The collapse of Silicon Valley Bank has highlighted how fragile the legacy financial system is.
This is an opinion editorial by Mickey Koss, a West Point graduate with a degree in economics. He spent four years in the infantry before transferring to the Finance Corps.
This is inevitable and will continue to be inevitable in one way or another, as long as the system exists. When fixing more printing money, which does not fix anything, the collapse will always be there.
Reflecting on the events of this weekend, I have a feeling that is only the tip of the iceberg, setting the stage for what is to come in the next few years; The slow motion train wreck of the financial and banking system, depending systematically on increased levels of credit and debt, whipsawing between periods of inflation and near collapse as financial levers are pulled in the opposite direction at increasingly frequent intervals.
The reality is that the Federal Reserve caused this collapse, and the inevitable pivot back to quantitative easing will be the precipice for the next collapse. Easing is the only cure for the problem that easing causes. For paraphrase Jeff Booth, the system cannot be repaired from within the system. He had gone too far and was no more.
Anti-Antifragile
The collapse of the Silicon Valley Bank (SVB) has highlighted how fragile the system has become as the Fed tries hard to tighten and resist the wave of inflation that has swept the western world for the past year and a half. The “damage demand,” as it is called, codes for deliberately and artificially raising the cost of capital in order to cause unemployment. Fewer people working means fewer people spending, hopefully reducing the upward pressure on prices exerted by quantitative easing, helicopter money and supply chain damage that defined the COVID-19 era in the early 2020s.
The only answer is to print money, to lower the yield, to raise the market, so that the system does not collapse. However, to maintain confidence, the Fed quickly reversed the trend, engaging in its most aggressive tightening cycle yet. The effect is now starting to play out in the banking system.
Who knows how many banks have gone bankrupt and are struggling to stay alive? Who knows how many emergency meetings were held last weekend by scared executives, desperate to put tape over holes in their balance sheets before investors and depositors wised up?
The problem with running a bank is that it is all based on trust. If the bank loses confidence, subsequent deposits can eliminate insolvency, even if there is no danger before the bank opens. It is a self-fulfilling prophecy. And now it is a systemic risk.
The move to backstop 100% of deposits after the collapse of SVB was all about maintaining confidence at all costs, to prevent the next bank run and open banks after that. Federal authorities tried hard to prevent contagion before arrest. They need to finish their job on inflation before they can reliably start printing money again. Or so they say.
With a 100% depositor guarantee, the Fed has, in essence, pivoted. Money doesn’t just appear out of nowhere, unless that works at the Fed, I guess.
Although the new Bank Term Funding Program is not called “quantitative easing,” I don’t see any significant difference. Lending money to banks against depressed assets to prevent them from marking losses to the market is nothing more than accounting alchemy, the shadow of printing money by another name.
Hidden Cracks In The System
With the bond market depressed to a level like this, it makes me wonder if the next domino could fall. I suspect the pension fund is in trouble. How long can you survive in a bond bear market? How many principals are lost, carrying on irrevocable obligations? How long until the Federal Reserve has to step back from ending bonds?
How long until they start overtly printing money again, depressing yields to the point where pension funds have to lever up just to meet their obligations again? It is cyclical. It will be a cycle until it can no longer survive.
Printing money causes this problem in the form of quantitative easing. Printing money is the only way out of the current debacle. It was inevitable. At the same time, printing money will only make things worse.
It’s a cycle, doomed to repeat itself, ad infinitum, until it can’t anymore. The next few years could be volatile with periods of easing and tightening as the Fed fights inflation and then a financial collapse triggered by a reversal – a deadly dance on the brink of hyperinflation and full financial implosion in alternating cycles.
Bitcoin is fundamentally different. I hear American HODL today refer to money as time, and inflation as stealing time. The manipulation of money is the manipulation of time for all those who are forced to work. Bitcoin is just a better system, completely separate from human whims, outside the grasp of the ruling class who always seem all too eager to pull the levers of control of the complex system. I keep my money in bitcoin to stay outside of that influence. The price I pay is fiat volatility, but in my opinion, it is well worth the cost.
Bitcoin can only become more important than ever, and I think people are starting to see that.
This is a guest post by Mickey Koss. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.