There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.Ludwig von Mises
Von Mises’ statement points directly to the dilemma faced currently by western central banks and, specifically, the Federal Reserve. In a nutshell, if the Fed does not resume printing money the colossal fiat currency and the fractional banking system will collapse this year. Alternatively, if the Fed prints enough money required to defer the inevitable, the dollar will collapse.
Shaken confidence in the banking sector
The collapse of Silicon Valley Bank got the banking crisis rolling, now on the heels of SVB is First Republic (FRC) with potential buyers of FRC passing after looking under the hood. This likely reflects that the quality of the assets at the big regional banks is considerably more impaired than has been publicly disclosed. All of these banks have significant exposure to commercial real estate, which is becoming distressed as a whole, either by direct loans or securitised bond trusts.
In response to the latest banking crisis, for which Silicon Valley Bank was merely the trigger and not the cause, the U.S. government – in conjunction with the Fed – is looking at the possibility of insuring all $18 trillion of bank deposits in U.S. banks. This signals that the banking crisis is far greater in scale than just SVB and First Republic.
The Fed’s predicament – print or collapse?
At the crossroads between “print and defer” or “step aside and collapse,” the Fed and the government have signalled that they will attempt to kick the can down the road. However, the problem is far more profound than the risk of a depositor bank run. The so-called GSIBs (Global Systemically Important Banks) are sitting on a powder keg of $100’s of trillions in nominal value of over-the-counter derivatives.
Credit Suisse was a casualty of these off-balance-sheet weapons of mass financial destruction. In response, the Swiss Government provided a $100 billion back-stop to coerce UBS to acquire Credit Suisse. However, $100 billion likely will be far from sufficient to “ring-fence” Credit Suisse’s ultimate liability exposure.
The point here is that we’re witnessing a repeat of what happened in 2008, only it’s happening on a much larger stage – larger in scale and more far-reaching in breadth. In 2008 it was the GSIBs primarily that required the massive, multi-trillion dollar central bank and government-funded bailouts. Now it is not just GSIBs, like Credit Suisse.
The banking crisis has spread to smaller, regionally-based banks with financial problems not specifically connected to OTC derivatives. To keep the western financial system from collapsing, it will require central bank money printing in multiples of what was printed between 2008 and 2022.
In fact, the Fed has already printed $300 billion in excess of the amount in Treasuries and mortgage bonds that have run off the Fed’s balance sheet (QT) this month:
The Fed has other asset accounts on its balance sheet other than the SOMA account (Treasury and mortgage QE) which enable it to inject liquidity into the banking system. In fact, it created a new liquidity facility – the Bank Term Funding Program (BTFP) – which provides loans to banks of up to one year in duration.
In exchange, the banks pledge eligible collateral (Treasuries, agencies, MBS). This is the longer duration hold-to-maturity securities on bank balance sheets that are underwater in aggregate across the banking system by at least $600 billion. This is simply Quantitative Easing (QE) money printing in a different format from 2008 that is accounted for in a different Fed asset account.
A new round of money printing begins
It’s not just the Fed. The Swiss National Bank is printing a minimum of $100 billion to support UBS’ acquisition of Credit Suisse. In my opinion, the central bank printing presses are just warming up. Meanwhile, the precious metals sector already caught wind of this last year:
The chart above is a 1-yr daily of GLD, used as a proxy for the gold price.
Since the last day of October 2022, gold has risen 21% (through to March 23, 2023), silver has run 20% higher and the mining stocks using GDX as a proxy are up nearly 30%. Over that same period of time, the Dow is down marginally, the S&P 500 is slightly higher and the Nasdaq is up 8%.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis. The opinions expressed in this article, do not purport to reflect the official policy or position of Kinesis.