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Fly in the Ointment

First Republic Bank – The second major receivership and the third failure.

One of the unsung heroes of English is its stranger, proverbial idioms that arose out of the King James Bible and the countless centuries of intermingling of continental languages with the Anglo tongue. Such beautiful idioms are rarely employed, unless in some bygone film of the past or in any Lifetime show set in the South or England. To lose these idioms is to lose the flair and pazazz of English that once dominated the airwaves, film, and most notably literature. Just as such eloquent languages as Greek, Latin, and English dominated the world’s creativity, banks once did the same.

While such fresh news from the banking sector is ripe one day and then thrown out the next, the continued breakdown of the Federal Reserve’s banking system (aka, the world’s banking system) continues to re-ripen. Perhaps come Monday, if not this weekend, First Republic Bank will find itself in receivership under the tutelage and care of the FDIC. Such a move is the fly in the ointment of money printing and higher interest rates paired together. What many pundits saw and many people hopped was a sector of the economy that was immune to poor monetary policy turns out to be just a façade.

The façade of the broader banking sector is twofold: First, that the Federal Reserve can solve or preempt all problems; and second, that any banking crisis is localized. The pompous attitude of those at the Federal Reserve is discouraging as it becomes clearer everyday that they believe they are in control of the economy, just as they did in 2020 when their recommendation was to turn off the entire economy for a time. While they formulate a solution to a problem they spurred on, they have to describe any crisis as localized, which is always true until it is not. Being that Silicon Valley Bank and Credit Suisse have already failed and essentially been nationalized, the ever persistent banking crisis appears to be spreading.

The Federal Reserve has one hope for this ever-expanding crisis to be contained, but it is not a good hope. In order for the banking crisis to not continue to expand in small and medium sized banks across the county and globe, leading to a full liquidity crisis that brings about a depression which wipes away the inflation of 2020/21 and destroys trillions of dollars in wealth, the kill switch is the de-dollarization of the world. If the American Dollar is no longer the world’s reserve currency the banking crisis will abate and at most affect those nations and banks most exposed to the currency. But such a void in how the world does business will bring on its own challenges that have not been seen since the collapse of the British Pound as the world’s reserve currency in the mid-nineteenth century.

Either way, there is a fly in the ointment. Recession was already experienced in 2022 when the hangover of 2020/21 started to be felt, even though it was only short-lived. The general consensus is that recession will be back this year since the spicket of free money has been turned off and interest rates are back at normal rates, however temporary that might be. Expect rate cuts this year, which are now being priced in as seen here, and look forward to more to come by election time in 2024. When we look back at the end of April at that time next year, the banking crisis will have taken on a whole new phase. No amount of rate cuts will abate any crisis for the issue is not that rates are not low enough, but that money is not being given out. The consumer is being stressed, at least those who are still working, and the assets and income that the consumer has are continuing to shrink.

With shrinking comes consolidation, which is highly needed for the American consumer as well as society as a whole. Expansion and contraction are normal parts to business, finance, monetary policy, and life; to counter the natural cycle is to drawn the extremes to be even greater. Once this new low is experienced when a slew of banks see their stocks drop 99% percent in a matter of weeks, then the third phase of the crisis will have passed, but the devastation, or more accurately devaluation, left in its wake will be detrimental to all. This being the second wave of the crisis entails that the entrance into the third phase is coming soon, however it might not be until the end of 2023 or the beginning of 2024 since there is more to disrupt.

As a refresher, the first wave of this crisis hit this time in 2022 when the crypto market reeled from the destruction of Terra and its various projects, most notably its stablecoin project. The bank run that killed the project in real-time since the crypto markets do not close is the very same thing that is killing First Republic Bank and its ilk, though only during the times that the market is open and the disclosures are reported. At that time Terra was the fly in the ointment that no one believed would impact the crypto market as it has. Oddly enough, the bitcoin has shown some resilience as traditional finance is now experiencing the woes it experienced a year ago. However, since bitcoin is still built upon traditional currency and finance the safe haven it has turned into is most likely a dead cat bounce as consumers and investors are looking to flee to any other asset class right now.

There is much pain still to be felt by everyone as this crisis proceeds through phase two, but if the correct actions are taken now then the bottom of the third phase will bring about a golden age of finance to follow. First, ensure excess waste is reduced in any sphere of influence that you can make. Frugality is not a shameful practice, but a practical way to stay ahead of external impacts to income and expenses. Second, reduce dependence upon “big” and start forming dependence upon “small.” Big corporations, big government, and big finance will perpetuate the ills of how we entered into this crisis as long as they can at the expense of everyone else. Local is the way to go as much as possible since your community is who you will have to lean upon when crisis occurs. Local government, economy, education, church, and life are the means for a properly lived life. Third, calculate carefully, do not make decisions out of haste. When issues occur and crises arise reactions that are poorly thought out and planned will add salt to the wound. These are important first steps to be prepared for what is coming.

Ultimately, the errors of the Federal Reserve and the federal government are the culprits for the current and continuing crisis. Until these institutions are resolved then the same flies will make their way into various other ointments. The best way to operate is independently of these institutions so their impact is as reduced as possible: localism is the answer. Stay informed and stay vigilant.

Grace to you and peace from God our Father and the Lord Jesus Christ.

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