On the Ironic Nature of the Emerging Financial Crisis

The Biden administration’s economic policies are clearly a disaster, largely because of the administration’s insane efforts to destroy the Russian and Chinese economies, rather than concentrating on improving our own.  That is not a partisan issue as both major political parties bear at least some blame, but the architects of this disaster are clearly Barak Obama, Joe Biden and their Ukrainian misadventures.

The latest problem, that of failing banks, very large banks, involves something that impacts all banks, large and small, and that involves the diminution in the value of their investment portfolios, especially the fixed, legally required portion invested in United States government securities.  The diminution is not the fault of the bankers, regardless of what the Justice Department and Securities and Exchange Commission seek to imply.  It is a direct result of the Federal Reserve’s efforts to curb the inflation caused by poorly thought out economic sanctions imposed by the United States and the European Union all over the world.

By raising interest rates to curb inflation, the Federal Reserve causes interest on all new debt to rise, making new debt more desirable for investors, including all kinds of financial institutions, than debt previously issued.  The older debt comprises a major portion of the assets held in portfolios. Consequently, the value of the principal on old debt decreases compared to the value of higher interest paying new debt.  It does so in order to equalize yields.  For example, a $100,000 dollar bond paying interest at the annual rate of five percent yields a $5,000 annual return.  If new $100,000 bonds paid ten percent, their annual yield would be $10,000 and in order to compete, that is, to yield a comparable return (10%), the old bonds, rather than having a price based on their face value, would have to be deeply discounted, in this case, to $50,000.  That would vastly reduce the value of portfolios holding the older debt.

That is exactly what happened to Silicon Valley Bank’s portfolio, seriously impairing its liquidity by souring initially sound investments, and putting the depositors’ savings at risk.  More seriously, that is what is happening to the portfolios of every financial institution required to maintain a portion of their assets in United States’ securities, securities issued by the same Federal Reserve that is responsible for the national banking system.

So, it is the state itself that is guilty of the disaster for not taking into account the consequences of its actions that resulted in inflation in the first place when imposing economic sanctions, getting involved in expensive armed conflicts abroad, and taking other reckless economic actions, such as forgiving debt, etc., and then the reactions to combat the resulting inevitable inflation

There is a belief in the United States, especially among Democratic Party strategists, that the United States can merely print its way out of the problem, increasing the national debt and inflation; but the world is no longer as accepting of such conduct.  Acceptance of irresponsible United States fiscal policies relies totally on maintaining the United States dollar as the world’s medium of exchange.  However, the arbitrary imposition of economic sanctions and the freezing of other countries assets are quickly resulting in the evolution of mechanisms to clear international transactions in currencies other than the dollar.  In addition, no longer will most countries feel secure in maintaining their assets, their gold, etc., in facilities subject to United States or even European Union control, and as that happens, a different doomsday clock approaches an economic apocalypse.

Fasten your safety belts and hang on.

© Guillermo Calvo Mahé; Manizales, 2023; all rights reserved.  Please feel free to share with appropriate attribution.

Guillermo (“Bill”) Calvo Mahé (a sometime poet) is a writer, political commentator and academic currently residing in the Republic of Colombia (although he has primarily lived in the United States of America of which he is also a citizen).  Until 2017 he chaired the political science, government and international relations programs at the Universidad Autónoma de Manizales.  He has academic degrees in political science (the Citadel), law (St. John’s University), international legal studies (New York University) and translation and linguistic studies (the University of Florida’s Center for Latin American Studies).  However, he is also fascinated by mythology, religion, physics, astronomy and mathematics, especially with matters related to quanta and cosmogony.  He can be contacted at guillermo.calvo.mahe@gmail.com and much of his writing is available through his blog at https://guillermocalvo.com/.

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