CRYPTO TAIL WAGS BANKER DOG
Over the last week, we have seen some extraordinary events in the US financial markets involving some relatively small US banks and the US stock markets. We have also seen a large Swiss bank, Credit Suisse, come under severe pressure plus instability in the global Stablecoin market and the Crypto market. BOOM has been asked many times “what is happening”? Some are worried about their local banks. Others are just wondering what (exactly) is the cause. Of course, it is hard to be certain about the exact course of events but BOOM hypothesizes that this was all about the Crypto Tail Wagging the Central Banker Dog.
What does that mean? It means that the US central bank, otherwise known as the Federal Reserve, “the Fed”, was given a choice where there was really only one option. In other words, as in the famous movie concerning a mafia family, The Godfather, they were given an offer they could not refuse.
They were (somehow) forced to bail out all of the major depositors of Silicon Valley Bank and not just the small insured ones who held deposits of less than $ 250,000. This hypothesis suggests that a large depositor or perhaps a number of large depositors exerted sufficient pressure on the Fed to bail them out along with all the other depositors such that it was non obvious what was really happening. We now know that the Fed caved in and agreed. Why? Because they were told (or threatened?) that a financial crisis would occur of unimaginable size if they did not bail out those larger deposits. Somehow, it also appears that Credit Suisse was involved in some way and thus its shares came under heavy pressure. However, BOOM must point out that Credit Suisse shares have been in persistent downtrend for a very long time, having fallen from US$ 72 in mid 2007 to just $ 2 on Friday.
To be clear, there was never any real substantial threat to the US banking system as a whole. In the United States, Silicon Valley Bank is simply not a large enough bank to trigger that and neither were the other banks involved. And the ongoing crisis of Credit Suisse has been in place for almost 15 years. So there has to be an alternative explanation for what happened.
BOOM strongly suspects that Silicon Valley Bank had some large depositors who simply could not afford to lose their deposit. And, if they did, then their company would fail. BOOM also suspects that ties to the Crypto market were the problem. Thus, if Silicon Valley Bank were to fall and take its large depositors with it, then the US$ 1 Trillion Crypto market could collapse and take many financial institutions and highly leveraged companies down with it.
The links which bind the Crypto market to Silicon Valley Bank appear to have been the problem which forced the hand of the Fed to the rescue. To solve the puzzle in full, it is necessary for readers to look at not only the identity of the large depositors involved but also their shareholders, bond holders, sponsors and alliances. The simultaneous crisis that occurred in the USDC Stablecoin peg to the US Dollar was clearly linked to the events that took place.
So, it appears that the Fed actually bailed out the Crypto market because they were told to do so presumably by one of their major client banks. Of course, much is made of the Fed ‘s “independence” from the US Government. But this does not mean that it is independent from influence altogether, especially from its client commercial banks. If this hypothesis is true, then BOOM expects the Fed to take a very hard look at how the Stablecoin market operates (or is supposed to operate) and at how the more general Crypto market operates, especially in regard to any associated derivative risks which may cause systemic risk to the entire Crypto market.
However, there is a problem for the Fed in this regard. The two major companies that issue the two major Stablecoins are Tether and Circle and those companies are not registered in the USA.
As BOOM pointed out two weeks ago —
USDT/Tether is issued by a Hong Kong-based company called Tether.
USDC/Circle is issued by Circle Internet Financial LLC – a private company registered in 2013 in Dublin Ireland.
Thus, they appear to be ultimately “regulated” by Chinese and Irish corporate authorities, not the Fed.
THE CONSEQUENCES
BOOM thinks that this mini-crisis will lead to much more rigid regulation and oversight of the Crypto markets. Why? Because this must never happen again. Contagion between the Crypto world and the world of conventional banking is no longer theoretical.
However, in the short term, BOOM does not expect the “crisis” to last much longer. The so-called “threat” to the US banking system is (probably) non existent. The US banks involved are just too small and the Crypto market appears to have avoided any collapse threat or crisis of confidence.
Even Credit Suisse CS appears to have weathered the storm with a loan of over $ 50 Billion from the Central Bank of Switzerland. And there is also the possibility that CS will be taken over by another bank at such a low share price. The obvious candidate for that role would be UBS, the other Swiss global banking giant. That would ensure stability rapidly. However, Deutsche bank would be another likely candidate for taking over Credit Suisse.
If this all pans out as BOOM expects, the crisis will be short lived.
COMMODITIES CONTINUE TO FALL – INTEREST RATES ON HOLD
There were some noteworthy price falls in certain commodities in the US last week.
The Gasoline price fell by 6.8 %
The Copper price fell by 9.56 %
The US Steel Index fell by 7.73 %
The West Texas Oil price fell by 12.72 %
The Natural Gas price fell 3.8 %
These falls in Copper, Energy and Steel all seem to add fuel to the BOOM macro thesis that America is actually in a recession already. Thus, BOOM expects that further significant interest rate rises are now unlikely for the time being.
Gold rose by 5.7% over the week and Silver rose by 9.54%. However, Platinum rose by only 1.7 % and Palladium by 1.75 %. If the crisis is calmed by Tuesday or Wednesday, these prices will (probably) fall back. Stock and Bond prices should also stabilize.
US YIELD CURVE DYNAMICS
Over the last month, the US Yield Curve has fallen across the board from 1 Month duration out to 30 year duration. This will help mortgage interest rates to remain stable in the US.
However, the shape of the Curve is worthy of inspection. The 1 Month Yield is 3.9534 % while the 30 Year Bond Yield is now at at 3.627 %. However, the Yield Curve is positive from 1 Month up to 6 Months where the yield is 4.6977 %. This was caused by panic funds flowing into the secondary market for very short duration Treasuries, especially the 1 Month duration. Thus, the Curve rises from 1 Month to 6 Months and then falls towards the 30 Year yield.
With such Yield Curve dynamics in play, BOOM again expects that further significant interest rate rises are now unlikely in the short term.
GEOPOLITICS AND ENTRAPMENT
BOOM recommends an extraordinary article on the Geopolitics behind the AUKUS submarine deal between Australia, the UK and the US. It is written by a highly experienced Australian diplomat, John Lander and is definitely worth reading if you seek a better understanding of global politics. The article is titled “The US is preparing Australia to fight its war against China”. It was published on February 1st at JohnMenadue.com John Menadue is also a highly experienced Australian diplomat and is an accomplished businessman as well.
Lander is brutal in his assessment of the AUKUS deal and what it means in a Geopolitical context. Many lessons are contained within the article. The key statement at the very beginning is this —
The United States is not preparing to go to war against China.
The United States is preparing Australia to go to war against China.
Other key statements include —
“The US now describes Australia as the most important base for the projection of US power in the Indo-Pacific.”
“Many analysts and commentators outside the governing elite, including myself, argue that these arrangements effectively cede Australian sovereignty to America.“
“ … a paper has been circulated to the Committee, expounding the details of the FPA, so in summary, it gives unimpeded access, exclusive control and use of agreed facilities and areas to US personnel, aircraft, ships and vehicles and gives Australia absolutely no say at all in how, when where and why they are to be used. “
“This has Australia trapped in the absurd policy paradox of preparing to go to war against China to protect Australia’s trade with China.”
The author has a long section on the subject of “Proxy War” and, towards the end of the article, he ominously refers to a statement made by Joe Biden — “America acts only in its own interests”.
Again, BOOM highly recommends the article to readers.
QB Explained
and BOOM’s Perfect Economy
In economics, things work until they don’t. Until next week, make your own conclusions, do your own research. BOOM does not offer investment advice.
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how the banking system and financial sector really work.
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.““Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
YouTube Video — https://www.bankofengland.co.u/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction
and https://www.youtube.com/watch?v=ziTE32hiWdk
Paper: Money in the Modern Economy — CLICK HERE
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
Reference: https://www.bundesbank.de/en/tasks/topics/how-money-is-created-667392
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.“…… the vast bulk of broad money consists of bank deposits”“Money can be created …….. when financial intermediaries make loans““In the first instance, the process of money creation requires a willing borrower.”“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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