Posted on March 23, 2023
Last week we wrote about the sudden bank failures of Silicon Valley Bank (SVB) and Signature bank on the runs of depositors taking money out of their bank accounts at the two banks. Afterward, a run also began on First Republic bank which caused several other banks to form a $30 billion bailout fund to prevent its closure.
Some believe Treasury Secretary Janet Yellen leaned on JP Morgan and other banks to bailout First Republic to help stem the bank runs that had begun in earnest a week earlier. US officials are anxious about asking taxpayers to directly pay for bank failures, so they are working on alternative systems to keep the banking complex up and running.
Post the brewing crisis on First Republic, word came out that beleaguered bank Credit Suisse was nearing collapse as well. Many will remember Credit Suisse from the bankruptcy of Greensill, an accounts receivable company that lent funds to help companies pay off their suppliers. Credit Suisse has also been embroiled in various investigations into illegal dealings that had caused regulators to take a close look at the bank several times in the past. Now competitor UBS is buying Credit Suisse for $3 billion, much less than the company was valued at the time of its collapse.
At this point, we know that rising interest rates have taken their first toll on the banking system. Two banks are out with two more whose fates are currently being decided. While we haven’t even formally announced a recession yet, it is clear that should be one of the next big shoes to drop for the economy. And it is against that backdrop that both cryptocurrencies, like Bitcoin, and precious metals have started to rebound. That is the market looking for safe places to put their money, and right now banks are not high on the list.
The FDIC insurance scheme has held up through the first round of bank failures, and it looks as though taxpayers will pay for the failures through increased fees at the remaining banks and will likely pass the fees on to their customers in some form or fashion. Politically, the actions by the Treasury and Fed look like a success and have stemmed a nightmare scenario of a full-on banking system collapse.
What matters now is where liquidity will become an issue again in the system. Will we have issues in the short-term repo market, where companies trade high-quality liquid assets to maintain operations? Will another bank fail? Will a company fail to make its debt payments? The next straw is unknown, but the market is now weary of a crash and will be looking out for the next issue to emerge as the recession deepens.
Almost as if on cue, Russia announces they will be banning the use of SWIFT for domestic transactions. SWIFT is the banking software that allows communication of messages for 11,000 participating banks and consists of over 42 billion messages being sent each day. It is this messaging system that settles the movement of money around the world, along with several other important banking functions. When you send a wire to a family overseas, for example, you are most likely using the SWIFT system to notify the bank on the other end of the transaction. Businesses use SWIFT for their everyday transactions, too.
While the whole world essentially uses SWIFT as the de facto banking communication hub, Russia and China have been working on their own alternatives. While different from SWIFT, those systems allow for transfers in the country’s home currency both domestically and in some cases internationally with participating countries. Russia’s own banking system is not as advanced as SWIFT, but it does not have to be. Russia is embracing private crypto currencies and intends to base its future banking system transactions on some form of digital ledger. This means Russia is on its way to leaving the Western banking system for good, and that is not good for us.
I have written about de-dollarization or the process for removing dollars from international trade contracts. This has been occurring for years and is accelerating. For example, China has recently negotiated an agreement between Saudi Arabia and Iran, two countries that have not been known as the best of friends. More importantly, Saudi Arabia has been one of the US strongest allies in the region and a supplier of much of our oil.
The more these countries sign deals with, and with the help of, China and Russia, the more they move away from Western systems of trade. This cannot help with America’s need for goods, particularly in food, technology, commodities, and energy. We import all these items and need robust markets to provide what we need for our lifestyle. But the trade and banking systems of the West are no longer ingrained in international business dealings, which means the US and its allies may soon be on the outside looking in.
The last two weeks have shown us that our banking system is not in the best of shape. And while the rest of the world has not enjoyed the fruits of having the world’s reserve currency for the last 5 decades, with its advantages in pricing and trade giving us nearly everything at a tremendously discounted price compared with the rest of the world.
With the world now essentially throwing off the Western banking system, it appears we may soon be on our own with our banking and economic issues. Our allies are not able to save us financially, and most of our trading partners are busy building a competing system to ours right under our noses. The next 20 years will probably be quite a bit different than the last 20 years. And it is those that have prepared for this reality that will weather the changes the best.
The coin of the week this week is not going to be a coin, but a 1929 Federal Reserve bank note. In celebration of a system that is now too long in the tooth, and soon to be antiquated, now may be your last chance to pick up a piece of what will become very famous monetary history.