other currency was ready to take on its role either. It wasn’t until 1970 or so that the US dollar finished settling into place as the currency of global trade. In the interval, international trade lurched along awkwardly using whatever currencies or commodity swaps the trading partners could settle on: that is to say, the same situation that’s taking shape around us in the free-for-all of global trade that will define the post-dollar era.

One of the interesting consequences of the shift now under way is a reversion to the mean of global wealth distribution. Until the era of European global empire, the economic heart of the world was in east and south Asia. India and China were the richest countries on the planet, and a glittering necklace of other wealthy states from Iran to Japan filled in the picture. To this day, most of the human population is found in the same part of the world. The great age of European conquest temporarily diverted much of that wealth to Europe, impoverishing Asia in the process. That condition began to break down with the collapse of European colonial empires in the decade following the Second World War, but some of the same arrangements were propped up by the US thereafter. Now those are coming apart, and Asia is rising. By next year, four of the five largest economies on the planet in terms of purchasing power parity will be Asian. The fifth is the US, and it may not be in that list for much longer.

In short, America is bankrupt. Our governments from the federal level down, our big corporations and a very large number of our well-off citizens have run up gargantuan debts, which can only be serviced given direct or indirect access to the flows of unearned wealth the US extracted from the rest of the planet. Those debts cannot be paid off, and many of them can’t even be serviced for much longer. The only options are defaulting on them or inflating them out of existence, and in either case, arrangements based on familiar levels of expenditure will no longer be possible. Since the arrangements in question include most of what counts as an ordinary lifestyle in today’s US, the impact of their dissolution will be severe.

In effect, the 5% of us in this country are going to have to go back to living the way we did before 1945. If we still had the factories, the trained workforce, the abundant natural resources and the thrifty habits we had back then, that would have been a wrenching transition but not a debacle. The difficulty, of course, is that we don’t have those things anymore. The factories were shut down in the offshoring craze of the Seventies and Eighties, when the imperial economy slammed into overdrive, and the trained workforce was handed over to malign neglect.

We’ve still got some of the natural resources, but nothing like what we once had. The thrifty habits? Those went whistling down the wind a long time ago. In the late stages of an empire, exploiting flows of unearned wealth from abroad is far more profitable than trying to produce wealth at home, and most people direct their efforts accordingly. That’s how you end up with the typical late-imperial economy, with a governing class that flaunts fantastic levels of paper wealth, a parasite class of hangers-on that thrive by catering to the very rich or staffing the baroque bureaucratic systems that permeate public and private life, and the vast majority of the population impoverished, sullen, and unwilling to lift a finger to save their soi-disant betters from the consequences of their own actions.

The good news is that there’s a solution to all this. The bad news is that it’s going to take a couple of decades of serious turmoil to get there. The solution is that the US economy will retool itself to produce earned wealth in the form of real goods and non-financial services. That’ll happen inevitably as the flows of unearned wealth falter, foreign goods become unaffordable to most Americans, and it becomes profitable to produce things here in the US again. The difficulty, of course, is that most of a century of economic and political choices meant to support our former imperial project are going to have to be undone.

The most obvious example? The metastatic bloat of government, corporate and non-profit managerial jobs in American life. That’s a sensible move in an age of empire, as it funnels money into the consumer economy, which provides what jobs exist for the impoverished classes. Public and private offices alike teem with legions of office workers whose labour contributes nothing to national prosperity but whose pay cheques prop up the consumer sector. That bubble is already losing air. It’s indicative that Elon Musk, after his takeover of Twitter, fired some 80% of that company’s staff; other huge internet combines are pruning their workforce in the same way, though not yet to the same degree.

The recent hullaballoo about artificial intelligence is helping to amplify the same trend. Behind the chatbots are programs called large language models (LLMs), which are very good at imitating the more predictable uses of human language. A very large number of office jobs these days spend most of their time producing texts that fall into that category: contracts, legal briefs, press releases, media stories and so on. Those jobs are going away. Computer coding is even more amenable to LLM production, so you can kiss a great many software jobs goodbye as well. Any other form of economic activity that involves assembling predictable sequences of symbols is facing the same crunch. A recent paper by Goldman Sachs estimates that something like 300 million jobs across the industrial world will be wholly or partly replaced by LLMs in the years immediately ahead.

Another technology with similar results is CGI image creation. Levi’s announced not long ago that all its future catalogues and advertising will use CGI images instead of highly-paid models and photographers. Expect the same thing to spread generally. Oh, and Hollywood’s next. We’re not too far from the point at which a program can harvest all the footage of Marilyn Monroe from her films, and use that to generate new Marilyn Monroe movies for a tiny fraction of what it costs to hire living actors, camera crews and the rest. The result will be a drastic decrease in high-paying jobs across a broad swathe of the economy.

The outcome of all this? Well, one lot of pundits will insist at the top of their lungs that nothing will change in any way that matters, and another lot will start shrieking that the apocalypse is upon us. Those are the only two options our collective imagination can process these days. Of course, neither of those things will actually happen.

What will happen instead is that the middle and upper-middle classes in the US, and in many other countries, will face the same kind of slow demolition that swept over the working classes of those same countries in the late 20th century. Layoffs, corporate bankruptcies, declining salaries and benefits, and the latest high-tech version of NO HELP WANTED signs will follow one another at irregular intervals. All the businesses that make money catering to these same classes will lose their incomes as well, a piece at a time. Communities will hollow out the way the factory towns of America’s Rust Belt and the English Midlands did half a century ago, but this time it will be the turn of upscale suburbs and fashionable urban neighbourhoods to collapse as the income streams that supported them disappear.

This is not going to be a fast process. The US dollar is losing its place as the universal medium of foreign trade, but it will still be used by some countries for years to come. The unravelling of the arrangements that direct unearned wealth to the US will go a little faster, but that will still take time. The collapse of the cubicle class and the gutting of the suburbs will unfold over decades. That’s the way changes of this kind play out.

As for what people can do in response this late in the game, I refer to a post I made on The Archdruid Report in 2012 titled “Collapse Now and Avoid the Rush”. In that post I pointed out that the unravelling of the American economy, and the broader project of industrial civilisation, was picking up speed around us, and those who wanted to get ready for it needed to start preparing soon by cutting their expenses, getting out of debt, and picking up the skills needed to produce goods and services for people rather than the corporate machine. I’m glad to say that some people did these things, but a great many others rolled their eyes, or made earnest resolutions to do something as soon as things were more convenient, which they never were.

Over the years that followed I repeated that warning and then moved on to other themes, since there really wasn’t much point to harping on about the approaching mess when the time to act had slipped away. Those who made preparations in time will weather the approaching mess as well as anyone can. Those who didn’t? The rush is here. I’m sorry to say that whatever you try, it’s likely that there’ll be plenty of other frantic people trying to do the same thing. You might still get lucky, but it’s going to be a hard row to hoe.

Mind you, I expect some people to take a different tack. In the months before a prediction of mine comes true, I reliably field a flurry of comments insisting that I’m too rigid and dogmatic in my views about the future, that I need to be more open-minded about alternative possibilities, that wonderful futures are still in reach, and so on. I got that in 2008 just before the real estate bubble started to go bust, as I’d predicted, and I also got it in 2010 just before the price of oil peaked and started to slide, as I’d also predicted, taking the peak oil movement with it. I’ve started to field the same sort of criticism once again.

We are dancing on the brink of a long slippery slope into an unwelcome new reality. I’d encourage readers in America and its close allies to brace themselves for a couple of decades of wrenching economic, social, and political turmoil. Those elsewhere will have an easier time of it, but it’s still going to be a wild ride before the rubble stops bouncing, and new social, economic, and political arrangements get patched together out of the wreckage.

Here’s How We’ll Have Labor Shortages and High Unemployment at the Same Time

Posted on by
Reply

By Charles Hugh Smith

Source: Of Two Minds

This is how we’ll end up with severe shortages of truly skilled labor and high unemployment of those who lack the necessary skills.

The labor force and the job market are referred to as if they were monolithic structures. But they’re not monolithic, they are complex aggregates of very different cohorts of age, skills, mobility, education, experience, opportunity, potential and motivation.

As a result, numbers such as the unemployment rate tell us very little about the labor force and the job market in terms of what matters going forward. So what does matter going forward?

1. Demographics–the aging and retirement of key sectors of the work force.

2. Skills and experience that will be increasingly scarce due to mismatched demand for skills that are diminishing as older workers retire.

3. What skills and experience will be demanded by re-industrialization, reshoring and expanding the electrification of the economy.

Consider these two charts of the US work force by age. (Courtesy of CH @econimica) In the first chart, Total US Employees, note that the prime working age work force (ages 25-54) has been flatlined for the past 20 years at 101-102 million. In contrast, the 55-and-older cohort of employees soared from 17 million to 37 million. This increase of 20 million accounts for virtually all growth in the employed work force.

A funny thing happens as workers get old; they retire and leave the work force. Their skills and experience are no longer available to employers or the nation’s economy. The second chart shows the aging of the American populace, as the 55+ cohort increased from 57 million to 99 million since 2000, as the number of older employees skyrocketed from 17 million to 37 million.

While the total US population increased by 18% from 281 million in 2000 to 331 million today, the 55+ cohort increased 74% (from 57 million to 99 million).

The key takeaway here is the number of experienced workers who will retire in the next decade will track the explosive growth in the 55+ cohort. The general consensus is this will not be a problem because there are plenty of younger workers available to fill the vacated slots.

But this overlooks the qualitative and quantitative differences in the millions leaving the work force and those joining the work force. This is especially consequential in real-world jobs, i.e. all those jobs that require engaging real-world materials rather than staring at screens.

Though few analysts and commentators will admit to it, the implicit assumption is that the jobs that matter all involve staring at screens–processing data, finance, entertainment and shaping narrative make the world go round. All the real-world stuff (boring!) will magically get done by tax donkeys who are out of sight, out of mind.

This mindset has it backwards: it’s the real-world work of changing the industrial / energy / energy distribution foundation of the economy that matters going forward, not the staring-at-screens jobs.

What few seem to realize is the work force that’s aging and retiring is the cohort with the real-world skills. It’s a nice idea to remake the entire electrical grid of the nation to transport much larger quantities of electrical power, but who’s going to do all that work? Young people whose career goals are becoming YouTube influencers or day-traders? No. All the ChatAI bots in the world aren’t going to get the real work done, either.

In other words, there is a massive mismatch between the skills available to hire in the young-worker cohort and the skills and experience needed to rebuild the material, real-world foundations of the US economy. It’s well-known but apparently not worth worrying about that the average age of the US farmer is pushing 60 years of age. Nobody left to grow all our food? Hey, isn’t there a ChatAI bot to do all that for us? It can all be automated, right? No? Well, why not? Somebody out there, get it done! Food in super-abundance should be delivered to everyone staring at screens 24/7, it’s our birthright.

The average age of skilled tradespeople is also skewed to the aging work force. There is no easy way to quantify real-world skills gained by on-the-job experience. I suspect it follows a power-law distribution: the newly minted worker just out of school / apprenticeship can handle basic functions, but when tough problems arise, the number of workers with the requisite experience to diagnose and fix the problem diminishes rapidly.

This distribution presents an enormous problem for the economy and employers. Once the super-experienced workers who can solve any problem leave, they cannot be replaced by inexperienced workers. So when the really big problems arise, the systems will break down because those who knew how to deal with the problems are no longer available.

This is how you can have 10 million unemployed workers and 1 million unfilled positions that can’t be filled because few are truly qualified. You want to erect new electrical transmission lines? Nice, but you’re not going to get the job done with green workers accustomed to staring at screens. It takes years of hard labor to acquire even a bare minimum of the skills required. These are not assembly-line jobs that can be filled by unskilled labor, these are jobs in the messy real world, not a distribution center.

As I note in my book on Self-Reliance, individuals with a full spectrum of real-world skills are now extremely rare. Skills that were once common are now performed by specialists. We seem to have all the time in the world to stare at hundreds of cooking programs on TV but how many people actually prepare three meals a day, week in, week out, month in, month out, year in, year out? How many people know how to repair anything, build anything, or maintain a machine?

My direct experience is that many young people don’t know how to put air in the tires of the vehicle Mom and Dad gave them. Young people with graduate-level diplomas don’t know what a green bean plant looks like. (Eeew, gross, it grows in dirt?) The cultural value system that only values wealth, regardless of its source, and minting money from staring at screens has generated a fundamental mismatch between the skills that will be needed going forward and the skills being presented as oh-so-valuable.

Yes, there are many young workers with sharp real-world skills. The question is, are there enough?

This is how we’ll end up with severe shortages of truly skilled labor and high unemployment in the cohort of workers with few real-world skills and a surplus of skills for which there is limited demand. As a real-world experiment, go find a tough old rancher and ask them a series of questions about livestock, machinery, fencing, generators, etc., and then ask the average newly minted college graduate that followed the warped values embedded in our economy the same questions.

Of course the young worker can’t match the experience of the old worker, but do they have any experience at all of a spectrum of essential real-world skills? If not, do they have the requisite physical endurance and commitment needed to acquire real-world skills?

Who’s going to do all the real-world work going forward? A few people talk about it as an abstraction, but it’s not an issue to everyone focused on Federal Reserve policy or GDP. But eventually, the real world will matter more than staring at screens and day-trading, because when the systems break down due to lack of truly qualified employees, we’ll all wake up. But by then it will be too late. We’ll be staring at dead screens begging for somebody somewhere to restore power so we can continue playing with ChatAI to trade zero-day options.

Bull or Bear? The Ultimate Source of Market Instability

Posted on by
Reply

By Charles Hugh Smith

Source: Of Two Minds

Market commentators tend to focus on Bulls and Bears and Federal Reserve policies as drivers of stock market gyrations, but there’s a far more profound dynamic working beneath these veneers: the forces of adaptation and evolution transforming the economy and society as conditions change.

While the general expectation is that the post-Covid economy “should” revert to the stability of 2019, this ignores what was already unraveling in 2019. The global economy experienced fundamental shifts in technology, production, energy, capital flows, labor, currencies and geopolitics in the past 25 years, and all these forces are not just in motion but accelerating in ways that are destabilizing the status quo.

The necessity of adaptation and evolution can be summed up very simply: adapt or die. This is the natural state not just of Nature and species but of systems such as societies and economies. Those which cling on to failing models stagnate and decay, while those which embrace dissent, transparency and a constant churn of experimentation and trial-and-error will adapt and evolve and emerge stronger and more adaptable.

The US economy went through a comparable period of instability and forced adaptation in the 1970s, a dynamic I explored in The Forgotten History of the 1970s (January 13, 2023). Everyone benefiting from the status quo arrangements fought the much-needed changes tooth and nail, and so progress was uneven. Transitioning to a more efficient and responsive industrial base required tremendous capital investments and scaling up new technologies.

The transition is more costly and takes more time than we would like; the 1970s transition took about a decade. We can anticipate a similar scale of capital investment and time will be needed for this structural adaptation.

As the chart below illustrates, the 1970s was characterized by high inflation and big swings up and down in the stock market. Successful adaptations generated hope for quick recovery, while lagging adaptations tempered the hope with painful realities.

Again, it is likely that the decade ahead will track this same general dynamic of big swings generated by hope that the worst is over and the realities that progress is only partial and instability still reigns.

Everyone wants a trend they can trade for effortless gains. That may no longer be realistic.

The GATHERING Storm in Ukraine Spells Doom for the West

Posted on by
Reply
Photo by by Adam Brummett

By Col. Douglas MacGregor

Source: Information Clearing House

The crisis of American national power has begun. America’s economy is tipping over, and Western financial markets are quietly panicking. Imperiled by rising interest rates, mortgage-backed securities and U.S. Treasuries are losing their value. The market’s proverbial “vibes”—feelings, emotions, beliefs, and psychological penchants—suggest a dark turn is underway inside the American economy.

American national power is measured as much by American military capability as by economic potential and performance. The growing realization that American and European military-industrial capacity cannot keep up with Ukrainian demands for ammunition and equipment is an ominous signal to send during a proxy war that Washington insists its Ukrainian surrogate is winning.

Russian economy-of-force operations in southern Ukraine appear to have successfully ground down attacking Ukrainian forces with the minimal expenditure of Russian lives and resources. While Russia’s implementation of attrition warfare worked brilliantly, Russia mobilized its reserves of men and equipment to field a force that is several magnitudes larger and significantly more lethal than it was a year ago.

Russia’s massive arsenal of artillery systems including rockets, missiles, and drones linked to overhead surveillance platforms converted Ukrainian soldiers fighting to retain the northern edge of the Donbas into pop-up targets. How many Ukrainian soldiers have died is unknown, but one recent estimate wagers between 150,000-200,000 Ukrainians have been killed in action since the war began, while another estimates about 250,000.

Given the glaring weakness of NATO members’ ground, air, and air defense forces, an unwanted war with Russia could easily bring hundreds of thousands of Russian Troops to the Polish border, NATO’s Eastern Frontier. This is not an outcome Washington promised its European allies, but it’s now a real possibility.

In contrast to the Soviet Union’s hamfisted and ideologically driven foreign policymaking and execution, contemporary Russia has skillfully cultivated support for its cause in Latin America, Africa, the Middle East, and South Asia. The fact that the West’s economic sanctions damaged the U.S. and European economies while turning the Russian ruble into one of the international system’s strongest currencies has hardly enhanced Washington’s global standing.

Biden’s policy of forcibly pushing NATO to Russia’s borders forged a strong commonality of security and trade interests between Moscow and Beijing that is attracting strategic partners in South Asia like India, and partners like Brazil in Latin America. The global economic implications for the emerging Russo-Chinese axis and their planned industrial revolution for some 3.9 billion people in the Shanghai Cooperation Organization (SCO) are profound.

In sum, Washington’s military strategy to weaken, isolate, or even destroy Russia is a colossal failure and the failure puts Washington’s proxy war with Russia on a truly dangerous path. To press on, undeterred in the face of Ukraine’s descent into oblivion, ignores three metastasizing threats: 1. Persistently high inflation and rising interest rates that signal economic weakness. (The first American bank failure since 2020 is a reminder of U.S. financial fragility.) 2. The threat to stability and prosperity inside European societies already reeling from several waves of unwanted refugees/migrants. 3. The threat of a wider European war.

Inside presidential administrations, there are always competing factions urging the president to adopt a particular course of action. Observers on the outside seldom know with certainty which faction exerts the most influence, but there are figures in the Biden administration seeking an off-ramp from involvement in Ukraine. Even Secretary of State Antony Blinken, a rabid supporter of the proxy war with Moscow, recognizes that Ukrainian President Volodymyr Zelensky’s demand that the West help him recapture Crimea is a red line for Putin that might lead to a dramatic escalation from Moscow.

Backing down from the Biden administration’s malignant and asinine demands for a humiliating Russian withdrawal from eastern Ukraine before peace talks can convene is a step Washington refuses to take. Yet it must be taken. The higher interest rates rise, and the more Washington spends at home and abroad to prosecute the war in Ukraine, the closer American society moves toward internal political and social turmoil. These are dangerous conditions for any republic.

From all the wreckage and confusion of the last two years, there emerges one undeniable truth. Most Americans are right to be distrustful of and dissatisfied with their government. President Biden comes across as a cardboard cut-out, a stand-in for ideological fanatics in his administration, people that see executive power as the means to silence political opposition and retain permanent control of the federal government.

Americans are not fools. They know that members of Congress flagrantly trade stocks based on inside information, creating conflicts of interest that would land most citizens in jail. They also know that since 1965 Washington led them into a series of failed military interventions that severely weakened American political, economic, and military power.

Far too many Americans believe they have had no real national leadership since January 21, 2021. It is high time the Biden administration found an off-ramp designed to extricate Washington, D.C., from its proxy Ukrainian war against Russia. It will not be easy. Liberal internationalism or, in its modern guise, “moralizing globalism,” makes prudent diplomacy arduous, but now is the time. In Eastern Europe, the spring rains present both Russian and Ukrainian ground forces with a sea of mud that severely impedes movement. But the Russian High Command is preparing to ensure that when the ground dries and Russian ground forces attack, the operations will achieve an unambiguous decision, making it clear that Washington and its supporters have no chance to rescue the dying regime in Kiev. From then on, negotiations will be extremely difficult, if not impossible.

Related Video:

Send in the Clowns

Posted on by
3

Yellen and Garland perform back-to-back surprise visits to Ukraine

By Philip Giraldi

Source: The Unz Review

Sometimes I think that the script being used by the Biden Administration to manage its foreign and national security policies has been written by George Orwell, though I am not sure if it based on 1984 or Animal Farm. Maybe it is a combination of the two. Either way, it would help explain why there is something seriously wrong here. For example, at the end of February Congress, confronted by a debt ceiling, began discussing cutting Medicare and Social Security while more recently a banking sector crisis seems to be developing so Treasury Secretary Janet Yellen decided to go off doing photo-ops in Kiev embracing Ukraine’s President Volodymyr Zelensky shortly after handing him the keys to the US economy. She explained to Zelensky how the White House had approved an additional $12 billion in aid to Ukraine during the previous week, including $2 billion for the military and $10 billion to support Zelensky’s government and other infrastructure needs. The US Treasury is now de facto the source of the Ukraine government’s entire annual budget. In addition, Yellen described glowingly how the Treasury and State Departments will implement a new round of sanctions against more than 200 entities and individuals with ties to Russia’s military, high-technology industries, and its metals and mining sectors. The US Department of Commerce is also enforcing export restrictions on materials and technology, including semiconductors, sold by American companies to customers in Russia and China.

In defense of her grand mission, Yellen penned an op-ed for the always compliant New York Times explaining the importance of Ukraine to the United States. She wrote how in Ukraine “…Russia’s barbaric attacks continue — but Kyiv stands strong and free. Ukraine’s heroic resistance is the direct product of the courage and resilience of Ukraine’s military, leadership and people. But President Volodymyr Zelensky and the Ukrainians would be the first to admit that they can’t do this alone — and that international support is crucial to sustaining their resistance. I’m in Kyiv to reaffirm our unwavering support of the Ukrainian people. Mr. Putin is counting on our global coalition’s resolve to wane, which he thinks will give him the upper hand in the war. But he is wrong. As President Biden said here last week, America will stand with Ukraine for as long as it takes… Ukrainians are fighting for their lives on the front lines of the free world. Today, and every day, they deserve America’s unyielding support.”

The Yellen op-ed drones on with a lie so large that it is astonishing that the New York Times would even print it: “When confronted with scenes of brutality and oppression, Americans have always been quick to stand up and do the right thing. Our strength as a nation comes from our commitment to our ideals — and our capacity to see in others the same desires that animated our own struggles for freedom and justice.” But then she tops that with assurances from “President Zelensky, [who] has pledged to use these funds in the ‘most responsible way.’ We welcome this commitment, as well as his longstanding agenda to strengthen good governance in Ukraine.” Huh?

And here is Yellen’s version of “Why We Fight!”: “Our support is motivated, first and foremost, by a moral duty to come to the aid of a people under attack. We also know that, as President Zelensky has said, our assistance is not charity. It’s an investment in ‘global security and democracy.’ Let’s look at the strategic impact of our support for Ukraine so far. Mr. Putin’s war poses a direct threat to European security, as well as to the laws and values that underpin the rules-based international system.”

So, Americans have a “moral duty” apparently up to and including sending their sons and daughters to die supporting Ukraine. And ah yes, it’s all about the “free” world, democracy and the notorious rules based international system! Has anyone yet cited Hegel’s observation that the President Joe Biden Administration’s foreign policy has already “repeated itself, first as a tragedy in Afghanistan, second as a farce”? Meanwhile one suspects Zelensky was laughing all the way to the bank as Yellen disappeared over the horizon to come up with the cash, as that old expression goes, and he probably already has one of his buddies shopping for a new villa on the French Riviera to supplement his other real estate! But wait! The story became even more exciting the following week, involving another visit to Mr. Z by America’s nearly invisible Attorney General Merrick Garland, a man who can literally look Z in the eye as they are both very short. Garland is generally engaged in chasing white supremacists and requiring all new FBI hires to learn all about how to identify and pursue antisemites, but he has made two trips to Kiev to meet mano-a-mano with the brave olive drab t-shirt clad warrior who is already being beatified as the twenty-first century’s Winston Churchill.

Garland was in town to do the other thing the engages his sense of law and order, which is to set up a tribunal to arrest, prosecute and punish Russian war criminals after Ukraine emerges triumphant from its conflict with the unimaginably evil President Vladimir Putin. It would be modeled on the Nuremberg Tribunals that tried leading Nazis after the Second World War, and Garland has cited his family’s escape from the so-called holocaust to explain why he is intent on personally being involved in delivering what he describes as “justice.” A Justice Department spokeswoman described Garland’s mission as being in Kiev to personally “reaffirm America’s commitment to help hold Russia responsible for war crimes committed in its unjust and unprovoked invasion against its sovereign neighbor.”

Garland had several meetings with President Volodymyr Zelensky and foreign law enforcement officials including Ukrainian Prosecutor General Andriy Kostin while attending what was billed as the “United for Justice Conference.” Zelensky elaborated that the purpose of the conference was to hold Russia’s leadership accountable for the alleged atrocities carried out by its army. “The main issue of all these meetings is accountability,” he said. The US Justice Department is reportedly actively engaged in the gathering of evidence to indict the Russians. During Garland’s first visit to Ukraine in June 2022 he announced the appointment of Eli Rosenbaum, an Office of Special Investigations prosecutor best known for going after former Nazis, to direct American efforts to identify and track Russian war criminals.

Garland laid it on thick, as was expected from someone responsible for prosecuting the rest of the world when it steps out of line. He told his hosts that “Just over twelve months ago, invading Russian forces began committing atrocities at the largest scale in any armed conflict since the Second World War. We are here today in Ukraine to speak clearly, and with one voice: the perpetrators of those crimes will not get away with them. In addition to our work in partnership with Ukraine and the international community, the United States has also opened criminal investigations into war crimes in Ukraine that may violate US law.” He concluded by throwing out the complete bullshit party line much beloved by Joe Biden and Tony Blinken, that “The United States recognizes that what happens here in Ukraine will have a direct impact on the strength of our own democracy.”

Of course, there is more than a little bit of irony in all this, not to mention top level hypocrisy, as the United States has killed more people directly or indirectly while committing more crimes against humanity dished out in various ways over the past twenty years than any other country, except, predictably, Israel, which currently is committing crimes against humanity on a nearly daily basis. Curiously, however, the normally tone-deaf White House and Pentagon seem to understand, on a certain level, that opening up Pandora’s box might not be a good idea when it comes to war crimes. Last week Secretary of Defense Lloyd Austin refused to share US information on alleged Russian crimes with the International Criminal Court (ICC) in the Hague. The Pentagon is blocking the Biden administration from sharing evidence with the ICC collected by American intelligence agencies regarding Russian activities in Ukraine because helping the court investigate Russians might set a precedent that could help pave the way for it to prosecute Americans. Washington does not recognize the ICC, fearing that it might well seek to examine the sorry record of US military crimes in Asia and Africa. Israel similarly does to recognize the court for roughly the same reason.

So here we are, two top level officials from the Biden regime sneak into Kiev to give an arch crook money and unlimited moral support, together with a pledge that more cash is on the way as are arms and war crimes tribunals await those nasty Russians. And guess what? It is all packaged as being good for America! This sounds like a song that was sung previously in places like Vietnam, Iraq and Afghanistan and it was a tissue of lies then just as it is now. Yellen ought to have stayed home to tend to the banking system and should be giving the billions of dollars earmarked for Zelensky back to the American people. If Garland wants to investigate anyone it should be the Pentagon, the intelligence agencies, and Congress. And yes, his own FBI! And don’t forget how the Bidens and Clintons became multi-millionaires! And then there is the destruction of Nord Stream. Funny how every time one turns over a rock in and around the US government something really smelly surfaces.

How Covid lockdowns primed the current financial crisis

Posted on by
Reply

By Christian Parenti

Source: The Grayzone

The lockdowns and the stimulus required to keep the economy alive helped drive inflation. Then the Fed jacked up interest rates. And all hell broke loose.

On Friday March 10th, 2023, Silicon Valley Bank (SVB) died of Covid. Alright, it’s a little more complicated than that, but Covid lockdowns followed by massive government stimulus were a critical – and massively under-acknowledged – factor in propelling the bank’s demise.

At the heart of the crisis is the gigantic pile of low-interest debt that was issued during the height of the pandemic. While private-sector pandemic-era debt like corporate bonds also soared, US government debt like Treasury bonds piled up.

In a nutshell, during the pandemic the government issued enormous amounts of extremely low interest government debt — about $4.2 trillion of it. But now interest rates, including on government debt, are higher than they have been in 15 years and investors are dumping their old low-interest debt. As they dump, the resale price of the old debt goes down. The more it declines, the more investors want to dump. And thus, a panic is born. 

To understand the problem fully, the question of US government debt has to be put into its larger context, which is: the pandemic response as a whole.

When news of the Covid virus first broke in December 2019, the 2 Year Treasury bond was being offered at 1.64% interest; the 10 year was at about 1.80%, and the resale value of such bonds on secondary markets was strong. Then, in March 2020, as Covid cases and deaths spiked, the US began to shutter its economy with panicked lockdowns that were supposed to “flatten the curve” or slow the spread of the virus and thus protect the hospitals. But Covid was politicized and the lockdowns were extended.  

As the lockdowns dragged on, the US economy began to collapse, shrinking at a record-shattering annualized rate of 31.4% during the second quarter of fiscal year 2020.

To avoid total economic devastation, the federal government began massive debt-financed spending. In March 2020, Trump signed into law the $2.2 trillion economic stimulus bill the CARES Act, or Coronavirus Aid, Relief, and Economic Security. Then, in March 2021, Biden signed the American Rescue Plan Act which contained $1.9 trillion more in Covid relief. Finally, in April 2021, another trillion or so of Covid relief arrived in the Consolidated Appropriations Act. 

Thanks to these laws, every industry and most people received public money. There was increased and extended unemployment payments, as well as the so-called “stimmy checks” or stimulus payments to everyone earning under $75,000 a year (about half the population). The Paycheck Protection Program spent almost a trillion dollars. The Provider Relief Fund doled out $178 billion to the healthcare system. 

All this debt spending kept millions of people in their homes, and helped feed, employ, and care for millions more. The measures allowed hundreds of thousands of businesses to stay afloat even as many thousands of others went under. The impact of the spending on Americans’ well-being was generally positive. For a moment, the US child poverty rate was cut in half, falling to 5.2%. 

But the economically destructive lockdowns were not necessary and did not work. Covid fanatics maintain that the lockdowns were unavoidable because the virus is so deadly. That, however, is uninformed. Last year I explained in detail how the Lockdown Left got the Covid crisis wrong. Not a single critic has challenged any of the facts I presented so there is little point in rehashing them all here. 

Those who advocated an alternative to ham-fisted lockdowns, like the authors of the Great Barrington Declaration, which called for “focused protection” of vulnerable groups like the elderly, were viciously targeted in a reputation destruction campaign covertly orchestrated by former NIH director Francis Collins and de facto Covid czar Anthony Fauci. Never mind that the document’s authors were three eminently qualified scientists: Sunetra Gupta, professor of Theoretical Epidemiology at Oxford University; Jay Bhattacharya, professor of medicine at Stanford; and Martin Kulldorff, formerly a professor of medicine and biostatistics at Harvard. They were portrayed as far-right cranks who were almost eager to see millions die. But now, they have been vindicated.

Ultimately, the federal government spent $4.2 trillion propping up the economy that it was simultaneously choking to death with lockdowns. These two contradictory pressures laid the groundwork for the recent bank failures. Government mandated lockdowns hit the economy like a body blow. Factories closed, small businesses went under, ports and logistic hubs reduced operations, and about 2 million mostly older workers simply resigned. But at the same time, the federal government injected vast amounts of purchasing power into the economy, thus boosting consumption.

These two, contradictory government moves imposed almost unbearable pressure on supply chains. As shortages mounted, prices began to surge. Put simply: lockdowns plus stimulus equaled inflation.

Consider just one of the most important bottlenecks in the whole economy. During lockdown, many commercial driving license schools were closed. This helped create a shortage of about 80,000 truckers. If trucks do not roll supplies run low and prices go up.

At first, the official line on inflation – parroted by the Lockdown Left – maintained that inflation was “transitory.” But it was not. Inflation peaked at 9.1% in June 2022 while wage growth lagged at about 5%. In April 2020 during the worst of the lockdown, the Federal Reserve’s Federal Funds Rate sank to 0.5%. By February 2022, it had only risen to 0.8%.  

Meanwhile, inflation was surging. By February 2022, inflation had reached 7.9%. Only then did the Fed, in an effort to tamp down prices, begin raising interest rates at the fastest pace rate in its history. The federal Funds rate was around 4.57% when SVB went under. Perhaps a massive wave of taxation could have soaked up enough liquidity to have helped cool prices, but that was a political impossibility. The more politically palatable response in Washington was for the Federal Reserve to raise interest rates. 

Herein lies the problem. During the height of the lockdowns, banks bought up enormous amounts of government debt. As the Wall Street Journal put it: “U.S. banks are suffering the aftereffects of a Covid-era deposit boom that left them awash in cash that they needed to put to work. Domestic deposits at federally insured banks rose 38% from the end of 2019 to the end of 2021, FDIC data show. Over the same period, total loans rose 7%, leaving many institutions with large amounts of cash to deploy in securities as interest rates were near record lows.” Awash in deposits with not enough demand for loans, the banks bought US government securities. Their purchases surged 53% between 2019 and the end of 2021, to a total of $4.58 trillion, according to Fed data reported by the Wall Street Journal.

Because so much debt was being issued, it carried super-low interest rates. For example, on July 27, 2020, the 10 Year Treasury was offered at an annual interest rate of only 0.55%. This is fine if you are the borrower of money, but if you are the lender (that is to say, a bank giving the federal government money in exchange for a Treasury bond), it means your income stream will be reduced to a mere trickle. If inflation rises, it essentially disappears. 

As the yield on new government debt reached toward 5% and inflation hung stubbornly at around 6.4%, all of that old, low-interest, pandemic-era debt started to look like garbage and banks began unloading it. The more that banks dumped old debt, the less value that debt had on resale markets. The lower its resale value, the more the banks wanted to dump it. SVB lost almost $2 billion selling off Government securities. And when they announced the loss, their stock price plunged by 60%. 

At the same time, many of SVB’s clients were withdrawing money. This was in part because rising interest rates made borrowing new money more expensive and thus incentivized the use of savings in day-to-day business operations. Also, higher inflation and higher interest rates made low-earning bank deposits less attractive and compelled depositors to redeploy their surplus capital towards higher-earning investments. So, just as SVB needed cash, deposits were evaporating.

By the end of the week of March 10, the four biggest banks in the United States had lost $51 billion because of their panicked dumping of pandemic-era debt. Right after SVB was taken under government control, state regulators closed the New York-based Signature Bank. Before the weekend was over the Federal Reserve announced the creation of a new lending facility that would ensure that “banks have the ability to meet the needs of all their depositors.” Furthermore, the Fed said it was “prepared to address any liquidity pressures that may arise.”

It would seem that the federal government is ready to execute another de facto partial nationalization of US banking, just as they did in 2008 via emergency “cash injections” and then the Troubled Assets Relief Program (TARP). In this current crisis, banks can avoid losses on their low-interest debt if they do not sell it before its maturity. For that to happen, the banks need money. The Fed has said it will pour enormous amounts of money into the banks while all of the relevant officials have proclaimed that the banking system will somehow pay for this. All of this will almost certainly mean even more government debt will be issued. 

Already, interest payments on the federal debt are one of the largest single items in the US budget – set to reach $400 billion this year. That is almost half as much as the grotesquely overdeveloped military budget. By comparison, federal spending on housing is only $78 billion.

Shoring up the banking system is necessary because if it collapses, the whole economy goes with it. At least in the short term, Americans are hostages of the US financial system. But government intervention without any new regulations and taxes upon the financial sector will likely mean more inflation and a bigger financial bubble. By refusing to properly tax the top 1%, the federal government also commits itself to more austerity for the many and more welfare for the rich, because rising government debt means a rising portion of our taxes must go toward interest payments. 

This system of crisis-prone, hyper-financialized capitalism seems ever more like a junkie. If it doesn’t get its regular fix of public sector help, it will simply collapse and die. 

Even if the federal government can stanch the current crisis, the pandemic debt story is global and very likely to cause trouble for some time to come. As a 2021 report by the World Bank put it: “The debt buildup during the pandemic-induced global recession of 2020 was the largest in several decades. This was true for all types of debt—total, government, and private debt; and advanced-economy and EMDE [emerging market and developing economy] debt; external and domestic debt. In 2020, total global debt reached 263 percent of GDP and global government debt 99 percent of GDP, their highest levels in half a century.” 

The US intelligentsia and its media elites are finally beginning to reckon with the impact of misguided and authoritarian lockdowns on student learning and the psychological and physical health of millions. But in all the discussion of the current bank runs, the pivotal role of lockdowns in priming the crisis remains overlooked.

Silicon Valley Bank Crisis: The Liquidity Crunch We Predicted Has Now Begun

Posted on by
Reply
A worker, middle, tells customers that the Silicon Valley Bank headquarters is closed on Friday, March 10, 2023, in Santa Clara, California. Silicon Valley Bank was shut down on Friday morning by California regulators and was put in control of the U.S. Federal Deposit Insurance Corporation. (Justin Sullivan/Getty Images/TNS)

By Brandon Smith

Source: Alt-Market.us

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.

In that same article I discussed the “yield curve” being a red flag for an incoming crisis:

“…The central bank is the largest investor in US bonds. If the Fed raises interest rates into weakness and tapers asset purchases, then we may see a repeat of 2018 when the yield curve started to flatten. This means that short term treasury bonds will end up with the same yield as long term bonds and investment in long term bonds will fall.”

As of this past week the yield curve has been inverted, signaling a potential liquidity crunch. Both Jerome Powell (Fed Charman) and Janet Yellen (Treasury Secretary) have indicated that tightening policies will continue and that reducing inflation to 2% is the goal. Given the many trillions of dollars the Fed has pumped into the financial system in the past decade as well as the overall weakness of general economy, it would not take much QT to crush credit markets and by extension stock markets.

As I also noted in 2021:

“We are now at that stage again where price inflation tied to money printing is clashing with the stock market’s complete reliance on stimulus to stay afloat. There are some that continue to claim the Fed will never sacrifice the markets by tapering. I say the Fed does not actually care, it is only waiting for the right time to pull the plug on the US economy.”

But is that time now?  I expanded on this analysis in my article ‘Major Economic Contraction Coming In 2023 – Followed By Even More Inflation’, published in December of 2022. I noted that:

“This is the situation we are currently in today as 2022 comes to a close. The Fed is in the midst of a rather aggressive rate hike program in a “fight” against the stagflationary crisis that they created through years of fiat stimulus measures. The problem is that the higher interest rates are not bringing prices down, nor are they really slowing stock market speculation. Easy money has been too entrenched for far too long, which means a hard landing is the most likely scenario.”

I continued:

“In the early 2000s the Fed had been engaged in artificially low interest rates which inflated the housing and derivatives bubble. In 2004, they shifted into a tightening process. Rates in 2004 were at 1% and by 2006 they rose to over 5%. This is when cracks began to appear in the credit structure, with 4.5% – 5.5% being the magic cutoff point before debt became too expensive for the system to continue the charade. By 2007/2008 the nation witnessed an exponential implosion of credit…”

Finally, I made my prediction for March/April of 2023:

“Since nothing was actually fixed by the Fed back then, I will continue to use the 5% funds rate as a marker for when we will see another major contraction…The 1% excise tax added on top of a 5% Fed funds rate creates a 6% millstone on any money borrowed to finance future buybacks. This cost is going to be far too high and buybacks will falter. Meaning, stock markets will also stop, and drop. It will likely take two or three months before the tax and the rate hikes create a visible effect on markets. This would put our time frame for contraction around March or April of 2023.”

We are now in the middle of March and it appears that the first signs of liquidity crisis are bubbling to the surface with the insolvency of SVB and the shuttering of another institution in New York called Signature Bank.

Everything is tied back to liquidity. With higher rates, banks are hard-pressed to borrow from the Fed and companies are hard-pressed to borrow from banks. This means companies that were hiding financial weakness and exposure to bad investments using easy credit no longer have that option. They won’t be able to artificially support operations that are not profitable, they will have to abandon stock buybacks that make their shares appear valuable and they will have to initiate mass layoffs in order to protect their bottom line.

SVB is not quite Bear Stearns, but it is likely a canary in the coal mine, telling us what is about to happen on a wider scale. Many of their depositors were founded in venture capital fueled by easy credit, not to mention all the ESG related companies dependent on woke loans. That money is gone – It’s dead. Those businesses are quietly but quickly crumbling which also conjured a black hole for deposits within SVB. It’s a terribly destructive cycle. Surely, there are numerous other banks in the US in the same exact position.

I believe this is just the beginning of a liquidity and credit crisis that will combine with overt inflation to produce perhaps the biggest economic crash America has ever seen. SVB’s failure may not be THE initiator, only one among many. I suspect that in this scenario larger US banks may avoid the kind of credit crash that we saw with Bear Stearns and Lehman Brothers in 2008. But, contagion could still strike multiple mid-sized banks and the effects could be similar in a short period of time.

With all the news flooding the wire on SVB it’s easy to forget that all of this boils down to a single vital issue: The Fed’s stimulus measures created an economy utterly addicted to easy and cheap liquidity. Now, they have taken that easy money away. In light of the SVB crash, will the central bank reverse course on tightening, or will they continue forward and risk contagion?

For now, Janet Yellen and the Fed have implemented a limited backstop and a guarantee on deposits at SVB and Signature. This will theoretically prevent a “haircut” on depositor accounts and lure retail investors with dreams of endless stimulus.  It is a half-measure, though – Central bankers have to at least look like they are trying. 

SVB’s assets sit at around $200 billion and Signature’s assets are around $100 billion, but what about interbank exposure and what about the wider implications?  How many banks are barely scraping by to meet their liquidity obligations, and how many companies have evaporating deposits?  The backstop will do nothing to prevent a major contagion.

There are many financial tricks that might slow the pace of a credit crash, but not by much.  And, here’s the kicker – Unlike in 2008, the Fed has created a situation in which there is no escape. If they do pivot and return to systemic bailouts, stagflation will skyrocket even more. If they don’t use QE, then banks crash, companies crash and even bonds become untenable, which puts the world reserve status of the Dollar under threat. What does that lead to? More stagflation. In either case, rapidly rising prices on most necessities will be the consequence.

How long will this process take? It all depends on how the Fed responds. They might be able to drag the crash out for a few months with various stop-gaps. If they go back to stimulus then the banks will be saved along with equities (for a while) but rising inflation will suffocate consumers in the span of a year and companies will still falter. My gut tells me that they will rely on contained interventions but will not reverse rate hikes as many analysts seem to expect.

The Fed will goose markets up at times using jawboning and false hopes of a return to aggressive QE or near-zero rates, but ultimately the trend of credit markets and stocks will be steady and downward.  Like a brush fire in a wind storm, once the flames are sparked there is no way to put things back the way they were.  If their goal was in fact a liquidity crunch, well, mission accomplished.  They have created that exact scenario.  Read my articles linked above to understand why they might do this deliberately.

In the meantime, it appears that my predictions on timing are correct so far. We will have to wait and see what happens in the coming weeks. I will keep readers apprised of events as new details unfold.  The situation is rapidly evolving.

Why the Banking System Is Breaking Up

Posted on by
Reply

By Michael Hudson

Source: The Unz Review

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?

In Killing the Host I wrote about what seemed obvious enough. Rising interest rates cause the prices of bonds already issued to fall – along with real estate and stock prices. That is what has been happening under the Fed’s fight against “inflation,” its euphemism for opposing rising employment and wage levels. Prices are plunging for bonds, and also for the capitalized value of packaged mortgages and other securities in which banks hold their assets on their balance sheet to back their deposits.

The result threatens to push down bank assets below their deposit liabilities, wiping out their net worth – their stockholder equity. This is what was threatened in 2008. It is what occurred in a more extreme way with S&Ls and savings banks in the 1980s, leading to their demise. These “financial intermediaries” did not create credit as commercial banks can do, but lent deposits out in the form of long-term mortgages at fixed interest rates, often for 30 years. But in the wake of the Volcker spike in interest rates that inaugurated the 1980s, the overall level of interest rates remained higher than the interest rates that S&Ls and savings banks were receiving. Depositors began to withdraw their money to get higher returns elsewhere, because S&Ls and savings banks could not pay higher their depositors higher rates out of the revenue coming in from their mortgages fixed at lower rates. So even without fraud Keating-style, the mismatch between short-term liabilities and long-term interest rates ended their business plan.

The S&Ls owed money to depositors short-term, but were locked into long-term assets at falling prices. Of course, S&L mortgages were much longer-term than was the case for commercial banks. But the effect of rising interest rates has the same effect on bank assets that it has on all financial assets. Just as the QE interest-rate decline aimed to bolster the banks, its reversal today must have the opposite effect. And if banks have made bad derivatives trades, they’re in trouble.

Any bank has a problem of keeping its asset valuations higher than its deposit liabilities. When the Fed raises interest rates sharply enough to crash bond prices, the banking system’s asset structure weakens. That is the corner into which the Fed has painted the economy by QE.

The Fed recognizes this inherent problem, of course. That is why it avoided raising interest rates for so long – until the wage-earning bottom 99 Percent began to benefit by the recovery in employment. When wages began to recover, the Fed could not resist fighting the usual class war against labor. But in doing so, its policy has turned into a war against the banking system as well.

Silvergate was the first to go, but it was a special case. It had sought to ride the cryptocurrency wave by serving as a bank for various currencies. After SBF’s vast fraud was exposed, there was a run on cryptocurrencies. Investor/gamblers jumped ship. The crypto-managers had to pay by drawing down the deposits they had at Silvergate. It went under.

Silvergate’s failure destroyed the great illusion of cryptocurrency deposits. The popular impression was that crypto provided an alternative to commercial banks and “fiat currency.” But what could crypto funds invest in to back their coin purchases, if not bank deposits and government securities or private stocks and bonds? What is crypto, ultimately, if not simply a mutual fund with secrecy of ownership to protect money launderers?

Silicon Valley Bank also is in many ways a special case, given its specialized lending to IT startups. New Republic bank also has suffered a run, and it too is specialized, lending to wealthy depositors in the San Francisco and northern California area. But a bank run was being talked up last week, and financial markets were shaken up as bond prices declined when Fed Chairman Jerome Powell announced that he actually planned to raise interest rates even more than he earlier had targeted, in view of the rising employment making wage earners more uppity in their demands to at least keep up with the inflation caused by the U.S. sanctions against Russian energy and food and the actions by monopolies to raise prices “to anticipate the coming inflation.” Wages have not kept pace with the resulting high inflation rates.

It looks like Silicon Valley Bank will have to liquidate its securities at a loss. Probably it will be taken over by a larger bank, but the entire financial system is being squeezed. Reuters reported on Friday that bank reserves at the Fed were plunging. That hardly is surprising, as banks are paying about 0.2 percent on deposits, while depositors can withdraw their money to buy two-year U.S. Treasury notes yielding 3.8 or almost 4 percent. No wonder well-to-do investors are running from the banks.

The obvious question is why the Fed doesn’t simply bail out banks in SVB’s position. The answer is that the lower prices for financial assets looks like the New Normal. For banks with negative equity, how can solvency be resolved without sharply reducing interest rates to restore the 15-year Zero Interest-Rate Policy (ZIRP)?

There is an even larger elephant in the room: derivatives. Volatility increased last Thursday and Friday. The turmoil has reached vast magnitudes beyond what characterized the 2008 crash of AIG and other speculators. Today, JP Morgan Chase and other New York banks have tens of trillions of dollar valuations of derivatives – casino bets on which way interest rates, bond prices, stock prices and other measures will change.

For every winning guess, there is a loser. When trillions of dollars are bet on, some bank trader is bound to wind up with a loss that can easily wipe out the bank’s entire net equity.

There is now a flight to “cash,” to a safe haven – something even better than cash: U.S. Treasury securities. Despite the talk of Republicans refusing to raise the debt ceiling, the Treasury can always print the money to pay its bondholders. It looks like the Treasury will become the new depository of choice for those who have the financial resources. Bank deposits will fall. And with them, bank holdings of reserves at the Fed.

So far, the stock market has resisted following the plunge in bond prices. My guess is that we will now see the Great Unwinding of the great Fictitious Capital boom of 2008-2015. So the chickens are coming hope to roost – with the “chicken” being, perhaps, the elephantine overhang of derivatives fueled by the post-2008 loosening of financial regulation and risk analysis.