Who's paying all the debt? Let's point fingers.
With the financial chain showing clear breakpoints, a need for some kind of refresh is inevitable. The real problem is for those at the end of the queue.
Bitcoin Block 780,880
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The fractional reserve banking system we all uphold and don’t care much to investigate is based on confidence and confidence only. One red alert that banks are insolvent and everyone rushes to protect their hard-earned capital. From the balance sheet of the bank to the government, this debt is thrown at each other until something breaks. Then some advisory council or a bunch of suited men decide who bites off the big slice of the meat. Lack of risk management, hedging techniques, and over-leveraging your position without keeping a long-term horizon in mind all contribute to an ever-increasing burden of debt and then the gruesome outcome of deprivation. This has to stop but today, with more than $31 trln in US debt, someone is bound to be the last one holding the bag.
Rotten from the root
The system is faulty at its core. You just can’t stop injecting the stimulus as the upside potential is lucrative. The concept of fractional reserve banking allows banks to increase their money supply and extend beyond their means. All is good at times of relaxed monetary policies from the central bank but as soon as something smells fishy or the public starts complaining everyone has to suffer from the increased harshness. Market cycles progress with ups and downs where the downward trajectory leads to talent being undermined and eventually wasted. The upward trajectory is filled with hype, FOMO, and recipes for disaster ahead.
Let’s go down to the basics. When you borrow money, obviously you’ll have to return it. If you borrow, someone is profiting from your conditions and charging an interest rate on it. When you have to return it, you are bound to generate more to satisfy the loan as well as the added interest on it. When you put money in a bank, you are doing the same thing. Just in this case, you are the lender to the bank and the deposited cash is the liability of the bank. What inclines you to save your money in a bank is the interest rate it provides which in itself is a competitive factor for the consumer to decide which bank. Now the bank has to find ways to generate returns on the dollars deposited. It diversifies itself into a variety of instruments just like any other personal portfolio.
However, the catch is, it is dealing with someone else’s money. Bad things happen when you eat away someone’s money and don’t even care to answer the call. The present generation we live in and the way Americans are bred over the “American dream” makes students and other individuals not capable of producing a steady return to pile up on debt. Schemes are introduced to make acquiring debt not far from the clicks of buttons. This makes debt rampant and fuels society with excess stimulus. There is a limit on the number of depositors so banks have to create i.e. print money from thin air to satisfy the demand of the rising debt. This is where the FED comes in.
The FED is the government’s piggy bank. Not exactly a place where you store money but a place for promises. The government promises payback through treasury bills which the FED takes up and monetizes. It is the government’s money printer. The fiscal policy can be as crazy as ever but the FED is always there to monetize government debt. The government issues the debt in the form of Treasury bills, notes, or bonds. When the FED buys them, the bond prices rise and the investors can receive extra money to operate thereby artificially bloating the money supply. So basically the treasury has a checking account at the FED. This is in addition to the accounts of other commercial banks which generate interest for them. The reverse repo instrument where the FED sells its assets for more liquid instruments generates income. The Treasuries and mortgage-backed securities are the income-generating vehicles for the FED so are its assets while others are the liabilities.
The FED is broke
For any individual to prosper in his financial life, it is simple, his assets must be greater than his liabilities. The FED purchased the Treasuries and mortgage-backed securities (MBS) at a time when the interest rate was lower. Now, as it has raised interest rates it has ultimately made its liabilities heftier to sustain. it has to pay more than it is earning. This has made it unable to generate income for the government and hence is unable to operate at profit. It can’t pay the depositors, simple as that.
Steve Meyer, a senior advisor to the Fed's Board of Governors, explains how this is done. “You may wonder how the Fed pays for the bonds and other securities it buys," he says. "The Fed does not pay with paper money. Instead, the Fed pays the seller’s bank using newly created electronic funds and the bank adds those funds to the seller’s account.”
This can be attributed to the hidden political mandate the FED holds. It has to satisfy the presidential campaign and has to finance unnecessary government spending. The FED, by law, is independent of the government and has to generate income on its liabilities without inclination but here it is, favoring the government’s extra stimulus and gobbling it up like it is the right-hand man of the prevailing administration.
Bank runs and the chase to QE infinity
With the recent bank collapse, we have started to see Silicon Valley Bank, Signature bank, and Silvergate. This is mainly because of the tough conditions to borrow and a supposedly higher interest rate provided by the FED leading to companies preserving the capital they have left and chasing any higher yield they can find. A bank run spreads when banks do not have the appropriate risk management techniques and hedges in place to counter the low-confidence environment.
But this hints toward the chokepoint operation. SVB is responsible for funding half of all the tech startups while Silvergate and Signature bank are two large banks funding many crypto companies. When these are closed it eventually leads to difficulty in ramping people into money that is yours. Banks are consolidating i.e. small banks and banks entering risky positions are being engulfed by the mega banks where their dictatorship reigns supreme.
ESG: The Piper’s drama
The amount of debt piling up has to be eradicated somehow. The rich and powerful have something else in store rather than adopting a disciplined monetary base like Bitcoin. Instead of pointing fingers for a long time, they are fooling individuals and small businesses into fueling their foolish Ponzi scheme by implementing policies that seem harmless upfront but dwell into some horrifying consequences in the detail. One such policy and regulation is ESG. By using double materiality, the EU has inevitably made consumers and businesses worrisome of all the impacts they have on the supply side as well as the product or service they provide on the other side. When a business sells a product, according to The European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD), it has to know the supplier’s complete impact on the environment and the people, as well as the consumer who uses the product, has to be analyzed and data expense must be made.
Isn’t this highly illogical and reduces the efficiency of the newly formed business? Well, this is what the upper hand wants. High amounts of inflation so no one cares about the debt. This will prove a massive expense for small business owners and business will be consolidated in a few hands, with complete centralization.
The FED has to step into the fun
Another step towards taking control is the FEDNOW service which is expected to launch in the summer of 2023. This is advertised as the breakthrough for seamless payment and easy settlements. However, that comes at a cost. The cost is that now your digital dollars will be tracked all down to the penny. Where you spend, how you spend, and what you spend, are all tracked by the FED. And a new development, money printing becomes very easy. Now just a press of a button and new money comes digitally. A too-big-to-fail bank has a lot of debt, no problem let’s erase its records and fill in with dollars. The power is immense.
In the end, it is important to remember that the masses are always large in number and the policies taken into effect represent just a few interests. There will always be public contagion and unrest at such a moment and only hard money will prevail. At this time it is important to consider where safety and decentralization lie which will be scarce bounties in the future. Custody your coins and remember if the product is free, the product is you. There is no free lunch, there are always strings attached.
Hope you liked my insight.