It’s time to get rid of the Cantillon effect once and for all!
This banking crisis shows we need better solutions. Especially all of Wall Street needs a reality check and get rid of its advantage thanks to its proximity with the central banks.
I usually publish my blogs in the first half of a week. This time, I wanted to wait and see what would unfold with the banking crisis.
As you may have read by now, there was a bank run at the Silicon Valley Bank last week, and out of this, the whole financial world went crazy. VCs spent most of their weekend tweeting in all Caps how DANGEROUS and UNFAIR this is.
These are the same folks who, just months ago, made fun of people who were in favor of canceling student debt. I was also against the cancellation of student debt because if you want to go to an overpriced university, you should pay for it. Don’t force the costs of your decisions onto people who didn’t do the same thing.
However, I wasn’t a hypocrite and called for government intervention in the SVB situation. VCs seem to jump ship if their own money is involved. Who would have thought?! Anyways, the week started with major news that the FED will essentially bail out SVB and that the liquidity in the markets is strong.
The market stabilized somewhat for 24 hours before we saw yet another bailout for a major bank. This time around, I was more frustrated because the bank at the center of attention was Credit Suisse. They weren’t bailed out by the Swiss National Bank 15 years ago. That was the other big swiss bank called UBS. Credit Suisse managed to just miss a bailout by a fraction, but laws were created to give them free taxpayer’s money. However, they seemed to have learned nothing. They fucked up again!
If you didn’t know, I’m half Swiss, half Austrian, and I used to live in Switzerland for 26 years. Ever since 2018, I’ve been warning friends about Credit Suisse. The writing was on the wall for a while, and I urged people to be cautious because they have gambled clients’ money away once before, and they would definitely do it again.
For the past four years, Credit Suisse has been in the headlines on a weekly basis. Whether that be for spying on former employees, scandalous deals with drug lords, and enormous fines from various regulators. As you can see above, the stock price has been riding down for the past five years.
The whole industry was worried, and just a few hours later, the Swiss National Bank announced that they’d support Credit Suisse with a support package. They didn’t call it a bailout; they changed the wording yet again, just like they did a few months ago with the definition of recession.
What’s frustrating for me is that we see all of the smaller banks fail because of these actions. As you can imagine, most clients of smaller banks have lost trust in the system and want to withdraw their money. Bank runs occurred, and all of them had to be bailed out.
This is where the FED and regulators don’t like to step in because most of them are not too big to fail. Some of these banks have been saved by bigger banks like JP Morgan or Goldman Sachs, but as you can imagine, this centralizes the whole banking sector again. The smaller banks fail, and the bigger banks are able to pick up the pieces.
On top of that, they get more money into the system as well. Because this is the only thing, these guys know. Instead of fixing the problem, aka don’t let banks over-leverage and over-speculate, they print more money and hand it to them. This is the same as sending a junkie to rehab and still giving him drugs.
The crisis is in, and the money printer just turned on
Just ten days ago, we saw Jerome Powell in front of the Senate Banking Committee. While he was there, he explained how important it is to raise the debt ceiling. Otherwise, the USA would default on its debt, and that is why they need to continue raising interest rates because inflation is still a bitch.
OK, the bitch part was my personal touch, but you get what I mean. His opening remarks are the best video to understand what the FED wants to do in the coming months. Please remember, this was before we saw all of these banks go tits up.
Ironically, since his statement, Powell might need to scratch his plans because all of the banks went belly up. For now, it looks like they’ll stop with rate hikes, and they will introduce new monetary measures to stabilize the banking crisis. This is banker talk for money printer go brrrr.
Which is what most of the banks like to see as well. They messed up their risk management yet again, and the only way out is to beg the FED for more money. This will fix some of their problems for a short period before we see even more inflation due to the newly printed money. Newer inflation would mean more rate hikes, which banks won’t hedge against, and we’ll find ourselves in the same situation again.
These crises have their own cycles; the more money they print, the more extreme they become. If you look at the chart above, you’ll see that we have already surpassed the deposit amount of failed banks of the past, and it seems like we’re on track for one even more, extreme failure.
However, most of the big banks don’t care. Why? They already won the game! They’re the closest to the money printer and have the ability to literally buy out their competition or get rid of them by shorting their stock. These institutions are the personification of the Cantillon effect.
The poor get poorer, and the rich get richer
This is the issue with the Cantillon effect; instead of looking after the weak and caring for the less fortunate, unelected people in suits decided to turn the world upside down.
You no longer have the ability to live a comfortable life and raise a family in a big house because everything is more expensive. You actually have to make some pretty risky bets for 35 years to afford your retirement. If we continue down this road, we might eliminate retirement entirely and work ourselves straight into a coffin. This is the result of the Cantillon effect.
In case you didn’t know, the Cantillon effect is a change in relative prices resulting from a change in the money supply. The ones closest to the most influential people are able to benefit from that money supply and therefore control the ones furthest away. It is the uneven expansion of the amount of money. 18th-century French banker and philosopher named Richard Cantillon coined the term.
The issue with this effect is that banks and politicians don’t seem to care. You already saw this in the last financial crisis. The banks got a slap on the wrists and more money in their pockets, and they continued doing the same things just 24 months later.
This fraud, which it’s what it is at the end of the day, resulted in an uprising against Wall Street—movements like Occupy Wall Street or general strikes against the banking sector.
All of these organizations or movements were short-lived because the majority of citizens didn’t understand what their vision was. Most of them called for punishment or regulation without realizing that most of these actions would also mean more restrictive measures for them. The banks would not punish themselves but the account holders.
Our only options are building on the existing financial rail or building in hard caps. Or we look for alternatives where the monetary policy is clear, and we’re operating on a fixed set of rules.
Ideally, a system where every participant can verify what’s going on and one where inflation is not an issue for later generations. Do these statements ring a bell for you?
That’s right, Bitcoin! Because back in 2008, when everyone was worried about their mortgage and financial future, we had Satoshi Nakamoto, who was willing to find a solution to the current problem and build an economic system that would stop trusting banks and engage peer-to-peer.
I’m not saying Bitcoin is the solution to everything, OK maybe I am, there are still issues we need to solve, but it’s arguably the best option we have currently to defeat the Cantillon effect and get rid of these bailouts and the artificial money expansion.
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