SVB, MMT, TNT – More Volatility Ahead?
Is the entire financial system and the economy in danger of implosion? Will the controlled efforts of the Fed be of much help?
SVB (Silicon Valley Bank)
The Silicon Valley Bank fiasco is an in-your-face example of the systemic risk inherent in fractional-reserve banking (see Elephant In The Room).
You cannot reliably expect to avoid indefinitely the results of reckless behavior. That should be apparent to all of us after 2008 - 2011. Sooner or later, the full onboard cost will be paid.
Balancing accounts after a long delay, though, is more expensive; usually much more so. I am reminded of an old commercial for oil filters - "You can pay me now; or you can pay me later." (See it here).
The questions are who pays? and how much? Depositors (unless their deposits are insured, or a bailout is effected) are obvious victims. The bigger the bank, though, the more potential for bigger, more expansive problems. Think domino effect and shock waves.
SVB was a big bank. Its failure was the largest since Washington Mutual Savings Bank failure in 2008. The potential for aftershocks is much greater now and the cost is potentially greater; hugely so because the entire system is structurally unsound.
MMT (Modern Monetary Theory)
Proponents of MMT (Modern Monetary Theory) believe that a sovereign government can never run out of money. Whenever it needs money, it creates it. There are no budget constraints or Treasury debt. There is no need to borrow money because the state never runs out of money.
Those same people are very clear in noting the potential for inflation under such a system. They argue, though, that the risk of high inflation can be controlled or minimized by retiring sufficient quantities of the sovereign currency via taxation.
All of this sounds suspiciously similar to the monetary circus known historically as Fiat Money Inflation in France (See the article MMT - Nothing New Here).
The problem with inflation is that its effects are cumulative and unpredictable. Over time those effects become more volatile, too. Attempts to manage and administer a qualified amount of unlimited money are doomed to failure.
Our current monetary system is not strictly in accordance with MMT, but it is essentially similar in its ignorance of fundamental economic theory and realistically prudent financial practice.
There is no reason to think that events like the Silicon Valley Bank failure are any less likely to happen under MMT than under our current system of fractional-reserve banking and unlimited credit.
TNT (Explosive, Implosive)
Explosives can be used to blow a hole in a mountainside or bring down an old building or other structure to make way for new construction. In the latter case, the action is called implosion.
“An implosion is the abrupt, violent collapse of something large." (source)
The action above requires controlled efforts and timing to minimize damage to immediate surroundings.
The entire financial system and the economy are in danger of implosion. The problem is that the controlled efforts of the Fed probably won't be of much help in limiting the damage.
This is true regardless of their intentions or the correctness of their actions. The implosion has begun, and the effects are uncontrollable.
- Expect more surprise events re: Silicon Valley Bank, Signature Bank, etc.
- Expect more volatility and lower prices for stocks and financial assets.
- Don't expect the Fed or the government to stem the tide of economic contraction.
- Expect the worst and pray for the best.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!