Banking Crisis Claims More Victims

BANKING CRISIS CLAIMS MORE VICTIMS – but Gold and Crypto Are Sitting Pretty!

They told you inflation was “transitory,” then assured you that this isn’t actually a recession and “disinflation” is here to stay. In the real world, however, housing has become unaffordable and supply chains are still disrupted – and the theme of unsustainable monetary policy that I’ve been talking about for years is now confirmed with full-on bank failure contagion.

Maybe you’d never heard of Silicon Valley Bank until a couple of weeks ago, but its collapse represents the second-biggest U.S. bank failure, with the biggest one being the implosion of Washington Mutual during the financial crisis of 2008-2009. Signature Bank and Silvergate Capital are two other recently failed regional banks that hold billions of dollars of customers’ money.

If you think that bigger financial institutions like Wells Fargo, Citigroup, and Bank of America can’t implode like those regional banks did, think again. Those banking giants were only saved by the government – or more accurately, by your tax dollars – as Congress voted to bail out the “too big to fail” banks during the Great Recession.

There was no bailout for the middle class, of course, and no big-bank chief executives did any jail time despite their malfeasance. This time around, it’s not mortgage-backed securities and “liar loans” that got financial firms into trouble; rather, it’s banks taking your deposits and investing too much of them into government bonds.

To see what the future of America’s banking system might look like, just observe the in-progress collapse of Credit Suisse. If this Swiss mega-bank can fail, there’s no telling what could happen to other banks here and abroad.

The old-fashioned 60-40 portfolio of 60% stocks and 40% bonds was supposed to be a safe way to invest clients’ money. Some firms went heavily into Treasury notes, assuming that the Federal Reserve would keep yields low and prices high. That strategy backfired in a big way.

The government printed and spent unprecedented amounts of money in response to the COVID-19 crisis, and I warned everyone that inflation would spike. That’s exactly what happened, and it was inevitable but it took a year or two for the other shoe to drop. Debt spending isn’t a sustainable policy, but it can work for a while until the house of cards inevitably comes crashing down.

Now, the Fed has to tighten the screws on the economy in order to tamp down runaway inflation, but this involves raising Treasury yields to their highest levels in many years. Both big and small banks held many millions of dollars’ worth of bonds, and the prices of those bonds have cratered. Consequently, the net worth of those financial institutions has declined, making it difficult for some banks to honor the withdrawal requests of their customers.

And so, you’re starting to see something not witnessed in a very long time in America: bank runs, which involve long lines at ATMs but also “digital bank runs” as people use their smartphones to try and withdraw funds, sometimes unsuccessfully.

Just like in 2008-2009, there will be no bailout for American families, but some midsize banks will get relief from the government, the Federal Reserve, and/or opportunistic big banks. An example would be the $30 billion rescue package for First Republic Bank, courtesy of JPMorgan Chase, Bank of America, Citigroup, and other financial giants.

Naturally, with an election coming up next year, there’s a political incentive for Treasury Secretary Janet Yellen to say that the U.S. banking system is “sound.” Meanwhile, many businesses depend on regional banks for loans, and if those banks fail, an underpinning of the economy will be lost.

Now, here’s the billion-dollar question: What asset types can prosper when traditional financial structures collapse? As you can see in the chart shown above, there’s a good reason I’ve been pounding the table for gold. Government assets like Treasury notes and dollar bills can lose value quickly when politicians behave irresponsibly, but they can’t destroy the value of your gold.

Only the media pundits will be surprised to see gold getting ready to permanently break through the $2,000 barrier now. I’ve been calling this for a while, and recommending ownership of gold as a much better crisis hedge than government bonds.

I’ve also been talking about Bitcoin for quite a while, and behold: Bitcoin is rallying while conventional banks are in turmoil. Not only in the U.S., but all over the world, people who’ve had enough of fiat money’s manipulation and deterioration are turning to cryptocurrency as an alternative place to store one’s wealth.

As Bitcoin reaches $27,000 and gold knocks on the door of $2,000, don’t assume that the banking crisis is almost over. Today it’s Silicon Bank that’s gone, tomorrow it could be Credit Suisse, and the next day it might be a bank in your neighborhood. This will be sad to witness, but not a personal problem as long as you’re diversified into assets that are managed not by governments, but by the people who hold them.