Yesterday I received a question that I have not heard in over 15 years!
"Should I withdraw money and stock pile some cash?"
Needless to say, I am concerned because this is exactly how it all started in 1929, Bank Failures During The Great Depression. That said, I do not know the answer to this question, nor do I advise one way or the other. But I do believe this is a massive opportunity to educate everyone on problems associated with our current fiat money and fractional banking systems.
The Morning Brew Laid down a very detailed Twitter thread, that each of you must stop and read. Even if it makes you uncomfortable or you do not fully understand it, I encourage you to study it thoroughly & re-read it multiple times, because it is the reason we all should be concerned.
Fractional Reserve Banking Process
Fractional reserve banking is an element of modern finance. By only requiring a fraction of bank deposits to be ready for withdrawal, the system frees up capital to lend across the economy. This sounds like a really smart idea because now your deposited money can be levered to provide loans; with the goal of stimulating the economy and earning interest for the bank. And it would be a fantastic idea if bank dollars were backed by hard money like Gold, but they are not. So instead we have vaporware!
Let's say that you deposit $2,000 of your hard-earned cash. In turn, the bank would add 10% of your $2,000 to their ledger, to then be loaned out. And despite the bank’s loan of your money, on paper, no one's balance is affected. It almost looks like an act of magic! You receive interest payments on your $2,000, and the bank receives interest at a higher rate from the borrower to pay your interest and profit from the service.
Sounds pretty clever...right? And it is! Until the Fed raises interest rates by 700% in less than a year.
So what happens when everyone runs to the bank to withdraw their money?
The bank is forced to sell its loans in order to recapitalize its customers. The problem is they don't have the money, nor Gold to sell in order to recapitalize the shortfall. Therefore they are forced to sell their loans. But they have a massive problem....no one wants to buy those low interest-bearing notes when they can get higher yield issuing new debt. As a result, they are forced to call on their investors to re-capitalize the bank, and that's when all panic sets in.
So the current question looming in my mind, are
- How many other banks are in this same situation?
- And if not banks, how many other businesses and corporations are sitting on excess inventory like cars, materials, and real estate to name a few?
- How many businesses are leveraged up to the gills with their own corporate bonds, and who will have the same problem as the SVB? The market price is not the same as a year ago. Therefore, a lot of goods and bonds are going to be sold at a loss.
Buckle up, because I suspect that Stagflation is on the horizon, which would honestly be even worse than a recession.
As I said last week, this is all a game, so do not let it scare you. Instead, have fun with it and prepare.
“Failing To Prepare Is Preparing To Fail” — Benjamin Franklin
Because every action has a reaction; and for every loser, there will be a winner. Long term, the United States is going to Thrive. We are the greatest country in the world, with more natural resources, more oil and gas, and a more unified nation than any other nation in the world. God Bless Capitalism. That said, keep your powder dry, because opportunity favors the bold and the prepared.
🗠 More Important Financial News
Biden has a goal to reduce the federal budget deficit by $3T over the next decade. And now it’s all outlined in his 184-page budget report to Congress — released last week.
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