a few things on capitalism: I recently read a comparison on how capitalism works like a system similar to biological life form where it naturally evolves/develops to survive by reallocating capital to sustain relevance and profitability. The beauty of capitalism is, although it is more zero-sum then most other systems, variance and choice is celebrated. In other words, many people can be the beneficiaries of single use cases (i.e. pepsi and coke). The biggest enemy to a systems sustainability is centralization and monopoly, as the bottlenecks to financial well-being dramatically tightens under these circumstances. With socialism you start at the end, with centralization and monopoly. This is why I tend to align with views that fight monopoly and central authority and celebrate capitalism, competition, and choice. Preserving an equilibrium of corporate power will naturally cater to consumers best interests from a bottom to top flow of demand. In other words, people actually have great political power in their collective economic demand. Top to bottom flow of demand (like in socialism) holds no such power and leads to bottlenecks in development and growth that will decay competition and choice and ultimately power on a global stage. People forget we don’t live in a bubble and geopolitics can also get pretty “Game of Thrones” sometimes making GDP important element of security and freedom. So long winded for I hope people choice not to fight capitalism and instead chose to preserve the elements that democratize and empower
I agree but it is also why I find myself increasingly leaning toward Chesterton's distributism and away from even capitalism because we know where capitalism ends up. We got here in the 1920s and now 100 years later. There has been no system that is better at innovation and raising people out of poverty. However, we inherently get to a point where the system needs a reset. Instead of resetting into socialism, as many seem to be suggesting, perhaps there is a third, untried way
Good report, thanks. A note on capitalism. It has been (like so many things) wrongly named. True capitalism is really just free trade between sovereign adult individuals. It can only happen with a sound currency (freely convertible into Gold at market, not fixed price with no paper gold allowed) and issued by the (small) government, NOT private CBs as now. Finally, I beg to differ that this isn't a systemic threat. It certainly is, due to THEIR response. They will need to backtrack on the forgiveness of deposits over 250T, OR they will need to guarantee all deposits nationally. (de facto nationalization). Also there's no way to stop the deposit flight (to higher yield instruments) from regional banks, which will kill them, as their assets are mostly long duration loans to SMBs. Doomed end game in a trap of their own making. Physical Gold will be the safety play of all time. In God and Gold I Trust
Fair points. We shall see. There is certainly the possibility that this becomes systemic. You are right that deposits that can are seeking money market accounts and/or short-term Treasury notes. Gold certainly will shine (pun intended) in this environment. We cannot rule out a nationalization of deposits at all. In fact, I think this episode accelerates the move toward central bank digital currencies and central banks like the Fed becoming the sole bank nationally.
Really helpful read that answered a lot of questions I've had recently. Specifically on imagining a world without banks.
On the topic of DeFi. Im sure it's possible that new constructs would arise that provide similar economic value to how banks do today. It is easy to imagine how the lack of banks would eliminate the efficiency and investment that leads to growth. But it is also easy to imagine new products on chain to support investment in equity/debt-like products would eventually find their place.
In the event that there is further hysteria, a scenario that I don't think should be discounted--improbable but still possible scenario of a move out of banks and into bitcoin. Would be interested to hear your take on recent price action. My Twitter can be somewhat of an echochamber at times, but I am seeing real early stage panic in the same people that panicked at SVB for unrealized bank losses that may not be reported and the discount window borrowing you cited above. The narrative I'm seeing is that if that cash infusion leads to additional inflation at the exact time we can't stomach it, then the fed will have to continue to raise rates and break things. That or the inflation runs away and coupled with more demand for digital currency could drive down USD value even more into what could be a very quick cycle of hyperinflation.
I should add that I do not think any products exist that would come close to replacing the value that banks have today and this is not a shift that could occur at this moment in time even if it was to happen.
But noting that if you go on wall street bets, and the average consumer who at the end of the day supports these banks, they are not rational. And the Fed will have to foot the bill of any macro consequences that could arise. Which means it comes right back to the USD and then us.
There is certainly a scenario that gets really dark, really quickly. The fact that the steps taken last weekend did not forestall a run on regional bank deposits but perhaps even exacerbated it is disconcerting. First Republic getting an infusion from other big banks, Credit Suisse going away, this is not the sign of a healthy banking environment.
On the inflation front, I have been more worried about a reaccleration of inflation, however, at this point, I think the bigger risk is a sharp fall in economic growth. The Fed's sticky core inflation, which has justified more hikes because of the labor market and higher wages, may get thrown out here near term. Goods inflation and housing inflation are going to go negative in the near term.
The Fed does not blink at low prices for stocks in spite of what many say. Speaking to es-Fed officials, and they say they blink when earnings, especially bank earnings, are in big trouble. I think we are now there. I would expect no move and hawkish rhetoric this week. ECB hiked last week and CS needed to be bailed out. The memory is the ECB hiking in July 2008 because of lagging inflation measures. I think the Fed understands that. We shall see.
One thing I forgot to add was this tweet from Eric Rosengren, formerly of Boston Fed:
https://twitter.com/EricSRosengren/status/1636749555395067904?t=UqyTMb-8O4Mk8ZspWYBxsQ&s=09
Punchline: Too soon to think the problem may be over
a few things on capitalism: I recently read a comparison on how capitalism works like a system similar to biological life form where it naturally evolves/develops to survive by reallocating capital to sustain relevance and profitability. The beauty of capitalism is, although it is more zero-sum then most other systems, variance and choice is celebrated. In other words, many people can be the beneficiaries of single use cases (i.e. pepsi and coke). The biggest enemy to a systems sustainability is centralization and monopoly, as the bottlenecks to financial well-being dramatically tightens under these circumstances. With socialism you start at the end, with centralization and monopoly. This is why I tend to align with views that fight monopoly and central authority and celebrate capitalism, competition, and choice. Preserving an equilibrium of corporate power will naturally cater to consumers best interests from a bottom to top flow of demand. In other words, people actually have great political power in their collective economic demand. Top to bottom flow of demand (like in socialism) holds no such power and leads to bottlenecks in development and growth that will decay competition and choice and ultimately power on a global stage. People forget we don’t live in a bubble and geopolitics can also get pretty “Game of Thrones” sometimes making GDP important element of security and freedom. So long winded for I hope people choice not to fight capitalism and instead chose to preserve the elements that democratize and empower
I agree but it is also why I find myself increasingly leaning toward Chesterton's distributism and away from even capitalism because we know where capitalism ends up. We got here in the 1920s and now 100 years later. There has been no system that is better at innovation and raising people out of poverty. However, we inherently get to a point where the system needs a reset. Instead of resetting into socialism, as many seem to be suggesting, perhaps there is a third, untried way
e/acc doesn’t fully address all economic elements but I think you would be interested nonetheless: https://open.substack.com/pub/effectiveaccelerationism?r=18fen1&utm_medium=ios
Good report, thanks. A note on capitalism. It has been (like so many things) wrongly named. True capitalism is really just free trade between sovereign adult individuals. It can only happen with a sound currency (freely convertible into Gold at market, not fixed price with no paper gold allowed) and issued by the (small) government, NOT private CBs as now. Finally, I beg to differ that this isn't a systemic threat. It certainly is, due to THEIR response. They will need to backtrack on the forgiveness of deposits over 250T, OR they will need to guarantee all deposits nationally. (de facto nationalization). Also there's no way to stop the deposit flight (to higher yield instruments) from regional banks, which will kill them, as their assets are mostly long duration loans to SMBs. Doomed end game in a trap of their own making. Physical Gold will be the safety play of all time. In God and Gold I Trust
Fair points. We shall see. There is certainly the possibility that this becomes systemic. You are right that deposits that can are seeking money market accounts and/or short-term Treasury notes. Gold certainly will shine (pun intended) in this environment. We cannot rule out a nationalization of deposits at all. In fact, I think this episode accelerates the move toward central bank digital currencies and central banks like the Fed becoming the sole bank nationally.
Really helpful read that answered a lot of questions I've had recently. Specifically on imagining a world without banks.
On the topic of DeFi. Im sure it's possible that new constructs would arise that provide similar economic value to how banks do today. It is easy to imagine how the lack of banks would eliminate the efficiency and investment that leads to growth. But it is also easy to imagine new products on chain to support investment in equity/debt-like products would eventually find their place.
In the event that there is further hysteria, a scenario that I don't think should be discounted--improbable but still possible scenario of a move out of banks and into bitcoin. Would be interested to hear your take on recent price action. My Twitter can be somewhat of an echochamber at times, but I am seeing real early stage panic in the same people that panicked at SVB for unrealized bank losses that may not be reported and the discount window borrowing you cited above. The narrative I'm seeing is that if that cash infusion leads to additional inflation at the exact time we can't stomach it, then the fed will have to continue to raise rates and break things. That or the inflation runs away and coupled with more demand for digital currency could drive down USD value even more into what could be a very quick cycle of hyperinflation.
I should add that I do not think any products exist that would come close to replacing the value that banks have today and this is not a shift that could occur at this moment in time even if it was to happen.
But noting that if you go on wall street bets, and the average consumer who at the end of the day supports these banks, they are not rational. And the Fed will have to foot the bill of any macro consequences that could arise. Which means it comes right back to the USD and then us.
There is certainly a scenario that gets really dark, really quickly. The fact that the steps taken last weekend did not forestall a run on regional bank deposits but perhaps even exacerbated it is disconcerting. First Republic getting an infusion from other big banks, Credit Suisse going away, this is not the sign of a healthy banking environment.
On the inflation front, I have been more worried about a reaccleration of inflation, however, at this point, I think the bigger risk is a sharp fall in economic growth. The Fed's sticky core inflation, which has justified more hikes because of the labor market and higher wages, may get thrown out here near term. Goods inflation and housing inflation are going to go negative in the near term.
The Fed does not blink at low prices for stocks in spite of what many say. Speaking to es-Fed officials, and they say they blink when earnings, especially bank earnings, are in big trouble. I think we are now there. I would expect no move and hawkish rhetoric this week. ECB hiked last week and CS needed to be bailed out. The memory is the ECB hiking in July 2008 because of lagging inflation measures. I think the Fed understands that. We shall see.