By now many of you have read or seen articles about various bank failures. I have seen people shrug it off due to a lack of understanding. Most people do not think it will affect them in any major way. I will admit, I was also that way until I started reading more about what happened. The banking industry failures will cause problems for us little guys at some point and here is why –
A gross over simplification of how the fed manipulates markets can be seen when interest rates are low, bond prices are high. Over the last decade banks were buying up these government bonds like candy. This created cheap and easy loans to increase everyone’s credit. The average person began buying more goods, services, and commodities. This ultimately led to an economic boom… on credit.
Prices began to rise and with it, inflation. Inflation is a measure of how much money is in circulation. It devalues itself when there is more of it around. If everyone could get cheap low interest loans, they would have more money to spend. This would eventually lead to an increase in prices like we saw in the recent housing market. The fed stepped in to curb inflation by raising interest rates.
Rising Interest Rates
Raising interest rates means it cost more to borrow money. When interest rates are high, bond prices plummet. Without pointing fingers, the fed basically encouraged banks to purchase bonds while rates were low and then decided to increase interest rates due to the rapid inflation. This caused various banks to realize a loss on their assets of up to $1.7 trillion in holdings from multiple studies from University of Pennsylvania and New York University.
This $1.7 trillion loss was due to loans costing the individual more money (higher interest rate). This forced the individual to withdraw more of their savings from the bank to pay for their goods or commodities. The bank then had to sell the bonds to make the cash to cover the customers withdraw request. The bank was forced to sell the bond at a lower price than when they originally purchased it leading to a net loss in income for the bank.
The Banking Alternative
The fed then offered to bail out the banks and buy the bonds at an inflated price. This puts more strain on the federal reserve. Why does this matter to us little guys?
The fed doesn’t have as much direct influence over money market accounts. Banks operate based on how much money we deposit. They use that money to purchase stocks and bonds and in return they pay us a trivial interest rate of 0.003% on the money in our accounts. A money market account offers much more in terms of interest rates. Some of the newer online banks can offer a savings account interest rate of 3-5% as of the writing of this blog.
The “Run on the Banks”
We are now seeing headlines reporting trillions of dollars being withdrawn from banks and going into the money market accounts. This causes further strain on the banking industry and will ultimately make it harder for people like me to obtain loans for big ticket purchases like houses and such.
Lacking an affordable lending option, people will be forced to pull down from their own savings. This will again cause banks to sell their bonds at a loss. The more withdrawn cash, the bigger the banks loss will be. At some point people will realize they can bank in other places to collect much higher interest rates and actually allow their money to show a real return. The Banks will no longer have the funding to offer various loan products for things like boats, RVs, or even houses and cars.
The Positive Aspect of Negative Thinking
It’s a big mess out there and I believe it is going to get much worse. We are seeing a dichotomy in predictions for our financial future. On one hand we have people saying the market is doing amazingly well while on the other its all doom and gloom. Me personally, I’m hoping for the doom and gloom.
I have made it a point to avoid buying anything on credit if I can avoid it. This is good and bad at the same time. It is good because it leaves me on the sidelines of any economic meltdown but bad because it limits my ability to leverage other peoples money for investments. The one great thing about inflation is that it makes your outstanding loans seem like less of a problem but makes your cash on hand hold less value.
What we are seeing right now is pending failure. Multiple companies are now laying off employees in the thousands. The fed is making it harder to get a loan. Banks are hemorrhaging money due to their prior bond purchases and hoping the government will bail them out. Individuals are slowly moving away from banks in favor of money market accounts with higher interest rates. People are sitting on a mountain of debt from years of cheap loans. Salaries for those still employed are not keeping pace with inflation. It is only a matter of time until one of these trigger that collapse.
The US dollar is suffering as a result of loose fiscal policies and multiple corporate bailouts. Additional assets like gold, silver, and crypto can theoretically give some protection. However, allowing for failure is not something the government will do. I expect additional bailouts burdened by the middle class. I would gladly pay top dollar for a commodity in exchange for cheaper taxes. Unfortunately though, we will likely see higher taxes to offset the bailouts which will only work to keep prices low and reinforce bad financial habits in the average individual.
This is not financial advice or a prediction of what to come. This is for entertainment only and should not be read by anyone. You are responsible for making your own opinions and decisions. This website is for entertainment and any real world application is purely coincidental.