A Sudden Paralysis of The System?
Will the shifting of financial and geopolitical tectonic plates cause an eruption?
Last week was momentous. Next week may be even more so.
Let’s zoom out and take a broader view of the eruptions and shifts in the tectonic plates of the global system.
Financial tectonic plates are shifting
By the end of the week central bankers had lost the plot. Janet Yellen, US Treasury Secretary, called an unannounced, emergency meeting of the U.S. Financial Stability Oversight Council late Friday, and then assured the world the system was “sound and resilient.”
Yet nothing central bankers said or did or could stem contagion.
By Friday the 24th shares in European banks were falling, with Deutsche Bank (DB) the hardest hit. Unlike SVB etc., DB is an investment bank with assets of $1.4 trillion.. (Recall that the failed SVB bank’s assets amounted to $200bn and Credit Suisse’s to $ 700bn.) DB is a bank that has long been considered dysfunctional . It is both a bank too-big-to-fail and as Kari Syrja noted on Twitter, “possibly-too-big-to-save…”
Also on Friday Deutsche Bank’s credit default swaps – which reflect the risk of default – shot up. Not just for DB but also for Charles Schwab, a large asset manager with $7.4 trillion in client assets. According to the FT, shares in Schwab have fallen further and faster than its rivals, such as Interactive Brokers, in the wake of SVB’s failure.
So hold tight – things are going to get VERY rocky. And remember, many people make a lot of money out of catastrophic events. According to the FT:
But far more make big losses. And a catastrophic failure of the banking and financial system inflicts violent pain on the most innocent and vulnerable.
That, as they say in Hollywood, is financialised capitalism.
Central bank rate rises led to the failure of five banks – four in the US: Silvergate, Silicon Valley Bank, Signature bank and First Republic (the latter propped up by a Goldman Sachs and JP Morgan $30bn rescue deal). And yet, and yet…
As confidence waned, and rates on US treasury bills rose, US customers pulled $98 billion of cash from small and regional banks and, it is presumed, invested them in central bank bonds that are higher rated, and in too-big-to-fail banks.
These events were followed by the collapse of Credit Suisse, in wealthy Switzerland. Urgent, extraordinary action was taken last week by the Swiss National Bank, including the wipe out of $17bn of risky Credit Suisse debt.
Once again the state was called upon to de-risk one of capitalism’s largest private financial institutions – UBS – in its takeover of Credit Suisse. The Swiss state’s offer of a lifeline to the hastily merged new private, global mega-bank took the form of an explicit guarantee of 100 billion Swiss francs ($109 billion).
If the mega-merger fails, the guarantee ensures that any future, potential losses can be shifted on to taxpayers.
The Fed Hikes, Until Something Breaks
Swiss lenders were not the only ones to feel real pain. Volatility in bond markets caused hedge funds to post huge losses in what the Financial Times has called “Central bank induced bond tumult.”
Jim Bianco posted the chart of the week: “The Fed Hikes, Until Something Breaks” –
Hiking until the economy breaks is a neoliberal central bank practice I have discussed on System Change. In July last year, I reminded readers that Paul Volcker and his board kept hiking until they trashed the economy. And I warned about the actions of central bankers here, in November, 2022.
Jim was also right to explain that the Federal Reserve had executed a sudden reversal of its current monetary policy – quantitative tightening (QT) - by offering record discount window lending to banks and other forms of credit -in the wake of SVB’s collapse.
Determined to ratchet up rates fast, and to stop buying bonds, the Fed then this last week laid the ground for reversing at speed. As any racing driver knows, that creates the risk the institution may lock the wheels of the banking system and throw the economy into an uncontrolled skid.
You have been warned.
The geopolitical tectonic plates are shifting
As the media were reminding us of the 20th anniversary of the ‘shock and awe’ bombing of Baghdad; of the uncounted millions that died in the war on Iraq, and of the involvement of our Prime Minister, Tony Blair in that debacle, this happened: Forty African countries travelled to Moscow on the 19th and 20th March to meet both President Putin and President Xi of China.
They included the presidents and prime ministers of some of Africa’s biggest countries, including Cyril Ramaphosa, prime minister of South Africa.
They were there to discuss “cooperation and the fight against the influence of “former colonial powers” – to quote the Africa Report.
Almost three billion of the world’s population were represented at that meeting. (Africa, 1.4 bn; China 1.2 bn; Russia 145 million). Contrast that with NATO countries with less than one billion.
Those present included members of the BRICS group (Brazil, Russia, India, China and South Africa (SA)) - planning to meet again this August 2023 in Durban, South Africa.
It is widely assumed the SA government will defy the instruction of the International Criminal Court - and will not arrest President Putin if he were to attend.
US Dollar Swap Lines
It is not only reckless western wars that have united countries in opposition to the west.
Recent and ongoing harsh American financial sanctions have triggered the disillusionment of BRICS countries.
These include the US decision to cut Russia off from the global economy by illegally freezing $300 billion of its sovereign assets - central bank reserves -believed to be mainly held in European banks.
Economic sanctions are the foreign policy tool of choice for the United States. The victims of this imperialist power play include Cuba, Iraq, Iran and Venezuela.
Piled on to the pain of economic sanctions, is the latest BRICS grievance: the Fed’s use of US Dollar Swap Lines - a way of lending dollars to foreign countries known as the Foreign and International Monetary Authorities (FIMA) repo facility.
Under this facility, the United States offers US dollars to foreign institutions in exchange for eligible assets. There are only 5 foreign central banks deemed worthy of such largesse: the central banks of Canada, England, Japan, the ECB and Switzerland.
This was remarked upon bitterly during the COVID pandemic, when low income countries experienced a massive outflow of capital to the US and other rich countries. This left them with a shortage of US dollars with which to pay for pharmaceuticals, oil etc.
Because of the current crisis, the Fed stepped in again last week to offer US dollars to its friends.
We know there has already been a massive drawdown $60 billion. However there is no certainty as to which central bank that was. Was it the ECB - preparing for a DB bailout? Some think it was the Swiss central bank, but others suggest it was Poland.
The shortage of the world’s reserve currency is deeply problematic at times of crisis, and I believe was a major motivation for the growing alignment between Russian, Chinese, African and Latin American leaders.
One example of the costs associated with the shortage is that international airlines don’t get paid in dollars for flights to and from the countries they fly to.
The demise of the US dollar?
But there are even more significant consequences for the current structure of The System. Countries excluded from swap lines are now preparing for the end of the US dollar reserve system. David P. Goldman made the case in the Asia Times at the end of this last tumultuous week, on the 25th March:
…the era of dollar-based reserves and floating exchange rates that began on August 15, 1971, when the US severed the link between the dollar and gold, is coming to an end. The pain will be transferred from the banks to the real economy, which will starve for credit.
And the geopolitical consequences will be enormous. The seize-up of dollar credit will accelerate the shift to a multipolar reserve system, with advantage to China’s RMB as a competitor to the dollar.
We agree the consequences of a new, multi-currency system would be world-changing. Just one proviso: the last time currency power shifted from one hegemon - Britain, to another, the US, a world war broke out. The question is how fast will this latest determination to shift away from the dollar accelerate? Could it be swift?
I doubt it.
It is clear there is a profound lack of confidence in the global financial system. If that lack of confidence is made worse by more banking crises next week, rising real market rates, inflation and a looming recession, then expect trouble.
If these are made worse by war, and by geopolitical tensions and divisions - then a sudden paralysis of The System is not improbable.
Finally, I would like to end with a warm welcome to the many hundreds of new System Change subscribers. It was heartening to watch as you all joined in response to last week’s post.
Very well written. Thank you for the analysis Ann!
The bald truth? Nothing of lasting significance is going to happen until the problems of inflation, insane destabilizing financialization, and a program of conceptually aligned policies that are so wildly beneficial for both the individual and enterprise simultaneously occur. And historically that kind of break through general resolution only happens when a genuine paradigm change occurs.
And a 50% Discount/Rebate policy at retail sale and the rest of the regulatory and policy program of Wisdomics-Gracenomics will mathematically, empirically and temporal universe-ly accomplish all of the above and more. And I can rebutt every orthodoxy, terminal cynicism, and even any apparent conflict with the economic necessities of climate change. Let us light a gargantuan flare with a mass movement for monetary and economic paradigm change rather than cursing the darkness (or even doing absolutely valid reseaches that yet do not accomplish the synthesis of paradigm change).