from Birch Gold Group:
The first inflation report since the Fed’s September interest rate cut begged some questions…
Since I sincerely hope most of you don’t follow these stories as closely as I do, we’ll start with a quick recap:
In August, the Fed lowered its primary interest rate by 1/2% (50 basis points) to 5%. That was the first reduction in interest rates since the Fed began raising rates from zero way back in 2022 – in an effort to tame the worst inflationary episode in over 50 years.
TRUTH LIVES on at https://sgtreport.tv/
(Okay, 2022 wasn’t really “way back” but so much has happened since then, it feels like a decade ago.)
Official September inflation numbers showed a slight, but definitely upward, trend. This is unwelcome news, however we slice it. Just like in Canada, reducing interest rates before the inflation target is met means inflation trends back up.
It’s particularly unwelcome for banks – who are still struggling with massive unrealized losses on their reserves.
How are the banks doing?
That depends on who you ask…
According to FDIC Chairman Martin Gruenberg in his September 5 update, “The banking industry continued to show resilience in the second quarter.”
He also noted, “This is the tenth straight quarter that the industry has reported unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.”
We all remember what happened back in 2023:
- Silicon Valley Bank became the 3rd largest bank failure in U.S. history
- That same month, two other banks collapsed: Silvergate Bank and Signature Bank (4th biggest)
- Swiss megabank Credit Suisse also failed in March
- Then in May, First Republic Bank collapsed (2nd biggest)
- Later that year, two regional banks failed: Heartland Tri-State and Citizens Bank (Iowa)
The Fed’s emergency backdoor bank lending program (BTFP) stopped making new loans in March – and I expected more trouble. One month later, Republic First Bank (different from First Republic Bank – I know, it’s confusing!) collapsed.
Since then, things have been relatively quiet on the banking front. Frankly that surprised me.
See, banks are still under a lot of pressure… Right now they’re sitting on losses nearly SEVEN times greater than during the worst of the Great Financial Crisis:
That is clearly the biggest challenge – but there’s more (quotes from Gruenberg’s September speech):
- The default rate on commercial real estate loans is “ts highest level since third quarter 2013”
- The default rate on multifamily real estate loans is “the highest since third quarter 2014”
- Banks simply gave up on ever getting paid for credit card loans at “ the highest rate reported since third quarter 2011”
- “deposits decreased $197.7 billion”
This really matters to banks!
In order to understand why, you need to understand how banks work at a very basic level…
“Banking is a confidence trick”
Famed Bloomberg columnist Matt Levine explained how modern banking works:
Banking is a confidence trick. You put money in the bank today because you are confident you can take it out tomorrow; to you, a dollar that you have deposited in the bank is just as good – just as much money – as a dollar bill in your wallet. If you show up at the ATM at any time of day or night, you expect it to give you your dollars. But the bank doesn’t just put your dollars in a box and wait for you to take them out; the bank uses its depositors’ money to make loans or buy [assets], and just keeps a little bit around for people who need cash. If everyone asked for their money back tomorrow, the bank wouldn’t have it. But everyone is confident that, if they ask for their money back tomorrow, the bank will have it. So they mostly don’t ask for it, so when they do, the bank does have it. The widespread belief that banks have the money is what makes it true.
It’s a simple problem: Banks use your money to do things you wouldn’t do.
They take depositors’ money and use it to “make loans or buy assets.”
Levine does a good job of explaining this dynamic further, including how it works:
