(2 of 2) There is no precedent for this, because there are far more people involved than during the Great Depression, because they are much more interdependent and because they are much more aware of what is going on all around the world - and because that information now travels in seconds, minutes and hours in unlimited volumes, while in the Great Depression, there was only telegraphs and newspapers.
Then there is increasing destruction from climate change, shortages of hydrocarbon fuels and mining reserves, and surely a massive growth in people escaping one place in hope of moving somewhere better where they are really not welcome, or likely to be highly productive.
In general, people are basing their idea of the future on an over-estimate of everyone else's confidence, solvency and of the real value which exists in capital items and which can be produced by factories, farms and service industries.
The whole collapse will be so pervasive and unprecedented that only the very wealthy will survive without genuine reduction in their living standards, even if they only wind up with 1/10th of the real value they have, or think they have now.
It is impossible for me to imagine any government trying to fix the mounting challenges they face without printing or electronically inventing more currency. We see this in the ability of the Swiss and the US governments so suddenly, within a day or so of heated negotiation, promise tens of billions of whatever currency they print, to supposedly prevent confidence sapping contagion in general, by backstopping this or that bank out of dozens and hundreds of other banks.
They didn't suddenly raise taxes to obtain that currency by tapping the productivity and/or wealth of their taxpayers. They print or electronically create it.
So the government responses are bound to be profoundly inflationary.
What happens when this inflation and the overall reduction in confidence feeds back onto itself to further lower confidence and flood the system with currency? More inflation and more loss of confidence.
What of the dizzying world of finance, with all its entanglements and derivatives? This was a barely stable arrangement when the real value of currency remained fairly stable, but all the assumptions this system relies upon to remain stable disappear with massive inflation and the inability of parties to these loans and derivatives to meet their contractual obligations.
Farms will still produce food - and people always want food. Mines will always be needed, since civilisation depends entirely on mining, as it does on agriculture and manufacturing. Manufacturing will still exist. I just hope that it will continue to work with complex supply chains able to provide all the components needed to make products - and every factory and many high-value products relies on very particular semiconductors and numerous other components. I know, since I make a few electronic products. If you can't get even one component - and connectors, integrated circuits, potentiometers etc. are exceedingly specific and typically come from only a single company, and so factory - you can't make the entire product.
In broad principle I can imagine a subset of banks failing and the rest surviving, in part due to depositors' funds being transferred to the them. However, the whole global economy is so complex, entwined and interdependent that even moderate levels of disruption are likely to drastically reduce manufacturing capacity of numerous products. That is inflationary - a smaller number of products are available and so command a higher real price in terms of other commodities and as measured in currency units.
If all the world used money, rather than currency, a lot of this trouble would have been avoided. Money has intrinsic value, such as a precious metal which is actually needed for production. (Gold's value is largely a social contagion. It is a useful metal but there's plenty of gold metal around without mining any more to meet the needs of electronics manufacturing and jewellery for years to come.) Copper, silver, and numerous engineering and precious metals have real value.
However, how could all money be 100% intrinsic value? Such a large amount of it would need to exist as actual metal, that it would be difficult to move around the place and it would require a massive amount of mining to create this, with that metal being unproductive.
!00% gold or whatever backed paper or electronic currencies are real money, and get around the physical transport problem - but who wants to tie up all that valuable metal in a vault?
Bitcoin started as an honest attempt to do better than fiat currency, but it became, and still is, a speculative craze. Its reliance on hugely energy intensive computations to process transactions and to enable the supply of its currency units to expand without some actor being able to create it at will means that it is a very costly and inefficient currency. It is not even private.
I have never been able to figure out enough about cryptocurrencies to assess the claims of Etherium or whatever to be practical non-fiat currencies.
I can't find a path through my model of the likely future which looks at all optimistic, such as limited damage and not too much social unrest - and this is ignoring the Ukraine war and what China threatens regarding Taiwan. The fact that China would face widespread starvation - and the West extraordinary disruption by not being able to get what China manufactures - is no reason to believe that the CCP wouldn't go ahead with an attack. Putin's invasion of Ukraine is all the evidence we need to establish this.
Don't think that Western leaders are any better. The Biden government's direct or complicit involvement in the Nord Stream pipeline sabotage proves the point Putin tried to weaken NATO and wound up strengthening it enormously. Biden tried to strengthen it and fatally weakened it by showing that even being the strongest NATO ally of the USA is no protection from a crippling and humiliating attack by the USA itself.
In many respects, governments are run by corrupt nincompoops - and it seems that banks are not much different. So why should we believe that they will handle a real crisis (economic collapse of confidence, for very good reason) in a way which leads to long-term best outcomes?
There is a general feeling that "the authorities" won't allow things to get any worse than some threshold. However, the problems were created by the authorities, clueless and corrupt in direct ways, and corrupted and misdirected by a voting public which itself much prefers cheap short-term fixes over costly long-term solutions.
Boy, I hear ya! It really *has* become so dizzyingly convoluted and complex that it defies understanding and predictions. Mr. Kust can address some specifics, but here’s a thought that might cheer you up: there’s always *something* new and completely unexpected - frequently a technological innovation - that pops up and changes everything.
In 1991 a book was published called,”The Coming Economic Earthquake”, by Larry Burkett. I recently found an old copy of this book and reread it to understand why his pretty soundly-reasoned predictions hadn’t come true. You know, massive national debt and house-of-cards financial instruments causing a collapse. But it *didn’t collapse (at that time) because the *Internet* was just being invented! When that took off, it caused a boom that kicked all of the economic nuttiness into the future. So I’m hoping that something will still save the world’s economy. - a breakthrough in fusion technology, or quantum technology, or who know what.
I’m absolutely *clinging* to this hope, because it’s sure better than dwelling on all of the probably more likely scenarios!
There are no transformational innovations in semiconductors on the horizon, or in radio or optical fibre communications. There may well be continuing innovation in Internet communications, but we have had a few decades of that now.
Fusion power in small-scale reactors would be transformational - but the current, well-known, research projects are all on a massive scale and are decades from producing a practical power plant, if it can be done at all.
The only genuinely transformational development I can imagine in the foreseeable future is proper understanding of the immune system's need for 50 ng/mL circulating 25-hydroxyvitamin D, which is 2 to 10 times what most people have without proper vitamin D3 supplementation. If this was ensured for all the world's population, or at least most of us, this would approximately half the total burden of disease, including cancer, sepsis, infectious disease and to some extent chronic auto-immune conditions: https://vitamindstopscovid.info/00-evi/
Most doctors and immunologists are extraordinarily clueless about this, since they resist even thinking about or reading anything which is not accepted by the majority of their colleagues. This deadly groupthink is arguably the biggest single problem to solve regarding human health and therefore the ability for whole populations to prosper economically. People other than doctors, immunologists and the like have far less trouble understanding this. Peter Nayland Kust wrote about it in July last year: https://newsletter.allfactsmatter.us/p/vitamin-d-is-still-the-best-candidate .
Another potential innovation is development of compounds to use as drugs which suppress our long-evolved excessive inflammatory immune responses. These destroy cells indiscriminately, including potentially our own.
In our ancestors, and up to about a century ago, these excessively strong, potentially self-destructive, inflammatory responses were downmodulated by multiple compounds exuded by helminths (intestinal worms). The inflammatory response primarily targets helminths and other multicellular parasites and they long ago evolved compounds to downmodulate this. Our ancestors evolved stronger than healthy inflammatory responses to counter this downmodulation from presumably ubiquitous infection by one or more species of helminth.
Now we are all dewormed, according to individual genetic variation, many people suffer from inflammatory auto-immune disorders. Helminths can be introduced to suppress these - https://helminthictherapywiki.org - but, even without helminths, much higher than usual vitamin D3 supplemental quantities can also suppress these conditions. The latter, such as the Coimbra protocol, requires medical monitoring. For more on this and helminths: https://vitamindstopscovid.info/06-adv/ .
Better nutritional supplements and avoidance of excessive salt, sugar and omega 6 fatty acids would radically improve human health and so also throw off much of the health and economic burdens of the corrupted, and in some crucial ways inept, healthcare, vaccine, quasi-vaccine and drug industries. This would be transformational, in numerous ways, including economically. However, such changes would likely take decades.
I don't expect AI to be a positive transformational improvement. Most likely it will be yet another thing which crapifies the world. For instance, Microsoft is keen to add AI to its email programs to help people write and respond to emails.
There's no reason to expect space exploration to uncover anything transformational for humanity.
Eric Starkman argues persuasively that Silicon Valley Bank's failure was due in large part to it taking its eye of the ball of banking itself and pursuing woke agenda. The role of Twitter in raising up a storm of concern about the bank's stability also surely played a role in its extraordinarily rapid demise. He reports on over a year of San Francisco Fed scrutiny and warnings about SVB which apparently had no beneficial effect.
The two explanations are not contradictory: Bank runs and failures are a natural consequence of an unsustainable and unstable economic system - and SVB was first off the rank because of its over-reliance on long-term treasuries whose value was seriously degraded by rising interest rates.
Lacalle presents an interesting thesis with which I partially agree. However, like Stiglitz he is in my view too quick to give bankers themselves a pass on their own bad and ultimately self-destructive behavior.
Like Stiglitz, Lacalle presents interest rates as entirely a product of government manipulations, and the data shows particularly in the US (which has been my focus moreso than Europe or Asia) that government capacity to set interest rates is imperfect and limited.
Rates began to trend upward in the summer of 2021, 6-9 months BEFORE the first federal funds rate increase in March 2022.
When you examine the movements of several exchange traded funds that focus on various security classes, you see that the decline in asset valuations similarly began before the Fed's first rate hike.
The forces that bring the banking system to this juncture are far more nuanced than the brute force application of the federal funds rate, which has been the only tool substantially used by the Fed with respect to interest rates and monetary policy. This is easily shown by looking at the trends in the Fed's own balance sheet, which do not show actual declines in the Fed's actual holdings of both Treasuries and mortgage-backed securities until last summer, a few months after the rate hikes began.
As a consequence, Lacalle, like Stiglitz, is completely ignoring the dynamics "on the ground" in the banking sector not just since the Fed began raising rates but before. Time was running out on the gambit of going long on Treasuries and other securities well before the Fed began pushing up the Federal Funds rate, and any banker who was paying attention to the data would have seen that--and their contribution to the overall economy necessarily entails them paying attention to precisely this data.
Lacalle is not wrong for criticizing central bank monetary policy. ZIRP and NIRP were always counterproductive and achieved few if any meaningful economic objectives aside from kicking the derivatives can down the road for several years. Lacalle is wrong for giving the bankers a pass on their own behavior, and for their failure to not only address declining asset values before the Fed's first action on interest rates in March 2022 but in the entire year since then.
Bankers should not get a pass merely because it is fashionable in certain circles to heap all the blame on government. They must account for what they have done and for what they have failed to do.
Banks seem to be a special form of business where they get to deal in the lifeblood of the economy - currency - in a manner which is so central to business and private activity, and so in need of being boring and reliable, that they often get off without having to pay back their depositors' funds due to the government (society at large) bailing them out.
So they profit without having to cover their failings. Furthermore, they profit more if they take greater risks. Proper regulation would prevent this for some class of banks which are really supposed to be boring and 100% reliable. If people want to deposit their money in riskier, higher interest paying, banks, then they should be able to do so without a chance of the public paying them back what their chosen bank can't.
However, the situation would still be unstable even if this (the Glass-Steagal act in the USA, as best I understand it) were true. Aggregating depositor funds to lend at higher interest rates to other parties is inherently risky. The bank can tolerate a certain failure rate, approximately within its profit margin, over some timescale of years, but it cannot handle anything worse than this.
To the extent that the banks incur risk by their reserves being risky due to overall changes in economic conditions, including interest rates, they can never be really secure on their own.
So why do we have them? We don't need banks to transfer currency. PayPal, TransferWise and arguably crypto currencies can do this, though the first two work between accounts in organisations which are or resemble banks.
Inflation sucks the value out of physical cash or parking currency somewhere with lower interest rates than the inflation rate (though there are different inflation rates for different classes of goods and services). Some parking place will offer higher interest rates than others. Why should anyone expect such parking to be 100% reliable? Especially when we know that those who pay higher interest rates are taking greater risks? The parking places puff themselves up with vast "assets", being deposits somehow lent out. This gives the impression that they are robust and cannot fail, and most people haven't got the time or capability to accurately assess the risks of each of these parking places.
Instead individuals and businesses expect the government god mummy daddy to guarantee that all parking places are 100% safe. The government pretends to do this, but in fact they can't. Governments' own attempts to manage the economy, and especially their special, corrupting, ability to print currency, ensure that the parking places will be strangled or encouraged into dangerous excesses along with the businesses and customers whose behaviour the government is trying to dampen or boost.
This expectation that banks, and governments, be god-like in their reliability, like perfect parents, is unrealistic except under conditions of really strong regulation and probably real money. Fiat currency corrupts governments and enables those who are influential (very wealthy) outside governments to steer their currency printing to the benefit of those wealthy people.
The only thing special about banks is that they are not in the class of what Adam Smith termed "productive labor."
Which is the most important thing to understand about banks. They do not create wealth, nor are they able to "manage" wealth. Wealth, as Adam Smith's treatise Wealth of Nations demonstrated innumerable times throughout, is the productive labor of people.
In recent decades we have seen the banking and finance industry arrogate unto itself an aura of being a separate economy from everyone else. Wall Street has actively promoted the notion, albeit not explicitly stated, that Wall Street is separate, apart, and even above Main Street. Over the past forty years we have seen this attitude metastasize into what some commentators call "financialism."
The world saw this attitude on display, and the wreckage it could cause, during the Great Financial Crisis of 2007-2009.
We saw it on display in the Enron scandal and the bursting of the tech stock bubble in 2001.
We saw it on display in the collapse of Lincoln Savings and Loan and the S&L crisis of the 1980s.
We saw it in stock market crashes of 1929 which heralded the onset of the Great Depression.
The Panic of 1893.
The Great Depression of 1873 (The Long Depression).
Time and again financial types have sought to set themselves apart from the productive economy of "Main Street" while leveraging that same economy as the foundation for their financial speculations and outright gambles. Time and again Main Street has had to pay for their arrogance.
And Main Street is paying for Wall Street's arrogance yet again.
Hi Peter, Thanks for all your analysis. I commented to try to improve my very limited understanding of economics. I can't imagine why anyone would really want to buy a bond which only pays 2%, with a maturity of 10 years, when anyone could see, or should have seen, that the then current interest rate, somewhat below this, was an artificial construct which could not last much longer.
Lots of banks did this, I guess in the name of diversifying their reserves, which broadly makes some sense. I understand that SVB bought a greater proportion of long maturity treasuries and so was most affected by rising interest rates, which made it the first to be ruined by a run. Perhaps there is some kind of regulation or expectation that a significant fraction of bank reserves should be in such bonds.
My genuinely brief description of the looming and past crashes is that there was a social contagion which led many or most people to believe they owned more real wealth than the actually did. This encourages genuine economic activity and a great deal of speculation. Both feed the impression that there is a lot more real wealth shared among a group of people than there really is in a long-term assessment. Once this becomes more widely recognised, the momentum of people trying to be ahead of the pack turns to a more realistic assessment of real value, business and customer confidence evaporates, genuine business activity and upwards directed speculative activity ceases and the whole system collapse towards, and perhaps beyond, a realistic assessment of the real value of whatever currency or other assets people hold legally and can actually access. Bank crashes without bailouts, bonds being zeroed and collapsing share prices are instances such processes of such perceived value turning out not to exist in any practical form.
Interest rates were incented to move lower by the Fed's actions. That much is certain. But as subsequent interest rate movements since then show, it's market forces that held them there.
This is the thing even the contrarian economists like Lacalle overlook: markets are going to happen no matter what governments do. Governments can change the incentives and distort markets (and boy have they done that in recent years!).
By far the greatest argument against government meddling in the marketplace is the reality that it can never have the control it thinks it does.
And yet, without regulation, anyone could set up a bank, attract customers who lack the ability or will to do the thorough due-diligence required to assess such banks, take their money, profit from lending it out, and walk away when the bank crashes.
A few with concentrated wealth are far more influential and powerful than masses with the same amount of wealth thinly divided. The masses elect governments to provide safe roads, safe cars and safe banks, so the governments must meddle. This can easily be done unwisely and be corrupted, but an economy of a few smart, strong, sharks and millions of not so smart, on average, and not so well organised, minnows is a disaster too, at least for the minnows.
Yes, I don’t know what the next big technological breakthrough will be - but I have an engineering degree and read very widely on science, so I believe there will be *something* that will lift us to a new level. It just needs to happen in time, before the financial house of cards topples.
Before I earned my undergrad degree in engineering, I majored in economics for 2.5 years. That certainly doesn’t make me an expert, but enables me to see that the world’s finances are too precarious. One of the biggest surprises to me is that it has managed to be juggled for this long! Fingers crossed on it holding together for the rest of my lifetime...
And you’re right about Vitamin D3, too. I’ve spent the past 25 years studying holistic nutrition, earning a master’s degree in it, and reading the thousands of studies on the importance of dozens of nutrients. Mainstream doctors, however, aren’t even taught more than a few hours of nutrition - they’re taught that ‘health’ is drugs and surgery. The pharmaceutical *industry* has completely taken over the medical *profession*. So we’re in deep trouble there.
But I’m trying to hold on to optimism. It’s not very easy, is it?
Hello Gbill7, There being no private message system within Substack, here is one for you - which others are welcome to read. Since you have a serious interest in nutrition, and in reading and surely discussing research, you are most welcome to join the Nutrition for Immune System Health email discussion list, which I coordinate: https://nish.groups.io . Discussions are confidential to members.
Members include some of the foremost vitamin D researchers, some of whom are MDs or professors of medicine. There are a bunch of us engineering types too. I work with electronic musical instruments and C++ programming for mining optimisation, maintaining and attempting to extend the work of my father Jeff. One senior vitamin D researcher was a PhD atmospheric physicist working on remote sensing for NASA and Jet Propulsion Laboratory. In the mid 1990s he saw the strong inverse relationship between maps of the USA for total ultraviolet flux from the Sun and the risk of breast cancer. Since then he has concentrated on vitamin D.
Another member is Henry Lahore, who is a retired Boeing electronics engineer. He co-wrote a number of research articles with leading researchers. He supports a variety of programs in third-world countries and spends most of his waking hours maintaining https://vitamindwiki.com.
Thanks! I have subscribed to your Substack, and will read your articles. Being retired, I don’t have any research to contribute to your very professional-level discussion list, although I’d like to read the posts. Clearly you’ve been as frustrated as I have by the Authorities’ refusal to acknowledge the efficacy of nutritional approaches to dealing with Covid. And you’re in Australia - you must really have been up against it!
(1 of 2) My eyes glaze over after considerable effort at trying to understand all this stuff. I can't find any reason here at All Facts Matters or in anything I read at https://zerohedge.com to think that a growing epidemic of bank runs - based on and causing lack of confidence in the ability of all banks to pay back depositors currency - is the inevitable path from here. This is one mechanism by which the economic system can collapse.
This is the start, and other mechanisms will naturally develop as a result. Some involve positive feedback especially in the short term - making them much more rapid, intense and destructive - while perhaps having long-term benefits and stabilising aspects. For instance, lack of economic confidence in US banks and business in general can reduce the value of the USD$ which boosts inflation immediately, but over years enables more real value to be created by manufacturing inside the USA.
The USD$ being a reserve currency has been a long-term curse, since all the US government needs to do is print USD$s and manufacturers, miners, and farmers overseas readily accept this in trade for their real stuff - reducing the ability of US manufacturers etc. to compete. It takes decades to build the skills, infrastructure and factories to recover from this.
The economic system, at every level from companies to countries, is a house of cards with most people and businesses having been in the habit of equating currency with value (not unreasonable since we can trade it for real things of value) and assuming that this level of value will remain stable enough to make ordinary life, business and planning possible.
Inflation weakens that conviction and both inflation and rising interest rates weaken the real value of whatever banks bought as reserves (some types more than others), to meet depositor, shareholder and regulatory expectations that they can firstly firstly remain solvent and profitable and secondly repay depositors' currency even if there is a run on the bank.
Since banks are all tangled up in each other by way of bonds (such as those just erased, as noted above) and derivatives / credit-default swaps (maybe not the same thing, but near enough for this high-level analysis) there's no reason to believe that the banking system is anywhere near as strong or able to pay back depositors' currency as they all pretend and wish to be.
Many companies have huge amounts of debt. Governments have such astronomical amounts of debt that they could never pay it back without strangling their populations and businesses with taxation for a decade or two, which would kill productivity and cause the people to flee to another country. (If they tried, they would soon by voted out or otherwise overthrown, to be replaced by some alternative which also pretends to be able to solve the massive problems, at least for a few years, without extracting massive, real, value from their citizens and businesses).
I don't really understand all this debt. Who is it owed to? The Chinese government has a lot of US treasuries. They are getting ready to fire hypersonic missiles to destroy US aircraft carriers which protect Taiwan. China relies on imports of food, hydrocarbons, coal for electricity and smelting iron AND the great majority of the semiconductors it needs to maintain its extraordinary manufacturing capability. Except for material coming from Russia and a few other land-reachable countries, the flow of semiconductors, food, etc. is by ships and aircraft which would be blockaded the moment China lurched at Taiwan.
Overall, I think governments behave as if they are sound when they are not, that their debt is sustainable, and that they can somehow carry on borrowing and printing currency in a way which firstly delays whatever immediate disaster would occur if they didn't do this AND not make the long-term, inevitable, chaotic correction of all this very much worse.
Many larger companies behave as if their general level of business and so income stream can be relied upon from one year to the next. But, depending on the short-term essentiality of their products or services, this is not the case. Shortage of currency and/or confidence about the future will greatly reduce their business activities and so the real value of currency they earn.
Likewise individuals and families have lots of debt, based on the idea that their jobs will continue and that they will continue to be paid about the same amount of real value.
However, pretty much every individual, company and government is basing their idea of the real and currency unit values of their future income, and of their assets, on the recent past in which the general level of confidence was - and still is - far higher than is justified considering the fundamental problems and the chaotic unraveling, rebalancing, value and confidence destruction which is about to ensue.
(2 of 2) There is no precedent for this, because there are far more people involved than during the Great Depression, because they are much more interdependent and because they are much more aware of what is going on all around the world - and because that information now travels in seconds, minutes and hours in unlimited volumes, while in the Great Depression, there was only telegraphs and newspapers.
Then there is increasing destruction from climate change, shortages of hydrocarbon fuels and mining reserves, and surely a massive growth in people escaping one place in hope of moving somewhere better where they are really not welcome, or likely to be highly productive.
In general, people are basing their idea of the future on an over-estimate of everyone else's confidence, solvency and of the real value which exists in capital items and which can be produced by factories, farms and service industries.
The whole collapse will be so pervasive and unprecedented that only the very wealthy will survive without genuine reduction in their living standards, even if they only wind up with 1/10th of the real value they have, or think they have now.
It is impossible for me to imagine any government trying to fix the mounting challenges they face without printing or electronically inventing more currency. We see this in the ability of the Swiss and the US governments so suddenly, within a day or so of heated negotiation, promise tens of billions of whatever currency they print, to supposedly prevent confidence sapping contagion in general, by backstopping this or that bank out of dozens and hundreds of other banks.
They didn't suddenly raise taxes to obtain that currency by tapping the productivity and/or wealth of their taxpayers. They print or electronically create it.
So the government responses are bound to be profoundly inflationary.
What happens when this inflation and the overall reduction in confidence feeds back onto itself to further lower confidence and flood the system with currency? More inflation and more loss of confidence.
What of the dizzying world of finance, with all its entanglements and derivatives? This was a barely stable arrangement when the real value of currency remained fairly stable, but all the assumptions this system relies upon to remain stable disappear with massive inflation and the inability of parties to these loans and derivatives to meet their contractual obligations.
Farms will still produce food - and people always want food. Mines will always be needed, since civilisation depends entirely on mining, as it does on agriculture and manufacturing. Manufacturing will still exist. I just hope that it will continue to work with complex supply chains able to provide all the components needed to make products - and every factory and many high-value products relies on very particular semiconductors and numerous other components. I know, since I make a few electronic products. If you can't get even one component - and connectors, integrated circuits, potentiometers etc. are exceedingly specific and typically come from only a single company, and so factory - you can't make the entire product.
In broad principle I can imagine a subset of banks failing and the rest surviving, in part due to depositors' funds being transferred to the them. However, the whole global economy is so complex, entwined and interdependent that even moderate levels of disruption are likely to drastically reduce manufacturing capacity of numerous products. That is inflationary - a smaller number of products are available and so command a higher real price in terms of other commodities and as measured in currency units.
If all the world used money, rather than currency, a lot of this trouble would have been avoided. Money has intrinsic value, such as a precious metal which is actually needed for production. (Gold's value is largely a social contagion. It is a useful metal but there's plenty of gold metal around without mining any more to meet the needs of electronics manufacturing and jewellery for years to come.) Copper, silver, and numerous engineering and precious metals have real value.
However, how could all money be 100% intrinsic value? Such a large amount of it would need to exist as actual metal, that it would be difficult to move around the place and it would require a massive amount of mining to create this, with that metal being unproductive.
!00% gold or whatever backed paper or electronic currencies are real money, and get around the physical transport problem - but who wants to tie up all that valuable metal in a vault?
Bitcoin started as an honest attempt to do better than fiat currency, but it became, and still is, a speculative craze. Its reliance on hugely energy intensive computations to process transactions and to enable the supply of its currency units to expand without some actor being able to create it at will means that it is a very costly and inefficient currency. It is not even private.
I have never been able to figure out enough about cryptocurrencies to assess the claims of Etherium or whatever to be practical non-fiat currencies.
I can't find a path through my model of the likely future which looks at all optimistic, such as limited damage and not too much social unrest - and this is ignoring the Ukraine war and what China threatens regarding Taiwan. The fact that China would face widespread starvation - and the West extraordinary disruption by not being able to get what China manufactures - is no reason to believe that the CCP wouldn't go ahead with an attack. Putin's invasion of Ukraine is all the evidence we need to establish this.
Don't think that Western leaders are any better. The Biden government's direct or complicit involvement in the Nord Stream pipeline sabotage proves the point Putin tried to weaken NATO and wound up strengthening it enormously. Biden tried to strengthen it and fatally weakened it by showing that even being the strongest NATO ally of the USA is no protection from a crippling and humiliating attack by the USA itself.
US government funded research lead to the creation of the SARS-CoV-2 virus. This could have caused little trouble if everyone had sufficient 25-hydroxvyitamin D to run their immune systems, but instead we got a global pandemic response which lead to tens of millions of people being killed. https://vitamindstopscovid.info/00-evi/ and https://nutritionmatters.substack.com/p/the-covid-19-pandemic-response-killed .
In many respects, governments are run by corrupt nincompoops - and it seems that banks are not much different. So why should we believe that they will handle a real crisis (economic collapse of confidence, for very good reason) in a way which leads to long-term best outcomes?
There is a general feeling that "the authorities" won't allow things to get any worse than some threshold. However, the problems were created by the authorities, clueless and corrupt in direct ways, and corrupted and misdirected by a voting public which itself much prefers cheap short-term fixes over costly long-term solutions.
Please cheer me up if you can!
Boy, I hear ya! It really *has* become so dizzyingly convoluted and complex that it defies understanding and predictions. Mr. Kust can address some specifics, but here’s a thought that might cheer you up: there’s always *something* new and completely unexpected - frequently a technological innovation - that pops up and changes everything.
In 1991 a book was published called,”The Coming Economic Earthquake”, by Larry Burkett. I recently found an old copy of this book and reread it to understand why his pretty soundly-reasoned predictions hadn’t come true. You know, massive national debt and house-of-cards financial instruments causing a collapse. But it *didn’t collapse (at that time) because the *Internet* was just being invented! When that took off, it caused a boom that kicked all of the economic nuttiness into the future. So I’m hoping that something will still save the world’s economy. - a breakthrough in fusion technology, or quantum technology, or who know what.
I’m absolutely *clinging* to this hope, because it’s sure better than dwelling on all of the probably more likely scenarios!
There are no transformational innovations in semiconductors on the horizon, or in radio or optical fibre communications. There may well be continuing innovation in Internet communications, but we have had a few decades of that now.
Fusion power in small-scale reactors would be transformational - but the current, well-known, research projects are all on a massive scale and are decades from producing a practical power plant, if it can be done at all.
The only genuinely transformational development I can imagine in the foreseeable future is proper understanding of the immune system's need for 50 ng/mL circulating 25-hydroxyvitamin D, which is 2 to 10 times what most people have without proper vitamin D3 supplementation. If this was ensured for all the world's population, or at least most of us, this would approximately half the total burden of disease, including cancer, sepsis, infectious disease and to some extent chronic auto-immune conditions: https://vitamindstopscovid.info/00-evi/
Most doctors and immunologists are extraordinarily clueless about this, since they resist even thinking about or reading anything which is not accepted by the majority of their colleagues. This deadly groupthink is arguably the biggest single problem to solve regarding human health and therefore the ability for whole populations to prosper economically. People other than doctors, immunologists and the like have far less trouble understanding this. Peter Nayland Kust wrote about it in July last year: https://newsletter.allfactsmatter.us/p/vitamin-d-is-still-the-best-candidate .
Another potential innovation is development of compounds to use as drugs which suppress our long-evolved excessive inflammatory immune responses. These destroy cells indiscriminately, including potentially our own.
In our ancestors, and up to about a century ago, these excessively strong, potentially self-destructive, inflammatory responses were downmodulated by multiple compounds exuded by helminths (intestinal worms). The inflammatory response primarily targets helminths and other multicellular parasites and they long ago evolved compounds to downmodulate this. Our ancestors evolved stronger than healthy inflammatory responses to counter this downmodulation from presumably ubiquitous infection by one or more species of helminth.
Now we are all dewormed, according to individual genetic variation, many people suffer from inflammatory auto-immune disorders. Helminths can be introduced to suppress these - https://helminthictherapywiki.org - but, even without helminths, much higher than usual vitamin D3 supplemental quantities can also suppress these conditions. The latter, such as the Coimbra protocol, requires medical monitoring. For more on this and helminths: https://vitamindstopscovid.info/06-adv/ .
Boron is another neglected nutrient: https://aminotheory.com/cv19/#08-boron as is magnesium, zinc and omega 3 fatty acids.
Better nutritional supplements and avoidance of excessive salt, sugar and omega 6 fatty acids would radically improve human health and so also throw off much of the health and economic burdens of the corrupted, and in some crucial ways inept, healthcare, vaccine, quasi-vaccine and drug industries. This would be transformational, in numerous ways, including economically. However, such changes would likely take decades.
I don't expect AI to be a positive transformational improvement. Most likely it will be yet another thing which crapifies the world. For instance, Microsoft is keen to add AI to its email programs to help people write and respond to emails.
There's no reason to expect space exploration to uncover anything transformational for humanity.
Maybe something will emerge.
Daniel Lacalle writes https://www.dlacalle.com/en/the-u-s-banking-system-was-destroyed-by-qeand-negative-rates-killed-it/ that the bank failures are a symptom of an inherently unstable economic system.
Eric Starkman argues persuasively that Silicon Valley Bank's failure was due in large part to it taking its eye of the ball of banking itself and pursuing woke agenda. The role of Twitter in raising up a storm of concern about the bank's stability also surely played a role in its extraordinarily rapid demise. He reports on over a year of San Francisco Fed scrutiny and warnings about SVB which apparently had no beneficial effect.
The two explanations are not contradictory: Bank runs and failures are a natural consequence of an unsustainable and unstable economic system - and SVB was first off the rank because of its over-reliance on long-term treasuries whose value was seriously degraded by rising interest rates.
Lacalle presents an interesting thesis with which I partially agree. However, like Stiglitz he is in my view too quick to give bankers themselves a pass on their own bad and ultimately self-destructive behavior.
Like Stiglitz, Lacalle presents interest rates as entirely a product of government manipulations, and the data shows particularly in the US (which has been my focus moreso than Europe or Asia) that government capacity to set interest rates is imperfect and limited.
Rates began to trend upward in the summer of 2021, 6-9 months BEFORE the first federal funds rate increase in March 2022.
https://fred.stlouisfed.org/graph/?g=11zUX
Despite the Fed's rate hikes in November and December of last year interest rates declined from November through to February of this year.
https://fred.stlouisfed.org/graph/?g=11zUH
When you examine the movements of several exchange traded funds that focus on various security classes, you see that the decline in asset valuations similarly began before the Fed's first rate hike.
The forces that bring the banking system to this juncture are far more nuanced than the brute force application of the federal funds rate, which has been the only tool substantially used by the Fed with respect to interest rates and monetary policy. This is easily shown by looking at the trends in the Fed's own balance sheet, which do not show actual declines in the Fed's actual holdings of both Treasuries and mortgage-backed securities until last summer, a few months after the rate hikes began.
https://fred.stlouisfed.org/graph/?g=11zTV
As a consequence, Lacalle, like Stiglitz, is completely ignoring the dynamics "on the ground" in the banking sector not just since the Fed began raising rates but before. Time was running out on the gambit of going long on Treasuries and other securities well before the Fed began pushing up the Federal Funds rate, and any banker who was paying attention to the data would have seen that--and their contribution to the overall economy necessarily entails them paying attention to precisely this data.
Lacalle is not wrong for criticizing central bank monetary policy. ZIRP and NIRP were always counterproductive and achieved few if any meaningful economic objectives aside from kicking the derivatives can down the road for several years. Lacalle is wrong for giving the bankers a pass on their own behavior, and for their failure to not only address declining asset values before the Fed's first action on interest rates in March 2022 but in the entire year since then.
Bankers should not get a pass merely because it is fashionable in certain circles to heap all the blame on government. They must account for what they have done and for what they have failed to do.
Banks seem to be a special form of business where they get to deal in the lifeblood of the economy - currency - in a manner which is so central to business and private activity, and so in need of being boring and reliable, that they often get off without having to pay back their depositors' funds due to the government (society at large) bailing them out.
So they profit without having to cover their failings. Furthermore, they profit more if they take greater risks. Proper regulation would prevent this for some class of banks which are really supposed to be boring and 100% reliable. If people want to deposit their money in riskier, higher interest paying, banks, then they should be able to do so without a chance of the public paying them back what their chosen bank can't.
However, the situation would still be unstable even if this (the Glass-Steagal act in the USA, as best I understand it) were true. Aggregating depositor funds to lend at higher interest rates to other parties is inherently risky. The bank can tolerate a certain failure rate, approximately within its profit margin, over some timescale of years, but it cannot handle anything worse than this.
To the extent that the banks incur risk by their reserves being risky due to overall changes in economic conditions, including interest rates, they can never be really secure on their own.
So why do we have them? We don't need banks to transfer currency. PayPal, TransferWise and arguably crypto currencies can do this, though the first two work between accounts in organisations which are or resemble banks.
Inflation sucks the value out of physical cash or parking currency somewhere with lower interest rates than the inflation rate (though there are different inflation rates for different classes of goods and services). Some parking place will offer higher interest rates than others. Why should anyone expect such parking to be 100% reliable? Especially when we know that those who pay higher interest rates are taking greater risks? The parking places puff themselves up with vast "assets", being deposits somehow lent out. This gives the impression that they are robust and cannot fail, and most people haven't got the time or capability to accurately assess the risks of each of these parking places.
Instead individuals and businesses expect the government god mummy daddy to guarantee that all parking places are 100% safe. The government pretends to do this, but in fact they can't. Governments' own attempts to manage the economy, and especially their special, corrupting, ability to print currency, ensure that the parking places will be strangled or encouraged into dangerous excesses along with the businesses and customers whose behaviour the government is trying to dampen or boost.
This expectation that banks, and governments, be god-like in their reliability, like perfect parents, is unrealistic except under conditions of really strong regulation and probably real money. Fiat currency corrupts governments and enables those who are influential (very wealthy) outside governments to steer their currency printing to the benefit of those wealthy people.
The only thing special about banks is that they are not in the class of what Adam Smith termed "productive labor."
Which is the most important thing to understand about banks. They do not create wealth, nor are they able to "manage" wealth. Wealth, as Adam Smith's treatise Wealth of Nations demonstrated innumerable times throughout, is the productive labor of people.
In recent decades we have seen the banking and finance industry arrogate unto itself an aura of being a separate economy from everyone else. Wall Street has actively promoted the notion, albeit not explicitly stated, that Wall Street is separate, apart, and even above Main Street. Over the past forty years we have seen this attitude metastasize into what some commentators call "financialism."
https://archive.ph/9L3YO
The world saw this attitude on display, and the wreckage it could cause, during the Great Financial Crisis of 2007-2009.
We saw it on display in the Enron scandal and the bursting of the tech stock bubble in 2001.
We saw it on display in the collapse of Lincoln Savings and Loan and the S&L crisis of the 1980s.
We saw it in stock market crashes of 1929 which heralded the onset of the Great Depression.
The Panic of 1893.
The Great Depression of 1873 (The Long Depression).
Time and again financial types have sought to set themselves apart from the productive economy of "Main Street" while leveraging that same economy as the foundation for their financial speculations and outright gambles. Time and again Main Street has had to pay for their arrogance.
And Main Street is paying for Wall Street's arrogance yet again.
This needs to stop happening.
Hi Peter, Thanks for all your analysis. I commented to try to improve my very limited understanding of economics. I can't imagine why anyone would really want to buy a bond which only pays 2%, with a maturity of 10 years, when anyone could see, or should have seen, that the then current interest rate, somewhat below this, was an artificial construct which could not last much longer.
Lots of banks did this, I guess in the name of diversifying their reserves, which broadly makes some sense. I understand that SVB bought a greater proportion of long maturity treasuries and so was most affected by rising interest rates, which made it the first to be ruined by a run. Perhaps there is some kind of regulation or expectation that a significant fraction of bank reserves should be in such bonds.
My genuinely brief description of the looming and past crashes is that there was a social contagion which led many or most people to believe they owned more real wealth than the actually did. This encourages genuine economic activity and a great deal of speculation. Both feed the impression that there is a lot more real wealth shared among a group of people than there really is in a long-term assessment. Once this becomes more widely recognised, the momentum of people trying to be ahead of the pack turns to a more realistic assessment of real value, business and customer confidence evaporates, genuine business activity and upwards directed speculative activity ceases and the whole system collapse towards, and perhaps beyond, a realistic assessment of the real value of whatever currency or other assets people hold legally and can actually access. Bank crashes without bailouts, bonds being zeroed and collapsing share prices are instances such processes of such perceived value turning out not to exist in any practical form.
Interest rates were incented to move lower by the Fed's actions. That much is certain. But as subsequent interest rate movements since then show, it's market forces that held them there.
This is the thing even the contrarian economists like Lacalle overlook: markets are going to happen no matter what governments do. Governments can change the incentives and distort markets (and boy have they done that in recent years!).
By far the greatest argument against government meddling in the marketplace is the reality that it can never have the control it thinks it does.
And yet, without regulation, anyone could set up a bank, attract customers who lack the ability or will to do the thorough due-diligence required to assess such banks, take their money, profit from lending it out, and walk away when the bank crashes.
A few with concentrated wealth are far more influential and powerful than masses with the same amount of wealth thinly divided. The masses elect governments to provide safe roads, safe cars and safe banks, so the governments must meddle. This can easily be done unwisely and be corrupted, but an economy of a few smart, strong, sharks and millions of not so smart, on average, and not so well organised, minnows is a disaster too, at least for the minnows.
I agree on all counts!
Yes, I don’t know what the next big technological breakthrough will be - but I have an engineering degree and read very widely on science, so I believe there will be *something* that will lift us to a new level. It just needs to happen in time, before the financial house of cards topples.
Before I earned my undergrad degree in engineering, I majored in economics for 2.5 years. That certainly doesn’t make me an expert, but enables me to see that the world’s finances are too precarious. One of the biggest surprises to me is that it has managed to be juggled for this long! Fingers crossed on it holding together for the rest of my lifetime...
And you’re right about Vitamin D3, too. I’ve spent the past 25 years studying holistic nutrition, earning a master’s degree in it, and reading the thousands of studies on the importance of dozens of nutrients. Mainstream doctors, however, aren’t even taught more than a few hours of nutrition - they’re taught that ‘health’ is drugs and surgery. The pharmaceutical *industry* has completely taken over the medical *profession*. So we’re in deep trouble there.
But I’m trying to hold on to optimism. It’s not very easy, is it?
Hello Gbill7, There being no private message system within Substack, here is one for you - which others are welcome to read. Since you have a serious interest in nutrition, and in reading and surely discussing research, you are most welcome to join the Nutrition for Immune System Health email discussion list, which I coordinate: https://nish.groups.io . Discussions are confidential to members.
Members include some of the foremost vitamin D researchers, some of whom are MDs or professors of medicine. There are a bunch of us engineering types too. I work with electronic musical instruments and C++ programming for mining optimisation, maintaining and attempting to extend the work of my father Jeff. One senior vitamin D researcher was a PhD atmospheric physicist working on remote sensing for NASA and Jet Propulsion Laboratory. In the mid 1990s he saw the strong inverse relationship between maps of the USA for total ultraviolet flux from the Sun and the risk of breast cancer. Since then he has concentrated on vitamin D.
Another member is Henry Lahore, who is a retired Boeing electronics engineer. He co-wrote a number of research articles with leading researchers. He supports a variety of programs in third-world countries and spends most of his waking hours maintaining https://vitamindwiki.com.
I have some articles at: https://nutritionmatters.substack.com but most of the more detailed vitamin D material is at: https://vitamindstopscovid.info/ Best regards, Robin.
Thanks! I have subscribed to your Substack, and will read your articles. Being retired, I don’t have any research to contribute to your very professional-level discussion list, although I’d like to read the posts. Clearly you’ve been as frustrated as I have by the Authorities’ refusal to acknowledge the efficacy of nutritional approaches to dealing with Covid. And you’re in Australia - you must really have been up against it!
(1 of 2) My eyes glaze over after considerable effort at trying to understand all this stuff. I can't find any reason here at All Facts Matters or in anything I read at https://zerohedge.com to think that a growing epidemic of bank runs - based on and causing lack of confidence in the ability of all banks to pay back depositors currency - is the inevitable path from here. This is one mechanism by which the economic system can collapse.
This is the start, and other mechanisms will naturally develop as a result. Some involve positive feedback especially in the short term - making them much more rapid, intense and destructive - while perhaps having long-term benefits and stabilising aspects. For instance, lack of economic confidence in US banks and business in general can reduce the value of the USD$ which boosts inflation immediately, but over years enables more real value to be created by manufacturing inside the USA.
The USD$ being a reserve currency has been a long-term curse, since all the US government needs to do is print USD$s and manufacturers, miners, and farmers overseas readily accept this in trade for their real stuff - reducing the ability of US manufacturers etc. to compete. It takes decades to build the skills, infrastructure and factories to recover from this.
The economic system, at every level from companies to countries, is a house of cards with most people and businesses having been in the habit of equating currency with value (not unreasonable since we can trade it for real things of value) and assuming that this level of value will remain stable enough to make ordinary life, business and planning possible.
Inflation weakens that conviction and both inflation and rising interest rates weaken the real value of whatever banks bought as reserves (some types more than others), to meet depositor, shareholder and regulatory expectations that they can firstly firstly remain solvent and profitable and secondly repay depositors' currency even if there is a run on the bank.
Since banks are all tangled up in each other by way of bonds (such as those just erased, as noted above) and derivatives / credit-default swaps (maybe not the same thing, but near enough for this high-level analysis) there's no reason to believe that the banking system is anywhere near as strong or able to pay back depositors' currency as they all pretend and wish to be.
Many companies have huge amounts of debt. Governments have such astronomical amounts of debt that they could never pay it back without strangling their populations and businesses with taxation for a decade or two, which would kill productivity and cause the people to flee to another country. (If they tried, they would soon by voted out or otherwise overthrown, to be replaced by some alternative which also pretends to be able to solve the massive problems, at least for a few years, without extracting massive, real, value from their citizens and businesses).
I don't really understand all this debt. Who is it owed to? The Chinese government has a lot of US treasuries. They are getting ready to fire hypersonic missiles to destroy US aircraft carriers which protect Taiwan. China relies on imports of food, hydrocarbons, coal for electricity and smelting iron AND the great majority of the semiconductors it needs to maintain its extraordinary manufacturing capability. Except for material coming from Russia and a few other land-reachable countries, the flow of semiconductors, food, etc. is by ships and aircraft which would be blockaded the moment China lurched at Taiwan.
Overall, I think governments behave as if they are sound when they are not, that their debt is sustainable, and that they can somehow carry on borrowing and printing currency in a way which firstly delays whatever immediate disaster would occur if they didn't do this AND not make the long-term, inevitable, chaotic correction of all this very much worse.
Many larger companies behave as if their general level of business and so income stream can be relied upon from one year to the next. But, depending on the short-term essentiality of their products or services, this is not the case. Shortage of currency and/or confidence about the future will greatly reduce their business activities and so the real value of currency they earn.
Likewise individuals and families have lots of debt, based on the idea that their jobs will continue and that they will continue to be paid about the same amount of real value.
However, pretty much every individual, company and government is basing their idea of the real and currency unit values of their future income, and of their assets, on the recent past in which the general level of confidence was - and still is - far higher than is justified considering the fundamental problems and the chaotic unraveling, rebalancing, value and confidence destruction which is about to ensue.
Wow. And a difference between market value and book value of 2 trillion dollars! The thought in my mind is, where will the contagion *end*?
It ends when the experts quit kicking the can down the road.