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PREPARE FOR BANK FAILURES

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DO YOU HAVE A PLAN B?
 
Hardly a month goes by without some major multinational bank pleading guilty to some sort of criminal charges – fixing exchange rates, colluding to fix interest rates, manipulating commodities prices, selling customers out to high-frequency traders… 

There is a consistent pattern in finance of willfully violating the trust that the public places in these institutions!

And when they royally screw up and make idiotic investment decisions with our deposits, the taxpayers are forced to bail them out so they can start all over again. 

 

It’s an absurd cycle!!! But the good news is that it’s coming to an end!!!

Banks were once vital middlemen who were necessary to facilitate commerce. 

If you had extra savings, you went to a bank to deposit it. If you needed capital, you went to a bank to ask for a loan. 

This is the way it has been for over seven centuries – banks have stood in the middle of that transaction because savers and borrowers had no way to access one another. 

This is no longer the case!!!

Our modern technology now makes it possible for people across the world to gather and organize online. 

And this means that nearly every single function of a bank can now be conducted cheaper, faster, and more efficiently through digital technology. 

If you want to borrow money, you no longer need to go to a bank. 

There are dozens of peer-to-peer lending platforms where you can borrow money for just about anything - starting a new business, buying a home, and even consumer purchases. 

And with the advent of services like Google Wallet, Apple Pay, and especially Bitcoin’s blockchain technology, you no longer need a bank to deposit money; it can all be stored digitally on your mobile phone. 

You can exchange currencies and send money around the world without a bank, quickly and inexpensively through websites like TransferWise and Azimo. 

Everything that a bank does - investing your money, processing credit card transactions, etc. can now be conducted outside of the banking system. 

All of this technology already exists. These “fintech” or financial technology companies are already out there. 

It’s merely a question of how quickly the technology will be adopted. 

20 years ago few people had ever heard of the Internet. Today we can’t imagine our lives without it. 

Expect the adoption of financial technology to occur much more rapidly! 

This is great news! The current financial system is in precarious condition. Banks are incredibly overleveraged and undercapitalized. Governments are bankrupt. Central banks are nearly insolvent. 

The entire system is a house of cards held up by a very thin layer of confidence!!!

But one of the great lessons of history is that no matter how much the people in charge screw up, human beings always rise!

We adapt! We create solutions! And we clear out the old system with something better!

That’s what’s happening now. We’re in the early stages of an amazing, transformative process. And it’s incredibly exciting!

 
Do You Have A Plan B? 

In case it weren’t completely obvious how completely screwed up the financial system is, please allow me to introduce Exhibit A: the Federal Reserve’s own balance sheet. LOL

First we need a quick accounting background! 
Read this, because it is important you all understand!!!

Think about your own finances. You, me, everyone…we all have assets and liabilities! 

Your assets might be things like cash, your house, car, baseball card collection, etc… 

And your liabilities are loans, credit card debt, etc…

The difference between the two can be thought of as your ‘net worth’. And hopefully it’s positive, i.e. your assets exceed your liabilities. 

In accounting, this concept of net worth is known as ‘equity’. Example: A company like Apple that has a lot of assets but not a lot of debt has substantial equity. 

Banks, too, have assets and liabilities. 

But while the balance of your savings account may be an asset for you, or the mortgage balance you owe to the bank is your liability, for the bank it’s actually reversed. 

Your savings account balance is actually money that they OWE you. 

So while your savings is an asset for you, for the bank it’s a liability. 

Similarly, your loan balance might be your liability. 

But for banks, the loans they make to customers are actually assets because they’re on the receiving end of the loan payments. 

For a bank, net worth (known as a bank’s ‘capital’) is a massively important indication of its financial health. 

Think about it – if a bank has a negative net worth, this means that it doesn’t have enough assets to repay its customer deposits. 

This is how banking crises start!!! It’s precisely why Lehman Brothers (and a whole lot of other banks) went bust in 2008/2009. The banks’ liabilities exceeded their assets!

Conservative banks hold vast amounts of capital, i.e. have substantial a net worth where the value of their assets drastically exceeds liabilities and customer deposits. 

One way of looking at this is by measuring a bank’s capital as a percentage of its total assets. (Conservative banks have a high percentage) 

Let’s say a bank has $1000 in assets like cash and loans, and $200 in liabilities (customer deposits). 

This means that the bank has $800 in capital, which constitutes 80% of its total assets!

In other words, the value of the bank’s assets can fall by 80%, and the bank would still be able to repay its depositors. 

This is a huge margin of safety that is unfortunately almost unheard of in banking!

Right before the crisis, in fact, Lehman Brother’s capital was just 3% of its total assets. 

And that leads me to central banks…

Just like regular banks and businesses, central banks also have assets and liabilities. 

In the US, the Federal Reserve’s assets total $4.486 trillion, including more than $2 TRILLION in US government debt. 

The Fed also has total capital (i.e. net worth) of $39.5 billion. 

That sounds like a lot. Until you realize that it constitutes just 0.88% of its total assets. Not even 1%!

This is a tiny, almost nonexistent level of capital at the Federal Reserve!!!

Put another way, the issuer of the United States dollar, the most widely used currency on the planet, and the central bank of the largest economy in the world, has almost no margin of safety!!!

This puts the entire global financial system at a tremendous level of risk!!!

Central banks can and do go bankrupt! It happened most notably in Iceland back in 2008, causing an epic currency crisis in that country! 

So running the Fed’s balance sheet down to the nub like this is not exactly a consequence-free course of action. 

But what’s really astonishing about all of this is how quickly the Fed’s balance sheet deteriorated! WHY?

Just two weeks ago, the Fed’s total capital was nearly $59 billion. And even that wasn’t very much given the size of its balance sheet. 

Today it’s $39.5. This is an incredible 33% drop in just two weeks!!!

Imagine your net worth collapsing by 33% in two weeks; it would probably be a huge personal crisis. Yet the Fed seems completely cool about it… LOL

I did some digging and found out why this happened!!! 

It turns out that Congress and the President passed a law last month called the Fixing America’s Surface Transportation (FAST) Act. 

The FAST Act is supposed to provide funding for America’s highway system. 

But one of the provisions is that a US citizen can have his passport revoked if the government believes in its sole discretion that he owes too much tax. Crazy!!!

And, buried deep within the nearly 500 pages of legislation is a neat little section demanding that Federal Reserve bank surpluses above a certain amount must be turned over to the United States Department of Treasury. 

In other words, the US government is so broke that they’re now confiscating assets from the Fed, putting the entire global financial system at even more risk!

It’s genius!!!

You just can’t make this stuff up… It’s so absurd it would be comical if it weren’t true!

So, yes, it should be completely obvious by now that there is a tremendous amount of risk in the system!!!

Western Governments are completely bankrupt! And even central banks now are being pushed into insolvency by the bankrupt governments they support!!!

This is not a story that has a happy ending!!! And whether the consequences arise today, tomorrow, or five years from now is irrelevant. 

This is a major risk!!! 

And for any thinking, rational person paying attention, it’s imperative to have a Plan B!!! REFER TO MY PAST POST’S ABOUT HAVING A PLAN-B.

 
For information on how I may be able to assist you and or your business please contact me via: ilias@iliasbafas.com 
 
 
 



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Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world. Anyone can join. Anyone can contribute. Anyone can become informed about their world. "United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.


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