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Possible bank liquidity crisis on one leg Possible bank liquidity crisis on one leg
by Joseph Gatt
2020-03-26 10:32:24
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Here's the cycle in North America, Europe, Asia. Banks loan money to households, corporations, local state governments and national governments. Local national governments, state governments, corporations, households, fail to repay their payments. Federal Reserve (or Central bank) gives banks more loans to commercial banks prevent a liquidity crisis. Banks loan more money to households, corporations, state and federal governments. More loans fail to be repaid. Banks go begging for more liquidity at the Federal reserve. Banks get more cash, dish out more loans, more loans don't get repaid, banks go begging for more cash at the fed.

Now formally, officially, the Federal reserve (or central banks) and banks are keeping up the tabs with corporate debt, household debt, state debt and federal debt.

bank0001_400But let's imagine this. Right now, most households and corporations rely on debt for survival. That is they need to borrow money to keep up with production costs, need to borrow money to repay loans, and need to borrow money to pay their staff. Staff needs to borrow money to keep up with living expenses.

And households, corporations, local governments, and national governments take out loans like it's free money.

Right now things are OK because what banks are doing are appointing hedonistic, narcissistic CEOs who like to play golf, to play with women, to play with their fat paychecks, and don't care too much about balancing the bank's budgets.

State governments, federal governments and corporations are also appointing hedonistic CEOs who are in it for the golf, the women, and the fat paycheck, and don't get too upset when they receive the monthly or annual budget report.

Now first possibility for North America, Europe and Asia is if debt spirals out of control. That is if corporations, households and governments have way more liabilities than assets (which is the case right now at this very moment) central banks and federal reserves will have to start loaning banks money daily, which leads to hyperinflation.

Hyperinflation punishes those disciplined individuals who liked to save their cash. Hyperinflation also leads to everyone living paycheck to paycheck, and leads to other strange things in the economy like asking to get paid daily instead of monthly, or taking up three informal jobs a day, basically leads us all to become freelancers.

Now Central banks also borrow money from other central banks in various forms. Can central banks collapse? No, but they can declare insolvency. What happens when Central banks declare insolvency? They get bailed out. By who? By the World Bank, IMF and other lenders.

But 15 or 20 trillion dollar bail outs are going to be hard to believe.

So, perhaps in 2021, I would predict that something of a new global financial order will take root. That is, if creditors bail central banks out, they will probably impose strict guidelines on those central banks when it comes to lending to commercial banks, which in turn will have strict guidelines when it comes to lending to households and corporations.

But some rules are tricky. When you took out that student loan, and signed those papers, it said that even in case of financial collapse, you would still owe the money. Same goes for a lot of loans and mortgages. That is even if you file for Chapter 7 or Chapter 11 bankruptcies, you will still owe the money!

To sum up, if central banks have to starting loaning commercial banks daily or three times a week to maintain liquidity in commercial banks, we're going to see our steak prices rise daily or three times a week, and our rent will go up by 10 or 100% each month (thank you for abolishing rent control!) and our savings will be losing value daily or three times a week.

Some investors advise those disciplined people to buy metals like gold and silver, because such metals tend to maintain their value, as they are not finite resources. That is if you trade your savings for gold, you could then gradually trade your gold for inflated cash. Example, I have 100,000 dollars in savings, spend 90,000 dollars on Gold and silver, and keep 10,000 for current expenses. When hyperinflation hits, once a week, I'll trade an ounce of gold for hyperinflated dollars and spend that on steak and rent.

Am I being pessimistic? Please, look at the debt numbers. When someone rides a donkey, I don't exclaim “that's a beautiful horse you have there!” 

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