Global Banking Crisis: The Unwind of a Ponzi Scheme

Global Banking Crisis Underway

Extreme Measures Everywhere...

The Ides are unfolding again, this time under Biden’s new New Deal.

Concerns about the stability of the global financial system were reignited today following a significant sell-off in Credit Suisse, which saw the company's stock plummet by over 30%. This decline was attributed to the revelation that Credit Suisse had uncovered "material weakness" in its financial reporting, which further compounded anxieties already present in the banking sector after the recent collapse of three major U.S. banks.

Yesterday we warned, “Beware the Ides of March”

It’s the day when debts get settled.

It was exactly ninety years ago, in March, when FDR's New Deal program led to a complete overhaul of the global financial system. It’s being overhauled again. Our debts are actively being rewritten.

That it’s all occurring exactly ninety years later serves as powerful testimony to the unstoppable force of the economic supercycle. It’s a stark reminder that attempts by humans to control, manipulate, or exploit the monetary system will eventually lead to disastrous consequences, causing untold suffering for those affected by its collapse.

There are no free rides. Just “kicks of the can.”

For the last 15 years, and in response to the financial crisis in ‘08, our government has mandated that all banks hold “safe and liquid” assets. The goal was to rein in a wild west banking industry that collapsed the global economy and shore it up so that depositors would once again have trust in the banking system.

The Dodd-Frank Act was enacted, mandating that banks hold liquid assets such as treasuries and mortgage-backed securities. As a result, we were assured that the banks were “well capitalized.” The Federal Reserve had promised to make these assets "safe."

It was a claim that smacked of hubris.

The program was called quantitative easing (QE). The plan was fairly simple. The Federal Reserve would buy bonds until interest rates were pinned to the floor. Once they manipulated interest rates to zero percent, their promise was that they would keep them there by continuing to purchase bonds. This would ensure that they continued to rise in value.

“Follow the whale,” they said. We all did. Miraculously, it worked.

Soon, whales from across the pond, in England and Europe, used their powerful tails to propel the global monetary system in the same direction. The Treasury whale was soon followed by the Gilt whale, the Eurobond whale and the Canada whale. (The JGB whale had been swimming in this direction for decades prior and needed no lessons.)

As a result of the actions taken by these monetary whales, the bond values of G7 governments experienced a surge, even into uncharted waters of negative yields.

This rise in bond values resulted in a boost to the balance sheets of banks, thanks to the appreciation of assets that were mandated by new regulations.

The Federal Reserve's financial engineering over the past 15 years not only improved the safety of treasuries, but also increased the profits of all stakeholders. This was accomplished by boosting bond values in response to falling interest rates. The implementation of quantitative easing (QE) was a remarkable achievement in this regard.

The fringe benefits for governments were even better. As interest rates fell the value of the bonds rose on central bank balance sheets around the globe.

What, you may wonder, did the whales do with all of their paper “profits?”

They moved the funds to their governments respective Treasuries and used the resulting surplus to run larger and larger budget deficits.

According to data from the Federal Reserve, it transferred a total of $983 billion to the U.S. Treasury from 2006 to 2020. The total consisted of interest income earned on the Federal Reserve's Treasury securities holdings, as well as capital gains realized on the sale of these assets.

It was more free money for the irresponsible politicians to spend.

Except it really wasn't free. It was all built on financial engineering. Not on productivity.

While the G7 countries were benefiting from rigging the monetary system, labor and commodity-producing nations were forced to accept currencies that were actively being devalued. If any of these nations raised their voice against such unjust practices, they were penalized with economic sanctions.

There could be only one thing that would force these whales to change direction. Inflation.

The most effective way to counter a system that is manipulated on the "demand side" is by causing a "supply shock".

The invasion of Ukraine by Russia, backed by China and supported by Brazil, India, Turkey, Saudi Arabia, and other nations, offered a means to break free from the constraints of the monetary system. The resulting shortages of vital commodities like oil, wheat, and fertilizer triggered a surge in inflation worldwide.

Inflation has forced the central banks to raise interest rates. This is where the Ponzi scheme unwinds.

The bonds these governments were accumulating on their balance sheets only increase in value when the central banks are buying them. The moment the whales had to sell and to swim in the opposing direction would be the moment it would all unwind.

We are witnessing the unwind in real time. It’s causing a global banking crisis.

Banks which bought a $1 low-interest rate bond while interest rates were on the floor as mandated by the Dodd-Frank legislation, are now finding that these bonds are only worth $0.80. The rapid rise in interest rates has forced the entire global banking system underwater. The value of the bonds sitting on consumer banks, investment banks, and the central bank balance sheet are now down bigly.

Over the last year, the Federal Reserve has suffered unrealized losses of over $1.2 trillion on their bond holdings. Similar unrealized losses are sitting on the balance sheets of every major G7 central bank. The same unrealized losses are sitting on the balance sheets of sovereign wealth funds, investment banks, and consumer banks.

Keep in mind that unrealized losses are fine so long as nobody asks for their money back.

However, when depositors do, these unrealized losses become realized as banks are forced to sell the very bonds that were designed to shore up the system. If these bonds ever needed to be “marked to the market” to meet liquidity crunches, banks would lose money.

When banks lose money depositors get very nervous. Bank runs occur. Today’s dramatic fall of Credit Suisse has many wondering how systemic the crisis truly is.

Extreme measures must be employed.

Extreme is the new norm.

Last July, in order to keep their economy from falling into the abyss, the European central bank was forced to employ an “anti-fragmentation” tool. In October, the Bank of England needed to step in and save a collapsing pension system. Over the last three months, the Japanese central bank has been forced to consume all of their countries debt over the last few months.

This week, due to the run on banks over the weekend, the Federal Reserve has been forced to backstop all deposits with a new program called the Bank Term Funding Program (BTFP).

Today, in an effort to calm the markets, the Swiss National Bank promised to provide liquidity to troubled lender Credit Suisse:

“The problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets. The strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability. Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. If necessary, the SNB will provide CS with liquidity...”

Another extreme measure by another central bank. The announcement stemmed the tide of a massive sell-off. U.S. stocks, which had been down more than 2% on the day, closed lower by 0.75%.

These stopgap extreme measures are warning of an existential crisis. Beware the Ides of March. There is no swimming back.

We recently published a special video and interview in which we drew a comparison between the Ponzi scheme of Sam Bankman Fried and the one run by Bernie Madoff fifteen years ago. As we informed our subscribers, we believed the situation resembled the Lehman moment of 2008. Lehman's failure was preceded by the collapse of Bear Stearns six months earlier.

Bear Stearns collapsed on the Ides of March in 2008.

Back then, the U.S. Federal Reserve intervened, engineering a rescue package for Bear Stearns in which it would be acquired by JPMorgan Chase for a fraction of its previous value. The deal was announced on March 16, 2008. The occurrences during the Ides of March in ‘08 presaged the financial crisis that soon followed.

Back then, the central whales jumped in full force and saved the day.

Over the last 15 years, and for those who own financial assets, the powerful move of the school of monetary whales was a godsend. QE was a central banking miracle that saved the world from another great depression and kept the Ponzi scheme that is “fractional reserve banking” alive. Central bankers were the heroes who saved us from the abyss.

They have since become rock stars. The world now knows them all by name. Bernanke, Draghi, Yellen, Lagarde, Carney, and Powell. These are the saviors we now worship.

Except their decisions have been self-serving and have arguably destroyed modern society.

The massive monetary easing experiment over the past fifteen years has fueled an explosion in credit, which has led to the explosion of financial assets and has catalyzed a massive wealth gap. It’s allowed a playground for irresponsible politicians to run massive and unpayable deficits, energizing what was already a polarized system.

We now find ourselves in the pickle of all pickles. Our incredible hubris has left us vulnerable.

Treasuries are the safest, most liquid assets on the planet, right?

Ultimately, it depends on who’s buying them.

When the Federal Reserve and other central banks purchase government bonds in large quantities, it results in a surge in their value, akin to whales devouring plankton. However, it is important to note that this practice can lead to a dilution of the value of currencies, which the Fed and other central banks have pledged to maintain. This is a fact that few comprehend.

The price of gold is nearing or surpassing all-time highs in every major currency across the globe.

Today’s entire global banking system is full of government bonds worth 20% less.

Well, at least their liquid, right?

Those that forget are doomed to repeat it.

The Ides of March are warning us all again.

Written by Adam Baratta

References:

1. https://www.washingtonpost.com/business/2023/03/15/svb-banking-credit-suisse-stocks/

2. https://www.google.com/url?q=https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm&sa=D&source=docs&ust=1678906430935415&usg=AOvVaw10JUefsMayzVfm0DhlAG7K

3. https://www.thebalancemoney.com/national-debt-by-year-compared-to-gdp-and-major-events-3306287

4. https://www.marketwatch.com/livecoverage/stock-market-today-dow-futures-sink-over-500-points/