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THE GLOBAL FINANCIAL MELTDOWN
PREPARE FOR 10 YEARS OF GLOBAL DESTRUCTION  

Egon von Greyerz
March 1, 2023
https://goldswitzerland.com/prepare-for-...struction/


The final stages of major economic cycles are always accompanied by the maximum amount of bad news as well as heinous events. This time is no different as the West is in the process of committing Harakiri (Seppuku).

As Elon Musk said: 
“My mentality is that of a Samurai. I would rather commit Seppuku than fail.”

Sadly, the problem for the West is that it is both committing Harakiri and failing. For at least half a century, the world has been in a process of self-destruction.  As the decline accelerates, the next phase of 5-10 years will include major political, social, economic as well as wealth – destruction.

What can be more heinous than a total economic and financial collapse accompanied by a potential World War III that at worst could destroy the world totally. A recent article of mine discussed global fragility due to War, Debt and Energy Depletion. In this article I outline the major risks today, financial and geopolitical and also discuss the best way to protect against these risks. Physical Gold is of course the ultimate wealth preservation investment. The next major move up in gold is not far away. See further on.

Biden’s recent visit to Ukraine and whistle stop tour of Europe confirmed that there is no desire to make peace but only war. More support of weapons and money from the US is forthcoming. And whatever the US dictates, Europe follows without considering the consequences.  At the end of his Warsaw address Biden stated about Putin: 

“For God’s sake, this man cannot remain in power”.

Hmmm…. Hardly the talk of a peace maker.  China on the other hand is trying to act as peacemaker but their proposal last Friday was cold shouldered by the West.  More importantly, the Chinese Ministry of Foreign Affairs issued an important policy document this week which is a very strong attack on the US hegemony called:  “US Hegemony and Its Perils”.

The attack starts in the introduction:

“Since becoming the world’s most powerful country after the two world wars and the Cold War, the United States has acted more boldly to interfere in the internal affairs of other countries, pursue, maintain and abuse hegemony, advance subversion and infiltration, and wilfully wage wars, bringing harm to the international community.

It then goes on in detail to attack all the areas of US Hegemony like: Political – Throwing its Weight Around, Military – Wanton Use of Force, Economic – Looting and Exploitation, Technological – Monopoly and Suppression, Cultural – Spreading False Narratives.

The document exemplifies in detail the hegemonic policies and attacks of the US. Although US politicians will totally reject its contents, it is difficult to argue with the facts put forward by China.

As I mention regularly, I very much like America and its people but have difficulties accepting the policies of the Neocons who dominate US politics. Here is an extract from the Conclusion in this Chinese document:

“The United States has been overriding truth with its power and trampling justice to serve self-interest. These unilateral, egoistic and regressive hegemonic practices have drawn growing, intense criticism and opposition from the international community.

Countries need to respect each other and treat each other as equals. Big countries should behave in a manner befitting their status and take the lead in pursuing a new model of state-to-state relations featuring dialogue and partnership, not confrontation or alliance. China opposes all forms of hegemonism and power politics, and rejects interference in other countries’ internal affairs.” (Here is a link to the full document.)

It is difficult to argue with this conclusion. But we need to wear the moccasins of the US and rest of the world and look at China from that perspective. This is to follow my adage to walk three moon laps in somebody’s moccasins before you judge him.

China is not attacking various countries in the world by force, but primarily using investments and trade routes to dominate the world like the Modern Silk Road called the Belt and Road Initiative. It sets out to connect 65% of the world’s population to China by creating a network of sea routes and land links. China is estimated to have spent $1 trillion so far but total estimates are as high as $8 trillion. It will most likely take decades to achieve and might become too costly as the world economy declines.

However, what is clear is that China is investing heavily in infrastructure around the world both in Europe, Africa and South America. For example China is buying up ports in a substantial number of countries. They are also investing heavily in the resource sector globally. 
Another problem that the West has with China is their human rights record. 
Regardless, the trend is clear. The West is in a long term structural decline and the shift to China and the rest of the East and the South is inevitable as I discussed in the article

“AS WEST, DEBT & STOCKS IMPLODE, EAST, GOLD & OIL WILL EXPLODE”


THE STRUCTURAL DECLINE OF THE WEST
All empires are ephemeral and this is what the US and Europe are currently experiencing.
The final stages of empires, like the Han, Roman, Mongol, Ottoman, Spanish and British always include the same ingredients some of which are:

  1. Excessive Debts and Deficits
  2. Currency Collapse
  3. Collapse of asset prices including property, bonds and stocks
  4. Hyperinflation in the final stages, especially in food, commodities & services 
  5. Migration
  6. High Crime Rates & Breakdown of Law & Order
  7. Moral Decadence
  8. Social Unrest, Civil War  
  9. Wars

As the West is now falling (& failing), we can tick all the above events also in the current collapse. Global debt has exploded since 1971 to $2-3 quadrillion as I have explained in many articles like here.

If it wasn’t for the Petrodollar, the US would have collapsed years ago. But as more countries are considering trading oil in other currencies like Yuan, the dollar will first Gradually lose its value and then Suddenly to paraphrase Hemingway.

But remember that since Nixon closed the Gold Window in 1971, all currencies have lost at least 97-99% of their value in real terms which is against gold.

Empires seldom die overnight so this process which started in 1971 could take another 5-10 years. But since we are now in the final stages, it could also happen Suddenly.  So let’s paint a potential scenario for the next 5-10 years.  In simple terms it will be more of the same if we look at the 9 points above.

Debts and deficits will increase exponentially. I have for many years shown the growth in US debt which on average has doubled every 8 years since Reagan became president in 1981. 
On December 6, 2016, the chart below was included in a Family Office presentation I gave in London:



Interestingly, the debt was $28T in Jan. 2021. It doesn’t require a genius to project this figure as it is a straight extrapolation of the trend dating back 40 years. Still, I didn’t see anyone forecasting anywhere near the $28T debt in 2016. A couple of years ago, I raised my $40T debt in 2025 to $50T as the chart below shows:

So how is the US going to go from $32T to $50T in 3 years. Well, in the same way as bankrupt countries collapse with tax revenue falling precipitously and expenditure exploding.

THE ROAD TO PERDITION FOR THE US & THE WEST

As the value of the dollar collapses, think:
  • Much higher war costs, social security, and pensions. As pension fund assets implode, there probably won’t be any pensions. 
  • Debt collapse both private and public with $2-3 quadrillion of derivatives turning into debt. 
  • All bubble assets of stocks, bonds and property, only held up by fake money, collapsing  by 75-95% in real terms.
  • Banks and financial institutions failing after initially having received $100s of trillions in printed, thus worthless, government support.
  • With high inflation or hyperinflation, interest rates going to at least 20% or probably much higher. Financing a debt in the quadrillions at 20%+ will of course lead to even more money printing. The Fed and other central banks will clearly lose control of interest rates which will be determined by a market in panic.. 

WILL THERE BE A GLOBAL NUCLEAR WAR?
The US has at this point stressed that there will be no uniformed US military in Ukraine. Both Russia and Ukraine has lost around 150,000 soldiers each. The problem for Ukraine is that this is around 50% of their regular soldiers whilst for Russia it is 13%. Also, a major part of the weapons and ammunition from the West is not forthcoming or substantially delayed. There just isn’t the spare capacity available to fulfil those promises.

At this point, it looks like this war at best will be a very long drawn local conflict although Ukraine will find it difficult to sustain the war. In January 2022 the Ukraine population was 41 million and now 14 million are estimated to have left the country.

In a war of this nature between two super powers, it is impossible to forecast the outcome. An “accident” or false flag can easily trigger the start of a nuclear war. Remember that this is a war between the US and Russia. So if there was a nuclear war, most missiles would be directed towards those two countries and potentially Ukraine.

But if the world will see a nuclear war, all bets are off since some parts of the world would then be destroyed for decades. Therefore, it is not worth speculation about.

WEALTH PRESERVATION & CBDCs
So assuming that this war remains a local conflict in Eastern Europe, how should people outside the war zone prepare financially?  Many countries are planing to introduce Central Bank Digital Money or CBDC.

As the current monetary system in the West collapses, CBDC will only be another form of fiat money. The worst part about it is the ability to spy on and control people that it gives governments. As Western governments’ finances implode, CBDC is the perfect system for the likely socialist or Marxist economies that many Western countries are likely to have. 
For individuals who have the freedom to move, it would be preferable to leave the heavily indebted USA and Europe (especially the EU countries).

One country in Europe still stands out as probably the best in the world both politically, economically and socially. This is of course Switzerland. Yes, I have skin in the game here! I am Swiss from birth and pleased that I am. I was born and educated in Sweden and also like Sweden.

But whilst Switzerland has remained a very sound country, Sweden has deteriorated dramatically. It now has one of the highest crime rates in Europe. As in the last 10-15 years Europe opened its borders for refugees from many poor and war struck countries, this has totally changed Swedish society.

There is nothing wrong with immigration. The world has always had migration. But until recent years, migrants had to look after themselves with no government subsidies. But in many countries in Europe and especially in Sweden, migrants arrive and get free housing and money to live. For many, there is no incentive to work and or to learn Swedish. Sadly an important percentage of men turn to crime and especially drug dealing. Fatal shootings between the immigrants are now happening daily in Sweden whilst 20 years ago, private weapons didn’t exist.

The best proof of a sound country and economy is the currency.  When I, as a younger man, came to Switzerland in the late 1960s, 1 Swiss Franc cost 1.10 Swedish Kroner. Today it costs 11.20 Swedish Kroner to buy one Franc. So the Krona has lost 90% in the last 50+ years.  The Swiss Franc has of course been strong against all currencies. The dollar for example has lost 80% against the Franc over 50 years.

THE SUPERIOR SWISS ECONOMY AND POLITICAL SYSTEM

But Switzerland has so much more than a strong currency and economy like:
  • Low debt, normally no deficits
  • Lowest crime rate in Europe and in the world (excluding some Middle East countries. It is one of the few countries where you can walk safely in any town at night. 
  • Rule of Law 
  • Direct Democracy allowing the population to have a referendum on virtually any topic. If the referendum is approved by a majority, it becomes part of the constitution and cannot be changed by government or parliament but only by another referendum. This is totally unique in the world. 
  • For example there will be a referendum on stopping Switzerland from becoming cashless
  • Whilst all  EU countries have decided to confiscate Russian assets, Switzerland has declared: “The expropriation of private assets of lawful origin without compensation is not permissible under Swiss law,” the government said on Thursday. “The confiscation of frozen private assets is inconsistent with the constitution,” it added, and “violates Switzerland’s international commitments”.
  • The standard and quality of everything is very high, services, construction, communications etc
  • Switzerland also has beautiful nature, and excellent food.

RISK OF WAR IN EUROPE
Some countries are worrying about a war in Europe. Except for a nuclear war which would be global, the risk of a war on the ground in Europe is in my view minimal.  Russia has been invaded many times with the most famous examples being Karl XII of Sweden in the early 1700s, Napoleon in the early 1800s and Hitler in the 1940s. But Russia has never made any serious invasion into Europe.  Their interest lies primarily within their former empire. There was a brief entry into Finland at the beginning of WWII which lasted 3 months. Also at the end of WWII the Russians drove the invading Germans back to Berlin. So in my view, there is absolutely no reason to fear a Russian invasion of Europe.

WEALTH PRESERVATION & GOLD
To protect your wealth against all the risks that I have outlined above is absolutely vital. Anyone invested in conventional assets like stocks, bonds and property, which have been artificially inflated by printing fake fiat money will in the coming 5+ years experience a major collapse of their wealth.

As I already said, for anyone who has the ability to move to a country outside the US and the EU, that would be the safest option. It is likely that these areas will have the biggest problems both in the economy and the financial system as well as socially. In that region, Switzerland will be an important exception.

Parts of South America like Uruguay should also avoid many of the problems in the West but sadly crime is high in many of these countries. Many Americans live in Central America but with the coming economic downturn, many countries will become less safe and also poor. In Asia, countries like Singapore and Thailand are very good but if there is a conflict between the US and China after a possible Chinese invasion of Taiwan, these areas could become more precarious.

The problem with Australia and New Zealand is that they are highly indebted with big asset bubbles, especially in property. The socialist policies are not a plus either.  But the biggest risk is that a conflict in Taiwan could make these countries very risky with Chinese aspirations.  Many people are moving to Dubai today for tax reasons. Russians are moving there since Dubai doesn’t sanction them. The problem with the UAE is that conflicts in the Middle East occur with regular intervals.

For the ones who can’t move for job or family reasons, a second passport is advisable.  But the most important asset protection is having wealth preservation assets outside your country of residence. There is no totally safe country today in an unsafe world.

For investors who want to preserve their wealth, the best asset is physical gold followed by the more volatile silver. Gold and silver shares have had a terrible 35 years but the good companies should perform spectacularly.  Since most stocks are held by custodians within the financial system, they are not the same degree of wealth preservation as physical metals that you have direct control of.

So my own preference would be to own physical gold and silver that I have direct control of and can withdraw or sell with very short notice. It is also important to deal with a company that can move your metals at very short notice if the security or geopolitical situation would necessitate it.

Our gold vault in the Swiss Alps is the biggest private gold vault in the world and is also nuclear bomb proof which is totally unique. This is for bigger investors. We also store gold in Zurich. Our second preference is Singapore with the reservations I have mentioned. We also have vaults in many parts of the world and as I have stated, this can be important if the situation in the world changes and the gold/silver needs to be moved.The world is now moving towards troubled times.

Remember that family and friends are your most important asset and treasure them profoundly.  Also, except for family and friends, many of the best things in life are free like books, nature, music, and sports.
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BIS WARNS OF 2023 BLACK SWAN -
A DERIVATIVES TIME BOMB 



THIS IS IT! – THE FINANCIAL SYSTEM IS TERMINALLY BROKEN
Egon von Greyerz
https://goldswitzerland.com/this-is-it-t...lly-broken

The financial system is terminally broken, toast, kaput!

Anyone who doesn’t see what is happening will soon lose a major part of their assets either through bank failure, currency debasement or the collapse of all bubble assets like stocks, property and bonds by 75-100%. Many bonds will become worthless.

Wealth preservation in physical gold is now absolutely critical. Obviously it must be stored outside a broken financial system. More later in this article.

The solidity of the banking system is based on confidence. With the fractional banking system, highly leveraged banks only have a fraction of the money available if all depositors ask for their money back. So when confidence evaporates, so do the balance sheets of the banks and depositors realise that the whole system is just a black hole. And this is exactly what is about to happen. 

For anyone who believes that this is just a problem with a few smaller US banks and one big one (Credit Suisse), they must think again.


THE BANKS ARE FALLING LIKE DOMINOS, INCLUDING CREDIT SUISSE TONIGHT
Yes, Silicon Valley Bank (16th biggest US bank) is gone after an idiotic and irresponsible  policy to invest short term customer deposits in long term US Treasuries at the bottom of the interest rate cycle. Even worse, they then valued the bonds at maturity rather than market, to avoid taking a loss. Clearly a management that didn’t have a clue about risk. SVB’s demise is the second biggest failure of a US bank.

Yes, Signature Bank (29th biggest) is gone due to a run on deposits. 
And yes, First Republic Bank had to be supported by US lenders and the Fed by a $30 billion loan due to a run on deposits. But this won’t stop the rot as depositors attack the next bank
and the next one and the next one……….

And yes, the Swiss second largest bank Credit Suisse (CS) is terminally ill after a number of poor investments over the years combined with poor management that has come and gone virtually every year.. I wrote an important article about the coming demise of CS 2 years ago here: “ARCHEGOS & CREDIT SUISSE – TIP OF THE ICEBERG.”

The situation at CS is so dire that a solution needs to be found before Monday’s (March 20) opening. The bank cannot survive in its present form. A failure for Credit Suisse would not just rock the Swiss financial system but have severe global repercussions. A merger with UBS is one solution. But UBS had to be bailed out in 2008 and doesn’t want to be weakened again by Credit Suisse without state guarantees and support from the Swiss National Bank (SNB). The SNB injected CHF50 billion into CS last week but the share price still went to a new low.

No one should believe that a state subsidised takeover of Credit Suisse by UBS will solve the problem. No, it will just be rearranging the deck chairs on the titanic and making the problem bigger rather than smaller. So rather than a lifebuoy, UBS will have a massive lead weight to carry which will guarantee its demise as the banking system collapses. And the Swiss government will take on assets which will be unrealisable.

Still, it is likely that by the end of the present weekend a deal will be announced with UBS
being offered a deal they can’t refuse by taking over the good assets and the SNB/Government nurturing the bad assets of Credit Suisse in a rescue vehicle.

The SNB is of course in a mess itself, having lost $143 billion in 2022. The SNB balance sheet
is bigger than Swiss GDP and consists of currency speculation and US tech stocks. This central bank is the world’s biggest hedge fund and the least successful.

Just to put a balanced view on Switzerland. It has the best political system in the world with direct democracy. It also has low Federal debt and normally no budget deficits. It is also the safest country in the world.

SWISS BANKING SYSTEM TOO BIG TO SAVE
But the Swiss banking system is very unsound, just like the rest of the world’s. A central bank which is bigger than the country’s GDP is extremely unsound. And a banking system which is 5x Swiss GDP makes it too big to save.

Although the Fed and ECB are much smaller in relation to their countries’ GDP than the SNB, these two central banks will soon discover that their assets of around $8 trillion each are grossly overvalued.

With a global banking system on the verge of a systemic failure, Central Bankers and bankers have been working around the clock this weekend to temporarily avoid the inevitable collapse of the bankrupt financial system.

BIGGEST MONEY PRINTING IN HISTORY COMING
As I pointed out above, the main Central Banks would also be bankrupt if they valued their assets honestly. But they have a wonderful source of money that they will tap to save the system.  Yes, I am of course talking about money printing.

We will in coming months and years see the most massive avalanche of money printing that has ever hit the world.  For anyone who believes that we are just seeing another bank run that will quickly evaporate, they will need to take a shower in ice cold Alpine water.   What we are witnessing is not just a temporary drama that will be sorted out by “the all powerful and resourceful” central banks.

THE DEATH OF MONEY
No, instead what we are seeing is the end phase of this financial era which started with the formation of the Fed in 1913 and in the next few years, or much sooner, will end with the death of money.

But the Death of Money doesn’t just mean that the dollar (and most currencies) will make their final move to ZERO, having already declined 98% since 1971.  Currency debasement is not the cause but the effect of the banking Cabal taking control of the money for their own benefit. As Mayer Amschel Rothschild said in the late 1700s: “Let me issue and control a nation’s money and I care not who makes the laws”.

Sadly, as this Cassandra (me) has written about since the beginning of the century,
the Death of Money is not just all currencies going to ZERO as they have throughout history. 
No, the Death of Money means a total and final collapse of this financial system. 
Cassandra was a priestess in Greek mythology who was given the gift of predicting major events accurately but also given the curse that no one would  believe her predictions. 
No depositor must believe that the FDIC (Federal Deposit Insurance Corp) in the US or similar vehicles in other countries will save their deposits. All these organisations are massively undercapitalised and in the end it will be the governments in all countries which step in. 
We know of course, that the government has no money. They just print whatever they need. That leaves ordinary people taking the final burden of all this money printing.

But ordinary people will have no money either. Yes a few rich people will be taxed heavily to cover bank deficits and losses. Still, that will be a drop in the ocean. Instead ordinary people will be impoverished with little income, no government handouts, no pension and money which is worthless.

The above is sadly the cycle that all economic eras go through. The issue this time is that the problem is global and of a magnitude never seen before in history.  Regrettably a rotten and bankrupt financial system needs to go through a cleansing period which the world will now experience. There cannot be sound growth and sound values until the current corrupt and debt infested system implodes. Only then can the world grow soundly again.

The transition will sadly be dramatic with a lot of suffering for most people. But there is no other way. We won’t just see poverty, famine but also many human tragedies. The risk of social unrest or civil war is very high plus the risk of a global war.

Central banks had of course hoped that their Digital Currencies (CBDC) would be ready to save them (but not the world) from the present debacle by totally controlling people’s spending. But in my view they will be too late. And since CBDCs are just another form of Fiat money, it would just exacerbate the problem with an even more severe outcome at the end. Still, it won’t prevent them from trying.

MARKET VALUE OF US BANKING ASSETS $2 TRILLION LOWER THAN BOOK VALUE
A paper issued by 4 US academics in finance, illustrates the $2 trillion black hole in the US banking system:

“Monetary Tightening and U.S. Bank Fragility in 2023: Mark-to-Market Losses and Uninsured Depositor Runs?”
March 13, 2023 
Erica Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru

CONCLUSION
We provide a simple analysis of U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets. We show that these losses, combined with a large share of uninsured deposits at some U.S. banks can impair their stability. Even if only half of uninsured depositors decide to withdraw, almost 190 banks are at a potential risk of impairment to even insured depositors, with potentially $300 billion of insured deposits at risk. If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs.”

What is crucial to understand is that the $2 trillion “loss” is only due to higher interest rates. When the US economy comes under pressure, the loan books of the banks will deteriorate dramatically and bad debts increase exponentially. With total assets of US commercial banks
at $23 trillion, I would be surprised if 50% is repaid or recoverable in the coming crisis. 
The above risks are just for the US financial system. The global system will be no better with the EU under massive pressure partly due to US led sanctions of Russia. Virtually every major economy in the world is in a dire position.

Let’s just look at the debt pyramid which I have discussed in many articles.
In 1971, when Nixon closed the gold window, global debt was $4 trillion. With gold backing no currency, this became a free for all to print unlimited amounts of money. And thus by 2000 debt had grown 25x to $100t. In 2006, when the Great Financial Crisis started, global debt was $120 trillion. By 2021 it had grown 75x from 1971 to $300 trillion. 

The red column shows global debt at $3 quadrillion sometime between 2025 and 2030. 
This assumes that the shadow banking system plus outstanding derivatives of currently probably around $2 quadrillion will need to be saved by central banks in a money printing bonanza. This will obviously lead to hyperinflation and thereafter to a depressionary implosion.
I know this sounds sensational but still a very likely scenario at the end of the biggest credit bubble in history.

GOLD – CRITICAL WEALTH PRESERVATION 
I have been standing on a soapbox for over 20 years, warning the world about the coming financial crisis and the importance of physical gold for wealth preservation purposes. In 2002 we invested important funds into physical gold with the purpose of holding it for the foreseeable future.

Between 2002 and 2011 gold went from $300 to $1,900. Since then gold corrected and then went sideways as stocks and the asset markets surged backed by massive credit expansion. 
With gold currently around $1990, there is not much gain since 2011. Still since 2002 gold is up 7x. Due to the temporarily stronger dollar, gold’s gains measured in dollars are much smaller than in Euros, Pounds or Yen. But that will soon change.

In the final section of the article “WILL NUCLEAR WAR, DEBT COLLAPSE OR ENERGY DEPLETION FINISH THE WORLD?”, I outlined the importance of owning physical gold to store it in a safe jurisdiction away from kleptocratic governments.

“2023 is likely to be the year of gold. Both fundamentally and technically gold looks like it will make major up moves this year.”

And at the end of this article, I explain the importance of how and where gold should be held:“PREPARE FOR 10 YEARS OF GLOBAL DESTRUCTION.”

“So my own preference would be to own physical gold and silver that only I have direct control of and can withdraw or sell with very short notice.

It is also important to deal with a company that can move your metals at very short notice if the security or geopolitical situation would necessitate it.”

In February 2019 I wrote about what I called the Gold Maginot Line which had held for 6 years below $1,350. This is typical for gold. Having gone from $250 in 1999 to $1,900 in 2011, it then spent 8 years in a correction. At the time I forecast that the Maginot Line would soon break which it did and swiftly moved to $2,000 by August 2020. We have now had another period of consolidation since then and the next move above $2,000 and towards $3,000 is imminent. 

Just to remind ourselves what happens to your money and gold during a hyperinflationary period, here is a photo from China’s hyperinflation in 1949 as people try to get their 40 grammes (just over one ounce) that they were allocated by the government. At some point in the next few years, there will be a panic in the West to buy gold at any price. 

So as I have been urging investors for over 20 years, please get your gold NOW while it is still available.

STOP PRESS
Intense discussions are right now going on here in Switzerland between UBS, Credit Suisse, the regulator FINMA, the Swiss National Bank – SNB – and the Swiss Government. The Fed, the Bank of England and the ECB are also involved.

The latest rumour is that UBS will buy Credit Suisse for CHF900 million ($1 billion). The shares of CS closed at a market cap of CHF8 billion on Friday. The deal would clearly involve backing from the SNB and the Swiss government which would have to take on major liabilities. 
The December 2022 book value of CS was CHF42 billion, as with all banks massively overstated.

The deal isn’t done at this point, 5.30pm Swiss time, but the whole banking world knows that without a deal, there will be global contagion starting tomorrow Monday the 20th. 
Even if a provisional deal will be done by Monday’s open, the financial system has now been permanently injured with an open wound which won’t heal. 
The problem will just move on to the next bank, and the next and the next…








THE LOOMING QUADRILLION DOLLAR DERIVATIVES TSUNAMI
Ellen Brown:
https://scheerpost.com/2023/03/12/ellen-brown-the-looming-quadrillion-dollar-derivatives-tsunami/?utm_source=substack&utm_medium=email


On Friday, March 10, Silicon Valley Bank (SVB) collapsed and was taken over by federal regulators. SVB was the 16th largest bank in the country and its bankruptcy was the second largest in U.S. history, following Washington Mutual in 2008. Despite its size, SVB was not a “systemically important financial institution” (SIFI) as defined in the Dodd-Frank Act, which requires insolvent SIFIs to “bail in” the money of their creditors to recapitalize themselves. 

Technically, the cutoff for SIFIs is $250 billion  in assets. However, the reason they are called “systemically important” is not their asset size but the fact that their failure could bring down the whole financial system. That designation comes chiefly from their exposure to derivatives, the global casino that is so highly interconnected that it is a “house of cards.” Pull out one card and the whole house collapses. SVB held $27.7 billion in derivatives, no small sum, but it is only .005% of the $55,387 billion ($55.387 trillion) held by JPMorgan, the largest U.S. derivatives bank. 

SVB could be the canary in the coal mine foreshadowing the fate of other over-extended banks, but its collapse is not the sort of “systemic risk” predicted to trigger “contagion.” As reported by CNN:

“Despite initial panic on Wall Street, analysts said SVB’s collapse is unlikely to set off the kind of domino effect that gripped the banking industry during the financial crisis.

‘The system is as well-capitalized and liquid as it has ever been,’ Moody’s chief economist Mark Zandi said. ‘The banks that are now in trouble are much too small to be a meaningful threat to the broader system.’

No later than Monday morning, all insured depositors will have full access to their insured deposits, according to the FDIC. It will pay uninsured depositors an ‘advance dividend within the next week.'”

A fuller report on the collapse of SVB will have to wait on developments that occur over the weekend and soon thereafter. 

This column, meanwhile, focuses on derivatives and is a followup to my Feb. 23  column on the “bail in” provisions of the 2010 Dodd Frank Act, which eliminated taxpayer bailouts by requiring insolvent SIFIs to recapitalize themselves with the funds of their creditors. “Creditors” are defined to include depositors, but deposits under $250,000 are protected by FDIC insurance. However, the FDIC fund is sufficient to cover only about 2% of the $9.6 trillion in U.S. insured deposits. A nationwide crisis triggering bank runs across the country, as happened in the early 1930s, would wipe out the fund. Today, some financial pundits are predicting a crisis of that magnitude in the quadrillion dollar-plus derivatives market, due to rapidly rising interest rates. This column looks at how likely that is and what can be done either to prevent it or dodge out of the way.

“Financial Weapons of Mass Destruction”

In 2002, mega-investor Warren Buffett wrote that derivatives were “financial weapons of mass destruction.” At that time, their total “notional” value (the value of the underlying assets from which the “derivatives” were “derived”) was estimated at $56 trillion. Investopedia reported in May 2022 that the derivatives bubble had reached an estimated $600 trillion according to the Bank for International Settlements (BIS), and that the total is often estimated at over $1 quadrillion.  No one knows for sure, because most of the trades are done privately

As of the third quarter of 2022, according to the “Quarterly Report on Bank Trading and Derivatives Activities” of the Office of the Comptroller of the Currency (the federal bank regulator),  a total of 1,211 insured U.S. national and state commercial banks and savings associations held derivatives, but 88.6% of these were concentrated in only four large banks: J.P. Morgan Chase ($54.3 trillion), Goldman Sachs ($51 trillion), Citibank ($46 trillion), Bank of America ($21.6 trillion), followed by Wells Fargo ($12.2 trillion). A full list is here. Unlike in 2008-09, when the big derivative concerns were mortgage-backed securities and credit default swaps, today the largest and riskiest category is interest rate products. 

The original purpose of derivatives was to help farmers and other producers manage the risks of dramatic changes in the markets for raw materials. But in recent times they have exploded into powerful vehicles for leveraged speculation (borrowing to gamble). In their basic form, derivatives are just bets – a giant casino in which players hedge against a variety of changes in market conditions (interest rates, exchange rates, defaults, etc.). They are sold as insurance against risk, which is passed off to the counterparty to the bet. But the risk is still there, and if the counterparty can’t pay, both parties lose. In “systemically important” situations, the government winds up footing the bill. 

Like at a race track, players can bet although they have no interest in the underlying asset (the horse). This has allowed derivative bets to grow to many times global GDP and has added another element of risk: if you don’t own the barn on which you are betting, the temptation is there to burn down the barn to get the insurance. The financial entities taking these bets typically hedge by betting both ways, and they are highly interconnected. If counterparties don’t get paid, they can’t pay their own counterparties, and the whole system can go down very quickly, a systemic risk called “the domino effect.”  

That is why insolvent SIFIs had to be bailed out in the Global Financial Crisis (GFC) of 2007-09, first with $700 billion of taxpayer money and then by the Federal Reserve with “quantitative easing.” Derivatives were at the heart of that crisis. Lehman Brothers was one of the derivative entities with bets across the system. So was insurance company AIG, which managed to survive due to a whopping $182 billion bailout from the U.S. Treasury; but Lehman was considered too weakly collateralized to salvage. It went down, and the Great Recession followed.

Risks Hidden in the Shadows

Derivatives are largely a creation of the “shadow banking” system, a group of financial intermediaries that facilitates the creation of credit globally but whose members are not subject to regulatory oversight. The shadow banking system also includes unregulated activities by regulated institutions. It includes the repo market, which evolved as a sort of pawn shop for large institutional investors with more than $250,000 to deposit. The repo market is a safe place for these lenders, including pension funds and the U.S. Treasury, to park their money and earn a bit of interest. But its safety is insured not by the FDIC but by sound collateral posted by the borrowers, preferably in the form of federal securities.

As explained by Prof. Gary Gorton:

“This banking system (the “shadow” or “parallel” banking system) – repo based on securitization – is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.”

While it is true that banks create the money they lend simply by writing loans into the accounts of their borrowers, they still need liquidity to clear withdrawals; and for that they largely rely on the repo market, which has a daily turnover just in the U.S. of over $1 trillion. British financial commentator Alasdair MacLeod observes that the derivatives market was built on cheap repo credit. But interest rates have shot up and credit is no longer cheap, even for financial institutions. 

According to a December 2022 report by the BIS, $80 trillion in foreign exchange derivatives that are off-balance-sheet (documented only in the footnotes of bank reports) are about to reset (roll over at higher interest rates). Financial commentator George Gammon discusses the threat this poses in a podcast he calls, “BIS Warns of 2023 Black Swan – A Derivatives Time Bomb.” Another time bomb in the news is Credit Suisse, a giant Swiss derivatives bank that was hit with an $88 billion run on its deposits by large institutional investors late in 2022. The bank was bailed out by the Swiss National Bank through swap lines with the U.S. Federal Reserve at 3.33% interest.

The Perverse Incentives Created by “Safe Harbor” in Bankruptcy

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, Prof. David Skeel refutes what he calls the “Lehman myth”—the widespread belief that Lehman’s collapse resulted from the decision to allow it to fail. He blames the 2005 safe harbor amendment to the bankruptcy law, which says that the collateral posted by insolvent borrowers for both repo loans and derivatives has “safe harbor” status exempting it from recovery by the bankruptcy court. When Lehman appeared to be in trouble, the repo and derivatives traders all rushed to claim the collateral before it ran out, and the court had no power to stop them.  

So why not repeal the amendment? In a 2014 article titled “The Roots of Shadow Banking,”
Prof. Enrico Perotti of the University of Amsterdam explained that the safe harbor exemption is a critical feature of the shadow banking system, one it needs to function. Like traditional banks, shadow banks create credit in the form of loans backed by “demandable debt”—short-term loans or deposits that can be recalled on demand. In the traditional banking system, the promise that the depositor can get his money back on demand is made credible by government-backed deposit insurance and access to central bank funding. The shadow banks needed their own variant of “demandable debt,” and they got it through the privilege of “super-priority” in bankruptcy. Perotti wrote:

Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral. This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims. [Emphasis added.]

The dilemma of our current banking system is that lenders won’t advance the short-term liquidity needed to fund repo loans without an ironclad guarantee; but the guarantee that makes the lender’s money safe makes the system itself very risky. When a debtor appears to be on shaky ground, there will be a predictable stampede by favored creditors to grab the collateral, in a rush for the exits that can propel an otherwise-viable debtor into bankruptcy; and that is what happened to Lehman Brothers. 

Derivatives were granted “safe harbor” because allowing them to fail was also considered a systemic risk. It could trigger the “domino effect,” taking the whole system down. The error, says Prof. Skeel, was in passage of the 2005 safe harbor amendment. But the problem with repealing it now is that we will get the domino effect, in the collapse of both the quadrillion dollar derivatives market and the more than trillion dollars traded daily in the repo market.

The Interest Rate Shock

Interest rate derivatives are particularly vulnerable in today’s high interest rate environment. From March 2022 to February 2023, the prime rate (the rate banks charge their best customers) shot up from 3.5% to 7.75%, a radical jump. Market analyst Stephanie Pomboy calls it an “interest rate shock.” It won’t really hit the market until variable-rate contracts reset, but $1 trillion in U.S. corporate contracts are due to reset this year, another trillion next year, and another trillion the year after that. 

A few bank bankruptcies are manageable, but an interest rate shock to the massive derivatives market could take down the whole economy. As Michael Snyder wrote in a 2013 article titled “A Chilling Warning About Interest Rate Derivatives:”

Will rapidly rising interest rates rip through the U.S. financial system like a giant lawnmower blade? Yes, the U.S. economy survived much higher interest rates in the past, but at that time there were not hundreds of trillions of dollars worth of interest rate derivatives hanging over our financial system like a Sword of Damocles.

… [R]ising interest rates could burst the derivatives bubble and cause “massive bankruptcies around the globe” [quoting Mexican billionaire Hugo Salinas Price]. Of course there are a whole lot of people out there that would be quite glad to see the “too big to fail” banks go bankrupt, but the truth is that if they go down, our entire economy will go down with them. … Our entire economic system is based on credit, and just like we saw back in 2008, if the big banks start failing, credit freezes up and suddenly nobody can get any money for anything. 

There are safer ways to design the banking system, but they are not likely to be in place before the quadrillion dollar derivatives bubble bursts. Snyder was writing 10 years ago, and it hasn’t burst yet; but this was chiefly because the Fed came through with the “Fed Put” – the presumption that it would backstop “the market” in any sort of financial crisis. It has performed as expected until now, but the Fed Put has stripped it of its “independence” and its ability to perform its legislated duties. This is a complicated subject, but two excellent books on it are Nik Bhatia’s Layered Money (2021) and Lev Menand’s The Fed Unbound: Central Banking in a Time of Crisis (2022).

Today the Fed appears to be regaining its independence by intentionally killing the Fed Put, with its push to raise interest rates. (See my earlier article here.) It is still backstopping the offshore dollar market with “swap lines,” arrangements between central banks of two countries to keep currency available for member banks,  but the latest swap line rate for the European Central Bank is a pricey 4.83%. No more “free lunch” for the banks.

Alternative Solutions

Alternatives that have been proposed for unwinding the massive derivatives bubble include repealing the safe harbor amendment and imposing a financial transaction tax, typically a 0.1% tax on all financial trades. But those proposals have been around for years and Congress has not taken up the call. Rather than waiting for Congress to act, many commentators say we need to form our own parallel alternative monetary systems. 

Crypto proponents see promise in Bitcoin; but as Alastair MacLeod observes, Bitcoin’s price is too volatile for it to serve as a national or global reserve currency, and it does not have the status of enforceable legal tender. MacLeod’s preferred alternative is a gold-backed currency, not of the 19th century variety that led to bank runs when the banks ran out of gold, but of the sort now being proposed by Sergey Glazyev for the Eurasian Economic Union. The price of gold would be a yardstick for valuing national currencies, and physical gold could be used as a settlement medium to clear trade balances. 

Lev Menand, author of The Fed Unbound, is an Associate Professor at Columbia Law School who has worked at the New York Fed and the U.S. Treasury. Addressing the problem of the out-of-control unregulated shadow banking system, he stated in a July 2022 interview with The Hill, “I think that one of the great possible reforms is the public banking movement and the replication of successful public bank enterprises that we have now in some places, or that we’ve had in the past.”

Certainly, for our local government deposits, public banks are an important solution. State and local governments typically have far more than $250,000 deposited in SIFI banks, but local legislators consider them protected because they are “collateralized.” In California, for example, banks taking state deposits must back them with collateral equal to 110% of the deposits themselves. The problem is that derivative and repo claimants with “supra-priority” can wipe out the entirety of a bankrupt bank’s collateral before other “secured” depositors have access to it. 

Our tax dollars should be working for us in our own communities, not capitalizing failing SIFIs on Wall Street. Our stellar (and only) state-owned model is the Bank of North Dakota, which carried North Dakota through the 2008-09 financial crisis with flying colors. Post-GFC (the Global Financial Crisis of ’07-’09), it earned record profits reinvesting the state’s revenues in the state, while big commercial banks lost billions in the speculative markets. Several state legislatures currently have bills on their books following the North Dakota precedent. 

For a federal workaround, we could follow the lead of Jesse Jones’ Reconstruction Finance Corporation, which funded the New Deal that pulled the country out of the Great Depression. A bill for a national investment bank currently in Congress that has widespread support is based on that very effective model, avoiding the need to increase taxes or the federal debt. 

All those alternatives, however, depend on legislation, which may be too late. Meanwhile, self-sufficient “intentional” communities are growing in popularity, if that option is available to you. Community currencies, including digital currencies, can be used for trade. They can be “Labor Dollars” or “Food Dollars” backed by the goods and services for which the community has agreed to accept them. (See my earlier article here.) The technology now exists to form a network of community cryptocurrencies that are asset-backed and privacy-protected, but that is a subject for another column.

The current financial system is fragile, volatile and vulnerable to systemic shocks. It is due for a reset, but we need to ensure that the system is changed in a way that works for the people whose labor and credit support it. Our hard-earned deposits are now the banks’ only source of cheap liquidity. We can leverage that power by collaborating in a way that serves the public interest.
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