That Sinking Feeling

Failing banks, falling stocks and Schrödinger's deposits...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

The stock market took off like a rocket yesterday morning. MarketWatch:

Dow jumps 300 points as fears about banking stability, credit crunch ease

The Dow fell 530 points on Wednesday as Treasury Secretary Janet Yellen’s comments that her department hadn’t discussed blanket protections for bank deposits appeared to overshadow a Fed interest rate hike and press conference, as well as the release of the central bank’s latest batch of economic projections.

… investors reassessed the market’s negative reaction to events late in the previous session.

The bad news was now good news. Down was up. Left was right.

The Fed raised rates by 25 basis points (0.25%). In the morning, investors thought they saw Janet Yellen at work. But by the afternoon they were sure it was Paul Volcker, raised from the dead, and sneaking back into the Fed. The rocket turned its nose down, the Dow gave up all its AM gains…and then bounced at the end of the day.  

$50 Trillion in Fake Wealth

Which leads us to an observation: we are in a tricky transition period. Between inflation and deflation. And the next few years will probably be a lot like yesterday…confusing. The Fed will appear to fight inflation. Jerome Powell will put lifts in his shoes and do an impersonation of Paul Volcker.

But the entire elite class is deeply afraid of deflation (which would mean giving up as much as $50 trillion in fake wealth). It will continue with its ‘stealth pivot,’ stick to a tried-and-true way to protect its bubble gains…and rip off the masses with inflation.  

The latest rate increase, for example, still leaves Fed monetary policy in inflationary territory, with its key rate more than a full percentage point below the level of consumer price increases.

The feds also have promised to spare bankers and their large depositors from the losses they deserve. And this month, the Fed’s balance sheet is growing again, after a year of small declines. The $626 billion of QT (the reduction of the Fed’s asset holdings…which is deflationary) may have already been erased (by more QE to bail out the banks, which is inflationary.) 

Nor is the federal government showing any sign of cutting back on spending. There’s ‘monetary’ inflation. There’s also ‘fiscal’ inflation. Aside from actually ‘printing’ money, the feds boost inflation by spending money they don’t have. And we’re looking at $1 trillion+ deficits from here to eternity.   

But sticking with the banks…

The Discipline of Capitalism

Why not let them fail? Bad restaurants go out of business. Bad poker players lose their money. Mismanaged banks are supposed to go bankrupt, too.

That is the discipline of capitalism. Can committees of bureaucrats and hacks do better? Can central planners improve on the way private markets allocate capital and price assets? Can politicians with no ‘skin in the game’ make better investments than investors with their own money at risk?

If so, it’s news to us. As far as we know, the discipline of capitalism is the driving force of human progress. It rewards successes. And it rejects failures. We learn. We do more of what works and less of what doesn’t. We get richer. Everyone is better off by getting rid of bad chefs and bad bankers…even the poor who, in rich countries, enjoy central heating, TV, AC, automobiles and hamburgers.

But the benefits of capitalism are not guaranteed. At any given time, there is always a tension – the wealth and power of the here and now…against the unknown wealth, power, technology and knowledge of tomorrow.

The steel plow was much more effective than the wooden model. Capitalism quickly put the wooden plow makers out of business. Had the feds been on the case, however, we might still be turning the earth with oaken blades. Lobbyists for the wooden plow makers would have argued that metal plows would put them out of business…and destroy jobs.

Steve Jobless

Think of the whole Information Age revolution…Amazon, Apple, Microsoft, Google, Meta… If the powers-that-were had only seen how they would shift advertising revenues from existing powerful beneficiaries – The New York Times, NBC, Vanity Fair Magazine etc – and how these new media would become the major channel for indoctrinating and misleading the public… they might have gotten control of them earlier…or prevented them from ever seeing the light of day. Imagine the scene. California, 1975. A knock on the garage door:

“Are you Steven Jobs?”

“Yes…”

“We’re from the FBI. Is that a personal computer you’re building?”

“Yes…why?”

“Because it is prohibited. National security. You’ll have to come with us.”

“Huh?”

“We can’t tell you anymore. It’s classified.”

The future is only allowed to happen at all because the elite don’t see it coming.  And now the Silicon Valley companies are here, firmly entrenched…representing billions in new wealth…and part of the elite themselves. Just two companies, Microsoft and Apple, are equal in value to a fifth of US GDP.

Naturally, the politicos are eager to control them…and enlist them in their propaganda efforts.  

The feds – and indeed today’s whole elite – represent the here and now. They’re the ones with ‘influence.’ They write the newspaper columns. They give campaign contributions and hire lobbyists. They have the money. They have the power.  Their goal is to protect it…by preventing the future from ever happening. The future, if it were allowed to happen naturally, would deflate their power and their overpriced assets. Bad banks would go broke….as they should. Speculators would lose money. And the elite, who are responsible for such monstrosities as our monetary policy, $90 trillion of debt, the Covid Hysteria, and the War on Terror, would lose their influence and reputations.

It is in order to prevent that future that the feds subsidize, restrict, control, tax, mislead, and defraud….printing up trillions in new money in order to inflate away excess debt. The cost of their ‘mistakes’ is thus borne by ordinary households and businesses. Like a baby whose head is intentionally deformed, the future survives, but misshapen and retarded.  

Regards,

Bill Bonner

Joel’s Note: Another day… another bank run.

So it must seem in the anxious minds of depositors, whose funds are locked away in Maybe Land, like Schrödinger's cat. Are they safe in the vault? Are they gone with the wind? Nobody knows… until everyone withdraws.

We saw some videos of long lines around First Republic Bank in the days following SVB’s collapse… but, for the most part, those jittery scenes haven’t been a feature of this particular crisis. Why?

“There's a reason you don't see people lined up at banks to get their money out,” observes BPR Macro Man, Dan Denning. “They don't need to. They're all on their phones. Mobile banking via the smart phone is one element of this crisis that's new. It accelerates the panic. You can move money faster from a dangerous place to a safe place. You can for now, anyway…”

We’ve wondered in this space before if all this stress on the financial system is not quite as accidental as it appears… whether it’s not part of what Dan calls the “controlled demolition” of the traditional banking sector, in order that a “new order” may come to replace it. If nothing else, governments are experts at breaking things… then “offering” (read: mandating) the so-called “solution.” Continues Dan…

“How long will it be before there are 'glitches' with mobile banking apps. And how long will it be before someone says that's why everyone needs access to the FedNow system for payment processing and instant settlement – “secure,” “safe,” “fast,” and “free.” A convenient way to invite all those savings to migrate straight into government accounts...where they will be stuck in Treasuries, financing government deficits and debt. But liquid! And safe!”

If you’re going to panic, you might want to do so early and beat the mob. Here’s BPR investment director, Tom Dyson, inspiring little confidence in the system with his take on the situation…

The reason the banks are collapsing is because depositors have found higher interest rates (and more safety) in money markets and T-bills. So deposits are draining out of the banking system and pouring into the Fed’s reverse repo facility and government debt securities. It’s causing the banking system to wobble, especially at the edges.

The Fed’s 0.25% rate hike [on Wednesday] will only put more energy into this trend.

This is just the beginning. Like there’s a big storm offshore, and we’ve just felt the first bands of rain and the first hurricane-strength gusts of wind. It’s going to be a big one.

Again, if you’re not already engaged in Maximum Safety Mode, a strategy Dan and Tom have devised to help protect your wealth against exactly these kind of shenanigans, you may wish to get on board now. Find a BPR membership plan that’s right for you, here…