The recent failures of major banks such as Silvergate, Silicon Valley Bank, Signature Bank, and Credit Suisse have highlighted the fragility of the modern banking system. These events occurred within a week, unlike the drawn-out process of the 2007-2008 financial crisis. The quick succession of bank failures underscores the inherent risks of a money system based on government fiat, central banks’ ability to print money and manipulate interest rates, and fractional reserve banking. Our financial system is vulnerable to global credit and liquidity crises, and recent events suggest that it is unable to withstand shocks. While steps have been taken to strengthen the system since the 2008 crisis, the recent bank failures suggest that more needs to be done.
The use of government-decreed fiat-backed money creates a system that is highly vulnerable to abuse and manipulation. In the aftermath of the 2008 financial crisis, the government’s decision to bail out failing banks using taxpayer money was highly criticized, with many arguing that it amounted to a transfer of wealth from the public to the financial sector. The banks paid their executives generous bonuses and enriched themselves with the bailout money all at the taxpayers expense.
The Bank Term Funding Program and the elimination of FDIC insurance limits have raised concerns about the role of government in regulating the financial sector and protecting the public. These actions have removed safeguards put in place to prevent another crisis, contributing to the systemic risks in the banking system.
These actions not only continue to contribute to the systemic risks inherent in the modern banking system but also raise serious questions about the role of government in regulating the financial sector and protecting the public from the excesses of the financial industry. Ultimately, the United States will have to print its way out of this financial hole, creating more inflation. Our taxes will have to rise to pay for the continued mistakes of the financial sector. Savers, the elderly dependent upon pensions, social security, wage earners with large tax liabilities, and those unprepared financially will be adversely affected by these actions.
The Great Financial Crisis of 2008 was caused by subprime mortgages, complex financial instruments, and the bursting of the U.S. housing bubble, leading to a wave of bank failures. In contrast, the 2023 banking crisis seems to be due to duration mismatch, where smaller regional banks purchased long-dated bonds to hold-to-maturity, resulting in unrealized losses due to the fastest rate of interest rate hikes. Depositors moved their money into higher-yield money market funds, and banks had to sell off losing assets to meet the liquidity demand, placing their solvency at risk. These events highlight the inherent risks of the modern banking system and the need for continued reform and vigilance.
The world is currently experiencing a period of instability and change, as a range of complex and interrelated challenges continue to emerge. The aftermath of COVID-19, the widening wealth gap, climate change, war, and demographic shifts are some of the many factors that contribute to this upheaval. Furthermore, technological innovation and the rise of artificial intelligence such as ChatGPT are radically transforming many aspects of our lives, including our social and educational systems.
All of these trends are accurately described by William Strauss and Neil Howe, in their classic book, The Fourth Turning published in 1997, which describes the cyclical nature of history and the recurring patterns of crisis and change. However, these symptoms are just the tip of the iceberg, revealing a much larger problem: the changing world order.
This new era is described by Ray Dalio, and characterized by a transition of the United States as the center of geopolitical influence to sharing the stage with China. Coupled with a digital revolution, aging infrastructure, rising debt, excessive money printing, rising populism, and the emergence of global competition, it is evident that the United States is losing its dominance in leading innovation in the 21st century.
Recent policy responses by the United States have focused on banning innovation, rather than investing in better education and placing it at the forefront of innovation. This is concerning because education and innovation were key factors that led to the United States becoming the dominant superpower after WWII and leading the way in Web2 technologies after 2000. However, the U.S. has fallen behind in the race for 5G, semiconductor, and blockchain technologies. These developments have significant politically, economic, and national security implications.
The monetary history of the United States since the creation of the Federal Reserve has been marked by a series of significant events that have shaped the country’s economy and financial system. The Great Depression of the 1930s was a major turning point that led to the establishment of various regulatory measures to prevent similar crises from occurring in the future. World War I and II had a significant impact on the U.S. economy, with the country emerging as a global superpower following the end of the Second World War. The Bretton Woods agreement established the U.S. dollar as the world’s reserve currency, a position that was reinforced by the rise of the Petro Dollar in the 1970s. However, the Nixon administration’s decision to take the U.S. dollar off the gold standard in 1971 led to a period of economic turbulence characterized by numerous boom-bust cycles including 2001, 2008, and 2023. Worldwide, the economy has experienced a series of banking and financial crises, hyperinflation, war, debt, and currency crises, geopolitical instability, amidst the COVID-19 pandemic. These crises are happening more frequently, insidious, pervasive, prolonged, and with greater severity.
In recent years, there has been a growing trend of countries divesting away from the U.S. dollar on the international stage. One of the main reasons for this trend is the perceived instability of the U.S. economy and the U.S. dollar as a reserve currency. The global financial crisis of 2008 and subsequent crises have eroded confidence in the U.S. economy and highlighted the risks associated with holding large amounts of U.S. dollars.
Recently, there has been growing interest in digital assets such as Bitcoin, particularly among countries seeking to address some of the inherent problems in the modern banking system. Bitcoin’s decentralized nature, transparency, immutability, fixed supply, and scalability make it an attractive option for many countries. By eliminating the need for intermediaries, Bitcoin has the potential to reduce costs, increase efficiency, and make banking more accessible to a wider range of people. The inherent properties of Bitcoin make it a potentially valuable store of value, particularly in times of economic uncertainty. While Bitcoin is not a perfect solution, it has the potential to address many of the problems in the modern banking system and provide a viable alternative to traditional banking. As such, it is not surprising that many countries are looking to Bitcoin as a way to improve their financial systems and meet the needs of their citizens.
It is important to note that Bitcoin is fundamentally different from centralized entities including FTX, Three Arrows, BlockFi, Celsius, and Terra Luna. These companies were run by groups of individuals engaging in non-transparent and unethical behavior. In contrast, Bitcoin is a decentralized software network that operates through a protocol that is open source and transparent. There are no central authorities, and its transactions are verified and recorded by a global network of nodes. While there have been instances of bad actors attempting to manipulate the Bitcoin network, the open and decentralized nature of the system makes it much more difficult for any one person or group to gain control. In essence, Bitcoin represents a new paradigm in finance, one that is based on software and peer-to-peer networks rather than centralized intermediaries.
That being said, it is important to acknowledge that Bitcoin is not without its own problems. Extreme volatility in its price is one of the most prominent issues, as the value of Bitcoin can fluctuate significantly over short periods of time. Additionally, there have been instances of bad actors using Bitcoin for illicit purposes, which has given the technology a bad reputation in the mainstream media. However, it is important to note that these problems are not inherent to Bitcoin itself, but rather are the result of external factors and the actions of individual bad actors. In fact, many proponents of Bitcoin argue that these issues can be mitigated through better education, regulation, and the development of new technologies that build on the strengths of Bitcoin while addressing its weaknesses.
In conclusion, the world is undergoing a period of significant instability and change, and it is up to us to adapt and evolve with it. The financial system is built upon a house of cards waiting to fall at the slightest systemic crisis. While there are no easy solutions to the challenges we face, there are opportunities for growth and transformation if we are willing to embrace new technologies and approaches. By investing in education, supporting innovation, and promoting transparency and accountability, we can create a more stable and equitable financial system that benefits all members of society. It is time to reimagine the future of finance and work together to build a world that is more resilient, inclusive, and sustainable for generations to come. While Bitcoin is not a perfect solution, its potential to address many of the problems in the banking system makes it an exciting development in the world of finance.
Author’s note: My views and opinions. Not advice. Edited with ChatGPT.