Tag: economics

Systemic Risk Exception

The FDIC is now effectively ensuring ALL bank deposits for all depositors, no matter how much money they have in their accounts.

The statement from the regulators was issued to announce a new emergency program to protect depositors of failing banks. They explained that they would make a “systemic risk exception” for both Signature and Silicon Valley Bank (SVB), a tech and start-up focused lender that was shut down following a bank run last week, allowing the clients of both banks to have full access to their deposits.

“[SVB] depositors will have access to all of their money starting Monday, March 13… We are announcing a similar systemic risk exception for Signature Bank… all depositors of this institution will be made whole. As with the resolution of Silicon Valley Bank, no losses will be borne by the taxpayer,” the regulators said, adding that they would use the FDIC’s deposit insurance fund to fully protect all depositors, both insured and uninsured.

The deposit guarantee was raised from $40,000 to $100,000 in 1980 and from $100,000 to $250,000 in 2008. This “new emergency program” is not really new, as despite the initially responsible statements by Yellen and the Federal Reserve, plans to implement the no-limit program have been in place since at least 2020:

The FDIC radically increased account protections from $100,000 to $250,000 for a temporary period; eventually, the $250,000 protection level became standard. Now, the revised level is expected to greatly surpass the $250,000 protection mark, though it’s unclear how much the increase will be. It’s also unclear what additional protections and safeguards are being considered. Another source tied into the U.S. banking sector said to expect a “drastic increase” designed to calm any run on the banks and general banking jitters. It was also noted that one possibility would be a no-limit FDIC protection plan, at least temporarily.

FDIC Planning to Increase Deposit Insurance Protection Beyond $250,000, 26 March 2020

Now the protection level has been made de facto limitless, which means that the next series of failures will threaten the collapse of the entire system. This is the fundamental problem with centralization, as it removes the protective limits of decentralization in a foolish, and inevitably futile, attempt to avoid the consequences of limited failure. Combine a) this increased centralization, with b) the $620 billion in unrealized losses that the US banks had not yet accounted for at the end of 2022, and c) the fact that the current zero-reserve banking system is a literal Ponzi scheme with the Fed desperately trying to make depositors whole each time a bank can’t keep up with its outstanding loans, and systemic failure is inevitable.

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Knock-On Effects

The SVB failure is having serious consequences for the California wine industry.

California’s wine industry is on the brink of a financial crisis following the collapse of Silicon Valley Bank.

The bank had been the main financial institution for bank for wineries in the Golden State for almost three decades.

The California Department of Financial Protection and Innovation closed the bank on Friday following a run by venture capital customers.

On Friday night, thousands of wineries found that they were completely locked out of their accounts with no clear timeline as to when they might be able to access their funds…

Wineries represented 2 percent of the bank’s total loan business but the ramifications are far-reaching including an inability to pay employees, bills, or credit card payments. Silicon Valley Bank, the nation’s 16th largest bank, had extended more than $4 billion in loans to wineries and vineyards since 1994.

Interesting that it says “16th largest” when just two days it was being reported as the 14th largest. But this demonstrates the folly of both the easy credit economy and allowing banks to buy other banks, as the consequences of single failure points become considerably more serious. In this case, the negative effects are crossing not only the United States, but the Atlantic Ocean.

Following SVB’s collapse, tech companies in Britain have had their accounts frozen, meaning they have no access to their money and are unable to pay staff.

Major firms such as online retail giant Shopify and Pinterest are also directly affected by the failure.

UK business leaders have raised concerns that the failure could create further problems in Britain, warning they face going bust if they cannot get their funds from the bank – which could cause thousands of job losses.

There are also fears the crash of the bank will spread around the world, with bases in countries including China, India and across Europe.

These knock-on effects may have even affected us. Starting Friday night, without any reason being provided or communication from our account manager, Castalia was suddenly locked out of one of our regular book production sites for the first time in nine years. This will have no effect on the Library, but could affect our traditional book publishing business. Fortunately, we already have an alternative lined up, although I very much doubt that it will be necessary.

UPDATE: Yellen: No federal bailout for collapsed Silicon Valley Bank

UPDATE: Treasury: New York State regulators are shuttering Signature Bank – a major New York bank – adding that all depositors both at Signature Bank, and also the now insolvent Silicon Valley Bank, will have access to their money on Monday.

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First Domino Down

Silicon Valley Bank just crashed so hard that the FDIC had to step in and seize it on a Friday morning before the close of business.

The Federal Deposit Insurance Corporation seized the assets of Silicon Valley Bank on Friday, marking the largest bank failure since Washington Mutual during the height of the 2008 financial crisis.

The bank failed after depositors — mostly technology workers and venture capital-backed companies — began withdrawing their money creating a run on the bank.

The FDIC ordered the closure of Silicon Valley Bank and immediately took position of all deposits at the bank Friday. The bank had $209 billion in assets and $175.4 billion in deposits as the time of failure, the FDIC said in a statement. It was unclear how much of deposits was above the $250,000 insurance limit at the moment.

Notably, the FDIC did not announce a buyer of Silicon Valley’s assets, which is typically when there’s an orderly wind down of a bank. The FDIC also seized the bank’s assets in the middle of the business day, a sign of how dire the situation had become.

But don’t worry. We are cross-the-FDIC’s-heart pinky-swear assured that there is little danger of contagion throughout the financial industry because all of the other banks are absolutely just fine and have totally no issues at all. It’s just a flesh wound, nothing more.

Please continue to consume with confidence and don’t forget to be tolerant and inclusive!

PS: this is what debt-deflation looks like. Billions of dollars in debt-wealth vanishing in an instant.

UPDATE: Wells Fargo customers have reported that their direct deposits were missing from their accounts on Friday morning, according to reports.

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Capital Controls Come to America

Remember when everyone believed that the USA was a free market economy that pushed for free trade all around the world because it was mutually beneficial? Yeah, those days are over now. This is additional evidence – not that any more was needed – that the free trade critics were correct all along.

On Friday, the Wall Street Journal reported that Washington is planning to outlaw American investment in the high-tech sectors of rival economies, citing sources and reports from the US Treasury Department and Commerce Department relating to the proposed regulation.

Sources close to the formulation of the new regulations said the restrictions will primarily be aimed against China and will likely focus on private and venture capital investments in the semiconductor, artificial intelligence, and quantum computing sectors

The Wall Street Journal noted that the reports did not specifically name countries which will be affected by the new regulations, nor did they single out the specific economic sectors which were being identified as being of particular risk to US economic security. However the reports indicated that the regulations will seek to target sectors which might increase the military capabilities of nations that rival the United States.

As one example, a report from the Treasury Department, noted that the new rules on foreign investment would focus on “preventing US capital and expertise from being exploited in ways that threaten our national security while not placing an undue burden on US investors and businesses.”

The new regulations have reportedly been in the works for months, while the US Treasury Department sought to craft the rules so as to be strictly focused on national security issues, while not being arguably designed to foster unfair economic advantages.

It will be interesting to see how a “rival economy” is defined. And it’s even more interesting to see decades of free trade propaganda abandoned overnight.

On the grand historic level, however, this is another bad sign for the survival of the USA as a unitary political entity. Empires that are forced to engage in capital controls in order to prevent money from being invested elsewhere usually are not empires that survive very long.

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Sweden Heads Toward Bankruptcy

The Swedish economy is collapsing due to an ongoing housing market crash:

Bankruptcies in Sweden soared for the seventh consecutive month in February amid declining household consumption and growing pressure on construction companies from an ongoing housing-market crunch, Bloomberg reported this week.

A severe slump in Sweden’s real estate sector has damaged the Nordic region’s largest economy, which is struggling with surging consumer prices and growing interest rates. The country has been facing its worst housing-price plunge in three decades, which has led to a reduction in investments in new dwellings.

The situation has contributed to a surge in defaults in the country. According to the media outlet, citing credit reference agency UC, the number of bankruptcy filings in February jumped by 11% year-on-year.

Fortunately, the “humanitarian superpower” has plenty of migrant manpower on which it can rely to rebuild the economy. After all, immigration is good for the economy, right?

Anyhow, this is coming soon to the US economy as well.

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Revisit Your Assumptions

College attendance and university degrees have long been defended on the basis of higher earnings prospects. But what was a great deal in the 1950s and 1960s, and still made some degree of sense in the 1970s, 1980s, and 1990s. But for the average college student in the United States, a university degree can no longer be justified on economic grounds.

When it comes to wages, fortunes flipped last year for college and high-school graduates.

In 2022, median annual pay was $52,000 for Americans with a bachelor’s degree, according to data released by the New York Federal Reserve Friday. That’s a 7.4% decline in inflation-adjusted terms — the steepest plunge since 2004, erasing nearly all of the pandemic-era gains. It was sharpest for those earning the most.

Meanwhile, wages accelerated 6% in real terms to $34,320 for those with only a high-school diploma — the biggest gain in more than two decades.

While secondary-degree holders are still paid more, those who didn’t attend college are catching up. Americans with only a high school diploma made 93% of what recent graduates with a bachelor’s degree in the bottom quarter of wages made.

While average degree-holder wages are still higher, the wage comparisons are meaningless when they fail to take into account a) the cost of college debt and debt service as well as b) the opportunity cost of not working for five years.

The cost of college debt service is the real killer. According to the Federal Reserve Bank of New York, only “37% of all borrowers saw their student loan balance shrink” as a result of making their payments in 2022.

So with an average student loan debt of $39,351, plus an estimated average $7,870 in lifetime debt service costs, plus an average $205,920 in lost wages, the college student pursuing a university degree in 2023 is $253,141 in the hole versus the high-school diploma holder from the start of his professional career.

Which means, if he is one of the fortunate 59 percent that manages to finish his degree in six years, it will take him 14 years just to reach economic parity with the less-educated members of his high school graduating class, just in time for their 20th high school reunion. And that is the positive outcome; don’t forget there is a forty-percent chance that all of that time and expense will be wasted by a failure to obtain a degree.

The fact is that college in the United States only made sense as a means of elevating members of the lower and working classes for a few decades. Now, it has become something more akin to what it historically was, which is a means of establishing class norms for the administers of empire. This is not to say that no young American should waste his time and money on university, only that he should sit down with his parents, and if necessary, a trusted friend who understands mathematics and statistics, and seriously consider the question of whether going to college is likely to prove advantageous to him or not.

Because it can no longer be reasonably assumed that, on average, it is.

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China Attacks USD

The largest foreign holder of the US dollar openly calls for other nations to stop enabling the USA’s debt-speding:

The world’s two largest foreign holders of US treasuries, Japan and China, continued to pare down their holdings of US debt in December, data from the US Treasury Department showed on Wednesday. Foreign holdings of US treasuries declined in 2022. Japan’s holdings also dropped by $224.5 billion specifically, while China’s holdings were down by $173.2 billion to $867.1 billion, the lowest since May 2010.

For a long time, changes in China’s holdings of US debt have been a topic of great concern, which is seen by some as a measure of the state of China-US relations. Yet, there is no need to complicate China-US relations with China’s reduced holdings of US treasuries. The reasons behind China’s recent reduction of its holdings of US debt are mainly economic considerations, as the problems in the US economy and the changes in bilateral economic and trade relations have increased the need for China to pursue diversification of its foreign exchange reserves.

To be clear, while China has reduced its holdings of US debt, it doesn’t change the fact that US treasuries remain an important part of China’s foreign exchange reserves. China is still the world’s second-largest non-US holder of US treasuries, because the US dollar remains the world’s most important currency for trade settlement and a safe-haven for investors seeking security amid the changeable markets. Besides, US sovereign debt has the highest and the most stable credit rating.

But nowadays these factors are changing.

US economy, debt mean other nations must diversify reserves, Global Times, 17 February 2023

Make no mistake. This public call to the BRICSIA nations to reduce their dollar reserves is a form of unrestricted warfare in action. China is in the process of doing to the US economy what the IMF has repeatedly done to third world governments since the 1960s, which is encourage them to enter a debt trap, become dependent on the IMF, and then seize the national assets used as collateral.

(NB: Before the smart boys jump in to make an erroneous “correction”, note that while Japan holds more US treasuries than China, China’s total dollar holdings are nearly four times greater than Japan’s. The former is a subset of the latter.)

While there is no actual collateral at risk here, what China has done is made the US economy dependent upon the Chinese willingness to subsidize it. This is why the USA can’t afford to financially sanction China the way it has sanctioned Russia, and why China has a financial gun to the US federal government’s head that is distinct from whatever control it directly exerts over politicians it has managed to buy or otherwise corrupt in various ways.

Live by the debt-dollar, die by the debt-dollar. Once an empire loses its reserve currency status, imperial decline tends to come swiftly. Consider the examples of the Venetian ducato, the Dutch guilder and the British pound if you want to contemplate likely timeframes and outcomes.

This appears to be another sign that China is getting closer to opening the Asian front of World War III.

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More Sanctions on China

I think we all know how this is going to end:

The US announced new sanctions against China on Friday, targeting six companies linked to Beijing’s suspected surveillance program. The move comes after a Chinese “spy balloon” was spotted and shot down in US airspace.

In a statement, the US Commerce Department said the entities were being blacklisted for supporting China’s “military modernization efforts, specifically those related to aerospace programs.” These included airships, balloons and related materials used by Beijing for intelligence and reconnaissance.

The new restrictions will make it harder for the sanctioned companies to obtain US technologies.

I’m sure the Chinese are quaking in their boots. Where will they ever get advanced technology that they don’t already possess? If only there was an island within 100 miles that possessed all the very latest and greatest in semiconductor technology!

At this point, the only question is whether the neoclowns are intentionally pushing the USA and Europe into defeat by the Sino-Russian alliance or if they are still hoping that the US military can defeat both China and Russia before they completely lose their influence in the USA.

My assumption is the latter, because if there is one useful piece of counterintuitive information that we have learned about Clown World over the years, it is that it is more tactically than strategically oriented, and its preferences are much more short term than one would tend to imagine. Keep in mind that a tactic blindly repeated and ultimately successful is, in hindsight, indistinguishable from a strategy.

And also remember that the seeds of future failure are sown by past success.

UPDATE: Yeah, so this wasn’t at all a foreseeable consequence of all the “hey, let’s fight China as soon as we’re done with Russia” talk from the neoclowns.

China is aiming to increase the number of itsnuclear warheads to 900 by 2035 as a deterrent against the US, Chinese sources have told Kyodo news agency. According to people familiar with the matter, President Xi Jinping has already approved the plan to double the country’s nuclear arsenal, the Korean agency reported on Saturday.

The number of China’s warheads is likely to grow from around 400 to 550 by 2027 and reach 900 in 2035, Kyodo’s interlocutors claimed.

Here’s my prediction. By 2035, both China’s and Russia’s nuclear arsenals will each be larger than the US nuclear arsenal, even in the event the USA still exists as a single, unitary political entity. Industrial capacity is the primary determinant of who wins global wars.

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Puzzled by the Productivity Slump

Clown World’s economists are perplexed by the “strange and awful” 50-year decline in US construction productivity.

Measurement error alone cannot explain the decline in US construction productivity over the last 50 years, with evidence pointing to the sector’s deteriorating ability to transform intermediates into finished products, and to the allocative inefficiency of construction inputs.

Despite aggregate productivity for the US economy having doubled over the past 50 years, the country’s construction sector has diverged considerably, trending downward throughout that period. And this is no slight decrease. Raw BEA data suggest that the value added per worker in the construction sector was about 40 percent lower in 2020 than in 1970 (see Figure 1).

How can a sector like construction, with average value-added of 4.3 percent of GDP between 1950 and 2020, experience such a precipitous decline in productivity relative to the rest of the economy? To answer this question, researchers have focused on issues relating to data measurement, hypothesizing that measurement errors largely explain this phenomenon. This new research updates some of those efforts and, importantly, extends them to investigate other hypotheses to find the following:

Using measures of physical productivity in housing construction (i.e., number of houses or total square footage built per employee), the authors confirm that productivity is indeed falling or, at best, stagnant over multiple decades. Importantly, these facts are not explained by the incidence of price measurement problems. Instead of data error, the authors investigate two other possible explanations. First, they find that the construction sector’s ability to transform intermediate goods into finished products has deteriorated.

And second, the authors describe the curious fact that producers located in more-productive areas do not grow at expected rates. Indeed, rather than construction inputs flowing to areas where they are more productive, the activity share of these areas either stagnates or even falls. The authors suggest that this problem with allocative efficiency may accentuate the aggregate productivity problem for the industry.

Interestingly enough, US hourly wages have also been stagnant since 1972. Now, whatever could possibly have happened to the labor force that would make it less productive?

It couldn’t possibly be immigration effecting a qualitative change in the workforce, could it? It’s not possible that a predominantly white male work force might be more productive than a sexually diverse, nationally diverse work force, right? No, surely not, because we are reliably informed that immigration is always good for the economy. Just maybe not for wages and productivity and per capita wealth.

But the resultant growth in debt and spending makes up for it, so it’s all good, right?

Even while Clown World is collapsing and burning before their eyes, these wicked morons will be convinced that everything is fine because their spreadsheets produce the expected numbers.

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Troisième Guerre Mondiale

A French analyst is one of the few quasi-mainstream thinkers who appears to understand the true scope of the current conflict.

Emmanuel Todd was not at Davos. But it was the French anthropologist, historian, demographer and geopolitical analyst who ended up ruffling all the appropriate feathers across the collective West these past few days with a fascinating anthropological object: a reality-based interview. So here’s Todd’s concise Greatest Hits.

  • A new World War is on: By “switching from a limited territorial war to a global economic clash, between the collective West on one side and Russia linked to China on the other side, this became a World War”.
  • The Kremlin, says Todd, made a mistake, calculating that a decomposed Ukraine society would collapse right away. Of course he does not get into detail on how Ukraine had been weaponized to the hilt by the NATO military alliance.
  • Todd is spot on when he stresses how Germany and France had become minor partners at NATO and were not aware of what was being plotted in Ukraine militarily: “They did not know that the Americans, British and Poles could allow Ukraine to fight an extended war. NATO’s fundamental axis now is Washington-London-Warsaw-Kiev.”
  • Todd’s major give away is a killer: “The resistance of Russia’s economy is leading the imperial American system to the precipice. Nobody had foreseen that the Russian economy would hold facing NATO’s ‘economic power’”.
  • Consequently, “monetary and financial American controls over the world may collapse, and with them the possibility for the US of financing for nothing their enormous trade deficit”.
  • “The fundamental dilemma of the American economy: it cannot face Chinese competition without importing a qualified Chinese work force.”
  • And that bring us, once again, to globalization, in a manner that Davos roundtables were incapable of understanding: “We have delocalized so much of our industrial activity that we don’t know whether our war production may be sustained”.

Of course he wasn’t at Davos. Davos isn’t listening to anyone who is capable of seeing the situation with clear eyes. Todd is not even remotely wrong. But if he’s selling 100,000 books in Japan based on those entirely obvious conclusions, I should really consider finding myself a Japanese publisher.

Anyhow, if you’re wondering why some of the more historically perspicacious intellectuals appear to be so wildly off-base with regards to their observations of the current situation, a recent conversation I had with one individual proved very illuminating. My impression is that it mostly comes down to the elder generation not being able yet to comprehend any sort of conflict between a) a regional war of the US and its allies against a single regional power, and, b) mutually assured nuclear destruction.

As a general rule, they believe that the USA of 2022 is still, more or less, the USA of 1950, only with momentarily ascendant leftists and better ethnic food. They see the qualitative problems very well, but don’t recognize the scale of the quantitative and issues, which is why their analyses, and their solutions, tend to rely upon some sort of 1980s Reagan-style renaissance that isn’t even a possibility anymore.

From centenarian clowns like Kissinger to twenty-something Republicans who read Victor Davis Hanson, all of the proposed “solutions” to the global war between Clown World and the other 80 percent of the planet led by the Sino-Russian alliance are comically irrelevant. Failing to understand either the nature or the scope of the conflict, it is their reliance upon their familiar axioms and the continuation of the current global infrastructure that is leading them astray.

But very important structural things, have fundamentally changed, as I pointed out on Monday’s Darkstream following a highly unusual statement by the Saudi Finance Minister.

Andy told me back in September 2022: “The dollar hegemony is right about ready to break when you realize that Saudi Arabia is about to join the BRIC nations. Do you think Biden is going to fly there to ask for more oil? He went there to beg them not to join BRIC.”

“The dollar was made reserve currency only because of our protection of the Saudi kingdom,” Andy continued. He then noted astutely that Saudi Arabia had signed new protection agreements with Russia. “All of the Eastern European countries that have repatriated their gold. They’re all part of the EU but they all trade their own currency. They’re all going to break away from the Western system,” he added.

And now it looks like Andy was right: it appears Saudi Arabia has just issued a death knell to the exclusivity of the petrodollar as we once knew it – the first of several dominoes that needs to fall before the U.S. is exposed financially as an emperor with no clothes.

Saudi Arabia Just Killed The Petrodollar, 18 January 2023

It may be worth noting here that my original prediction of 2033 for the end of the political entity known as the USA was predicated on the expected lifespan of the post-Bretton Woods dollar. I don’t recall anyone taking that timeframe very seriously at the time, but if it was an option, it would probably be considered in the money now.

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