Given all the building bank problems, two questions need to be answered about the world's reserve currency, which is the title given to the dollar. First, does this title fit? And how does it relate to the Silicon Valley and Signature bank failures?
To answer these questions, we must go back in history and look at the origin of the word "reserve."
Since the founding of the Bank of England (BoE) in 1694, bank crises have been recurring events. I've seen several in my lifetime in the US and other countries…
These crises are inevitable because, in this BoE-created system, banks can never meet their obligations to their depositors for one reason. Some bank assets that mature years in the future are funded with assets that depositors can withdraw at any time.
There exists an inherent asset/liability maturity mismatch on bank balance sheets. So if a preponderance of depositors asks for their money, banks either have to call in or sell outstanding loans to get the money they need to repay the depositors withdrawing their money.
As we have seen with Silicon Valley and Signature banks, depositor confidence can evaporate overnight. A crisis is a result, and that's when the role of reserves comes in. Reserves are held to restore trust, stop the bank's run, and end the crisis before the contagion spreads.
The actions by the Federal Reserve to bail out the collapsed Silicon Valley and Signature banks show that they are on the same track as before. Throwing more credit at banks in a system already drowning in credit with a mountain of debt is going to solve the problem of insolvent banks. Further, where does this money the Fed is throwing at these banks come from?
It is conjured out of thin air. Picture Ben Bernanke's helicopter drop as a furious typing of keystrokes on a computer…
The Fed bought time this way in 2008 and just kicked the can down the road. But there's no guarantee that trick will work this time around. More debt – more promises – is not solving the underlying asset/liability mismatch problem that plagues the banking system, which leads us to the role of reserves.
Monetary history shows that confidence is restored, and more bank runs are stopped with something tangible, which is why gold and silver have been money for thousands of years. They are the reserve, and physical gold and silver are something that everybody should own because they are money without counterparty risk, which brings us back to the dollar.
It became the world's reserve currency at the end of World War II because it was thought back then to be 'as good as gold.' It lost that title long ago, and as I see it, unless gold and silver – the money of the American Constitution – are returned as circulating currency, the dollar will, in time, lose its world reserve currency title too.
Note: For those of you who are dollar-cost averaging your physical gold and silver purchases, continue to purchase at the same time each month or quarter. But for those who do not have any physical gold and silver, what you have just witnessed is a classic warning sign of systemic instability that will worsen over time. And this problem is going to spread to Europe, which has a much weaker banking system than the United States. The ECB will have to print massive amounts of money to halt the contagion whenever the shorts begin to attack the banking system in Europe. And they will. The primary beneficiary of this chaos and instability will be gold and silver, which have been money for thousands of years.
This article was printed from TradingSig.com