Bitcoin and Bank Failures - Get Your BTC and Get Out
Arthur Hayes wrote about why you should get your BTC and get out. I summarize the article succinctly.
Bitcoin is a beautiful, weird thing. Worth nothing and worth everything at the same time. I view it as digital gold, digital property, as a way to save your economic energy from being inflated away.
It's a new decentralized protocol layer on top of the internet. Created out of the two most scarce things, time and energy (our money requires time and energy to earn, shouldn't it be created out of the same things required to earn it?).
I have a few go to minds on Bitcoin I listen to and trust. Robert Breedlove, Jeff Booth, Greg Foss and Arthur Hayes. Arthur Hayes recently came out with an article that was censored on Medium.com. He's since moved over to Substack.
His articles are quite heavy so I went ahead and broke down his post called "the denominator" into easy to digest notes.
The current US Banking System
*Again, this is a summary of Arthur Hayes over-arching points.
Because of the Nixon shock in the early 1970's which was functionally a default on the US debt. Banks and the government went off a gold standard and the US dollar moved to being backed by oil and the US military.
This is also know as the petro dollar because all countries are required to buy energy in dollars. As such, the government could now print money and export that debt obligation to other countries.
As the reserve currency, if you're a nation state holding treasuries, you're treasuries get debased through money printing. Good for Americans and the US, horrible for everyone else who has to work and earn dollars.
Who's holding the bag?
"A good banking system allows the savings of its citizens to be lent out." When a bank run happens there is a negotiation between stakeholders, the US government and depositors to see who is holding the proverbial bag.
Our current banking system is split into two halves:
Too big to fail (TBTF) - Failure of these instituions would lead to a global economic collapse because the US dollar is the reserve currency and the under-pinning of the world wide financial system. These banks are essentialy state owned as the profits are privatized to shareholders but losses socialized to citizens.
Non too big to fail (non-TBTF) - Think of your local bank that lends out home mortgages, business loans and so forth.
Recent bank failures
During the bank failures of Silicon Valley and First Republic (and more to come!) the government stepped in with bank term funding programs.
These funding programs established that "any bank that held treasuries or mortgage backed securities could exchange them to the Fed and receive 100% of their face value in USD.
Oh, by the way this "bank term funding program" only applied to TBTF banks.
This led to a 4.4T debt expansion as the US government had to step in to back up depositors while at the same time talking out of the other side of their mouth how they are going to fight inflation. You can't expand the money supply and fight inflation. One causes the other.
First Republic Bank Failure
This is the first casualty of a non-TBTF bank not getting the bank term funding program.
It resulted in JP Morgan buying all their assets because the "deal was so good that the JPM CEO said on a shareholder call that the bank would recognize an immediate 2 billion dollars in profit."
So what's the catch because there is no free lunch?
JPM got cheap loans from the FDIC (bore big lossess on their own books).
The US government had to expand the bank funding program to too big to fail banks (or TBTF bank acquisitions). Which is an easier situation to deal with politically.
This is leading to a banking sector consolidation.
What happens next?
Arthur says "there will be a 100% failure rate for non-TBTF banks" aside from the ones that operate as a full reserve bank. Non-TBTF bank deposists will continue to roll out of smaller banks into bigger banks whcih will cause failures.
The Denominator
Arthur uses the term "denominator" to explain who is "holding the bag" as I like to say. He brings up the analogy of going to a club and splitting the bottle. Who chips in for the bottle service? Who's part of the denominator.
Rules must be established. So who is part of the demoniator for who bears the economic loss from these bank failuares?
Non TBTF banks have 7.75 trillion dollars in loand on their balance sheets. These loans need to be backstopped as deposits leave these banks roe TBTF banks.
Understand:
Deposists will leave because depositors would rather earn 4% using a money market fund or high yeild savings account rather than .01% in a banking checking account.
As deposits leave, banks need to sell their loans to fill the hole.
These loans will be sold at a loss because they were underwritten when interest rates were much lower. These lossess accumulate and result in balances less than deposists for the non-TBTF banks.
Two options to fix this looming non-TBTF bankruptcy
The Fed can cut rates and existing loans are no longer underwater or the bank term funding program is eligible for all banks.
If the fed cuts rates:
Risk assets moon. Risk assets are assets that have significant price volatility, such as equities, commodities, high-yield bonds, real estate, and currencies.
Bank funding program for all banks
If this happens all assets outside of the traditional financial system will moon (like Bitcoin) and assets inside the system will drop.
Why?
The bank term funding program will shrink availability of loans and credit.
Currently Powell is still raising rates. Rates going up accelerate the process of non-TBTF bank failures as Arthur explained (and as I have outlined).
The spread widens between existing loans and the current interest rates.
Conclusion
Unless you believe the political elite is willing to stomach a total, and complete failure of the banking system, get your Bitcoin and get out.
By get out, meaning move your BTC off whatever exchange you bought it on and move it into a hardware or software wallet you control.