“A U.S. dollar is an IOU from the Federal Reserve Bank. It’s a promissory note that doesn’t actually promise anything. It’s not backed by gold or silver.”— P. J. O’Rourke
“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”— Dan Quayle
“The chances of a bank going out of business are extremely slim, but it’s always a good idea to spread around major sums so every penny is backed by insurance.”— Suze Orman
“I know the Federal Reserve Bank can continue to print more and more money… but city and state governments cannot.”— Robert Kiyosaki
“Paper money eventually returns to its intrinsic value — zero.”— Voltaire, French writer, historian, and philosopher
“Government is the only agency which can take a useful commodity like paper, slap some ink on it and make it totally worthless.”— Ludwig Von Mises, theoretical economist
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”— John Maynard Keynes, chief architect of our current fiat-paper money system
“The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception.”— Friedrich Hayek, Nobel Memorial Prize winning economist
“Give me the power to issue a nation’s money; then I do not care who makes the law.”— Mayer Amschel Rothschild
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”— George Washington
You may remember a while back when money was valuable and you could put it in a bank for safekeeping. Well, no longer. Money value is getting trashed right now, along with the formerly safe banks. The value decline started in 1913, with the dollar today worth only around 4 cents in equivalent purchasing power. And now banks are suddenly collapsing. Where is this mess headed next?
This has been a couple of bad weeks (so far, anyway) for money and banks. Not only is inflation steadily chipping away at what’s left of money’s value, or purchasing power, but money held by banks turns out not to be at all secure. Maybe not even there if you need it.
What is going on right now that wasn’t visibly going on a few weeks or months ago?
Money is no longer money because it never was a store of value
When we think of money, we see it as paper cash and perhaps a few coins in our pockets, or cash and paper checks that we deposited in a bank. The paper cash and coins can be stolen or lost, but not if we take adequate care. It is tangible, visible, but bank deposits are not except in terms of bank statements that say it is tangible and visible somewhere and is theoretically available on request.
Is jewelry money? How about a house or car? No, these are things that we purchased with money. So what exactly is money?
Wikipedia defines money as having a very particular set of properties:
“Properties. The functions of money are that it is a medium of exchange, a unit of account, and a store of value. To fulfill these various functions, money must be:
- Fungible: its individual units must be capable of mutual substitution (i.e., interchangeability).
- Durable: able to withstand repeated use.
- Divisible: divisible to small units.
- Portable: easily carried and transported.
- Acceptable: Most people must accept the money as payment.
- Scarce: its supply in circulation must be limited.”
There is another, equally or even more important property that Wikipedia seems to have missed: trust in the money issuer.
The second most important property is store of value. We must have confidence – trust – that money in whatever form will retain its value, or at least stay within a small range, over long periods of time.
Inflation decreases money’s store of value
Inflation, in terms of money’s purchasing power for a reference set of common goods, is a process that erodes the purchasing value of money over time. This erosion is invariably caused by the money issuer creating new money without creating any corresponding increase in values. We speak of “printing money” in this context, since newly printed money is relatively costless (especially if it is in digital form, like most money these days).
If this inflation – caused by the increase in money supply – occurs slowly enough, most people will not notice or care much about the purchasing power decrease. As noted above, the purchasing power of a U.S. dollar in 1913 has been eroded in this manner so that today in 2023 the dollar is maybe worth about 4 cents, a 96% decrease. Since not many folks were around for any great period of this decline, the slow but steady decrease in value is not visible, except to economists.
And no, we’re not even close to hyperinflation, as a recent post tries to explain. Of course, the official inflation figures are routinely fudged and fiddled.
This means in practical terms that money-as-dollars is not a particularly good store of value. It never was, but people accepted this decline in return for the convenience of paper, or “fiat”, money. The term “fiat” of course reflects the designation of printed paper as money by a “trusted” entity like the government and its central bank. Umm …
Our bank deposits are in reality a loan to the bank
Most of our money is not cash – that is, paper fiat money. It is instead what we have wisely stored in banks for safety until needed. Or so we are led to believe. Actually, we give our tangible cash and checks form of money to a bank in return for – a promise. What is this “promise”? Well, it is the bank’s solemn word that it will give our tangible money back if and when we request it. The “promise” is in effect an IOU. The bank is effectively a borrower, and we are lenders to it.
And the bank, thanks to highly-convenient banking laws, is then free to use most of our deposited money to fund loans to other borrowers. This means that our deposits are no longer in the bank but have been given in part to these borrowers in return for the borrower’s promise to pay the bank back, with interest. Banks keep only a relatively small amount of cash on hand to fund normal depositor needs for cash.
This arrangement works quite well – until it doesn’t.
Bank runs are caused by depositors wanting their money back
ZeroHedge lays out this process quite nicely: “SVB Lessons: If You Can’t Hold It, It’s Not Really Yours”
“The dirty little secret is US banks don’t hold your money in their vaults. They loan it out to other people. In the US fractional reserve banking system, financial institutions only have enough cash on hand to cover a fraction of their deposits. If too many people show up at the bank to demand their money at the same time, the bank will not have enough funds available to cover all of the withdrawals. This is why bank runs are so dangerous. They can cause a bank to go under.”
“When you put your money in a bank, you create ‘counterparty risk.’ In a nutshell, it is the risk that a person or institution on the other side of a transaction might not fulfill its obligation – i.e. the bank doesn’t have the money to return your deposit.”
“Even if you pull all of your money out of the bank and stuff it under your mattress, you still have counterparty risk, as Mises Institute president Jeff Deist explained.”
“Even if you managed to withdraw all of ‘your’ money in physical cash from banks tomorrow and put it in your well-guarded safe at home, you are still a creditor to the Fed & Treasury. You still hold IOU paper with risk of loss.”
“In fact, you’ve suffered significant losses in the value of your dollars over the last two years thanks to rampant price inflation.”
Banks quite often mismanage your money’s store of value
The Silicon Valley Bank (SVB), about which you may have heard very recently, was among the largest and most trusted banks in America. It specialized in serving high-tech businesses both in lending to them and in handling their deposited funds. But it mismanaged its investments of depositor funds, buying huge amounts of very safe U.S. Treasury debt but earning the very low interest rates of recent years. Then boom …
SVB’s major depositors recently started asking for their money back so it could be invested in new, much higher rate, Treasury bills and such. SVB of course had insufficient readily available cash to handle these requests, so it had to liquidate a lot of their low-rate Treasury bills at a huge loss. This quickly crippled SVB beyond recovery so that the Federal Reserve had to take over and close the bank. SVB assets were able to cover only a relatively small fraction of its total deposits, meaning the depositors faced what could be an almost or complete loss of deposited funds. Trusted store of value no more.
Update: Our most generous government has agreed to fully cover all SVB (and Signature Bank) deposits, not just the $250,000 limit covered by FDIC insurance. The mechanics for doing this great kindness to bankers and rich depositors are complex, but probably in the end mean simply printing a bunch more money.
Not surprisingly, this unfortunate situation spread to many other banks, such as NYC’s Signature Bank, which the Feds also had to take over and close. Things this week (early March 2023) got progressively worse until the Feds were forced to cover these depositor losses. No word yet on how much of the reported $620 billion in such unrealized bank losses, as of this moment, might actually have to be covered by the Fed’s money printing.
Big money printing for this purpose would certainly result in huge increases in inflation. Not a good scene either way.
So, we have our cash/fiat money being eroded by never-ending inflation of the money supply, plus our bank deposits now at great risk due to bank investment mismanagement. Money as a store of value? Hah!
At least the bank runs appear to have been stopped, or at least postponed. For the moment anyway.
Our “money” today is no longer money as once defined and used
This situation is, to say the least, not convenient. We still need the functions of some kind of money, but what alternatives do we have, now that our cash/fiat and bank-held money is at great risk of loss.
This is a global problem today, not one restricted to a few countries. Almost every bank is loaded with low-rate government investments (e.g., bonds) that have huge as-yet-unrealized losses. Losses that could kill many of these banks, and with them much or all of our bank deposits.
Of course, this financial collapse possibility has been known since at least the Lehman crash in 2008. Some even think that the 2008 collapse was simply the beginning of a much larger and longer-term collapse. Bank executives tend to be managers and followers, not leaders. They do what all others are doing, which results in widely-shared mismanagement.
Trying to get our deposits out of banks and figuring out what to do with the cash if we succeed is a serious challenge. Of course, relatively few will be able to retrieve their bank-held money since this will likely cause bank failure long before all of the “promised” deposit money is returned.
Under almost any scenario, our so-called money is at pretty serious risk right now. As such, it really no longer fits the definition and requirements of actual money. Our bank deposits are actually investments – loans to the bank. Loans now with quite a sizable risk of loss. We are involuntary and unknowingly bank investors.
How comforting. Not.
Our money is no longer money
Except for the cash in our pockets and wherever, we have no real money that can be used to buy stuff. Writing a check on our bank deposits works only so long as the bank has enough cash on hand to cover the check.
Worse yet, our money in any form is being steadily devalued in the background by inflation – making it a pretty weak store of value. Without the ability to provide a reliable store of value, our fiat paper cash is in practice little more than a claim on a central bank that may or may not be honored. It’s just printed paper in terms of any real value. And if we are not earning significant interest on our bank deposits, these also are being steadily eroded away in purchasing power.
Unfortunately, money no longer being money is the good – or the least bad – part of the story on our current financial zoo. Two huge new monsters are lurking in the swamp: CBDCs (Central Bank Digital Currencies), and “derivatives”.
First, recent developments on the CBDCs front
CBDCs are a form of digital money that is government-issued and tied in some manner to the current fiat money paper and its digital representations. Unlike cash and even cryptocurrencies (“cryptos”), CBDCs as presently designed capture huge amounts of data about users, what they buy (or pay for), where they purchased, and so on. These digital money things would be tied to our digital IDs, as I attempted to explain in several recent posts: here, here, here, and here.
Cryptos and CBDCs are competitors in many respects, and since governments don’t like competition, cryptos must go away. ASAP or sooner. Inconveniently, the crypto supporters, of which there are very many right now, vigorously oppose such a digital money takeover by CBDCs.
Coincidentally as always, the recently shut down SVB was deeply into serving the crypto businesses. How convenient.
And just today (March 17, 2023), Tom Ozimek via The Epoch Times reports on the Fed’s new digital “payment system”: “Fed Announces Launch Of ‘FedNow’ Real-Time Payment System, Sparking Debate”:
“The Federal Reserve has announced a timeline for the launch of its long-awaited FedNow payment service that will let banks offer customers instantly available funds and execute real-time payments, with critics flagging concerns like lack of cross-border payment processing and raising questions about surveillance.”
“’Right on schedule. Here is your CBDC launch,‘” Lawrence Lepard, investment manager at Equity Management Associates, stated in a tweet.”
“Jordan Schachtel, publisher of The Dossier on Substack, raised concerns about surveillance. ‘FedNow appears to be a prototype CBDC,’ he stated in a tweet. ‘While instant, 24/7 payments seems good, there’s implications to leaning into credit-based system. FedNow can quickly transform to a surveillance system.’”
“Controversy has surrounded the adoption of CBDCs, with House Republicans warning of the risk that they could amount to an ‘authoritarian-style’ and ‘surveillance-style’ digital dollar.”
“House Republicans recently introduced the CBDC Anti-Surveillance State Act that would restrict the ‘unelected bureaucrats’ from establishing and issuing a CBDC that they say would threaten the financial privacy of the American people.”
“’Any digital version of the dollar must uphold our American values of privacy, individual sovereignty, and free-market competitiveness,’ said House Majority Whip Tom Emmer (R-Minn.) in a statement. Anything less opens the door to the development of a dangerous surveillance tool.’”
We of course have complete confidence that our wise and responsible government folks would never even think of morphing FedNow into a CBDC possibly also called “FedNow”. Never. Surely.
This unthinkable thought would require cryptos to disappear, such as recently occurred at the major crypto firm FTX. A recent post had a brief look at this completely unexpected and improbable happening: “Cryptocurrencies Are Dead. Why? CBDCs. Maybe.”.
On to an even bigger threat to money in whatever form …
The looming derivatives catastrophe
Just in case bank managements are not going to get fatally hammered by poor investment decisions on “super-safe” government debt, many have decided to gamble on complex financial instruments called “derivatives”.
Jason Fernando writing in Investopedia provides a relatively simple description of these very complex financial instruments: “Derivatives: Types, Considerations, and Pros and Cons”
“What Is a Derivative? The term derivative refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. A derivative is set between two or more parties that can trade on an exchange or over-the-counter (OTC).”
“These contracts can be used to trade any number of assets and carry their own risks. Prices for derivatives derive from fluctuations in the underlying asset. These financial securities are commonly used to access certain markets and may be traded to hedge against risk. Derivatives can be used to either mitigate risk (hedging) or assume risk with the expectation of commensurate reward (speculation). Derivatives can move risk (and the accompanying rewards) from the risk-averse to the risk seekers.”
Ellen Brown tells it like it is (but hopefully not) in The Burning Platform: “The Looming Quadrillion Dollar Derivatives Tsunami”:
“’Financial Weapons of Mass Destruction.’ In 2002, mega-investor Warren Buffett wrote that derivatives were “financial weapons of mass destruction.” At that time, their total “notional” value (the value of the underlying assets from which the “derivatives” were “derived”) was estimated at $56 trillion. Investopedia reported in May 2022 that the derivatives bubble had reached an estimated $600 trillion according to the Bank for International Settlements (BIS), and that the total is often estimated at over $1 quadrillion. No one knows for sure, because most of the trades are done privately.”
Just what we need to ensure that any major financial collapse could quickly become catastrophic.
CBDCs vs. Cryptos: The Digital Money Wars
Some folks see the current banking system crisis as a means to introduce government-based digital money in the form of CBDCs. This means that cryptocurrencies like Bitcoin must be crushed. Oddly enough, SVB and Signature Bank were big players in providing financial services to major crypto firms.
Whether true or not, the underlying battle appears to be one of government control via CBDCs, and private, independent, limited digital money via cryptos. But neither CBDCs nor cryptos are real money as traditionally defined. Recent posts had a look at digital money in the context of this battle: see here, here, and here.
Digital money is not really “money”. It is worth doing a quick review of this critical point since digital money is almost certainly where we are headed. Investopedia offers a simple definition: “Digital Money: What It Is, How It Works, Types, and Examples”:
“Digital money (or digital currency) refers to any means of payment that exists in a purely electronic form. Digital money is not physically tangible like a dollar bill or a coin. It is accounted for and transferred using online systems. One well-known form of digital money is the cryptocurrency Bitcoin.”
“Digital money can also represent fiat currencies, such as dollars or euros. Digital money is exchanged using technologies such as smartphones, credit cards, and online cryptocurrency exchanges. In some cases, it can be converted into physical cash through the use of an ATM.”
Physical cash is still real (fiat paper) money, but electronic/digital money isn’t. Digital money in the form of either CBDCs or cryptos is just bits and bytes stored on a computer, probably somewhere in a cloud. Its stored value – a critical and fundamental attribute of money – is maybe zero, or less if accessing it requires a fee.
Used as a payment method for real goods and services, digital money also suffers from the same inflationary (value decreasing) pressures that cash does. You don’t want to store your money value in something that depreciates significantly even over relatively short periods. That’s why the gold and silver folks are doing so well, but these money forms are a bit awkward for transport and transactions, and are subject to theft. Gold and silver are not money solutions for us normal folks.
Since governments generally have the upper hand in such matters, especially if addressed globally as the One World Government folks are trying to do, it would seem that a CBDC version of digital money – digital not-money, in truth – is in our near future. FedNow is almost upon us, which will set the stage for CBDCs.
So what can we do in this tough situation?
If you have all of your bank-held money in a single bank, then you might want to spread it around to several “safe” banks. This diversifies your exposure to loss-risks from any one bank, at least in theory. And which banks are “safe”?
In reality, probably almost none. The question should be reframed as which banks are least likely to fail under any widespread financial crisis – such as we are having right now?
One answer is to use banks (and other financial institutions) that have been deemed to be systemically important – otherwise known as “too big to fail”. And what are these systemically important financial institutions (SIFIs)? From Wikipedia:
“As the financial crisis of 2007–2008 unfolded, the international community moved to protect the global financial system through preventing the failure of SIFIs, or, if one does fail, limiting the adverse effects of its failure. In November 2011, the Financial Stability Board (FSB) published a list of global systemically important financial institutions (G-SIFIs).”
Globally may not be of much use to us locals, so these wise guys have developed lists of SIFIs on a national basis – so-called Domestic Systemically Important Banks (D-SIBs). Wikipedia helpfully has a list of these for the U.S.: “D-SIBs in the US.”:
“For the United States, the D-SIB list includes those financial institutions not being big enough for G-SIB status, but still with high enough domestic systemically importance making them subject to the most stringent annual Stress Test (USA-ST) by the Federal Reserve. Strictly speaking, the Financial Stability Oversight Council (FSOC) does not designate any banks or bank holding companies as systemically important, but the Dodd–Frank Act in its terms on the statute imposes heightened supervision standards (including being subject to the annual USA Stress Test) on any bank holding company with a larger than $50 billion balance sheet. Despite the lack of any official D-SIB designation, the banks being subject to the USA Stress Test can be considered to be D-SIBs in the US.”
Whether the “stress tests” do anything useful seems questionable, but having a deposit institution deemed “too big to fail” means that the government will do everything possible to save such banks. Last resort kinds of things.
The good old days when money was valuable and you could put it in a bank for safekeeping are gone. We are in the early stages of yet another banking crisis – globally. Your bank deposits, which you thought were “money”, are in reality unsecured loans to the bank. Very high risk loans, it turns out, as bank failures are painfully demonstrating. Adding to this pain is inflation that reduces the purchasing power of so-called money now at a fairly rapid rate. Money is no longer money in any practical sense. With digital money forms being forced upon us, we are in a new world where money is no longer a store of value except for the very short term, and it is becoming a tool for surveillance and control.
- MN Gordon of the Economic Prism via All News Pipeline offers a simple explanation of the current banking crisis that took down Silicon Valley Bank and Signature Bank in the U.S. and is about ready to knock off the giant Credit Suisse in Europe: “After Decades Of Political Corruption, The Past Week+ Shows Why America Is Headed For A Venezuela Style Collapse And Societal Catastrophe – The Bank Meltdown Just Got Worse”:
“Negative Carry. Borrowing short and lending long works mostly well most of the time. This is how modern banking works. You may be a customer at a bank. But you also supply the product. “
“In short, a bank will pay you a small percent for the deposits in your checking and savings accounts, which you can withdraw at any time. This is the borrowing short side of the operation. “
“The bank then takes your deposits and invests the money in some longer-term assets, such as loans and bonds that aren’t paid back for years. Say the bank earns 2 percent on its money while paying depositors a fraction of a percent. The bank pockets the spread, the net interest margin. Easy money. “
“However, when the Federal Reserve intervenes in the market and presses the federal funds rate to zero and holds it there for 2 years (March 2020 to March 2022), driving yields across the range of maturities to 5,000-year lows, something bad is bound to happen. “
“The experience for consumers over the last 24 months has been raging consumer price inflation. But that’s only a small part of the bad stuff that can happen. “
“Because as the Fed jacked up the federal funds rate starting in March 2022, to contain the consumer price inflation of its own making, the yield curve has inverted. Short term yields are higher than long term yields. And banks, having borrowed short to lend long, have negative carry. “
“Perhaps it would all work out for the banks if depositors stayed put. But in a world where you can score nearly 5 percent from Treasury Direct – with no brokerage fees – why keep excess deposits in the bank when you only get a fraction of a percent? It’s a good question…”
- From Egon von Greyerz via GoldSwitzerland.com and ZeroHedge: “This Is It!” – Von Greyerz Warns “The Financial System Is Terminally Broken“:
“THE DEATH OF MONEY. No, instead what we are seeing is the end phase of this financial era which started with the formation of the Fed in 1913 and in the next few years, or much sooner, will end with the death of money.”
“But the Death of Money doesn’t just mean that the dollar (and most currencies) will make their final move to ZERO, having already declined 98% since 1971. “
“Currency debasement is not the cause but the effect of the banking Cabal taking control of the money for their own benefit. As Mayer Amschel Rothschild said in the late 1700s: ‘Let me issue and control a nation’s money and I care not who makes the laws’.”
“Sadly, as this Cassandra (me) has written about since the beginning of the century, the Death of Money is not just all currencies going to ZERO as they have throughout history. “
”No, the Death of Money means a total and final collapse of this financial system.“
“Cassandra was a priestess in Greek mythology who was given the gift of predicting major events accurately but also given the curse that no one would believe her predictions. “
“No depositor must believe that the FDIC (Federal Deposit Insurance Corp) in the US or similar vehicles in other countries will save their deposits. All these organisations are massively undercapitalized and in the end it will be the governments in all countries which step in.”
“We know of course, that the government has no money. They just print whatever they need. That leaves ordinary people taking the final burden of all this money printing. “
“But ordinary people will have no money either. Yes a few rich people will be taxed heavily to cover bank deficits and losses. Still, that will be a drop in the ocean. Instead ordinary people will be impoverished with little income, no government handouts, no pension and money which is worthless. “
“The above is sadly the cycle that all economic eras go through. The issue this time is that the problem is global and of a magnitude never seen before in history.”
- Paul Craig Roberts, appointed by President Reagan as Assistant Secretary of the Treasury for Economic Policy, weighs in on the current situation: “The US Has the World Setup for a Worse Financial Crisis than in 2008”:
“There is, of course, the question: Is this real stupidity or is a plot unfolding to collapse the financial system as we have known it in order to ‘save’ us with the introduction of central bank digital currency? Are we passing from the remnants of democracy and self-government into total tyranny?”