I’m clearly dating myself with the title here, but I loved the movie “Three Men and a Baby.”
I even sing the “goodnight sweetheart” song to my daughter at night! During the birth of our first child, it was peak Covid insanity, QE madness by the Fed, and stimmies galore by the US government. It’s what led me to find bitcoin because it didn’t make sense and didn’t seem sustainable.
As luck would have it, during the birth of our second child (a boy!) the other week, banks were failing left and right, and bitcoin had its mainstream moment…in the developed world (USA). When we hit three bank failures, I instantly knew the title of my next post. It was meant to be.
So where to begin??? What a bonkers few weeks. If you weren’t paying attention because of March Madness…
I got you. Silvergate bank, Silicon Valley bank, and Signature bank failed…
These weren’t small banks either.
I won’t even be discussing Credit Suisse (CS) bank failing since I’ve written most of this before that even occurred (so technically, it’s four banks now, but I prefer my current title). I will say one thing about CS though. Who’s the bubble now???!! You come at the king you best not miss.
First off, I’d like to state that I DON’T think the world/financial system is about to collapse and people should get in their bunkers and buy firearms and pull all their money out of the banks. It could happen, and bank failures would be the catalyst, but let’s be realistic. I also don’t think this will lead to hyperbitcoinization overnight, but it likely did speed up the timeline, similar to how Covid sped up the transition to work from home and the use of other technologies. The Fed has a lot of tools left in the toolbelt to keep the party going. They will use all of them before it’s over.
What’s going on right now is simply the end stage of fiat money, and you get to witness it. It is entirely predictable, and it’s why I haven’t blinked an eye the whole time despite the craziness since I HODL bitcoin.
It won’t play out quickly as every imaginable trick is pulled to save the system, but towards the end, it likely will be sudden when bitcoin becomes more obvious to all. If you get it now, you’re just early…relax and smile. You aren't shocked if you have read these newsletters and understand Bitcoin and its value proposition. You are stacking bitcoin now so that when everyone is rushing for the exits at the end, you’re already comfortably out the door. You buy home insurance before your house is on fire.
Root cause analysis
I’ll discuss why these banks (and likely more to come) have failed in a moment, but it’s important to understand the root of the problem. Fractional reserve banking.
Ultimately, this is the big problem and where bitcoin differs. When you put your money in a bank to store it/save it, they lend it out. The digits may be on the screen, but your money isn’t really there. Banks are lending it out (mortgages, etc.) and buying other investments (bonds) to make a profit. Ever wonder why your savings account gets 0.2% interest when the federal funds interest rate is 5%? The bank gives you 0.2% and nets 4.8% profit buying treasuries. Easy money! CEOs like that.
It’s not entirely malicious, as banks are a business, and it’s their right to try and make a profit with a service they provide you that you deem valuable. Otherwise, you’d store all your cash in your mattress without a bank. There are limits on how far you can push customers though before they wake up and take their money elsewhere.
The main problems are their reserve requirements, greed, and poor regulation. Over the years, reserve requirements have been reduced to ZERO. ZERO!
Banks are not required to hold ANY of your dollars at the bank. They are free to lend them all out to turn a profit. When you want your money, there are generally controls (like $ withdrawal limits per day) that allow them to get you your money on their terms. Plus, it’s rare when all their customers want all their money on the same day. That’s called a bank run, and it just happened to all these banks that failed. Then their stock does this as investors fear bankruptcy:
No, this is not a chart of an altcoin or bitcoin. This is a “real” publically traded bank stock that is supposed to be “safe.” Much safer than bitcoin.
Reserve requirements have decreased because of Fed policy. Before Covid, the reserve requirement was 10%. Given the need to stimulate the economy and encourage banks to make loans instead of holding cash, dropping the reserve rate to zero percent was a tool they used, and they haven’t looked back. Unfortunately, every intervention has second-order consequences. There is no free lunch. We’re now paying the bill.
A second-order effect of low-interest rate savings accounts (given declining bond yields) was that everyone was forced into investing in bonds and the stock market instead of simply storing money with their bank and earning interest. When I was growing up, my savings account/CDs earned 7-10%! Now, to keep up with inflation, you need to be invested in stocks because earning 0.2% in your savings account isn’t going to cut it.
That’s why the stock market is now a defacto savings account, and everyone buys low-cost index ETFs. Quite disturbing if you ask me, as everyone is taking on MUCH more risk and having to pay someone to help them manage that risk on top of it! If only there was a novel technological solution to this problem…
Banks Failing
What the heck happened here?
TLDR:
The fed raised rates too quickly, destroying bond value and damaging bank balance sheets. Eventually, this triggered bank runs as customers feared for their money if the bank was insolvent.
Greed and stupidity by some banks, poor oversight/regulation by the government, with likely malice toward crypto/bitcoin friendly banks
Explaining it to a 10-year-old…
The honorable Elizabeth Warren, played by Bart Simpson, beautifully.
The play-by-play:
Everyone was making money in 2020 and 2021. Stimmies, the stock market flying, the housing boom, you name it. When it’s earned (or given to you by the government), that money goes into the bank.
Given the fractional reserve nature of banking, they are allowed/incentivized to seek out opportunities to make a profit on your deposits, as discussed above.
What did they do with those deposits? They bought bonds, like the Fed wants them to/mandates they do (to some degree). Specifically, they bought long duration (10-year and longer bonds) because those bonds had the highest yield in 2020/2021 where they could earn the most profit (greed).
Everything was swell as the money flowed in, but good times don’t last forever. These banks, in particular, didn’t plan for them to end (stupidity), nor did regulators watch them closely enough (poor oversight), and there are legit rumblings that fear was stirred up by design (malice).
Given all the QE, stimmies, and Covid supply chain issues, inflation soared in 2021-2022. The Fed returned to its 1970s playbook and started jacking interest rates at a reckless pace to slow the economy. If they couldn’t fix the supply chains, they would crush demand. This isn’t the 1970s though. It’s more like the 1940s after WWII with all the sovereign debt and different demographics. Major Fed error, in my opinion.
Multiple things lined up that caused the bank failures - a true swiss cheese moment (no pun intended CS). First, when interest rates rise, it really hurts growth/tech companies who thrive on low-interest rate environments for funding/loans since they aren’t mature companies yet generating cash/profits. These companies were burning through/needing more cash to support their business, stay afloat, and took withdrawals from the bank in 2022 as rates increased and VC money dried up. Second, average Joe’s like you and me said, “Hey, why am I keeping my money in a bank earning 0.3% when I could buy a 6-month bond earning 5%, or Robinhood is offering 4.15% in their checking account? I’m taking my cash outta here!” And we did, because banks didn’t keep up with the Fed.
Banks need our money to do business and earn a profit. Decreasing deposits is no bueno.
To meet those dollar claims from businesses/people withdrawing money, the banks had to come up with the money to give to them. However, given the fractional reserve nature of banks today, they didn’t have it on them.
So, to get the cash, the banks were forced to sell the “safe” bonds they bought in 2020/2021 in hopes of making a profit. Here’s the problem, no one anticipated the biggest bond market losses since the 1840s. Bonds are supposed to be “safe,” right?
Yes and no.
Bonds are really confusing, so let’s discuss this. If you buy a $100 bond and hold it until maturity (2, 5, 10, whatever years), you will get back the $100 plus interest. This is backed by the government, and they promise to repay you in full. If they can’t, they’ll print it. That’s why they guarantee it. Overall, quite a safe bet. The problem is the interest you earn on that $100 has been paltry over the past decade plus. You aren’t beating inflation with it, so you’re losing money at the end of the day. Suboptimal investment, but potentially better than losing money in stocks, so people do it, especially older folks nearing retirement and pension funds.
Bonds are risky if you become a forced seller like the banks. Bonds trade on the market daily. When yields rise, bond prices/value fall. It’s an inverse relationship. When the Fed raised interest rates from 0% to 5% (fast)…
suddenly the bonds people were buying in 2020/2021 became much less attractive to own. Why would you own a bond with a 0-2% coupon when new bonds give you a 4-5% coupon? You wouldn’t, and so the old bonds sell off (yields rise) and are worth less. The bond market suffered an ~25% loss in 2022 - absolutely historic when typical yearly gains are 6% over the past 30 years. As noted in prior articles, there is no free lunch, and aggressive interest rate hikes have consequences that we are JUST starting to see (lag effect). We are in the “Danger Zone” where stuff breaks (see prior article). Something always does.
Since the banks were now FORCED sellers of the 2020/2021 bonds to meet cash demands by their clients, they had to realize tremendous losses on those bonds.
Given the hyperconnected (Twitter, etc.), digital/mobile, 24/7/365 news in today’s world, the word spread quickly that these particular banks might be in trouble with their balance sheets. Word got out that they were trying to raise money to get cash…trigger the bank runs.
Banking is all about confidence. Once confidence is lost, you don’t want to be the last one to pull your money out and find it’s gone.
There was a mad dash by all the bank’s clients to get their money out ASAP, which exacerbated the death spiral of selling bonds at a loss and impairing their balance sheet. Enter the FDIC to save the day.
Most of us don’t have >$250,000 in cash in our bank accounts. Why would you? It earns you basically nothing sitting in there. Plus, anything over 250k isn’t insured by the FDIC, so you’re taking a risk. However, companies have millions of dollars in cash they have to store someplace, and the banks that failed were those companies’ savings accounts. Ruh-roh.
You’ve probably heard “FDIC insured” a billion times and maybe never appreciated what it was for, but now you do. Anything under 250k is guaranteed to you because the Fed can ultimately print the dollars to make you whole. However, they won’t go a penny above that…or will they? Enter BTFP. A new intervention program by the Fed.
Once Silvergate, then SIVB, and finally Signature bank were deemed non-salvageable in rapid succession, people started freaking out. Again, banking is a game of confidence. They’re also all connected in very complex ways, and so when one bank fails, there is a lot of counterparty risk out there that could damage another entity. Prominent people were screaming on Twitter that the Fed must step in to save these depositors. If not, they surmised disaster for the entire financial system would strike. Anyone who had >250k would pull their money out of these smaller banks and move it to a big bank like JP Morgan or Schwab or Fidelity that are “too big to fail.” This would be a calamity for the regional banks which are important in our economy.
They whined loudly, and the Fed listened. A new program was created to solve the problem. BTFP.
Bank Term Funding Program. I prefer to call it - “Buy The F’ing Ponzi”.
Is this QE or not QE? That is the million dollar question. The smartest people in macro can’t agree, so I’m sure not going to have the answer. Here’s the narrative the Fed is trying to sell us though on the economy…
By strict definition, it is NOT QE. This program offers loans to banks from the Fed for their collateral (bonds and mortgage-backed securities) AT PAR. What does this mean? Basically, banks don’t have to realize the losses on their bonds, and the Fed will give them a cash loan for the FULL amount of their bond portfolio before any losses. If the bond has lost 25%, the Fed will still issue a loan for 100% of the value of the bond, no questions asked. The bank has to repay the loan in a year with interest (fed funds rate plus .10%).
Basically, it’s another trick to keep the party going. This prevents banks from not being able to handle a bank run like the three other failed banks. They mismanaged their balance sheet and did risky stuff with YOUR money, and this trick allows them to keep doing that. However, the risk doesn’t get washed away by the Fed. It just gets transferred somewhere else. Exactly where that is isn’t clear yet, but it will come to the surface soon enough in a big way, and yet another intervention will be necessary.
Did Silicon Valley and Signature bank get a “bailout”? Once again, nobody can agree, so I’m not sure, but it smells funny.
Equity holders got killed, so in the strict sense, it wasn’t a bailout like the 2008 banking crisis. This time, the funds to cover the uninsured depositors over the 250k limit will come from the FDIC. The FDIC is funded by bank premiums. These are fees that banks pass on to you and me. So ultimately, when they say taxpayers won’t pay for the lost funds, it’s a crock of sh*t. If you use a bank, you’ll pay the fee somehow. Ultimately, you and I are footing the bill. Banks win, we lose, same ol’ same ol’ thing.
At the end of the day, I’m still calling this quasi-QE, and money printer go kinda-brrrr because the Fed and the Treasury are ultimately backstopping this entire operation, and the Fed’s balance sheet went UP as a result, offsetting QT.
We won’t know for a year if this is true QE or not based on whether the loans can get paid back, but I don’t see that happening.
If the bank takes a loan from the Fed, where will they get the money from to pay it back? People are pulling money from banks as the Fed keeps raising interest rates - so that doesn’t seem promising. The housing market has dried up with high rates, which isn’t great either for new loans. Oh, the commercial real estate market? I’ve been saying for over a year that this is the “big one” that will really turn the money printer back on.
Regional banks are sitting on billions and billions of losses in commercial real estate. It will only get worse as leases expire and companies continue the transition to work from home. Empty mega office buildings are a big problem for banks, and the problem is JUST coming to the forefront.
The BTFP also allowed the Fed to keep raising rates. They went ahead and increased by another .25% this week, bringing the fed funds interest rate to 5%.
Without this program, banks would have been slaughtered as bonds continue to lose value with rising interest rates, and people continue to withdraw money to find better returns than their bank offers.
Banks can’t even raise savings rates to stem the tide because if they do, that will hurt their profits! It’s a toxic mess. However, via the BTFP, banks can get cash quickly from the Fed if needed. Otherwise, it would be a domino bank run scenario all over again.
Bitcoin’s moment to shine
A few of my buddies texted me separately that more than ever before, they now understand the value of bitcoin and what I’ve been stressing. If you were selling bitcoin because banks were failing…I have no words.
Just like in the last article where I discussed orange pilling a wealthy American vs. a person in Nigeria - it’s WAAAAY harder to get someone in the US to understand bitcoin when they have no fear of losing their money. They’ve never considered that putting their money in a bank is really a loan to the bank and that anything over 250k can be lost by the bank. If the bank fails, anything under 250k is insured, but in that case, they’ll still end up taking a hit (as will you and I) because taxpayers will end up footing the bill somehow, someway.
Given these recent events of bank failures, and for a moment understanding that your money isn’t always guaranteed in the bank, people freaked out.
People recognized the value of storing your wealth in a decentralized cyberspace bank account that you can access 24/7/365 without permission with NO counterparty risk (banks making bad loans, etc.).
Bitcoin was launched in 2009 because of the 2008 banking crisis. Because the banks were bailed out. Because of fractional reserve banking that will continue to be a problem no matter how many bandaids they put on it. Because of monetary debasement and how it ravages our life savings, contributes to inflation, and creates a society of the haves and have-nots.
Bitcoin is a FULL RESERVE bank account in cyberspace with no counterparty risk. It’s protected by the largest computer network on earth, its laws are math and computer code that no entity can change (not based on trust like banks or the Fed), and given the 21 million maximum amount of bitcoin ever to exist per the protocol rules (not based on trust) your savings should go UP in value over a long enough time if demand for bitcoin persists (supply and demand). I’m betting it’s just getting started.
There are two main issues with bitcoin, in my opinion, used as a savings account today. Both will be resolved with time, I strongly believe. First, the volatility. If you store cash in a bank, you expect to be able to access it with the nominal value still the same. Put in $100, get out $100. With bitcoin, the volatility precludes that currently. As the asset class grows into the trillions, it will become much less volatile, and then people will see it as a more useful cyberspace savings bank account. In the meantime, if you can stomach the volatility leading up to that moment and don’t need the money you put in for 4-5 years, the returns on bitcoin the asset could be significant.
Second, if you need to buy something with cash there is no capital gains tax. If you purchase anything with bitcoin there is. The two solutions to this are 1) over many many decades as younger generations come into power who are more comfortable with digital assets, laws could change where this no longer applies to bitcoin. This will just take time. The boomers won’t hold office positions forever. Everyone eventually dies. 2) don’t sell your bitcoin and take out a fiat loan against it (not ideal, but doable). The ultra-wealthy already do this commonly today. They take out a loan against their NYC skyscraper or successful business, they don’t sell the valuable asset which keeps going up in value, and avoid taxes from selling it at the same time. Pretty smart, actually.
Then they fight you…
I can’t stress this enough, the powers that be behind closed doors are scared to death of bitcoin. It won’t die. They can’t shut it down. They can’t imprison the founder. Fiat is dying, and they know it. The internet makes it so everyone now knows about bitcoin, and the more they try to bash it, the more attention/popular it gets. The gig is also up with trusting the media - nobody does anymore so the trash articles written about bitcoin just fire up people like me, who then help spread the truth. The internet has democratized information, and it is glorious.
Bitcoin is a global asset that anyone can flee to from fiat. Literally, every mistake the fiat financial system makes emboldens and grows the bitcoin ecosystem more. Those mistakes are increasing and compounding. The bigger bitcoin gets, the more users it gets and the more trust it brings. This makes the fiat death spiral accelerate. Don’t be the last one trying to exit.
I’m not much into conspiracy theories but make no mistake, they are trying now to fight bitcoin and block the exits (quietly). The banks are limiting how much you can withdraw to bitcoin platforms for purchase, and these failed banks were big in the crypto business. Bitcoin is NOT crypto, but the government is doing anything it can to stop the flow of funds out of the dollar and into bitcoin/crypto. The dollar is the world reserve currency, it gives our country tremendous global power. It is a weapon, and is being used as such currently against Russia (and others).
Other nations needing dollars to buy oil and other goods is critical to funding the American dream. If they don’t need dollars, there are fewer people to buy our debt (bonds), making it harder to pay for all of our nice things - social security, medicare, defense, social programs, etc. The death of the dollar is coming, but slowly. It will likely go out with a bang (dollar milkshake theory), but on the other side, you will want to have some of the neutral digital reserve currency everyone needs. Some think that’s gold, I just strongly disagree with that. My bet is on bitcoin. Maybe it won’t be YOU that needs it, but it may be your kids or grandkids. The events of these past few weeks continue to show the instability of ALL fiat money. The USD is just the cleanest dirty shirt in the pile.
CBDCs next?
Again, not trying to sell a conspiracy theory, but some of the writing seems to be on the wall for what’s coming down the pipeline…CBDCs (central bank digital currency). I wrote about CBDCs a few articles ago, and the “FedNow Service” is supposed to launch in July 2023. This got lost in the chaos of bank failures.
This is NOT a CBDC in the truest sense, but it’s definitely a precursor of what’s coming. Baby steps to lure people in and appear benign with tons of advantages promoted. Be wary.
The ultimate goal is control. Every country is experimenting with these and following in China’s footsteps, which has a fully functioning CBDC system up and running. Learn about it. Read about it. Get informed now. It’s all about control and what America stands AGAINST.
Bitcoin is freedom from that control.
Bitcoin is an idea whose time has come.
All aboard the bitcoin life raft.
The fiat sinking ship is taking on more water. It’s sinking faster.
These meetings shouldn’t be happening….
And remember, they will lie to you right up until the last moment…
The time for the money printer to go extreme brrrrrrr yet again is near, but not just yet. Soon. Patience.
To protect your time and your savings, choose the best money, and choose wisely.
If you choose bitcoin, just DCA and chill. Keep stacking those sats no matter what. It’s gonna be fine even if you stack at the top.
You can peacefully choose to opt out of the system and participate in building a new, stronger, more fair, digitally native financial system that’s open to everyone. You don’t get to vote for this guy…
So vote with your wallet and buy bitcoin. Spend less time fighting over politics, which is what they want you to do (because it generates “clicks” and creates division).
You can even do it while watching Netflix. It’s that easy.
What’s my Saturday night plan?
Watch Three Men and a Baby, buy some bitcoin, and chill.
Thanks for reading.
Until next time…
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