Geopolitical Update : Are bank deposits safe? Our financial system is doomed, but not finished yet
By Christian Takushi, Macro Economist, Switzerland – 16 March 2023 (Truncated public release)
After several US banks collapsed and Credit Suisse experienced a near free-fall, people – all across the West – are asking if their bank deposits are safe.
As usual I will spare you the rehearsing of news-noise and short term events. Let us try to focus on that which is strategic and relevant for the long term, while still addressing whether Credit Suisse will survive. What happens to CS matters from London to Tokyo now.
One reason why so many people and even so many Western bankers are scared is that they think the collapse of US banks is a failure of FED policy, a massive accident and embarrassment.
It is not. This is where it is incredibly important to keep the big geopolitical-macro picture in sight. Washington cannot afford huge volatility in the USD until August 2023 and the fight against inflation should no longer be done with Fed rate hikes alone.
The failure of some banks is exactly what central bankers knew would come and some of them “quietly wanted”. If they can engineer “contained bank failures”, they can consolidate the banking industry and a banking crisis allows for a Credit Squeeze. That Credit Squeeze would be a very effective tool in Spring 2023 to bring down inflation, allowing our central banks to do an earlier or gentler pivot. Thus, the FED and ECB wouldn’t have to raise interest rates so sharply any longer. A Credit Squeeze has its risks, but so does a steep hike in interest rates above 5% in the USA and 4% in Europe.
A banking crisis would allow G7 states to tighten their control over the financial system.
The good news: Bank deposits in the West are safe for now, but they are backed up with the same inflated or debased paper money that brought us here. The risk is shifting from depositors to investors. It is key to understand the big picture, because policy makers’ hands are tied on many fronts.
Washington has set the tone
The US government last week surprisingly expanded deposit insurance to all depositors of affected banks. But there is big criticism about the US government intervention. Investors are furious that only depositors are protected – well, unlike 2008, stock & bond investors are not protected at all. For many investors and bankers that “grew up” with a FED PUT and the notion that the FED would do whatever it takes to keep asset prices rising, this is a rude awakening. Something only older bankers and economists like me can fully relate to.
One thing is certain – we live in a different world now than the one we had until Friday last week. This is not just for banks – the banking system is vital for the whole economy.
The move by US regulators is a massive one, and I humbly think the US government has done “pretty well” over the weekend, given the massive array of predicaments they are facing and the strategic trap they are in.
It was the smartest they could have done given the fact that the Treasury is stretched already and using its liquidity reserves to keep the US government operations running to avert a US government default.
Primarily a Western problem
After living beyond their means for more than four decades thanks to reckless fiscal spending financed by money printing and zero interest rates, the developed economies of the West are facing another one of the negative side-effects.
Many Western banks took on too much risks or cannot handle the normalisation (rise) of interest rates. When interest rates rise, not only does liquidity supply shrink, the price of the bonds they hold in their balance sheets as core capital drops. In the case of Silicon Valley the losses in the US bonds proved too much and eroded trust.
Outside of the G7 there are other (somewhat bankrupt and) equally troubled developing and frontier economies on all continents – like Argentina or Sri Lanka, but for the most part emerging economies have run a much more disciplined fiscal & monetary policy than the rich G7 over the past two decades. During the Covid crisis Brazil, Colombia, Peru and Chile did not simply print money to finance huge Covid-handouts as we did in the West. They knew they would be brutally punished by voters – and they were all replaced by left leaning administrations that wanted to emulate the West’s largesse. We have to admire the fiscal discipline that has taken root in the emerging world. Thanks to a moderate fiscal-monetary discipline people are not desperately queuing up outside of their banks in Punjab (India), Sao Paulo (Brazil) or Yogyakarta (Indonesia) to check if their deposits are OK.
This banking crisis is the latest in a series of crises of trust in the West. Another confirmation to capitals in the Global East and Global South, that they are doing the right thing in advancing plans to decouple from the USD & EURO and from our increasingly “shaky” Western banking system. In fact these nations are advancing different plans to create parallel reserve currencies and trading platforms to allow for a gradual decoupling from us. It is – truth be said – a strategic shift from the Global East & South (I call it “GES”) to decouple from a morally declining West.
Why panic is misplaced for now – Credit Squeeze desired
The strategic situation of the combined West is desolate and knows no good outcomes, but we are not at the end-game yet. Our policy makers are rather surprisingly putting up a good battle these days in long war that looks daunting.
As said earlier, a major reason why so many people and even Western bankers are so scared is, because they think the collapse of US banks is an unwanted disaster caused by too aggressive a FED policy. A policy failure. It is not.
This is where it is incredibly important to continually keep the big geopolitical-macro picture in sight. Washington cannot afford huge volatility in the USA in this 1st half 2023. Washington has several moving targets in sight, not just inflation. That is the huge mistake bankers and investors have made since last Summer, they have been exceedingly obsessed with the FED and its every tiny talk about inflation. Just that.
The big picture of policy makers .. in times of war
The G7 economies have one major problem, they are full of massive bubbles. To go into war with all your assets in a bubble is a very bad idea – FED officials wisely conveyed to Congress recently. Powell got a green light to proceed. Few people noticed this.
Most asset prices (houses, bonds, equities, art etc.) in the West are overvalued – they have been artificially pumped up over decades. The collapse of the weakest banks and the non-protection of stock & bond holders allows for some hot air pressure to escape the G7 asset bubble.
In my opinion the failure of some banks is exactly what central bankers have wanted. If they can engineer contained bank failures, they can consolidate the banking industry and engineer a Credit Squeeze. That Credit Squeeze would be an effective tool to keep inflation from reaccelerating and to bring it down, allowing our central banks to do an earlier or gentler pivot. Elevated interest rates, but with policy flexibility. In a war you need flexibility. If you look beyond the headlines, you will know that the USA is at war – US officials and Congress leaders have said it out loud.
Thus, the FED and ECB wouldn’t have to raise interest rates that sharply any longer. A Credit Squeeze has its risks, but so does a seep hike in interest rates above 5% in the USA and 4% in Europe.
The extra demand for US Treasuries should also help insulate the USD and keep it firm as we go into the geopolitically very critical 2nd quarter.
Much needed Wealth normalisation
I think our policy makers are also seizing the current situation as an opportunity to “somewhat” correct overvalued Asset Prices – thus to get some Asset Price Normalisation in the West. Of course millions of people in the West see this this last ten days as Wealth Destruction.
Washington knows that the massive asset bubbles in the Western economies are a huge “Achilles heel” in their epic confrontation with Russia and China. Our massive asset bubbles are one the main arguments Beijing and Moscow are using to attract powerful nations into the BRICS. It is almost a matter of national security for these nations to diversify away from our colossal bubbles – otherwise our coming financial collapse or debt defaults could sweep them away too.
G10 central bankers can’t talk about this publicly, but they know .. the West is stuck in a Wealth Illusion that needs some correction – every correction is painful.
The West is simply not as wealthy as it think it is. We used to produce many goods and to have value creation, but 70% of the US economy is now mere consumption – much of which is on credit. In other words, much of this wealth is on inflated and debased Paper-Money. Well, increasingly people in Asia are saying we are paying for their goods in debased USD and EUROS, Monopoly Money. They’d prefer we pay in gold or a commodity like ..
This report has been truncated here – If you want to read the full report, you can write to email@example.com
By Christian Takushi MA UZH, Independent Macro Economist and Geopolitical Strategist. Switzerland – 16 March 2023. Public Release Truncated
Geopolitical and economic conditions need close monitoring, because they can change suddenly.
No part of this analysis should be taken or construed as an investment recommendation.
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