lewrockwell--2020-08-14--An Unexpected Systemic Crisis Is for Sure

Downturns in bank credit expansion always lead to systemic problems .
We are on the edge of such a downturn , which thanks to everyone ’ s focus on the coronavirus , is unexpected .
We can now identify 23 March as the date when markets stopped worrying about deflation and realised that monetary inflation is the certain outlook .
That day , the Fed promised unlimited monetary stimulus for both consumers and businesses , and the dollar began to fall .
The commercial banks everywhere are massively leveraged and their exposure to bad debts and a cyclical banking crisis @ @ @ @ @ @ @ them out .
In this article we look at the global systemically important banks — the G-SIBs — as proxy for all commercial banks and identify the ones most at risk on a market-based analysis .
Uncontrolled Risk : Les ... Williams , Mark Best Price : $ 1.98 Buy New $ 12.76 In these bizarre markets , the elephant in the room is systemic risk — visible to all but simply ignored .
This is partly due to everyone in government and central banks , as well as their epigones in the @ @ @ @ @ @ @ our economic problems are only a matter of Covid-19 .
In other words , when the pandemic is over normality will return .
But Covid-19 has acted like a conjurer ’ s distraction : it has deflected us from the consequences of Trump ’ s trade wars with China and the liquidity strains that surfaced in New York last September when the repo rate soared to 10 % .
The liquidity strains and the severe downturn in the stock markets that followed earlier this year before mid-March have been buried for the moment @ @ @ @ @ @ @ .
Liquidity problems following last September ’ s repo crisis and the S & P 500 index collapsing by one third between 19 February and 23 March were a clear signal that the multiyear cycle of bank credit expansion had already peaked .
Ever since the last credit crisis in 2008 , the banks had recovered their lending confidence and expanded bank credit , a classic expansionary phase .
If we take US dollar M1 money away from M2 money , we get a rough approximation of the growth of bank credit and @ @ @ @ @ @ @ has slightly more than doubled in the long expansionary phase , and since early June , despite the unprecedented injection of base money into the banking system by the Fed , bank credit is now stalling .
We are moving into this contractionary phase of credit with some significant banks dangerously leveraged .
That is usual ahead of a credit crisis , but never to the extent we are experiencing today .
And thanks to Covid-19 , this danger is universally ignored .
Not only are some of the global systemically important banks @ @ @ @ @ @ @ balance sheets , but in most cases stock markets are valuing their equity at a fraction of their balance sheet book values , contrasting with outrageously high valuations for non-financial stocks in the most severe economic downturn ever seen in peacetime .
It would be reasonable to expect a new bull market for equities to include the banking sector , but this is not so .
Table 1 below illustrates the point by incorporating the combination of balance sheet gearing and stock market valuations for all the G-SIBs to give a multiple of @ @ @ @ @ @ @ ranking them from most dangerous to the least on this measure .
The only banks in the list with market capitalisations higher than balance sheet equity — price to book ratios of more than one — are North American banks , which might explain why critical leverages are not recognised as a systemic problem in US financial markets .
The three highest leverages are of Eurozone banks : remember these are just the G-SIBs — there will be many large and smaller commercial banks as highly leveraged which are not on this list @ @ @ @ @ @ @ less than 20 % of book value , which is the indignity suffered by the French bank , Société Générale , should send warning signals to French banking regulators .
But they insist on only looking at the ratio of balance sheet assets to balance sheet equity ; which for Soc Gen is still an eye-watering 21.4 times .
Unlike the regulator , investors appear to think this bank is most likely bankrupt , its share price little more than a call option bet on its survival .
To be clear , the @ @ @ @ @ @ @ debts declared by this bank is magnified 118.8 times in pain for shareholders .
It is worth taking a moment to let the implications sink in and to understand how little it would take to bankrupt the bank .
Unleashing Usury : How ... Westra , Richard Best Price : $ 12.61 Buy New $ 24.95 It is a problem which particularly affects banks in the Eurozone .
In its twin towers in Frankfurt , a mere sneeze could destabilise Deutsche Bank .
In France the regulator dismisses the balance sheet gearing and @ @ @ @ @ @ @ Société Générale ’ s balance sheet gearing is 21.4 times , Credit Agricole ’ s is 28.1 times — the highest of all the G-SIBs — and BNP is 20.1 times .
And experience tells us that the numbers reported by banks are bolstered by their gaming of the regulatory system , which is why when a bank fails the outcome is always worse than the pre-failure numbers would suggest possible .
Large banks do not operate in national silos , having trade finance activities , foreign exchange and derivative trading , lending @ @ @ @ @ @ @ and subsidiary operations abroad .
The idea that a crisis in the Eurozone , or China for example , can be contained to national boundaries is wishful thinking .
With the exception of Wells Fargo , US G-SIBs come out better than those of other jurisdictions , but that will not save them from a systemic crisis originating elsewhere .
While we can point to the end of the credit cycle , there is no doubt that Covid-19 has precipitated a more immediate crisis .
We are now seeing the initial effects on @ @ @ @ @ @ @ doubtless their subsequent revisions will make them even worse .
The official talk is of a V-shaped recovery , and indeed , government spending has increased with that result in mind .
It is reported that we , the general public , have saved our money in the lockdown , and that we will resume spending as normal once Covid-19 passes .
All that failing businesses have to do is just hang on in there , and as President Reagan famously put it , wait for the knock on the door : “ @ @ @ @ @ @ @ I ’ m here to help ” .
But there is a truth swept under this proposition : in both the US and UK , with their consumer-driven societies in common , a Pareto 80 % of employees live paycheque to paycheque .
Those whose spending has fallen and upon which a spending recovery is banked are mostly retirees , who are unlikely to make much difference to a consumer-driven economy by splashing out when all lockdowns end .
Governments have introduced emergency plans .
The US Government is distributing money by metaphorical @ @ @ @ @ @ @ scheme and tax deferments .
But they do little to alleviate the concerns of highly leveraged commercial bankers , facing the prospects of soaring bad debts .
Bank balance sheet asset values to market capitalisation ratios strongly suggest the banking system can not cope with what is ahead .
1 % .
The book that the ... Sharratt , Robert Best Price : $ 9.93 Buy New $ 8.99 The US and UK governments have also implemented or announced schemes to help employers , and doubtless are prepared to step up their support @ @ @ @ @ @ @ numbers of workers .
But these measures can not change the fact that many businesses and individuals face bankruptcy .
The banks know it , and because their actions to protect themselves from bad debts in the non-financial economy are restricted for fear of making things worse , their actions in the financial economy will become important .
The dilemma is this .
As a banker , do you take the view that financial assets will continue to grow in value , so that by increasing your bank ’ s involvement you might @ @ @ @ @ @ @ of trouble by expanding financial and investment activities , or do you crack down on financial risk and commitments , in the hope that you will release balance sheet space to handle bad debts in the real economy ?
Presumably , central banks are rooting for the former but among their commercial charges it appears the latter view prevails .
And with balance sheet gearing as it is , who can blame them .
Not only have many G-SIBs reduced or closed their investment banking activities following Lehman , but their recent experience @ @ @ @ @ @ @ silver will probably encourage them to reduce their books in a wide range of other financial activities .
We can not know if this has impacted on equity markets yet ; but the initial effect is likely to drive prices higher as market making liquidity deteriorates before trend-chasing buyers stop chasing rising trends .
Given the strength of US equity indices , this is precisely what we are seeing .
Being bureaucrats who stick to their rules , regulators ignore the market values which we all know matter in the real world .
@ @ @ @ @ @ @ is also critical ; and with equity markets buoyant , bank stocks behaving like dogs are important to identify , for therein trouble surely lies .
Earlier this year , in about mid-February , markets took seriously the deflationary implications of Covid-19 .
The dollar ’ s trade weighted index spiked higher in a dash for the safety of cash .
Bank stock prices fell sharply as the implications of a deflation of bank credit began to be uppermost in investors ’ minds .
On Comex , open interest for gold plummeted from @ @ @ @ @ @ @ to over 120 .
The S & P500 index collapsed from 3386 on 19 February to 2237 on 23 March , falling by a third .
23 March was also the day that the Federal Reserve announced it would unhesitatingly provide all the monetary support needed by the US economy , turning growing fears of deflation into certain inflation .
That marked the turning point for all financial markets : the dollar ’ s trade weighted index peaked and began to fall .
The S & P500 began a new bull run and @ @ @ @ @ @ @ .
Premiums over the gold spot price appeared on Comex , the gold silver ratio began to fall rapidly , and the copper price turned sharply higher .
Oil turned higher as well , though temporarily it dipped in April due to technical factors before rising to join the other bulls .
Some of these effects are shown in Figure 2 .
The common factor was the downturn in the dollar , reflecting the switch from deflationary fears to expectations of monetary inflation .
The dollar lost its deflation safe-haven status and was @ @ @ @ @ @ @ the euro .
At the same time every dollar hedge , from equities to commodities , and even bitcoin began to rise .
Financially , this is when the tide turned , and if the banks were solid , their share prices should have joined the upward trend .
Therefore , all we need to do is look at those struggling to get off their lows to identify the G-SIBs most likely to be in real trouble .
In the Eurozone the two standouts are Société Générale and Banco Santander .
Their charts @ @ @ @ @ @ @ when stock markets took off , and are shown in Figure 3 .
As recently as 17 February Société Générale hit €31.93 before collapsing to €11.77 on 15 May .
And as the chart shows , it is like a floored boxer struggling to get up off the canvas .
Coupled with a ratio of assets to market capitalisation of a staggering 118.8 times , this bank ’ s ability to survive the slightest knock is very doubtful .
Mises on Money Gary North Best Price : $ 7.90 Buy New $ 9.00 @ @ @ @ @ @ @ surprise .
With assets to market capitalisation of 48.8 times , it is dangerously geared , but not so much as other Eurozone G-SIBs , such as Deutsche Bank on 79.5 times .
Nevertheless , investors have sold it down from €3.955 on 12 February to €1.8232 on 19 May .
Again , this bank is rated as likely doomed by the markets .
In this analysis we are restricting our commentary to those banks who post-March are behaving like dogs .
But that does not necessarily mean other banks are safe .
@ @ @ @ @ @ @ at under €5 in March and have rallied to €8.25 , in theory recovering with equity markets .
But on 14 February it had already collapsed from €10.19 , more than halving .
Furthermore , before the Leman crisis , the shares were as high as €91.625 .
Commerzbank , not on the G-SIB list , is similarly afflicted having recovered from a low of €3.05 on 19 March to €4.873 currently .
But its share price was over €300 in March 2007 , and its ratio of assets to market capitalisation is @ @ @ @ @ @ @ ’ s .
These two large private banks are unconscious on their feet and could topple at the slightest nudge .
There are two British banks with a similar performance , close to their lows for the year .
At 63.8 times Barclays has the highest ratio of balance sheets assets to market capitalisation , but it is not one of them .
The British banks suffering most in the markets from 23 March are Standard Chartered and HSBC , shown in Figure 4 .
HSBC peaked at 791.70p in January 2018 , @ @ @ @ @ @ @ since when it has continued its decline .
With a price to book of 51 % it is still rated in the market better than many other G-SIBs .
HSBC ’ s obvious problem is the China connection and sanctions against Hong Kong .
With total assets to balance sheet equity of 14.8 times , HSBC is on a par with Standard Chartered at 14.3 But with Standard Chartered ’ s price to book at 23.9 % and HSBC ’ s at 51.1 % , the former appears to be the more vulnerable @ @ @ @ @ @ @ that HSBC is also far from safe .
This brings us to our last category , China .
All four Chinese G-SIBs ’ share prices have collapsed , having initially enjoyed the post-23 March rally .
And it is worth noting that the Shanghai Composite Index also turned higher on 23 March , from 2660 to 3320 this week .
These major banks , government controlled , should have maintained their rally with the market and not declined .
Figure 5 shows them all to be at or near their lows .
And @ @ @ @ @ @ @ safest in China , being organs of the state .
Following the easing of China ’ s lockdown , the Shanghai composite index rallied strongly , with retail investors piling into stocks .
The authorities encouraged the appearance of a return to normality , with the state-run China Securities Journal in a front-page editorial talking up a healthy bull market and the wealth effect of rising share prices underpinned by an improving economy .
Bank shares initially benefited , all hitting a peak on 7 July .
The broader market topped out two @ @ @ @ @ @ @ % from the top .
But the share prices of these major banks have all fallen .
The Tyranny of the Fed ... O'Brien , Brian Best Price : $ 16.00 Buy New $ 16.99 The Chinese regulators have been cleaning up shadow banking activities and reforming the wealth management product market ( WMPs ) , to which banks are exposed to an estimated $ 3.3 trillion equivalent .
Not only has this been an immensely important business activity for them , but the banks have given explicit and implicit guarantees to investors @ @ @ @ @ @ @ According to a Moody ’ s note released on 7 August , implicit guarantees amount to over half of these WMPs .
The problem for the regulator is that the banks are taking on the risk of changes in underlying asset values instead of investors .
Understandably , they have sought to change what has become a systemic issue of major importance .
Was it this that was behind the “ official ” recommendation for investors to pile into equities , given that before the stock market rally , the implicit guarantees to @ @ @ @ @ @ @ banks , and they needed some breathing space ?
We will probably never know the truth , but recently the regulators decided to extend the deadline for risk transfer from banks to WMP owners by a year .
The signal from the performance of Chinese bank shares in recent weeks , particularly when contrasted with the performance of the rest of the Chinese equity markets , is that risk perceptions for bank shareholders have become significantly elevated .
Then there is geopolitics .
Inward investment flows through the Hong Kong – Shanghai connect @ @ @ @ @ @ @ .
As noted above , banks such as HSBC are likely to be targeted next by the US administration , extending extra systemic risk into the Chinese banking system through their banking relationships .
The last bank with a share price near its lows is Wells Fargo , which is Figure 6 .
In January , Wells Fargo ’ s stock traded at $ 54 , halving between then and 23 March , when everything in the world of finance changed .
An unfortunate comparison perhaps , but WFC ’ s subsequent performance @ @ @ @ @ @ @ Figure 3 , which , as we noted above , is like a floored boxer struggling to get up off the canvas .
Of the North American G-SIBs , it stands out with the greatest discount to book value , giving it a total asset to market capitalisation leverage of 18.6 times .
Its balance sheet ratio to equity is a mere 10.4 times , which compares with that of JPM Chase at 10.3 .
Undoubtedly , US bank regulators see no problem here , though markets are telling us another story .
@ @ @ @ @ @ @ we have identified some of the likely weak points in the global banking system : others will exist in banks not on the G-SIB list of which Commerzbank cited above is an example .
The surprise finding , perhaps , is the systemic threat from China ’ s large banks combined with two British G-SIBs operating in Hong Kong and the Far East .
If the US deep state sees China ’ s financial system as worthy of further attack , it could be responsible for the collapse of the global banking system @ @ @ @ @ @ @ would be the most optimistic outcome in a G-20 world which has passed regulations to permit bail-ins .
Any jurisdiction going down the bail-in route will probably make things worse by shifting the failure onto the shoulders of bank bond holders and large depositors , creating disorderly runs on other banks deemed to be at risk .
Our assumption must be that when any one of these dominoes topples , it will be bailed out by the relevant authorities , without hesitation .
If a G-SIB fails , then it seems logical other @ @ @ @ @ @ @ state which has a G-SIB failure must therefore be prepared at the outset to underwrite its whole banking system .
It will most probably turn into a wider problem with the result that the global banking system will fall into the hands of major governments .
Gods of Money : Wall St ... Engdahl , F. William Best Price : $ 8.98 Buy New $ 29.95 Initially , the inflationary implications can only be guessed at .
How the crisis affects economic prospects and undermines financial assets will feed into those guesses .
@ @ @ @ @ @ @ by the state , the impediment of the bank credit cycle to inflationary input will be replaced by the direction of central bankers and treasury ministers .
Global monetary inflation to buy off a gathering slump will become unhindered and unprecedented .
The effect of a banking crisis on wider financial assets is an analysis yet to be made .
We have seen how 23 March became the turning point for markets , which spinning on a sixpence adjusted expectations from credit deflation to unlimited inflation of fiat currencies .
It is also @ @ @ @ @ @ @ a full and final market and currency crisis .
A consequence has been the start of dollar weakness , likely to persist .
Foreign flows out of the dollar and dollar assets are likely to continue , or even accelerate .
With foreigners being increasingly net sellers of US financial assets , not only will the foreign exchange rate for the dollar continue to suffer , but with foreign divestment it will be increasingly difficult for the Fed to maintain the financial asset bubble .
That the Fed will end up financing the @ @ @ @ @ @ @ of the government itself will blow away the fig leaf of non-inflationary financing through QE .
Monetary inflation will be laid bare for what it is , calling for a market reassessment US Treasury bond yields .
In short , with a weakening dollar , however it is measured , the Fed risks losing control over government bond markets , and therefore over other financial asset prices as well .
The Fed ’ s success in gradually reducing funding costs for the US Treasury has relied on its unchallengeable supremacy over markets : @ @ @ @ @ @ @ Following the now imminent banking crisis , this confidence is likely to be badly damaged , and the Fed ’ s actions questioned by increasing numbers of market sceptics .
It threatens to be a replay of the problems faced by the Bank of England in the early 1970s , when nearly every action it took failed to convince the markets .
Between 1972–75 , the FT30 index fell 73 % , a banking crisis ensued in November 1973 , price inflation roared , and in 1976 the IMF was called in to @ @ @ @ @ @ @ conclude that a systemic crisis leading to widespread bank failures and their being taken into public sector ownership will in turn be seen by the general public and investors alike as a failure of neo-Keynesian central bank monetary policies .
A banking crisis more serious than the Lehman crisis of 2008—2009 would be a stepping-stone to a wider crisis for financial asset values , leading to an increasing pace of loss of purchasing power for the dollar , whose fortunes are now bound tightly to confidence that the US budget deficit will continue @ @ @ @ @ @ @ dollar ’ s fate hangs the future of all the other paper currencies linked to it .
The Best of Alasdair Macleod

Downturns in bank credit expansion always lead to systemic problems. We are on the edge of such a downturn, which thanks to everyone’s focus on the coronavirus, is unexpected.
We can now identify 23 March as the date when markets stopped worrying about deflation and realised that monetary inflation is the certain outlook. That day, the Fed promised unlimited monetary stimulus for both consumers and businesses, and the dollar began to fall.
The commercial banks everywhere are massively leveraged and their exposure to bad debts and a cyclical banking crisis is now certain to wipe many of them out. In this article we look at the global systemically important banks — the G-SIBs — as proxy for all commercial banks and identify the ones most at risk on a market-based analysis.
Introduction
Uncontrolled Risk: Les... Williams, Mark Best Price: $1.98 Buy New $12.76 (as of 03:20 UTC - Details) In these bizarre markets, the elephant in the room is systemic risk — visible to all but simply ignored. This is partly due to everyone in government and central banks, as well as their epigones in the investment industry and mainstream media, believing our economic problems are only a matter of Covid-19. In other words, when the pandemic is over normality will return. But Covid-19 has acted like a conjurer’s distraction: it has deflected us from the consequences of Trump’s trade wars with China and the liquidity strains that surfaced in New York last September when the repo rate soared to 10%.
The liquidity strains and the severe downturn in the stock markets that followed earlier this year before mid-March have been buried for the moment in a tsunami of central bank money. Liquidity problems following last September’s repo crisis and the S&P 500 index collapsing by one third between 19 February and 23 March were a clear signal that the multiyear cycle of bank credit expansion had already peaked. Ever since the last credit crisis in 2008, the banks had recovered their lending confidence and expanded bank credit, a classic expansionary phase.
If we take US dollar M1 money away from M2 money, we get a rough approximation of the growth of bank credit and that tells us two things. It has slightly more than doubled in the long expansionary phase, and since early June, despite the unprecedented injection of base money into the banking system by the Fed, bank credit is now stalling.
We are moving into this contractionary phase of credit with some significant banks dangerously leveraged. That is usual ahead of a credit crisis, but never to the extent we are experiencing today. And thanks to Covid-19, this danger is universally ignored.
Why bank market capitalisations matter
Not only are some of the global systemically important banks (G-SIBs) highly leveraged on their balance sheets, but in most cases stock markets are valuing their equity at a fraction of their balance sheet book values, contrasting with outrageously high valuations for non-financial stocks in the most severe economic downturn ever seen in peacetime. It would be reasonable to expect a new bull market for equities to include the banking sector, but this is not so.
Table 1 below illustrates the point by incorporating the combination of balance sheet gearing and stock market valuations for all the G-SIBs to give a multiple of balance sheet assets to market capitalisation, ranking them from most dangerous to the least on this measure. The only banks in the list with market capitalisations higher than balance sheet equity — price to book ratios of more than one — are North American banks, which might explain why critical leverages are not recognised as a systemic problem in US financial markets.
The three highest leverages are of Eurozone banks: remember these are just the G-SIBs — there will be many large and smaller commercial banks as highly leveraged which are not on this list.
To have your equity valued at less than 20% of book value, which is the indignity suffered by the French bank, Société Générale, should send warning signals to French banking regulators. But they insist on only looking at the ratio of balance sheet assets to balance sheet equity; which for Soc Gen is still an eye-watering 21.4 times. Unlike the regulator, investors appear to think this bank is most likely bankrupt, its share price little more than a call option bet on its survival. To be clear, the effect of every euro of new bad debts declared by this bank is magnified 118.8 times in pain for shareholders. It is worth taking a moment to let the implications sink in and to understand how little it would take to bankrupt the bank. Unleashing Usury: How ... Westra, Richard Best Price: $12.61 Buy New $24.95 (as of 03:15 UTC - Details)
It is a problem which particularly affects banks in the Eurozone. In its twin towers in Frankfurt, a mere sneeze could destabilise Deutsche Bank. In France the regulator dismisses the balance sheet gearing and share prices with a Gallic shrug. Société Générale’s balance sheet gearing is 21.4 times, Credit Agricole’s is 28.1 times — the highest of all the G-SIBs — and BNP is 20.1 times. And experience tells us that the numbers reported by banks are bolstered by their gaming of the regulatory system, which is why when a bank fails the outcome is always worse than the pre-failure numbers would suggest possible.
Large banks do not operate in national silos, having trade finance activities, foreign exchange and derivative trading, lending in foreign currencies and even substantial branches and subsidiary operations abroad. The idea that a crisis in the Eurozone, or China for example, can be contained to national boundaries is wishful thinking. With the exception of Wells Fargo, US G-SIBs come out better than those of other jurisdictions, but that will not save them from a systemic crisis originating elsewhere.
While we can point to the end of the credit cycle, there is no doubt that Covid-19 has precipitated a more immediate crisis. We are now seeing the initial effects on GDP of lockdowns being reported, and doubtless their subsequent revisions will make them even worse. The official talk is of a V-shaped recovery, and indeed, government spending has increased with that result in mind. It is reported that we, the general public, have saved our money in the lockdown, and that we will resume spending as normal once Covid-19 passes. All that failing businesses have to do is just hang on in there, and as President Reagan famously put it, wait for the knock on the door: “I’m from the government and I’m here to help”.
But there is a truth swept under this proposition: in both the US and UK, with their consumer-driven societies in common, a Pareto 80% of employees live paycheque to paycheque. Those whose spending has fallen and upon which a spending recovery is banked are mostly retirees, who are unlikely to make much difference to a consumer-driven economy by splashing out when all lockdowns end.
Governments have introduced emergency plans. The US Government is distributing money by metaphorical helicopters, and Britain has a furlough scheme and tax deferments. But they do little to alleviate the concerns of highly leveraged commercial bankers, facing the prospects of soaring bad debts. Bank balance sheet asset values to market capitalisation ratios strongly suggest the banking system cannot cope with what is ahead. 1%. The book that the... Sharratt, Robert Best Price: $9.93 Buy New $8.99 (as of 02:53 UTC - Details)
The US and UK governments have also implemented or announced schemes to help employers, and doubtless are prepared to step up their support, particularly for those who employ large numbers of workers. But these measures cannot change the fact that many businesses and individuals face bankruptcy. The banks know it, and because their actions to protect themselves from bad debts in the non-financial economy are restricted for fear of making things worse, their actions in the financial economy will become important.
The dilemma is this. As a banker, do you take the view that financial assets will continue to grow in value, so that by increasing your bank’s involvement you might be able to trade your way out of trouble by expanding financial and investment activities, or do you crack down on financial risk and commitments, in the hope that you will release balance sheet space to handle bad debts in the real economy?
Presumably, central banks are rooting for the former but among their commercial charges it appears the latter view prevails. And with balance sheet gearing as it is, who can blame them.
Not only have many G-SIBs reduced or closed their investment banking activities following Lehman, but their recent experience in the derivative markets for gold and silver will probably encourage them to reduce their books in a wide range of other financial activities. We cannot know if this has impacted on equity markets yet; but the initial effect is likely to drive prices higher as market making liquidity deteriorates before trend-chasing buyers stop chasing rising trends. Given the strength of US equity indices, this is precisely what we are seeing.
The direction of share prices matters
Being bureaucrats who stick to their rules, regulators ignore the market values which we all know matter in the real world. But how values in the marketplace evolve is also critical; and with equity markets buoyant, bank stocks behaving like dogs are important to identify, for therein trouble surely lies.
Earlier this year, in about mid-February, markets took seriously the deflationary implications of Covid-19. The dollar’s trade weighted index spiked higher in a dash for the safety of cash. Bank stock prices fell sharply as the implications of a deflation of bank credit began to be uppermost in investors’ minds. On Comex, open interest for gold plummeted from record levels and the gold/silver ratio soared to over 120. The S&P500 index collapsed from 3386 on 19 February to 2237 on 23 March, falling by a third. 23 March was also the day that the Federal Reserve announced it would unhesitatingly provide all the monetary support needed by the US economy, turning growing fears of deflation into certain inflation.
That marked the turning point for all financial markets: the dollar’s trade weighted index peaked and began to fall. The S&P500 began a new bull run and has recovered to new highs this week. Premiums over the gold spot price appeared on Comex, the gold silver ratio began to fall rapidly, and the copper price turned sharply higher. Oil turned higher as well, though temporarily it dipped in April due to technical factors before rising to join the other bulls.
Some of these effects are shown in Figure 2. The common factor was the downturn in the dollar, reflecting the switch from deflationary fears to expectations of monetary inflation. The dollar lost its deflation safe-haven status and was even sold for other currencies, particularly the euro. At the same time every dollar hedge, from equities to commodities, and even bitcoin began to rise. Financially, this is when the tide turned, and if the banks were solid, their share prices should have joined the upward trend. Therefore, all we need to do is look at those struggling to get off their lows to identify the G-SIBs most likely to be in real trouble.
In the Eurozone the two standouts are Société Générale and Banco Santander. Their charts are from 23 March, the day when stock markets took off, and are shown in Figure 3.
As recently as 17 February Société Générale hit €31.93 before collapsing to €11.77 on 15 May. And as the chart shows, it is like a floored boxer struggling to get up off the canvas. Coupled with a ratio of assets to market capitalisation of a staggering 118.8 times, this bank’s ability to survive the slightest knock is very doubtful. Mises on Money Gary North Best Price: $7.90 Buy New $9.00 (as of 05:45 UTC - Details)
Santander’s weakness is a mild surprise. With assets to market capitalisation of 48.8 times, it is dangerously geared, but not so much as other Eurozone G-SIBs, such as Deutsche Bank on 79.5 times. Nevertheless, investors have sold it down from €3.955 on 12 February to €1.8232 on 19 May. Again, this bank is rated as likely doomed by the markets.
In this analysis we are restricting our commentary to those banks who post-March are behaving like dogs. But that does not necessarily mean other banks are safe. Deutsche Bank, for example, traded at under €5 in March and have rallied to €8.25, in theory recovering with equity markets. But on 14 February it had already collapsed from €10.19, more than halving. Furthermore, before the Leman crisis, the shares were as high as €91.625. Commerzbank, not on the G-SIB list, is similarly afflicted having recovered from a low of €3.05 on 19 March to €4.873 currently. But its share price was over €300 in March 2007, and its ratio of assets to market capitalisation is 76 times, similar to Deutsche Bank’s. These two large private banks are unconscious on their feet and could topple at the slightest nudge.
There are two British banks with a similar performance, close to their lows for the year. At 63.8 times Barclays has the highest ratio of balance sheets assets to market capitalisation, but it is not one of them. The British banks suffering most in the markets from 23 March are Standard Chartered and HSBC, shown in Figure 4.
HSBC peaked at 791.70p in January 2018, declining to 584.50p on 9 February, since when it has continued its decline. With a price to book of 51% it is still rated in the market better than many other G-SIBs. HSBC’s obvious problem is the China connection and sanctions against Hong Kong. With total assets to balance sheet equity of 14.8 times, HSBC is on a par with Standard Chartered at 14.3 But with Standard Chartered’s price to book at 23.9% and HSBC’s at 51.1%, the former appears to be the more vulnerable. However, geopolitics will likely mean that HSBC is also far from safe.
This brings us to our last category, China. All four Chinese G-SIBs’ share prices have collapsed, having initially enjoyed the post-23 March rally. And it is worth noting that the Shanghai Composite Index also turned higher on 23 March, from 2660 to 3320 this week. These major banks, government controlled, should have maintained their rally with the market and not declined. Figure 5 shows them all to be at or near their lows. And these banks, surely, are the safest in China, being organs of the state.
Following the easing of China’s lockdown, the Shanghai composite index rallied strongly, with retail investors piling into stocks. The authorities encouraged the appearance of a return to normality, with the state-run China Securities Journal in a front-page editorial talking up a healthy bull market and the wealth effect of rising share prices underpinned by an improving economy. Bank shares initially benefited, all hitting a peak on 7 July. The broader market topped out two days later and is down only 3.5% from the top. But the share prices of these major banks have all fallen.
The Tyranny of the Fed... O'Brien, Brian Best Price: $16.00 Buy New $16.99 (as of 04:50 UTC - Details) The Chinese regulators have been cleaning up shadow banking activities and reforming the wealth management product market (WMPs), to which banks are exposed to an estimated $3.3 trillion equivalent. Not only has this been an immensely important business activity for them, but the banks have given explicit and implicit guarantees to investors absolving ownership of WMPs from risk. According to a Moody’s note released on 7 August, implicit guarantees amount to over half of these WMPs.
The problem for the regulator is that the banks are taking on the risk of changes in underlying asset values instead of investors. Understandably, they have sought to change what has become a systemic issue of major importance. Was it this that was behind the “official” recommendation for investors to pile into equities, given that before the stock market rally, the implicit guarantees to WMP holders were threatening to undermine the banks, and they needed some breathing space?
We will probably never know the truth, but recently the regulators decided to extend the deadline for risk transfer from banks to WMP owners by a year. The signal from the performance of Chinese bank shares in recent weeks, particularly when contrasted with the performance of the rest of the Chinese equity markets, is that risk perceptions for bank shareholders have become significantly elevated.
Then there is geopolitics. Inward investment flows through the Hong Kong – Shanghai connect has been effectively stopped by US sanctions. As noted above, banks such as HSBC are likely to be targeted next by the US administration, extending extra systemic risk into the Chinese banking system through their banking relationships.
The last bank with a share price near its lows is Wells Fargo, which is Figure 6.
In January, Wells Fargo’s stock traded at $54, halving between then and 23 March, when everything in the world of finance changed. An unfortunate comparison perhaps, but WFC’s subsequent performance echoes that of Société Générale shown in Figure 3, which, as we noted above, is like a floored boxer struggling to get up off the canvas. Of the North American G-SIBs, it stands out with the greatest discount to book value, giving it a total asset to market capitalisation leverage of 18.6 times. Its balance sheet ratio to equity is a mere 10.4 times, which compares with that of JPM Chase at 10.3. Undoubtedly, US bank regulators see no problem here, though markets are telling us another story.
In conclusion, through our market-based approach we have identified some of the likely weak points in the global banking system: others will exist in banks not on the G-SIB list of which Commerzbank cited above is an example. The surprise finding, perhaps, is the systemic threat from China’s large banks combined with two British G-SIBs operating in Hong Kong and the Far East. If the US deep state sees China’s financial system as worthy of further attack, it could be responsible for the collapse of the global banking system.
Unquestioned bail outs by the state would be the most optimistic outcome in a G-20 world which has passed regulations to permit bail-ins. Any jurisdiction going down the bail-in route will probably make things worse by shifting the failure onto the shoulders of bank bond holders and large depositors, creating disorderly runs on other banks deemed to be at risk. Our assumption must be that when any one of these dominoes topples, it will be bailed out by the relevant authorities, without hesitation.
The consequences of a global bank failure
If a G-SIB fails, then it seems logical other lesser banks will also fail. Any state which has a G-SIB failure must therefore be prepared at the outset to underwrite its whole banking system. It will most probably turn into a wider problem with the result that the global banking system will fall into the hands of major governments. Gods of Money: Wall St... Engdahl, F. William Best Price: $8.98 Buy New $29.95 (as of 03:42 UTC - Details)
Initially, the inflationary implications can only be guessed at. How the crisis affects economic prospects and undermines financial assets will feed into those guesses. But when banks are owned and controlled by the state, the impediment of the bank credit cycle to inflationary input will be replaced by the direction of central bankers and treasury ministers. Global monetary inflation to buy off a gathering slump will become unhindered and unprecedented.
The effect of a banking crisis on wider financial assets is an analysis yet to be made. We have seen how 23 March became the turning point for markets, which spinning on a sixpence adjusted expectations from credit deflation to unlimited inflation of fiat currencies. It is also the moment the clock started ticking for a full and final market and currency crisis. A consequence has been the start of dollar weakness, likely to persist. Foreign flows out of the dollar and dollar assets are likely to continue, or even accelerate. With foreigners being increasingly net sellers of US financial assets, not only will the foreign exchange rate for the dollar continue to suffer, but with foreign divestment it will be increasingly difficult for the Fed to maintain the financial asset bubble.
That the Fed will end up financing the US Government through intermediaries under the control of the government itself will blow away the fig leaf of non-inflationary financing through QE. Monetary inflation will be laid bare for what it is, calling for a market reassessment US Treasury bond yields. In short, with a weakening dollar, however it is measured, the Fed risks losing control over government bond markets, and therefore over other financial asset prices as well.
The Fed’s success in gradually reducing funding costs for the US Treasury has relied on its unchallengeable supremacy over markets: what the Fed says, goes. Following the now imminent banking crisis, this confidence is likely to be badly damaged, and the Fed’s actions questioned by increasing numbers of market sceptics. It threatens to be a replay of the problems faced by the Bank of England in the early 1970s, when nearly every action it took failed to convince the markets. Between 1972–75, the FT30 index fell 73%, a banking crisis ensued in November 1973, price inflation roared, and in 1976 the IMF was called in to bail Britain out.
We can only conclude that a systemic crisis leading to widespread bank failures and their being taken into public sector ownership will in turn be seen by the general public and investors alike as a failure of neo-Keynesian central bank monetary policies. A banking crisis more serious than the Lehman crisis of 2008—2009 would be a stepping-stone to a wider crisis for financial asset values, leading to an increasing pace of loss of purchasing power for the dollar, whose fortunes are now bound tightly to confidence that the US budget deficit will continue to be financed. And on the dollar’s fate hangs the future of all the other paper currencies linked to it.
Reprinted with permission from Goldmoney.
The Best of Alasdair Macleod


lewrockwell--2020-08-14--WATCH: New Zealand to Move All ‘Covid Cases’ to ‘Quarantine Centres’

The New Zeland government announced yesterday that ALL cases of Sars-Cov-2 infection “ are to be managed in a quarantine @ @ @ @ @ : How ... O'Donnel , Kevin Buy New $ 7.99 Health Director-General Dr Ashley Bloomfield @ @ @ @ @ press conference yesterday ( August 12th ) .
As of today , New Zealand has @ @ @ @ @ coronavirus infection .
That has not prevented the government from locking down Auckland , the @ @ @ @ @ Section 70 of the Health Act , the NZ government has the power to compel @ @ @ @ @ will .
According to a report from stuff.co.nz quarantine centres have – among other things @ @ @ @ @ ” than isolation hotels .
According to Dr Broomfield the new quarantine rules : A @ @ @ @ @ are incredibly unreliable and can return very large numbers of false-positive results .

The New Zeland government announced yesterday that ALL cases of Sars-Cov-2 infection “are to be managed in a quarantine facility”.
COVID-19 OUTBREAK: How... O'Donnel, Kevin Buy New $7.99 (as of 05:05 UTC - Details) Health Director-General Dr Ashley Bloomfield made the announcements in a press conference yesterday (August 12th). As of today, New Zealand has 36 active cases* of alleged coronavirus infection. That has not prevented the government from locking down Auckland, the countries largest city.
Under Section 70 of the Health Act, the NZ government has the power to compel people into quarantine against their will. According to a report from stuff.co.nz quarantine centres have – among other things – “more stringent security” than isolation hotels.
According to Dr Broomfield the new quarantine rules:
Will apply to all test-positive cases and also family members who may be at risk, where appropriate.
A reminder that the PCR tests are incredibly unreliable and can return very large numbers of false-positive results.
Read the Whole Article


lewrockwell--2020-08-14--Is Biden-Harris on Tom Dewey’s Path?

Is Biden-Harris on Tom Dewey’s Path?

Accused of being a serial harasser in 2019 , Joe Biden did what comes naturally .
He apologized for perceived past misbehavior , and , to appease his accusers , pledged to choose a woman for a Biden ticket .
Reacting to the racial rage that erupted after the death of George Floyd under the knee of a white Minneapolis cop , Biden reacted again .
He put out word he would be looking closely for a Black woman to run with .
Thus did Joe paint himself into a corner .
For there was no Black female governor of @ @ @ @ @ @ @ there was only one Black woman in the U.S. Senate — Kamala Harris .
Dewey Defeats Truman : ... Baime , A. J .
Buy New $ 17.99 This presented a problem .
For in the first debate , Harris had charged Biden with colluding with segregationist senators in the ’ 70s to block the busing of school children for racial balance .
Harris introduced the toxic charge against Biden with this sweet upfront concession : “ I don ’ t believe you are a racist.
” This Tuesday , Biden made a @ @ @ @ @ @ @ Harris to run with him .
And did so just one day after receiving a letter from 100 prominent Black men led by rapper Sean “ Diddy ” Combs and radio host Charlamagne tha God that read like an ultimatum .
“ For too long Black women have been asked to do everything from rally the troops to risk their lives for the Democratic Party with no acknowledgment , no respect , no visibility , and certainly not enough support .
“ Failing to select a Black woman in 2020 means you will @ @ @ @ @ @ @ ’ t want to choose between the lesser of two evils and we don ’ t want to vote for the devil we know versus the devil we don ’ t because we are tired of voting for devils — period.
” Astonishing .
Here are prominent Black Democrats describing the candidates they have had to support in recent years — Bill and Hillary Clinton , Al Gore , John Kerry , Joe Biden — as “ devils ” and the “ lesser of two evils.
” Last Friday , 700 “ Concerned @ @ @ @ @ @ @ letter to Biden demanding he put a Black woman on the ticket .
The Case for Trump Hanson , Victor Davis Best Price : $ 13.41 Buy New $ 12.19 Wednesday , Biden complied .
But after the media ovation for Biden ’ s selection of Harris dies down , a new reality will emerge .
Before winning her Senate seat in 2016 , Harris was a prosecutor and two-term attorney general of California who had established a reputation for being tough on petty criminals .
Biden , as chairman of the Senate @ @ @ @ @ @ @ in helping craft the Violent Crime Control and Law Enforcement Act of 1994 , which dramatically increased incarcerations and disproportionately affected Black men .
However , Black Lives Matter has pulled the Democratic Party sharply to the left on the issue of crime and cops with its battle cry of “ defund the police !
” Yet , today , two months after Floyd ’ s death , mayors and cops in Democratic cities are still bedeviled by rioters , looters , arsonists , anarchists and a criminal class that settles its quarrels @ @ @ @ @ @ @ The public is getting fed up .
People want their cops back , and leftist politicians and police are coming into increasing conflict .
Nixon ’ s White Ho ... Buchanan , Patrick J .
Best Price : $ 2.03 Buy New $ 8.50 The Black police chief of Seattle , Carmen Best , has retired rather than carry out the city ’ s decision to cut 50 % of her budget .
Elected officials in New York , Los Angeles and Minneapolis have approved plans to reduce police budgets .
Meanwhile , @ @ @ @ @ @ @ almost every city including D.C. and New York , where more have died of gunshot wounds in 2020 than died all last year .
The president has staked out his position , and it does not lack for clarity .
President Donald Trump embraces the phrase “ law and order , ” denounces the “ defund-the-police ” movement as promoting anarchy , and offers federal aid and agents to cities that request help .
He calls on mayors and governor to demand the National Guard to deal with the crisis and condemns them @ @ @ @ @ @ @ cities they have run for decades .
Trump has been accused of taking us back to the Nixon era .
But 1968 was the culmination of a decade of soaring crime the likes of which the nation had not known .
At its convention in Chicago , the Democratic Party was ripped apart by anarchic violence and the police response .
In late September , even Hubert Humphrey was denouncing the “ fascists ” shouting him down at every appearance .
But it is not certain that Biden ’ s sheltering in his @ @ @ @ @ @ @ Portland , Seattle and the shootings , lootings and killings in Chicago , will prevail on Nov. 3 over Trump ’ s boisterous campaign call to crack down on criminals , go back to school , get back to work and “ play ball.
” Biden-Harris looks like a ticket content to sit on its lead and ride to victory in November , the way Governor Dewey did in 1948 .
The Best of Patrick J. Buchanan

Shop all books by Pat Buchanan
Accused of being a serial harasser in 2019, Joe Biden did what comes naturally. He apologized for perceived past misbehavior, and, to appease his accusers, pledged to choose a woman for a Biden ticket.
Reacting to the racial rage that erupted after the death of George Floyd under the knee of a white Minneapolis cop, Biden reacted again. He put out word he would be looking closely for a Black woman to run with.
Thus did Joe paint himself into a corner.
For there was no Black female governor of any state in the Union, and there was only one Black woman in the U.S. Senate — Kamala Harris. Dewey Defeats Truman: ... Baime, A. J. Buy New $17.99 (as of 03:21 UTC - Details)
This presented a problem. For in the first debate, Harris had charged Biden with colluding with segregationist senators in the ’70s to block the busing of school children for racial balance.
Harris introduced the toxic charge against Biden with this sweet upfront concession: “I don’t believe you are a racist.”
This Tuesday, Biden made a virtue out of necessity.
He chose Harris to run with him. And did so just one day after receiving a letter from 100 prominent Black men led by rapper Sean “Diddy” Combs and radio host Charlamagne tha God that read like an ultimatum.
“For too long Black women have been asked to do everything from rally the troops to risk their lives for the Democratic Party with no acknowledgment, no respect, no visibility, and certainly not enough support.
“Failing to select a Black woman in 2020 means you will lose the election. … We don’t want to choose between the lesser of two evils and we don’t want to vote for the devil we know versus the devil we don’t because we are tired of voting for devils — period.”
Astonishing. Here are prominent Black Democrats describing the candidates they have had to support in recent years — Bill and Hillary Clinton, Al Gore, John Kerry, Joe Biden — as “devils” and the “lesser of two evils.”
Last Friday, 700 “Concerned Black Women Leaders” delivered a similar letter to Biden demanding he put a Black woman on the ticket. The Case for Trump Hanson, Victor Davis Best Price: $13.41 Buy New $12.19 (as of 03:21 UTC - Details)
Wednesday, Biden complied. But after the media ovation for Biden’s selection of Harris dies down, a new reality will emerge.
Before winning her Senate seat in 2016, Harris was a prosecutor and two-term attorney general of California who had established a reputation for being tough on petty criminals.
Biden, as chairman of the Senate judiciary committee, also had taken pride in helping craft the Violent Crime Control and Law Enforcement Act of 1994, which dramatically increased incarcerations and disproportionately affected Black men.
However, Black Lives Matter has pulled the Democratic Party sharply to the left on the issue of crime and cops with its battle cry of “defund the police!”
Yet, today, two months after Floyd’s death, mayors and cops in Democratic cities are still bedeviled by rioters, looters, arsonists, anarchists and a criminal class that settles its quarrels with nightly killings and weekend shootouts.
The public is getting fed up. People want their cops back, and leftist politicians and police are coming into increasing conflict. Nixon’s White Ho... Buchanan, Patrick J. Best Price: $2.03 Buy New $8.50 (as of 12:15 UTC - Details)
The Black police chief of Seattle, Carmen Best, has retired rather than carry out the city’s decision to cut 50% of her budget.
Elected officials in New York, Los Angeles and Minneapolis have approved plans to reduce police budgets. Meanwhile, shooting and killings are going up in almost every city including D.C. and New York, where more have died of gunshot wounds in 2020 than died all last year.
The president has staked out his position, and it does not lack for clarity. President Donald Trump embraces the phrase “law and order,” denounces the “defund-the-police” movement as promoting anarchy, and offers federal aid and agents to cities that request help. He calls on mayors and governor to demand the National Guard to deal with the crisis and condemns them for their chronic failure to safely secure cities they have run for decades.
Trump has been accused of taking us back to the Nixon era.
But 1968 was the culmination of a decade of soaring crime the likes of which the nation had not known. At its convention in Chicago, the Democratic Party was ripped apart by anarchic violence and the police response. In late September, even Hubert Humphrey was denouncing the “fascists” shouting him down at every appearance.
Undeniably, Trump has his problems.
But it is not certain that Biden’s sheltering in his basement and issuing his milquetoast responses to Portland, Seattle and the shootings, lootings and killings in Chicago, will prevail on Nov. 3 over Trump’s boisterous campaign call to crack down on criminals, go back to school, get back to work and “play ball.”
Biden-Harris looks like a ticket content to sit on its lead and ride to victory in November, the way Governor Dewey did in 1948.
The Best of Patrick J. Buchanan


lewrockwell--2020-08-14--Gold Prices Show There’s a ‘Big Short’ Going on in Official Currencies

On August 4 , 2020 , the price of gold surpassed $ 2,000 per ounce , currently trading around an all-time high of $ 2,050 per ounce .
While one may say that the price of gold is on the rise , it would actually be more meaningful to say that the purchasing power of the world ’ s fiat currencies vis-à-vis gold is on the decline , because this is what a rising price for gold and silver in , say , US dollars , euros , Chinese renminbi , Japanese yen , or Swiss francs really stands for @ @ @ @ @ @ @ precious metal , the lower the exchange value of official currencies .
Gold isn ’ t just a good like any other .
It is special : it is the “ ultimate means of payment , ” the “ base money of civilization.
” Monetary history bears this out : whenever people were free to choose their money , they went for gold .
Indeed , gold has all the physical properties that make for sound money : gold is scarce , homogenous , easily transportable , divisible , mintable , durable , @ @ @ @ @ @ @ has a relatively high value per unit of weight .
Even though officially demonetized in the early 1970s , people haven ’ t stop appreciating gold ’ s “ moneyish ” qualities .
The Big Short Best Price : $ 2.00 Buy New $ 4.76 However , it is not only the rising gold price that indicates that the purchasing power of fiat currencies is on the decline .
Basically , all other goods prices go up as well , most notably asset prices—the prices of stocks , bonds , housing , and @ @ @ @ @ @ @ can buy fewer and fewer stocks , bonds , and houses with a given official currency unit .
From this perspective , you can rightfully conclude that a broad-based debasement is going on as far as the world ’ s major official fiat currencies are concerned .
Of course , this is not what most people would wish for , as they prefer to hold a kind of money that doesn ’ t go down in value , money that actually preserves or even increases its purchasing power over time .
Actually no @ @ @ @ @ @ @ would wish to hold inflationary money .
Unfortunately , however , central banks have been debasing their official fiat currencies over the last decades .
To make things even worse , the monetary debasement is gathering speed due to the consequences of the politically dictated lockdown crisis .
Central banks around the world print up ever greater amounts of fiat currencies to make up for lost income and profits .
It is against this background that the rise of goods prices in terms of official currencies can be interpreted in a meaningful way @ @ @ @ @ @ @ money will , as an economic law , cause the exchange value of the money unit to go down—either in absolute terms or in relative terms ( that is by keeping money prices at a higher level when compared to a situation in which the quantity of money has not been increased ) .
The Wolf of Wall Street Best Price : $ 2.00 Buy New $ 4.55 In view of central banks ‘ expansion of the quantity of fiat currency , people increasingly seek to hold assets , such as , say @ @ @ @ @ @ @ , and commodities , that are considered to be “ inflation protected.
” As they exchange fiat currencies for other goods , the money prices of these goods are bid up , and higher money prices are equivalent to a decline in the purchasing power of fiat currencies .
Of course , financial market traders will be among the first to react and benefit , while those less informed will get the shaft .
In a world in which central banks not only ramp up the quantity of fiat currency but also push @ @ @ @ @ @ @ get hit particularly hard .
Saving in traditional instruments ( bank deposits , money market funds , etc . )
is made impossible .
The artificially lowered interest rates also contribute to asset price inflation : the prices of stocks and real estate are driven upward .
Those holding fiat currencies suffer losses as far as their purchasing power is concerned , while people who hold assets that gain in price are on the receiving end .
Margin Call Best Price : $ 3.12 Buy New $ 4.99 Unfortunately , an end to @ @ @ @ @ @ @ in sight .
There is the widespread and deeply entrenched belief among people that an increase in the quantity of fiat currency would make the economy richer , and that it would help overcome financial and economic crises .
This is , however , a serious mistake , for all an increase in the stock of money does is make some richer at the expense of many others .
And an inflation policy can cover up economic and financial problems only for so long .
Mises ’ s words should help us to @ @ @ @ @ @ @ ( and lately also silver ) vis-à-vis the fiat currency universe has been underway for quite some time now .
Ludwig von Mises , The Theory of Money and Credit , trans .
J.E .
Batson ( 1953 ; repr.
, Auburn , AL : Ludwig von Mises Institute , 2009 ) , p. 230 .
The Best of Thorsten Polleit

On August 4, 2020, the price of gold surpassed $2,000 per ounce, currently trading around an all-time high of $2,050 per ounce. While one may say that the price of gold is on the rise, it would actually be more meaningful to say that the purchasing power of the world’s fiat currencies vis-à-vis gold is on the decline, because this is what a rising price for gold and silver in, say, US dollars, euros, Chinese renminbi, Japanese yen, or Swiss francs really stands for: The higher the price of this precious metal, the lower the exchange value of official currencies.
Gold isn’t just a good like any other. It is special: it is the “ultimate means of payment,” the “base money of civilization.” Monetary history bears this out: whenever people were free to choose their money, they went for gold. Indeed, gold has all the physical properties that make for sound money: gold is scarce, homogenous, easily transportable, divisible, mintable, durable, and, last but not least, has a relatively high value per unit of weight. Even though officially demonetized in the early 1970s, people haven’t stop appreciating gold’s “moneyish” qualities. The Big Short Best Price: $2.00 Buy New $4.76 (as of 11:55 UTC - Details)
However, it is not only the rising gold price that indicates that the purchasing power of fiat currencies is on the decline. Basically, all other goods prices go up as well, most notably asset prices—the prices of stocks, bonds, housing, and real estate. This means that you can buy fewer and fewer stocks, bonds, and houses with a given official currency unit. From this perspective, you can rightfully conclude that a broad-based debasement is going on as far as the world’s major official fiat currencies are concerned.
Of course, this is not what most people would wish for, as they prefer to hold a kind of money that doesn’t go down in value, money that actually preserves or even increases its purchasing power over time. Actually no one who is in his right mind would wish to hold inflationary money. Unfortunately, however, central banks have been debasing their official fiat currencies over the last decades. To make things even worse, the monetary debasement is gathering speed due to the consequences of the politically dictated lockdown crisis.
Central banks around the world print up ever greater amounts of fiat currencies to make up for lost income and profits. It is against this background that the rise of goods prices in terms of official currencies can be interpreted in a meaningful way: the rise in the quantity of money will, as an economic law, cause the exchange value of the money unit to go down—either in absolute terms or in relative terms (that is by keeping money prices at a higher level when compared to a situation in which the quantity of money has not been increased). The Wolf of Wall Street Best Price: $2.00 Buy New $4.55 (as of 03:23 UTC - Details)
In view of central banks‘ expansion of the quantity of fiat currency, people increasingly seek to hold assets, such as, say, stocks, housing, real estate, and commodities, that are considered to be “inflation protected.” As they exchange fiat currencies for other goods, the money prices of these goods are bid up, and higher money prices are equivalent to a decline in the purchasing power of fiat currencies. Of course, financial market traders will be among the first to react and benefit, while those less informed will get the shaft.
In a world in which central banks not only ramp up the quantity of fiat currency but also push market interest rates to zero, people get hit particularly hard. Saving in traditional instruments (bank deposits, money market funds, etc.) is made impossible. The artificially lowered interest rates also contribute to asset price inflation: the prices of stocks and real estate are driven upward. Those holding fiat currencies suffer losses as far as their purchasing power is concerned, while people who hold assets that gain in price are on the receiving end.
Margin Call Best Price: $3.12 Buy New $4.99 (as of 06:00 UTC - Details) Unfortunately, an end to central banks’ inflationary policies is not in sight. There is the widespread and deeply entrenched belief among people that an increase in the quantity of fiat currency would make the economy richer, and that it would help overcome financial and economic crises. This is, however, a serious mistake, for all an increase in the stock of money does is make some richer at the expense of many others. And an inflation policy can cover up economic and financial problems only for so long.
Ludwig von Mises wrote:
The collapse of an inflation policy carried to its extreme—as in the United States in 1781 and in France in 1796—does not destroy the monetary system, but only the credit money or fiat money of the State that has overestimated the effectiveness of its own policy. The collapse emancipates commerce from etatism and establishes metallic money again.
Mises’s words should help us to better understand why the appreciation of gold (and lately also silver) vis-à-vis the fiat currency universe has been underway for quite some time now.
—
Ludwig von Mises, The Theory of Money and Credit, trans. J.E. Batson (1953; repr., Auburn, AL: Ludwig von Mises Institute, 2009), p. 230.
The Best of Thorsten Polleit