Two Hundred Ninety Seven Billion Reasons to Be Worried
The Fed has responded to the banking crisis in the US the only it knows, by printing more money
There are no solutions, only tradeoffs.
Doomberg
Following the stunning collapse of Silicon Valley Bank (SVB) last week, the US Government and the US Federal Reserve reacted the only way they know: They printed money. A lot of money. If you haven’t read last week’s newsletter on the failure of SVB, stop reading this newsletter and read it first here.
On Sunday night last week, all the plans carefully prepared over the past 15 years to deal with the failure of banks were thrown out of the window at the first sign of stress in the banking system. The US Government guaranteed all deposits at SVB, going beyond the $250,000 cap per depositor.
Shamelessly, after this announcement, SVB started bragging that it was the safest bank in the US since all deposits were insured without limit, a unique situation in the US. The email below is not a parody. It is something SVB really sent to his clients.
SVB filed for bankruptcy on March 17, 2023. Its shareholders will be entirely wiped out.
As the panic spread, several other banks had to be bailed out. First Republic Bank received deposits from other large banks in the US to avoid a bank run.
This security package didn’t convince the market, and the stock price continued to tank. It is down 81% since the beginning of the year.
Regulators suspiciously shut down another bank, Signature Bank, despite being apparently solvent. Its crime: working with the crypto industry. If true, such an abuse of power will most likely be investigated.
Speaking of investigation, do not expect to find out who is responsible for the collapse of SVB. It looks like the arsonist will be involved in the investigation of who started the fire.
So what did the Fed do to try and stop the bank run? It allowed banks to borrow from the Fed using collateral that had lost value because of… the Fed and its policy of rapid rate hikes!
Remember last week when I explained that banks were sitting on hundreds of billions of dollars of losses on their bond portfolio? To fix the problem, the Fed said to the banks, “Don’t worry about it. We got you! We will assume these losses don’t exist. Your collateral worth less than $1 (because interest rates increased) will allow you to get $1 of cash.” Isn’t it nice to rewrite the rules as you go?
The consequences of the new Fed support measures were immediate: They flooded the system with $297 billion of newly created dollars in just one week. Let that sink in. These dollars did not exist the week before, but now they do. It’s that easy to create more money in the fiat world.
To give you a sense of the magnitude of the bailout, it’s close to half of the money extended to US banks during the 2008 Great Financial Crisis. In just one week, supposedly to prevent relatively small, non-systematically important commercial banks from collapsing, the Fed fired up its money printer again.
Over the course of a few days, the Fed undid half of the Quantitative Tightening (QT) it had been so painfully implementing over the past twelve months. Through QT, the Fed was destroying $95 billion every month to try and shrink its balance sheet. It looks like QT is already over.
Readers of this newsletter won’t be surprised by this outcome since it was what I had written would happen just a few months ago. If you understood math, you knew what was going to happen. What you didn’t know was exactly when. See below the link to the newsletter from July 2022.
So who is going to pay for all these bailouts? If you believe the White House, no one. Wouldn’t it be nice to create $297 billion out of thin air without anyone bearing any cost?
In economics and finance, there is no free lunch. Every single decision must be analyzed through tradeoffs.
In poker, there is a saying: If you don't know who the fish is [at the table], it's you. If you don’t understand who is paying for this, it’s you. Holders of US Dollars (and those holding other fiat currencies, since they are all valued relative to the US Dollar) just saw the purchasing power of their money diluted by the issuance of $297 billion that did not exist just a week ago.
Far from stopping the fire, the Fed and the US Government have made everyone worried about the safety of their deposits. SVB was just a symptom. The issues are more profound.
Bank of America alone, one of the systematically important banks in the US, is sitting on $113 billion of unrealized losses.
How did we get there?
The US Government had to use a $297 billion bazooka to try and squash a banking panic because regulators were completely caught off guard by the magnitude of the problem. The combination of money printing during Covid and the subsequent sharp rise in interest rates proved deadly for the US banking sector.
The people in charge have proven many times they are not great at forecasting anything.
June 2017
April 2021
(The Fed ended up hiking seven times in 2022 alone, taking its benchmark interest rate from 0% to 4.25%)
Now if you want to be scared, watch Janet Yellen (the 76 years old US Treasury Secretary) respond to a question asked during a hearing this week by a US Senator.
I forgot to mention another banking collapse in Europe, that of Credit Suisse. It’s hard to keep up with all the bank failures these days! The bank received a $54 billion lifeline from the Swiss Central Bank. But given that Credit Suisse had about $254 billion of client deposits at the end of 2022, $54 billion may not be enough.
Where do we go from here?
Banking panic, money printing, all this sounds very familiar, doesn’t it? So what is the market telling us about the situation?
Needless to say, the divergence that started on March 13 is very significant. Investors dumped bank stocks and flocked to hard assets: gold and Bitcoin. Gold because it cannot be printed, unlike fiat currency, and because of its 1,000+ year track record of protecting wealth. Bitcoin because you can self-custody it, meaning you face no counterparty risk (as long as you don’t leave your coins on any exchange), and because it is programmatically capped at 21 million units (there are currently 19.3 million bitcoins already mined).
Since 2016, I have written A LOT of articles on Bitcoin and have given many talks and conferences about it. You can find some of the articles I wrote over the years on Medium, LinkedIn, and the CoinTelegraph.
Someone who has a very strong conviction that the price of Bitcoin is about to explode is Balaji S. Srinivasan. In response to someone ready to bet $1 million that the US would not enter hyperinflation, Balaji said he was willing to bet $1 million that the price of Bitcoin would reach $1 million… in 90 days!
You should read Balaji’s long tweet below by clicking on it to understand where he is coming from.
Balaji is an American entrepreneur and investor. He co-founded Counsyl, was the former Chief Technology Officer of Coinbase, and was a general partner at the venture capital firm Andreessen Horowitz.
He made incredible calls over the past few years. Back in January 2020, when most people in the West were barely paying attention to a virus spreading in China, he predicted pretty much everything that would be unfolding over the following 24 months.
The only way Balaji’s bet would pay off will be if the US entered a period of Weimar-like hyperinflation. I guess we’ll find out what happens in 90 days!
Finally, I will leave you with this tweet from Naval Ravikant.
Best Podcast Episodes of the Week
Here is a selection of the best episodes I listened to this week.