Recent Bank Failures Due to Systemic Forces
The current financial crisis is due to systemic monetary distortions decades in the making.
Make no mistake, the forces leading to recent bank failures are systemic rather than specific to particular institutions. Central banks drove what is arguably the most important set of prices in an economy (rates of interest) far below any natural level causing financial asset prices to rise artificially to unsustainable levels. Now as interest rates rise the price of fixed rate bank assets (Treasuries, MBS, bank loans, etc.) will fall, with declines a mathematical certainty, while bank liabilities (deposits) remain the same; thus all banks are moving toward insolvency. Banks, highly leveraged by design, are particularly susceptible to collapse as their relatively meager equity (assets minus liabilities) vaporizes quickly in concert with rising interest rates and falling asset prices.
Also know, at this point no painless option exists to wring decades of monetary distortion from the global financial system. Central banks face just two options; continue to attempt a reversal of monetary expansion and trigger a global deflationary collapse as interest rates rise or accelerate monetary debasement leading to inflationary collapse. Short interest rates having been driven to zero the avoid hangovers stay drunk "strategy" employed to avert collapse during the last four decades, further distorting asset prices by forcing short rates to new nominal lows, is over. Central banks will not be able to further expand asset prices by pushing short rates to new nominal lows, as in the past, since those rates would now need to be more than marginally negative.
So which outcome should we expect? Given that all national currencies are fiat, meaning they are literally IOUnothings, accelerating monetary expansion and consequent inflationary crisis offers the near certain bet. Fiat currencies can be, and historically have often been, debased to an enormous extent. For protection tangible assets offer refuge from financial wealth destruction wrought by price inflation, particularly liquid tangible assets such as precious metals (further examined in the next post).
Tragically someone, meaning most everyone, must hold oceans of falling financial paper all the way down. Contrary to a popular notion there is no net selling in a market. For every seller there must be a buyer, hence the losses will be suffered. At this point seeking refuge sooner rather than later will likely prove prudent.
I hope insights offered assist as you navigate your financial future. My best wishes to every innocent soul.
Peace
Cruising Economist
Appreciate the insights - keep them coming!