Running out of road

Kristalina Georgieva, managing director of the International Monetary Fund (IMF), has told a Beijing conference that risks to “financial stability have increased at a time of higher debt levels”.

Global debt is about $300 trillion, according to the Institute of International Finance (IIF), close to what it was in 2021 but around 26% higher than before the 2008 crash. JP Morgan calculates that developed market debt has exploded from 73% of gross domestic product (GDP) prior to the Great Financial Crash of 2008 to 122% today. Global debt of $300 trillion translates to around an average £37,500 compared to around $12,000 GDP per capita. We’re running out of road. As JP Morgan says: “Debt stability? Forget about it”.

The assumption is that policymakers – governments – know what they’re doing and that they will always come to the rescue if need be. They come to the rescue of collapsing banks, either by a bailout, or forcing mergers, or bending the rules to protect depositors.

We saw a fine example of rule-bending over the collapse of SVB. The Federal Deposit Insurance Corporation (FDIC) provided insurance to failed bank depositors up to $250,000. But after vigorous lobbying President Joe Biden retroactively designated SVB (and another failed banking minnow, Signature Bank) as ‘systemic risks’ to the US financial system – and thereby guaranteed all deposits, no matter how large. According to one report federal guarantees are now made of “a president’s whim… This is the sort of crony capitalist collusion that… should bother everyone”. The government strong-arming of UBS to take over Discredited Suisse is disliked by more than half of the country according to one poll but that is of no account. Protect the banks; protect the banking ‘system’. First Citizens Bank (founded in 1898 and today in the top 20 US banks by assets ) is apparently lined up to buy most of SVB; losses of some $20 billion will be incurred by the FDIC, which is paid for by other banks. The FDIC insurance fund last December had about $128 billion; if it had to cover all accounts up to $250,000 it would need about $10 trillion.

Blind trust circle

If the 2008 banking crash was like a fever that swept through a community, the 2023 banking sickness is more chronic and, because it seems relatively low-key, more serious. On Friday, the share price of Deutsche Bank fell by more than 8%, and rose by 4.7% by midday Monday this week. Friday saw Europe’s Stoxx 600 banks index drop by 3.8% only to rise by 1.2% by Monday midday. “Banking is a confidence trick” says The Economist the trick being “to ensure that customers never have cause to whisk away their cash”.

The rot that runs deep is in the banking system we have evolved, in which deposits at banks don’t exist in the amounts we believe. Fractional banking, which is how all banks today operate, means that only a small percentage of deposits are covered by cash-on-hand. Banks don’t hold onto the full amount that is deposited. In fact, the US Federal Reserve in 2020 removed all reserve requirements “for all depository institutions”. The overwhelming majority of fiat money held on deposit at banks is not backed by anything. Bernie Madoff bet that he would never have to re-pay too many people all at the same time; banks make the same bet. If we hold our money via a bank, we are little better than a blind person being led by a blind system. It’s a circle of blind trust.

Out of the shadows

Non-bank financial intermediaries – aka shadow banks – today make up almost half of the world’s financial assets, which the Financial Stability Board (FSB) put at $468.7 trillion in 2020. This largely unregulated sector could be the “soft spot in the financial system” and might trigger the next financial crisis says Luis de Guindos, vice-president of the European Central Bank (ECB).

Central banks have belatedly taken notice of inflation and have used their main weapon to beat it – interest rate rises. They are hurriedly trying to cure an illness of their own creation. Easy money and rock-bottom interest rates for years have fuelled a massive explosion in global debt, debt which cannot be repaid. Higher interest rates mean that the cost of servicing these debts has risen. The US national debt – fast approaching $32 trillion – will cost more than $640 billion to service this year. The Congressional Budget Office (CBO) estimates that interest costs on this debt will take up almost 40% of all federal revenues by 2053. This is unsustainable; US politicians mostly seem to prefer to adopt an ostrich position in the face of this chronic sickness.

What brought SVB low was the (then remarkably safe) decision to park its surplus deposits in US government bonds, regarded as the last word in safety. But inflation forced the hand of the US Fed to put up interest rates, which caused bond prices to drop, and SVB found itself sitting on massive unrealized losses. According to some new research , the unrealized (i.e. potential) losses of the US banking sector are now a staggering $2.2 trillion. Around 1,600 banks are potentially insolvent.

Whether it’s shadow banks, bloated debts, risky conventional banks, disgruntled populations squeezed at both ends by rising prices and wage rises failing to keep pace with inflation, increasing demands for greater welfare support, unexpected wars and disasters, the world seems to be tiptoeing towards the edge of chaos. Hope for the best but prepare for the worst seems a sound motto.

For us at Glint that means buying gold and using it as money. So far this year (up to 20 March) the gold price has risen by 8.5% in US Dollar terms. Some people are predicting the gold price to “exceed $8,000 in the coming decade” which seems a remote likelihood at the moment. But then, who in January 2022 would have expected Russia to start a war against its neighbour?

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.