Balaji Srinivasan, author of the bestselling book “The network state“, sets a bold million dollar bet. The book, explains how an online country could in practice exist on the model of the Bitcoin.
Srinivasan believes that within the next 90 days the price of Bitcoin will reach one million dollars, due to the abundant money liquidity that the central bank will be forced to pour into the market.
Why? Because he predicts a collapse of the banking system.
Any chance he’s right? We are not of course referring to the price of Bitcoin, which could really go anywhere, but to the case of a massive failure of banking institutions due to a bank run, which will come from a loss of depositor and investor confidence.
The weak link
Before examining Balaji Srinivasan’s rationale, let us start with an observation that is not widely understood, although it is extremely critical.
No bank in the world has enough money in its coffers to repay depositors in case they want to make massive withdrawals.
Let us now move on to a second, equally important one.
Contrary to the almost universally accepted myth, no state has the capacity to cover all bank deposits in the event of a generalized problem.
It is all based on faith.
Even in countries with a developed banking system, large depositors are not guaranteed to be compensated in the event of a bank failure. That is why they behave so unpredictably.
And when the big fish start to withdraw their deposits, the smaller ones follow because they think they know best.
How hard is it to spread a rumor that a bank is in trouble so that everyone runs to withdraw their savings?
Not at all.
Trust can be eroded very quickly, even by a simple rumor. Mass withdrawals are never made in euphoric conditions. But they can happen. It’s a matter of hours, as the case of Silicon Valley Bank has shown us.
So the big question dominating this time is how vulnerable is the banking system today? If there is a bank run at one bank, is there any chance that the panic will spread to the others? Is it enough to be the first girl to bring down the rest?
The survey
A report by economists published earlier this week in the Social Science Research Network and featured in the Wall Street Journal attempts to answer these questions.
As the 21-page study by Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski and Amit Seru states, Silicon Valley Bank, it seems, was probably not an isolated case.
In fact, the researchers identified not one or two, but 186 banks at risk! (you can find the entire report in the Supporting Material column).
As they estimate, these banks face problems similar to those that caused the Silicon Valley Bank collapse.
If half of the uninsured depositors quickly withdraw their funds, even insured depositors could face impairments because the bank would not have enough funds to fully compensate all depositors. Intervention by the authorities (FDIC) would therefore become necessary.
Where the problem has arisen from
What the heck is going on that all the banks are in trouble?
The problem started with the increase in deposits, due to the subsidies to deal with the effects of the pandemic, and more generally the monetary and fiscal expansion policies.
Individuals and businesses in the US and elsewhere suddenly found themselves with lots of cash.
Combined with the reduction in economic activity, it led them to not need loans or use their credit cards.
Not only that, they began to more easily pay off the repayments on the credit exposures they had already made. This was on one hand good for the banks, as they avoided massive defaults and bad loans.
On the other hand, deposits were at an all-time high. In the US in particular, they rose by almost 30% from just before the pandemic, to about $17.3 trillion. What’s wrong with that, you may ask?
Given their customers’ reluctance to take out loans, they were going unused. So what were they left to do? They bought low-interest Treasury bonds.
2020 and 2021 was a satisfactory outlet that served them all. States, corporations and individuals borrowed cheaply to cover their debts, banks put their money into the safest securities ever, citizens saw their savings grow without having to work.
What an idyllic picture! Money coming out effortlessly, without risk!
Reality takes its revenge
Except that reality once again proved to be unforgiving when you ignore it. Printing money doesn’t mean you create wealth. You undermine competitiveness and erode the value of the currency.
Indeed, the false prosperity did not last long. In 2022 everything changed after the Fed decided to raise interest rates.
States and corporations began borrowing expensively and making large payments, banks saw their safe haven securities lose value at record levels in the secondary market, citizens began withdrawing deposits because their wages were not enough to cover the increased cost of living due to inflation.
Not only that. Large depositors began to feel nervous realizing that their money was being held in institutions that risked being labelled insolvent.
Why? The value of the banks’ assets had fallen so much that it was not enough to cover the deposits, in case they were forced to liquidate them immediately.
As Balaji Srinivasan argues, the banking establishment is acting in the same way that Sam Bankman Fried acted: They used their customers’ deposits to buy shitcoins, covered by accounting tricks to fool both themselves and others. Which shitcoins did they invest in? Long-term US Treasury bonds.
Who did they get fooled by? By the Fed itself. Powell, the head of the US central bank, reassured them that he would keep interest rates low until November 3, 2021.
On November 22, he revised it. He started raising rates much faster than anyone expected.
Srinivasan believes that just as those who invested in long-term bonds in 2021 got screwed, so will anyone who puts their money in quarterly bills.
He claims that the near 5% interest rate offered by the big banks is a trap. Just as most bank accounts in dollars and by extension in any other sovereign currency are now a trap.
In conclusion, the author of The network state urges those who believe him to buy Bitcoin, which he considers the only safe haven globally. And certainly not to keep it in the exchanges.
The rest of us who trust bankers and the US media should ignore him.😏
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