US Banking System: Bankrupt

 

Dear Subscribers,

 

Can a bank go bankrupt? What about an entire banking system?

 

The answer to the first question is yes. Banking failures aren't common, but they still happen occasionally.

 

Surprisingly, the answer to the second question is also yes. In fact, the US banking system is on the verge of collapse right now.

 

Surprised? The media aren't talking about this—yet. But they will be soon, thanks to...

 

A Scary Announcement from the Fed

 

The Federal Reserve tracks the health of our banking system in various ways. One of the more important numbers is the amount of monetary reserves in the system. The lower the reserves, the closer the banks are to collapse.

 

Look at what's happened in the last two months:

 

 

 

That vertical line on the right isn't a printing glitch. Since December, non-borrowed reserves have fallen off a cliff. They've plunged deep into negative territory for the first time ever.

 

In just two months, bank reserves went from $42 billion to negative $18 billion.

 

Our Entire Banking System Is Now Insolvent!

 

How is this possible?

 

This whole situation comes from the Fed's new Term Auction Facility (TAF). The Fed has been auctioning off truckloads of cash to banks since December—almost $60 billion so far.  This is an attempt to free up the frozen credit markets by flooding the banking system with liquidity.

 

All this borrowing has driven the banks' balance sheets deeply into the red. However, according to the Fed, this is no reason for concern. The whole situation is just a "false alarm" caused by the TAF.

 

As a Fed report explained, "The negative level of non-borrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves." So the whole situation is merely an accounting technicality.

 

This is true, but it's also pointless. Let's say I own a house worth $200,000, and I borrow $300,000 against it. I now have $100,000 in cash, and I'm feeling pretty good—but none of the cash is mine. All of it owed is to somebody else. Even worse, I owe a lot more than my assets are worth. Plus, to make this analogy complete, I start continuously flushing $100 bills down the toilet (representing the heavy, ongoing losses Western banks have been taking during this crisis).

 

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Once the lender figures out what's going on, the sheriff is going to show up at my front door and post a foreclosure notice on it. I'm going to lose my house, no matter how much I protest about "false alarms" and "accounting technicalities."

 

Yes, banks still have some cash reserves at the moment, but none of it is theirs. It's all borrowed money. On a net basis, they're now insolvent. Apparently, this fact is too complicated for the economic geniuses at the Fed to figure out.  (And these are the people in charge of our nation's money supply!) 

 

Plunging Deeper Every Day

 

Every day, the banking crisis gets worse. In fact, it's now spread from our nation to the rest of the world.

 

Credit Suisse just announced a staggering $2.85 billion loss. The speed and magnitude of this loss has stunned financial analysts. Only a week ago, the bank reported its quarterly results, and had said it was doing just fine. Not any more.

 

Which institutions will get hit next? Nobody knows for sure, but many suspect the insurance industry will get clobbered soon. (AIG's shares plummeted recently because of these concerns.) Insurance companies tend to be less aggressive about marking their assets to market, so they haven't revealed their losses yet.

 

Banks in Taiwan, South Korea, and Europe are also expected to get whacked. Other institutions will surely follow.

 

When will this crisis be over? Apparently, not any time soon, because...

 

"What everyone is trying to work out is where the rest of the bodies are."

 

That's a quote from an official at the G7 (Group of Seven nations) meeting in Tokyo a week or so ago.

 

When the sub-prime contagion started a year ago, the Fed estimated it would cause about $50 billion in losses. Then it revised its estimate to $100 billion. Then $200 billion.

 

Now, at its Tokyo meeting, the G7 said total losses will be a staggering $400 billion.

 

There's one problem, though. So far, losses have 'only' been $120 billion. Where will the other $280 billion in losses appear?

 

Where are the rest of the bodies buried?

 

Nobody knows yet. But policymakers are eyeing each other nervously, trying to figure it out. Meanwhile, the Western central banks are desperately inflating their money supplies, trying to drown the problem in a flood of liquidity.

 

And that brings up an interesting point. The global financial crisis has caused the dollar to crash. Conversely, gold has exploded upwards by 44 percent just since last summer.

 

If we have another $280 billion to go in this crisis, gold's huge leap up has been just a preview—the "coming attractions" for the historic gold bull we're now entering.

 

And that's not even considering all the other bullish forces pushing gold up—the ones that were driving up the metal's price long before the first sub-prime problem appeared.

 

This market has already shattered previous records, and we're just getting started. I'm looking forward to gold at $2,500!

 

Best Regards,

 

 

James DiGeorgia