Essential Update - This Impacts Everyone

On Thursday morning, I received warnings of a potential bank run on Silicon Valley Bank (SVB).

By Thursday afternoon, a full blown bank run was on, with companies and individuals racing to get their money out of SVB.

What's happening right now is likely to affect all of us at some point, whether we bank at SVB or not, so I'd like to share what I know as of Sunday morning.

By Friday am, SVB went into receivership, meaning that depositors could not access their funds. The FDIC which insures up to 250K per depositor, per insured U.S. bank, for each account ownership category, announced that depositors would receive what they were owed up to this maximum, and those with anything over 250K would receive a certificate which would essentially place them in a line of creditors owed during the bankruptcy process.

SVB was the primary bank for around 40,000 small businesses, many of which are scrambling to make payroll for around 120,000 employees this coming week.

Why does everyone need to be aware of this unfolding tragedy?

Because countless individuals and corporations that have deposits at other regional banks throughout the States are waiting for banks to open on Monday morning to begin wiring their funds out to one of a few banks that are too big for the U.S. government to allow to fail: JP Morgan Chase, Bank of America, Citi, or Wells Fargo.

Silicon Valley Bank was an A-rated FDIC-insured bank, the 16th largest in the States with over 200 billion in assets.

If Joe Biden, Janet Yellen, and regulators don't step in to guarantee that all depositors will be made whole, my view is that there is a strong probability that many small and mid-size banks will go bankrupt in the days and weeks ahead because of contagion-fueled bank runs.

For the past year, I've shared the view that the U.S. central bank would continue to raise interest rates to bring down the inflation that they created with excessive money printing until rising rates broke something. This is that moment.

How did this happen?

With central banks flooding the world with trillions of dollars of money backed by nothing since Covid lockdowns, banks saw record amounts of deposits come in throughout 2020 and 2021 - many banks parked this money in long-dated U.S. bonds, believing them to be risk-free. The value of these bonds as priced by the free market fell by close to 50% from March 2020 to November 2022, leaving banks with enormous losses on depositor funds.

Early last week, Silicon Valley Bank sold a big chunk of their assets at a loss of 1.8 billion, and then tried to raise 2.25 billion to repair their balance sheet - this is essentially what led to the bank run that caused their collapse within two days. I'm leaving out some of the granular details, but not to be missed is that the CEO of Silicon Valley Bank personally sold over 3 million dollars' worth of his company's stock just before the collapse, a tale as old as time.

Here's the thing: SVB wasn't the only bank to invest large amounts of depositor funds in long-dated government bonds. My understanding is that the vast majority of banks did the same thing, and are currently sitting on eye-watering sums of losses on depositor funds. Banks with proper risk management practices will have hedged such positions. But not all banks follow such practices, as clearly evidenced by SVB's collapse.

The underlying problem is that banks don't hold our deposits in a vault, waiting to return our funds whenever we make a withdrawal request. They lend our deposits out 10 to 25 times, looking to maximize yield. This is how legacy banking works. It's called fractional reserve lending - they keep only a fraction of our deposits on hand. So if enough people lose confidence in a bank and go to withdraw their funds at the same time, a multi-billion dollar bank can go bankrupt over a weekend.

Key Takeaways:

If we deposit money at a bank, it's no longer our money - it's technically a loan we are making to the bank, and we are considered creditors to the bank. Isn't this crazy? We deposit our money at a bank thinking that it's the safest place to keep it, but the fine print tells us that we are actually lending our money to the bank, and if they lose it, we can only recover up to whatever the FDIC, CDIC, or each country's deposit insurance corporation covers per account.

If you run a small to medium size business that keeps more than 250K in the bank to pay vendors, make payroll, and handle other regular expenses, if your bank collapses for any reason, including a bank run, you may lose your business within a short period of time

If you understand all of the above, the natural next step is to think about how you can best protect yourself and your loved ones. Please consider taking time to learn what is happening so that you can come up with a plan that feels right for you - a good first step might be to contact your bank and ask how much your accounts are insured up to.

For those with less than 250K in one account at an insured U.S. bank, there isn't much to worry about in the near term. For those with more than this amount in any one account, it may be prudent to consider distributing between multiple accounts to ensure that everything is insured. In Canada, the CDIC covers 100K per account, including retirement accounts.

In the years ahead, I expect the central bank-controlled monetary system to be largely overhauled as the world moves toward something other than the USD as the world reserve currency.

Going back to the mid 1400s, five distinct sovereign nations reaped the benefits of controlling the world reserve currency - in order: Portugal, Spain, the Netherlands, France and Britain. On average, the fiat currencies of these nations held onto world reserve currency status for 94 years. The USD's reign is now going on 103 years. The world is overdue for a store of value and medium of exchange that cannot be manipulated by any one entity, is truly decentralized, and allows all 8 billion+ people in the world to have permissionless access to it.

Imagine a world in which we can self-custody our earnings in a currency that is guaranteed to protect our purchasing power over the long run. It's coming.

"Money that is easy to produce is no money at all, and easy money does not make a society richer; on the contrary, it makes it poorer by placing all its hard‐earned wealth for sale in exchange for something easy to produce."

- Saifedean Ammous The Bitcoin Standard