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Emerging Banking Crisis and Real Estate Collapse Threaten U.S. Economy, Paving the Way for Central Bank Digital Currency
As regional bank stocks plummet and real estate woes plague major cities like San Francisco, the United States is grappling with the potential onset of a banking crisis that could lead to 100% inflation within the next two to three years. The recent failures of major banks such as First Republic and Silicon Valley Bank signal that the worst of the crisis may just be beginning. Investment mogul Charlie Munger and Elon Musk have expressed concern that U.S. banks are filled with bad commercial property loans, which account for 43% of small bank loans in the country. Global macro commentator Andrew Axelrod predicts that more failures in the banking sector could lead to industry consolidation, potentially paving the way for a Central Bank Digital Currency (CBDC) and contributing to spiraling inflation.
Banking consolidation has been a long-standing trend, with the number of FDIC-insured banks in the U.S. dropping from 35,000 in the early 1900s to just 5,000 today. Europe has experienced a similar trend since 2009. The big four banks, City, Wells Fargo, JP Morgan, and Bank of America, represent half the country’s deposits, so the recent collapses highlight a systemic weakness within the banking system and a lack of competition.
The banking system’s fragility is compared to a Jenga Tower, with the more consolidated and top-heavy the banks become, the more brittle the entire system becomes. The entire system is bankrupt, with 5x more debt than global GDP. The potential triggers for a banking system collapse include a crash in the commercial real estate sector. Elon Musk also warned of a serious threat later this year, as small banks provide the Lion’s Share of commercial property loans, approximately $1.9 trillion, which could contribute to a larger collapse.
The banking system faces massive problems with collateral layers, particularly mortgages and government debt. Remote working has left office space vacant, and mortgages are expected to see defaults and not be rolled over. Meanwhile, government debt has become more expensive with the federal funds rate hike. Of the $31 trillion federal debt, $16 trillion is maturing in the next three years, and $30 trillion is maturing in the next six months. When these mature, it will become much more expensive to fund the government.
Axelrod believes a perfect storm is brewing in the U.S. economy, with inflation, recession, and stagflation on the horizon. The possibility of a debt ceiling crisis could lead to a loss of faith in the U.S. government, which backs the U.S. dollar. If the appetite for U.S. debt abroad goes away and the banking system is unable to absorb it, it will land on the Federal Reserve, potentially leading to tremendous inflation.
The current banking crisis could accelerate the need for a Central Bank Digital Currency (CBDC). The Fed’s recently launched FedNow payment system, a precursor to a CBDC, is seen as critical to controlling the situation. However, Andrew warns that having a centralized system could lead to a massive “honey pot” that falls victim to expensive programs and money printing, ultimately turning into “slaughterhouses and killing pens” for people’s savings.
To counter the risks of this crisis, some experts suggest that Bitcoin is a safe asset class with zero counterparty risk outside of the system. Although making price predictions for Bitcoin is difficult, $100K in the next 12 months is not an unreasonable estimate given its small market cap and potential for adoption by countries.
While gold has been a safe haven for thousands of years and is being bought at record rates by central banks, from a technical standpoint, Bitcoin has superior features, including portability, speed, and memorization. Gold may be superior in terms of fungibility and could benefit from a national reset. However, for the population at large, Bitcoin would be more practical.
The possibility of derivative products, such as futures and ETFs, outgrowing the underlying asset of Bitcoin raises concerns of market manipulation and a lack of self-custody among Bitcoin holders. Nonetheless, in the short to midterm, there are many appealing aspects to using Bitcoin as a pressure valve to an imploding market.
The potential for large productivity gains could prolong the current system’s runway, but when debt interest payments become astronomical, a pressure valve may be needed, possibly fulfilled by cryptocurrencies such as Bitcoin.
Debate remains over whether a reset of the financial system would involve gold or Bitcoin. The guest speaker acknowledges the risk of internet outages impacting Bitcoin and sees merit in both gold and Bitcoin as hedges against the current crisis. The guest predicts that gold could potentially reach $3K in the 12-month outlook.
The emerging banking crisis and real estate collapse in the United States have sparked concerns and heated discussions about potential solutions, such as the implementation of a Central Bank Digital Currency and the use of cryptocurrencies like Bitcoin. As the situation unfolds, it is crucial for individuals, businesses, and governments to closely monitor these developments and adapt their strategies to mitigate the risks and harness the opportunities presented by the evolving financial landscape.
