The U.S. Business Model Is Collapsing

Money is all theoretical… until it’s not.

Paper money is bad enough, as France learned under the tutelage of the rascal John Law in the early 1700s. The nation was broke, exhausted by foolish wars, and heaped under unbearable debt.

Monsieur Law, a Scottish genius-wizard (the Jerry Lewis of political economy), landed in Paris, cast a spell on the regent Duc d’Orléans, set up a magic credit engine fueled by dreams of untold riches-to-come burgeoning out of the vast, new-found lands called Louisiana up the Mississippi River and modern finance was born!

The stock-and-money schemes known as the Mississippi Bubble soon ruined France and put finance in such a bad odor that the word “banque” could not be used in polite society there for a century to come.

Monetary inflation became a thing for the first time since Roman days — a much easier trick with printed paper banknotes than with silver coins — but the effect was the same: the evaporation of “wealth” (which is what money supposedly represents).

At the height of the crisis, trading in gold was criminalized, though that was so easily worked around due to sheer custom and habit that the Crown had to re-legalize it. The frenzy from start to finish lasted only a few years, but the nation was set on the path that would eventually lead to revolution.

Law ended his days dolefully running card games in Venice.

The U.S.

Likewise, the creaking polity called the USA in our time spawned many new incarnations of John Law as it transitioned from being “the arsenal of democracy” — you know, making real things — to a land of make-believe, where unicorns galloped over rainbows conjured by computer magic and utopian wishes of equity, diversity and inclusion.

The overhang of previously amassed wealth kept those dreams going long after we discontinued the rough and messy business of making stuff, and thereby generating real wealth. But now a klaxon blares, signaling the end of dream-time, and the nation wakes up in a ramshackle house with the floor giving way under the bed.

The rot was plain to see in the banking architecture built on U.S. Treasury paper (bills, notes, bonds) as rising interest rates undercut the price of all the debt paper issued previously at lower rates. And this was the collateral that banks generally held the depositors’ money in.

So when it became necessary to declare a problem with the balance sheet, and cash had to be raised to cover it, the Treasury paper could only be sold at a loss, liabilities exceeded assets, word got out, depositors rushed to secure the money in their accounts and that was all she wrote for yon bank, in this case, Silicon Valley Bank, the first to crumble.

House of Cards

Since banks today exist in a vast matrix of interconnected obligations — promises to pay this-and-that — fear grows that the rot from one bank, such as SVB, will infect many other banks that are no longer able to keep their promises about paying this-and-that, leading to a daisy-chain of things not getting paid.

For an economy, that’s about the same as the blood ceasing to circulate in a body.

As if all the operations around finance in this land were not already unsound and degenerate enough, the alleged president just cancelled moral hazard altogether. It’s now official: From here forward there will be no consequences for banking fraud, poor decision-making, fiduciary recklessness, self-dealing or any of the other risks attendant to the handling of other people’s money.

Bailing out the Silicon Valley Bank and Barney Frank’s deluxe Signature Bank means that the government will now have to bail out every bank every time something goes wrong.

The trouble, of course, is that the government doesn’t have the means to bail out every bank. Its only resort is to ask the Federal Reserve to summon new money from a magic ether where the illusion of wealth is conjured to paper over ever greater fissures in the splintering matrix of racketeering that America has become.

That will quickly translate into U.S. dollars losing value, that is, accelerating inflation, which is how nature punishes you when your government lies and pretends that it has a bad situation well in hand.

The Jupiter and Minerva of American Banking

The practice in situations such as this (say, as in 2008-09) is for the governing authorities — who supposedly rule over the banking world like gods — to rush to rescue these outfits with “liquidity,” money (or representations of it) as required to re-balance things or maybe provide the impression of re-balancing until something else can be figured out.

The Jupiter and Minerva of American banking, Jay Powell and Janet Yellen, were faced with just that sort of call for divine intervention over the weekend as fear seeped into every nook and crevice of the money world that wealth was flaring away in the long-feared-of conflagration out of the dumpster banking had become.

Sunday morning, Ms. Yellen told CBS News “bailouts, no way” but by the afternoon Mr. Powell cried “bailouts, way,” and they had to get their story straight. They offered up $25 billion to bail out depositors for a smoldering system that will arguably require a trillion dollars or more of liquidity to quench the spreading fires.

One thing looks for sure: The interest rate hikes that Mr. Powell spoke of so confidently only days ago just got stashed into his folder labeled “Fuggeddabowdit.” So the campaign to control inflation must now yield to the urgent need to create a whole lot of money to spray over those fires.

The U.S. Business Model Is Collapsing

You may have noticed that the value of your money has been slip-sliding away the past year or so. Peanut butter at five bucks a jar, and all. The situation at hand kind of guarantees that we’ll be seeing a whole lot more of that.

And then the gods of money will have lost control of the interest rate console altogether.

No more tweaking the broken knobs. More inflation will prompt U.S. Treasury paper holders to dump what they can while there’s still some value to retrieve. But the U.S. has to issue more debt for all the bailouts and theoretical buyers of new debt will perforce bid up the rates to keep up with inflation… and yet the U.S. can’t possibly bear the burden of paying higher interest on its debt.

Looks like the business model for running the USA is breaking down before our eyes.

Luckily, Cap’n “Joe Biden” is at the helm of this steaming garbage barge. His conference room full of geniuses is ready with the solution to our predicament: the long-mythologized central bank digital currency — a dream-come-true for would be tyrants… the Godzilla of unicorns whinnying atop the biggest rainbow of all: the promise of endless magic money for everybody, forever.

All you have to do to get it is: Surrender your decision-making power over your own life. The government will amalgamate your few remaining assets in a CBDC account, tell you exactly what to spend it on and shut off your little card if you show any contrary impulses.

Well, they can try it. I doubt it will work. Instead, the government will melt down in its own rancid puddle of insolvency, the meta-grift will grind to an end and it will be everyone for his/her/they self in the broke-down Palace of Chaos for a while… until things emergently reconstruct.

But I get a little ahead of myself. It’s not even ten o’clock on Monday morning. Oh, and then there’s Ukraine…

The Daily Reckoning