{"id":29032,"date":"2023-05-09T06:12:32","date_gmt":"2023-05-09T13:12:32","guid":{"rendered":"https:\/\/coinnetworknews.com\/is-your-money-safe-during-the-banking-crisis\/"},"modified":"2023-05-09T06:12:32","modified_gmt":"2023-05-09T13:12:32","slug":"is-your-money-safe-during-the-banking-crisis","status":"publish","type":"post","link":"https:\/\/coinnetworknews.com\/is-your-money-safe-during-the-banking-crisis\/","title":{"rendered":"Is Your Money Safe During The Banking Crisis?"},"content":{"rendered":"

<\/p>\n

\n <\/a><\/p>\n<\/figure>\n

This is an opinion editorial by Brad Mills, host of the Magic Internet Money Podcast and an investor in several Bitcoin-focused projects.<\/em><\/p>\n

Big banks are failing. Credit Suisse, one of the largest globally-systemic important banks (G-SIBs) in the world at $1.2 trillion in total assets<\/a>, has recently failed, requiring a bailout from the Swiss central bank<\/a>. <\/p>\n

Before the era of quantitative easing (QE), Term Asset-Backed Securities Loan Facility (TARF) and Troubled Assets Relief Program (TARP) bailouts, bank failures were common. Allowing excess risk to flush from the system is a healthy part of free markets. Almost 500 banks<\/a> failed during the Great Financial Crisis (GFC). <\/p>\n

During the last decade of QE, barely any banks failed while economists, central bankers and politicians have been continually and confidently assuring us that their stress tests are keeping the banking system sound.<\/p>\n

\n <\/p>\n<\/figure>\n

Is it a coincidence that during the last decade, as governments, central banks and commercial banks worked together to expand the money supply faster and higher than ever before in history, that banks stopped failing? <\/p>\n

Have banks stopped failing over the last seven to eight years because banks are safer and more conservative, or is it because record amounts of money printing and government bailouts have moved the risk from bank balance sheets to somewhere else, simply delaying the inevitable? <\/p>\n

Did moving this risk from bank balance sheets to the central bank\u2019s balance sheets via deficit spending, stimulus, QE and bailouts actually help keep your deposits safer, or has it actually caused wealth inequality to rise, debased the value of your savings account and contributed to high inflation rates which makes the dollars in your bank worth less? <\/p>\n

Finally, after all of this, are we about to see a reversion to the mean of bank failures anyway? Is there a way to protect yourself from the extremely-unlikely event of hyperinflation, or the more-likely event of a deflationary bust or continued high inflation due to governments printing money to prevent the collapse of the global banking system and the loss of confidence in the currency itself? <\/p>\n

Deposit Insurance Turned Into A Confidence Game<\/h2>\n

Economists and policymakers cite Federal Deposit Insurance Corporation (FDIC) and Canada Deposit Insurance Corporation (CDIC) insurance and post-GFC regulations like the Dodd-Frank Act<\/a> and Basel III<\/a> stress tests to assuage our concerns, telling us that the banks are healthy and that the banking system is sound. <\/p>\n

The reality is that the insurance fund is woefully undercapitalized to cover large bank failures. <\/p>\n

In the U.S., there is more than $18 trillion in deposits and only about $125 billion in the FDIC fund<\/a>. Warren Buffet\u2019s Berkshire Hathaway has more money than the FDIC<\/a>.<\/p>\n

\n <\/p>\n<\/figure>\n

FDIC insurance was put into place in 1933<\/a> during the Great Depression as a way to provide confidence in the banking system. A lot has changed since 1933. The money supply used to be constrained by the amount of gold that was backing dollars. There was still fractional-reserve lending, but it was a lot more conservative back then. <\/p>\n

While we were on a sound money standard, it was plausible that the FDIC and CDIC could act as a legitimate insurance policy for depositors, when coupled with strong bank regulations and balanced budgets. <\/p>\n

However, the FDIC\u2019s reserves have failed to keep up with the growth in the money supply, and it has had to be bailed out in some form or another<\/a> during the 1990s, in 2008 and 2009 and, most recently, with the latest round of bank failures. <\/p>\n

Deposit insurance is just another strategy in the confidence game designed to distract you from discovering the reality of how money and banking work. <\/p>\n

Addressing Fractional Reserve Banking And The \u2018Money Multiplier\u2019<\/h2>\n

Many think that we operate on a fractional-reserve bank system that enables the \u201cmoney multiplier<\/a>,\u201d but this is a common misconception as banks do not operate on that system anymore. Banks literally have the license to print money from nothing and the \u201cmoney multiplier\u201d is a myth.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

You may have seen fractional-reserve banking and the money multiplier described as the bank keeping 10% of your deposit as reserves and lending the rest out, then repeating that process until the original deposit is multiplied upwards of ten times.<\/p>\n

When you deposit $1,000 into the bank, there is no formula that says the bank keeps 10% of that as reserves and then it can loan $900 to someone else, repeating this ad nauseum until $1,000 becomes $10,000. <\/p>\n

In reality, it\u2019s \u201cfictional<\/em> reserve<\/em>\u201d banking, because the money lent out by banks is not backed by anything tangible and the debt that the government issues continually expands. The national debt will never be paid off and the banks have no reserve requirements anymore. <\/p>\n

Many smart people reject this framing. They can\u2019t accept that this is how the monetary system works. <\/p>\n

Don\u2019t feel bad if you\u2019re confused about this stuff. It\u2019s an opaque process designed<\/em> to obfuscate the reality of how the purchasing power of money will always be debased.<\/p>\n

The modern banking system is like a computer operating system where a small group of people have root-level administrator access, and they give a group of their friends a god mode cheat code. <\/p>\n

The reality is that \u201cBankOS\u201d has been architected as a system of control and a wealth transfer mechanism from the bottom to the top\u2026 and you\u2019re probably not at the top. <\/p>\n

Many smart people who believe they understand the banking system are confused about how banks issue loans, they believe that banks conservatively issue new loans based on the amount of deposits they have. They believe that as customer deposits grow, banks lend that money out, and since the money had to exist in order for the bank to lend it out, the banks didn\u2019t print the money. <\/p>\n

This is a naive understanding, and it does not serve your interests to believe in this fairytale. <\/p>\n

Let\u2019s take Silicon Valley Bank (SVB), for example, the third-largest bank to collapse in U.S. history<\/a>.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n
\n
Source<\/em><\/a><\/figcaption><\/figure>\n

My smart friends will look at the above graphs and say, \u201cSee, Silicon Valley Bank didn\u2019t just make money from nothing; they received lots of new deposits over the years and loaned out those deposits!\u201d <\/p>\n

They will see that the bank ended with about $200 billion in deposits and about $70 billion in loans and mistakenly think that the bank was conservatively lending existing money, not creating new money. <\/p>\n

But the hard-to-accept reality is that the incoming deposits were actually created when a bank made a loan. <\/p>\n

Maybe it was Silicon Valley Bank that created the deposits from nothing, maybe it was another bank \u2014 but the majority of the \u201cdeposits\u201d in the banking system are created from nothing by banks. <\/p>\n

My smart friends will say, \u201cThis makes no sense, if banks can create money from nothing, why wouldn\u2019t they just continually print money to make unlimited profits?\u201d <\/p>\n

The truth is, when you look at the growth of the money supply, that\u2019s what they do. <\/p>\n

As long as there\u2019s demand for borrowing, banks will lend. They have a license to print the money and a license to charge usurious levels of interest on the money. <\/p>\n

It\u2019s a wonder why banks fail at all under a system where they have a license to expand the money supply through issuing loans, constrained primarily by our demand for borrowing and what they deem your \u201ccreditworthiness\u201d to be. <\/p>\n

Most of the \u201cmoney\u201d in the system is actually just created from nothing this way by banks \u2014 and as icing on the cake, when you deposit this created-from-nothing-by a bank \u201cmoney\u201d into a bank, they also take your deposits and invest them in the treasury market or deposit them to the central bank as bank reserves to make even more profits. <\/p>\n

The moment that you deposit money into a bank account, it becomes a liability on the bank\u2019s balance sheet and is no longer \u201cyour money.\u201d <\/p>\n

Bank regulations are part of the confidence game, designed to prevent bank runs by depositors. In March 2020, the reserve requirements for U.S. banks were lifted<\/a>, and many British Commonwealth countries have been on a zero-reserve requirement regulatory scheme for 20 to 30 years.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

Instead of 8% to 12% reserve requirements, there are various liquidity and collateral rules that banks are urged to follow. One of these rules is the liquidity coverage ratio, or LCR<\/a>. <\/p>\n

LCR is important when it comes to bank runs, which is what we are seeing happen now across the global banking system. <\/p>\n

In order to pass regulatory stress tests, banks must keep a portion of their reserves in high-quality liquid assets (HQLA)<\/a> which include cash and cash-like instruments such as government bonds that can be quickly sold to meet customer withdrawals. <\/p>\n

Banks must always have enough high-quality liquid assets in order to meet 30 days of expected net outflows and customer withdrawals. <\/p>\n

The Bank of Canada assumes that customer deposits in the country\u2019s \u201dBig Six\u201d banks<\/a> are very sticky, so it only assigns a run-off rate of 3% to 5%<\/a> and these banks are not required to keep significant HQLAs to cover deposits.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

The problem arises when there is a systemic crisis in either the banking system or the money itself that causes fear and panic, driving people to withdraw their money physically or wire it out digitally. <\/p>\n

In 2022, when Canada Prime Minister Justin Trudeau and Deputy Prime Minister Chrystia Freeland invoked the Emergencies Act<\/a> and threatened to freeze the bank accounts of anyone involved in or supporting the Freedom Convoy, this caused a run on the Canadian banks, as shown by the LCR chart below. <\/p>\n

This sudden shock and erosion of trust in the Canadian banking system from a large enough percentage of the population caused the LCR of Canada\u2019s biggest banks to drop significantly. <\/p>\n

When a bank run happens, 30 days\u2019 worth of expected net outflows might be taken out in one day, leaving the bank potentially insolvent if there are liquidity issues with the high-quality liquid assets the bank uses for its HQLA reserves.<\/p>\n

\n
Source: Bank of Canada <\/em><\/figcaption><\/figure>\n

\u2018Too Big To Fail\u2019: How The Current Bank Failures Are Not Like 2008 <\/h2>\n

So, now that we know that the money multiplier is a myth and banks are actually allowed to create credit (money) from nothing via fictional-reserve banking, authorized by the central bank, let\u2019s continue! <\/p>\n

Why did we not see any signs of bank failures during the last 10 years until now? <\/p>\n

It turns out that the central bankers kept interest rates near zero while they recapitalized banks and monetized record government debt issuance (deficit spending) to the tune of trillions of dollars. In that environment, banks appear to be healthy. <\/p>\n

If the government gave you a money printer, I\u2019m sure your finances would be a lot more sound as well! <\/em><\/p>\n

There is a \u201cfinancial soundness\u201d indicator that the central banks use known as a Common Equity Tier 1 (CET1) ratio<\/a>, which is also known as a capital buffer. <\/p>\n

In the chart below, thanks to QE and other bailout programs, you can see that the soundness of the banks increased until recently, when we saw the largest percentage drop of CET1 since they started measuring it.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

U.S. banks went from having nearly zero excess reserves pre-2008, to being continually injected with hundreds of billions per year via bailouts and QE until the total reserves parked at the Federal Reserve peaked at an astronomical $4 trillion recently.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

The last banking crisis was caused by too much real estate speculation by the public and too much toxic, derivative-risk taking by big banks. <\/p>\n

The big banks were deemed \u201ctoo big to fail.\u201d In order to save the flawed system, they threw out the idea of being fiscally conservative and started normalizing bailouts as the first resort. <\/p>\n

We are 50 years into the backed-by-nothing U.S. dollar experiment and nearly 15 years into this infinite, reserve-banking, central-planning experiment, and it looks like everything is broken, especially the purchasing power of dollar savers. <\/p>\n

Too much centralization and interference in financial markets to save the \u201ctoo big to fail\u201d banks has shown up as an acceleration of the perversion of incentives in the economy. <\/p>\n

The role of the dollar went from being a savings vehicle \u2014 work hard and save your money \u2014 to a system of control and wealth redistribution from the bottom to the top \u2014 work hard and spend your money. <\/p>\n

Due to this new \u2018too big to fail\u2019 experiment, we\u2019ve seen the rise of the \u201ceverything bubble,\u201d which makes this crisis much different than the last one. The current crisis is a crisis of confidence in the money itself and the entire banking system, not necessarily anything that the banks did.<\/p>\n

\n <\/p>\n<\/figure>\n

How Did Governments And Central Banks Cause The Everything Bubble? <\/h2>\n

Interest rates were held artificially low during this period of time. With the central bankers signaling that rates would be held lower for longer, this encouraged over borrowing and excessive risk taking by banks, corporations and citizens. <\/p>\n

Combine this poor central banking policy with gluttonous government deficit spending and we see the total supply of money rise exponentially. <\/p>\n

When you add in the supply chain disruptions from the \u201cend of the age of abundance<\/a>\u201d as French president Davos aficionado Emmanuel Macron recently warned about \u2014 all of this has caused inflation to rise faster than my generation has seen in our lifetimes. <\/p>\n

The U.S.\u2019s national debt increased<\/a> from a staggering $10 trillion to a mind-numbing $30 trillion since the 2008 to 2009 GFC.<\/p>\n

The money supply has inflated massively. It took the U.S. two centuries to accrue $7 trillion in national debt until recently, when $7 trillion was added in just another two years!<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

Price inflation is the highest it\u2019s been in decades<\/a>. <\/p>\n

Labor participation is the lowest it\u2019s been in decades<\/a>. <\/p>\n

Wealth inequality is continually going in the wrong direction since 1971<\/a> and has accelerated during the QE period. <\/p>\n

The bond markets are more volatile now than they have been in decades<\/a>, and 2022 was the worst year for stocks and bonds since 1920<\/a>.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

The ballooning of the money supply and growth of the debt-based monetary system is not a left versus right phenomenon \u2014 at least in America \u2014 both sides have presided over the destruction of the dollar\u2019s purchasing power and the weakening of the banking system.<\/p>\n

\n <\/p>\n<\/figure>\n

What Does History Tell Us About What Might Come Next? <\/h2>\n

It\u2019s very difficult to look at the past and figure out which period of history this is most like. <\/p>\n

Independent analyst Lyn Alden has pointed out<\/a> that if you take a very long term view of the economy and the financial system, the most relevant period of time to compare this to is the 1930s and 1940s. <\/p>\n

Since the dollar has lost nearly 97% of its purchasing power over the last 100 years<\/a>, and the supply of money has changed by orders of magnitudes, she\u2019s devised a proxy measuring stick of using percentage of GDP. <\/p>\n

Aside from 1940s-style inflation, another correlation to that time period is the explosive growth in the debt-to-GDP ratio that we currently face compared to what it was during World War II.<\/p>\n

\n
Source<\/em><\/a>.<\/em><\/figcaption><\/figure>\n

Yield Curve Control<\/em><\/a> (YCC) is basically when a central bank needs to intervene with the bond markets to manipulate the interest rate by mandate, rather than letting the free market sort it out. <\/em><\/p>\n

\n <\/p>\n<\/figure>\n

Alden points out that<\/a>, similar to the 1930s, in 2003 interest rates were cut to 1%, which caused banks and citizens to take on lots of debt and risk. Then, in 2004 to 2006, the rates were jacked up, which caused the housing crisis that surfaced a few years later \u2014 leading to the banking crisis. <\/p>\n

The can was kicked down the road until 2020 to 2021, when interest rates were cut all the way to zero while central bankers were printing money and conducting QE. <\/p>\n

In 2022 to 2023, the rates were jacked up, causing the current banking crisis.<\/p>\n

\n <\/p>\n<\/figure>\n

Alden also points out that in the 1940s<\/a> as well as in the 1970s, inflation came in waves, and she expects the same to happen over the next decade.<\/p>\n

\n <\/p>\n<\/figure>\n

In January 2022, during a House of Commons of Canada session, Conservative Party Pierre Poilievre Leader gave a speech<\/a> on the history of money, educating fellow MPs about the follies of money printing and how it causes inflation: <\/p>\n

\u201cWe have not been immune to this inflationary disease. In the post-war era, we inherited monstrous debts fighting the fascists. We basically operated on an American-led standard whereby you could exchange a U.S. greenback at a rate of $35 per ounce in gold.\u201d <\/p>\n

Poilievre continued talking about the prosperity we had in the post-war era under the gold standard: <\/p>\n

\u201cHere in Canada, with solid currency, we wrestled the inflationary beast to the ground. We paid off our record war debts, we increased the size of the Canadian economy by 300%, and by 1973 we had basically become a debt-free country.\u201d<\/p>\n

\n <\/p>\n<\/figure>\n

\u201cThen what happened in the 1970s?\u201d he continued. \u201cPresident Nixon wanted to spend on warfare and welfare. Of course, the Americans were bogged down in Vietnam, which was costly an enterprise. President Nixon wanted to keep his popularity at home, so he decided to spend, spend, spend\u2026 In the decade that followed 1971, not only did they unleash the American dollar from a sound money standard, but they increased the number of U.S. dollars in circulation by 150% while output only grew by 39%. In other words, the amount of money grew about four-times faster than the amount of underlying output that that money represented.\u201d <\/p>\n

This next part gets a bit partisan, but it\u2019s very relevant to what we\u2019re experiencing now.<\/p>\n

Poilievre continued, \u201cHere in Canada, we had Pierre Elliot Trudeau as prime minister. He looked down at all the inflation that the U.S. government was creating \u2014 they had reached double-digit inflation, a total inflationary crisis. <\/p>\n

\u201cThe American dollar was devalued on an international basis, incapable of buying affordable petroleum on the world market \u2026 poverty was overtaking inner-city streets and the wealth gap was expanding in the United States of America. <\/p>\n

\u201cWhat did Pierre Elliot Trudeau do? He started printing money here in Canada, massively increasing the money supply. Between 1971 and 1981, the money supply in Canada grew by over 200% while GDP only grew in real terms by about 47%. <\/p>\n

\u201cSo you can imagine when money is growing in supply at more than four times the rate as the economy is growing, you have more dollars chasing fewer goods, and what do you get?\u201d <\/p>\n

Inflation. <\/p>\n

Why Deflation Is Good And Prices Should Come Down, If It Weren\u2019t For Central Banks And Politicians<\/h2>\n

Not only are we dealing with government-induced inflation, but we\u2019re also now suffering from their proposed solution to inflation: jacking up the interest rates and crushing everyone financially. <\/p>\n

The banking crisis was never fully dealt with in 2008 and 2009. <\/p>\n

Instead of taking a decade of pain, allowing rates to naturally rise while over-leveraged, large banks failed and poorly run businesses went under, they decided to socialize the losses and privatize the gains. <\/p>\n

Not only was the can kicked down the road, but central bankers and economists tried to sell us on being scared of deflation! <\/p>\n

They were trying to rationalize their monetary machinations as a way to stop prices from dropping, trying to fear monger and convince all of us that lower prices is a bad thing.<\/p>\n

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Source: Twitter<\/figcaption><\/figure>\n

In Jeff Booth\u2019s book \u201cThe Price of Tomorrow,\u201d he describes how technology is deflationary. If we had a sound money like Poilievre described, it would make sense that technological advancements and productivity gains would cause prices to drop. <\/p>\n

With a more sound money that does not continually inflate like our current debt-based, broken money system, your purchasing power would not decline over time and we would enjoy the deflationary benefits of technology. <\/p>\n

With deflation and a more sound monetary system, you could live a dignified life and afford a home on a smaller wage as prices naturally come down. <\/p>\n

Critics of sound money will say that under the gold standard we saw booms and busts, and you can\u2019t get out of an economic depression without inflating the money supply. <\/p>\n

There is no easy answer here, and the solution is probably something in the middle, at least during a transitory phase. We need to slowly transition to a sound money system while also increasing financial literacy. <\/p>\n

Critics of sound money systems like a gold-backed standard too often rely on a false dichotomy argument, where it has to be either continuous stimulus or<\/em> global depression with nothing in the middle. <\/p>\n

Something has to change \u2014 it\u2019s clear that the debt-based, money-printing, stimulus-by-default system we\u2019ve been operating on has seen continual expansion of the wealth gap. In fact, it is plausible to have a period of transition where you could help the bottom 50% out with a form of universal basic income, while you increase financial literacy and encourage saving in a hard money. <\/p>\n

You could do this while eliminating a lot of excessive federal spending, and transitioning to a more sound monetary system over a period of five to 15 years, all while we enjoy the benefits of technology making our lives better! <\/p>\n

Politicians, mainstream economists and central bankers are fighting the deflationary benefits of technology by arbitrarily targeting 2% inflation<\/a> and continually increasing the supply of money via various methods like government deficit spending, commercial bank credit creation and central bank money printing. <\/p>\n

Since these economists and bankers were claiming that QE and stimulus didn\u2019t cause inflation, they were fear mongering about a \u201cdeflationary spiral,\u201d trying to create the political will for the next round of money printing to keep their inflation experiment going\u2026 and, predictably, they overreacted and gave us an inflationary crisis instead of a deflationary one.<\/p>\n

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Source: Twitter<\/figcaption><\/figure>\n

Governments Cause Inflation And Inflate Asset Bubbles With QE <\/h2>\n

Canada\u2019s central bankers follow the consensus of the rest of the G20 countries, especially the U.S. <\/p>\n

Like most G20 countries, the Canadian government cannot finance deficit spending without issuing debt. <\/p>\n

Since there was not sufficient demand to purchase the newly-issued debt (bonds), Trudeau and Freeland worked in lockstep with Bank of Canada Governor Tiff Macklem \u2014 essentially directing the Bank of Canada \u2014 to buy long-term debt from the government (via the banks) to artificially manipulate the rates as close to zero as they could get it. They call this QE.<\/p>\n

Shockingly, beginning in 2019, the Bank of Canada has purchased an abnormally-high percentage of all Canadian government bonds issued<\/a>, which has enabled the Trudeau government to ignore free market impulses and put the country into historic debt levels. <\/p>\n

Canada\u2019s public and private debt-to-GDP expanded much faster than any other G20 country at the start of 2020.<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

That trend continued until just recently, when our total debt-to-GDP began to look more like the peak of the U.S.\u2019s debt-to-GDP ratio in the 1940s during World War II. <\/p>\n

Remember: this includes public debt (federal and provincial government deficit spending and liabilities) and public debt (corporate and household debt).<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

From Canadian macroeconomic forecaster Joseph Barbuto, aka Economic LongWave, here is what Canada\u2019s historical debt-to-GDP looks like over the last century (we have to go back to the 1930s to see the last time our public debt-to GDP ratio was this high):<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

Part of the reasoning behind this massive deficit spending was that Freeland and Macklem were both blindsided by inflation, along with all of their G8 money master peers, fear mongering about deflation as recently as October 2020<\/a>. <\/p>\n

In August 2022, after the price of homes, investments and other desirable items had caught up to all of the newly-issued money and inflation soared to the highest it\u2019s been in decades, Freeland, Macklem and the Bank of Canada were trying to control the narrative around inflation. <\/p>\n

They released a statement<\/a> claiming that they did not cause inflation by \u201cprinting money,\u201d and shifted the blame using the \u201ceveryone else is doing it\u201d defense while advising businesses not to increase wages in response to rising prices. <\/p>\n

Jesse Berger, a Canadian author focused on monetary policy, commented<\/a>, \u201cEarlier this month the Bank of Canada blamed you for inflation and told you not to give raises despite awarding themselves $45 million in bonuses.\u201d <\/p>\n

He continued<\/a>, \u201cWhere did they get the funds to buy bonds? They didn’t \u2018print cash\u2019 per se, they just used a \u2018kind of central bank reserve\u2019 thing. No physical notes means it’s not literally \u2018printed cash.\u2019 So it’s a figurative lie, not a technical one.\u201d<\/p>\n

\n <\/p>\n<\/figure>\n

This is how they try to confuse what they are doing with complicated terms like \u201cquantitative easing\u201d and obfuscate what money is by labeling the money they create during QE as \u201ccentral bank reserves.\u201d <\/p>\n

However, in November 2022, Macklem testified<\/a> that the Bank of Canada should have started tightening rates sooner and Government spending contributed to inflation. <\/p>\n

What Is QE? Quantitative Easing, Demystified<\/h2>\n

Poilievre spoke at a rally about the effects of quantitative easing on the money supply, inflation and interest rates in Canada. <\/p>\n

Cogently explaining how the central bank pays to buy the bonds from the government, he said<\/a>, \u201cWell, it deposits money in the financial institutions\u2019 accounts held at the Bank of Canada. The deposits for these financial institutions skyrocketed to about $300 Billion from almost nothing within a couple of years.\u201d<\/p>\n

\n
Source<\/em><\/a><\/figcaption><\/figure>\n

He continued, \u201cThose deposits can be turned into hard paper cash. That is why the money supply went from $1.8 trillion to $2.3 trillion \u2014 half a trillion dollars, which is almost exactly what the deficit was \u2014 not a coincidence. <\/p>\n

\u201cThe paper money \u2014 the stuff that\u2019s printed \u2014 went from $90 billion to $124 billion. Both increased by approximately 27% in a few years. <\/p>\n

\u201cThe money that\u2019s still on deposit with the central bank has created a new problem. The central bank bought bonds with yields of 0.25% and paid for it with deposits on which it now has to pay 4.5% \u2014 in other words, they\u2019re now losing money on the spread. <\/p>\n

\u201cFor the first time in history, the Central Bank of Canada needs a bailout of $4 billion a year. That doesn\u2019t take into consideration any additional losses that will happen if they eventually sell those bonds which are worth less now than when they bought them.\u201d<\/p>\n

\n
These bonds are down 26% from about two years ago when the latest round of QE started.<\/em><\/figcaption><\/figure>\n

\u201cThis has been very good for the very wealthy because in addition to arbitraging those transactions, this inflationary policy drove up asset prices,\u201d Poilievre continued. \u201cIf you have a $10 million mansion and house prices go up by 50%, you\u2019ve just made $5 million tax free. If you\u2019re the new immigrant who doesn\u2019t own any property, the purchasing power of your dollar in terms of real estate has just gone dramatically down.\u201d<\/p>\n

Poilievre punctuated his lesson on how QE creates wealth inequality by saying it is \u201ca massive wealth transfer from the have-nots to the have-yachts.\u201d <\/p>\n

Quick Review So Far <\/h2>\n

At this point, l\u2019d like to recap and add some more factors to the discussion so we can continue understanding why many banks are technically insolvent and starting to fail:<\/p>\n

    \n
  1. Central bankers held interest rates too low and signaled to everyone, including the banks, that they will continue to keep rates low to avoid deflation, promoting the flawed logic of \u201cinflation is transitory\u201d and \u201cdeflation is bad.\u201d <\/li>\n
  2. Banks do not operate on a reserve system anymore \u2014 instead they continually create debt money through credit issuance and are encouraged to hold high-quality liquid assets, such as government bonds and mortgage-backed securities, to protect against bank runs in case everyone discovers there are not adequate reserves for everyone to get their money out.<\/li>\n
  3. Governments inflated the money supply with massive stimulus and deficit spending. Central Banks enabled the massive deficit spending with QE. <\/li>\n
  4. QE by itself did not directly add new money to the system, even though the central bank created the reserves from nothing \u2014 because banks used existing money (our deposits!) to buy the bonds which they sold to the central banks.<\/li>\n
  5. The G7 made a difficult decision to drop a nuclear bomb on the financial system by sanctioning Russia<\/a>, putting contagion pressure on European and other Western banks. <\/li>\n
  6. Central banks started raising rates faster than they ever have before in history to combat inflation, deflating the bond bubble and causing banks to become insolvent. <\/li>\n<\/ol>\n

    As Poilievre mentioned in his rebuke of QE, central banks could realize losses if they are forced to sell bonds. <\/p>\n

    However, a fair rebuttal to this argument is that central banks don\u2019t have to sell their bonds \u2014 they will likely hold them for years or decades to maturity and not realize any losses in dollar terms because they can create the dollars. <\/p>\n

    (This is why they claim that the bonds are \u201crisk free.\u201d While it\u2019s true that they are risk free when denominated in the currency, they are not risk free when measured in purchasing power.) <\/p>\n

    Unlike central banks, regular banks are in a precarious position where they have to sell underwater bonds as depositors withdraw record amounts of money. <\/p>\n

    Due to this exodus from the banking system, they are no longer able to hide the problem with accounting tricks. The depositor runs are forcing banks to realize the massive losses that were hidden with held-to-maturity (HTM) accounting<\/a> rather than fair-value accounting of their underwater bond portfolios. <\/p>\n

    This accounting trick only worked as long as depositors didn\u2019t withdraw their funds. Now that there are record withdrawals happening, as demonstrated in the chart below, it is exposing the insolvency and causing banks to fail. <\/p>\n

    Why Are People Withdrawing Their Money At Historic Rates? <\/h2>\n

    There are two main reasons why depositors are withdrawing their money. <\/p>\n

    Firstly, as depositors lose confidence in their banks, it causes them to move their money to a bank that they trust more. Secondly, high interest rates are causing depositors to wire their money out of their accounts to seek higher yield in money market funds, bonds, guaranteed investment contracts (GICs) and certificates of deposit (CDs) and other investment vehicles. <\/p>\n

    Maybe you haven\u2019t thought about how unfair this is, but many people are realizing that the banks and central banks are taking advantage of them. <\/p>\n

    Let\u2019s say you\u2019ve been depositing and saving money at a big bank, and the big bank gives you a savings rate of roughly 0%. The big bank took your money and bought government debt during QE and received central bank reserves which it parks at the central bank and now gets paid about 5%! <\/p>\n

    People are waking up to how unfair this is, and they are wiring their savings out of their banks and putting it into investments and alternative stores of value, like gold, real estate and bitcoin. <\/p>\n

    In an age of digital money, bank runs in the 2020s don\u2019t look like they did in the 1920s. Instead of lineups around the corner, now we have digital bank runs. <\/p>\n

    In 2022, a record $600 billion in deposits were withdrawn from U.S. banks:<\/p>\n

    \n
    Source<\/em><\/a><\/figcaption><\/figure>\n

    TXMC, a monetary historian and market analyst, has suggested that a more fair way to visualize the amount of withdrawals is by looking at the percent drawdown in bank deposits, which adjusts for the increase in the money supply over time:<\/p>\n

    \n
    Source<\/em><\/a><\/figcaption><\/figure>\n

    Either way you choose to look at the data, there is a historically-significant amount of withdrawals happening from bank accounts.<\/p>\n

    Blaming COVID Is Inaccurate: Government Bonds Are Losing Value<\/h2>\n

    The banks are backing only a fraction of deposits by holding some of their reserves in HQLAs like U.S. treasuries, which are supposed to be easily converted to dollars. (Colloquially, this is known as \u201cmoney good.\u201d) <\/p>\n

    U.S. treasuries are thought of as the safest collateral in the world. The U.S. bond market has historically been deeply liquid and U.S. bonds are considered to be the \u201cworld reserve asset\u201d alongside the U.S. dollar as the \u201cworld reserve currency.\u201d <\/p>\n

    However, the cracks started to appear in the foundation of the financial system in 2019, before the pandemic was used as an impetus to restart QE. <\/p>\n

    In 2019, the Federal Reserve tried to slowly raise interest rates and stopped doing QE<\/a>. <\/p>\n

    Since we operate on a debt-based money system where our economies are addicted to stimulus, when the central bankers \u201ctook away the punch bowl\u201d by stopping QE, and started to slowly raise rates, the interbank lending markets froze up. Overnight, bank-to-bank borrow rates massively shot up to more than 10%<\/a>! <\/p>\n

    This liquidity freeze up is similar to what started the 2008 financial crisis, so the Federal Reserve immediately intervened in the interbank lending markets and started doing a stealth form of bank bailouts the year before anyone had even heard of COVID-19. <\/p>\n

    \n
    Source<\/em><\/a><\/figcaption><\/figure>\n

    Many were speculating at this time, in 2019, that Credit Suisse or Deutsche Bank were functionally insolvent, and that they \u2014 and many other banks \u2014 would have failed much sooner had the central banks not intervened in 2019 and 2020 with massive bailouts in the interbank lending markets, the corporate bond markets and the U.S. treasuries market. <\/p>\n

    Since cracks have started to show in the U.S. treasuries and mortgage-backed securities (MBS) markets in 2019, 2020 and 2021 with no-bid auctions, rate volatility and growing illiquidity, the central banks are doing whatever they can to prevent banks from having to add sell pressure to the U.S. treasuries markets. <\/p>\n

    With record outflows<\/a> from depositors, banks like Silicon Valley Bank<\/a> and Credit Suisse<\/a> were forced to start selling their bonds, realizing the losses on their underwater bond portfolios and going insolvent.<\/p>\n

    These issues in the banking system and bond markets were not caused by COVID-19, and the trend of bank failures is clearly not over as another large U.S. bank, First Republic Bank, has been taken over by the FDIC and sold to JPMorgan<\/a>.<\/p>\n

    Added Pressures From Europe And Russian Sanctions<\/h2>\n

    Almost precisely one year before Silvergate Bank failed in the U.S., kicking off a wave of bank failures, I wrote about<\/a> how the Russia sanctions were a nuclear bomb that went off in the banking system and expected to see a wave of bank failures come in the wake of it. <\/p>\n

    Much like how two nuclear bombs ended World War II, capital-crushing central bank policy rate hikes and Russian sanctions were like two nuclear bombs dropped on the economy and the banking system. The shock wave took one year to make its way around the world, and now we’re dealing with the fallout. <\/p>\n

    European banks like Deutsche Bank<\/a> and Credit Suisse<\/a> were very intertwined with Russia, and tried to resist cutting ties with Russian business lines as this would inevitably lead to their failures, which would spread as contagion to the rest of the global banking system. <\/p>\n

    When you want to get an idea of the health of a bank, you can look at a few things, things such as:<\/p>\n