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If you missed my note on the banking crisis that started last week, you can find it here:

A lot has happened since. What follows are a few essential points I think everyone should be aware of:

In realizing that they were facing massive contagion that could wipe out countless regional banks, the U.S. government and central bank announced that they would cover all deposits at Silicon Valley Bank and Signature Bank in New York.

But more importantly, for the foreseeable future, they will allow all consumer and commercial banks to essentially borrow against their assets at book value with no fees, haircuts, or penalties for prepayment. Foreign banks are also eligible.

Explain it so even a 5-year old can understand this?

Without explicitly saying so, the U.S. government is implying that they will guarantee all deposits if doing so will prevent a systemic banking crisis. If a bank doesn't have enough cash to return depositor funds, they can borrow what they need from the government to avoid going out of business.

It's like this: if a friend asked us to safeguard $1000 for him, and we bought $1000 worth of bonds with his money, even if the total value fell to $500 on paper, we could borrow up to the par value of $1000 to do whatever we want with it, including giving it back to our friend if he asks for it.

To put this into real numbers, as of March 13, 2023, JP Morgan Chase, Citi, Bank of America, and Well Fargo were essentially given a $210 billion bailout, as this is the approximate sum of losses they have on their books on long dated bonds that got decimated over the past year.

The administration insists that this isn't a bailout. I'm sorry to say that this is a blatant lie - it's an enormous bailout that will ultimately lead to trillions of dollars being printed to avoid an unthinkable collapse of the banking system. These trillions of dollars will dilute the value of all existing money, and will ultimately be the burden of taxpayers through higher taxes, as well as the entire population through inflation on goods and services.

This is the broken monetary system at play. I'm leaving out granular details that tend to cause confusion for those without a background in finance, formal or otherwise. Ultimately, there is too much debt that won't ever be paid back. And the only way to afford just the interest payments on said debt is to cut interest rates.

So what do I expect in the months ahead?

A lot of volatility in asset prices. But eventually, as the money printers go brrrrr and central banks around the world begin reducing interest rates in the months ahead, growth assets will begin rising again. Big tech, dividend-paying utilities, and the most scarce assets will do well. Again, there will be a lot of volatility along the way, which may include steep corrections, so it's always prudent to have a plan that suits individual circumstances, goals, and risk tolerance, and to consult with a trusted professional if necessary.

Remember: the goal should be to preserve or grow our future purchasing power for energy - food and fuel. In the current monetary system, if we keep all or most of our earnings in cash for the long term, we are guaranteed to lose in our future purchasing power. This isn't to say that holding cash is bad - sometimes, it is prudent to have a large cash position. These are the things that the broken monetary system is forcing us to learn about to protect ourselves and our loved ones.


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