The recent spate of bank failures is likely just the beginning. It highlights the truth of what McAlvany analysts have been saying for years: Low interest rates result in high levels of malinvestment; government bailouts of poor investments spurs further malinvestment; malinvestment has consequences; the consequences will not be pleasant or small; and the road down which we have been kicking the can dead-ends at some point in the future—perhaps even the near future.
The variables affecting the outcome are legion, so timing is tricky. But every time the government steps in to “save” investors, banks, institutions, or even countries from their foolish investment decisions, it insures that the eventual comeuppance will be far worse.
All those who put their faith in the government’s paradigm will eventually reach the end of the road. The problem is that many of those who didn’t put their faith in the government’s paradigm have reached the end of the road much sooner. It can be a discouraging dynamic.
Still, some have persevered. They have instituted important disciplines, they have redoubled their efforts, and they have built strong “edifices.” If those edifices are their own lives, their families, their churches, or their communities, such things greatly strengthen society and will greatly aid its survival.
If those edifices are publicly owned companies, they offer investing opportunities very much unlike the companies that have prospered only because of low interest rates and government and central bank largesse. They are diamonds in a barrel of cubic zirconia—hard to find, but tough, valuable, and created by pressure and able to withstand it.
That’s at the heart of MFG efforts—the difficult, obstacle-laden, but crucial search for the real: real money, real value, real (true) information, real character, real virtue. Join the search by clicking on one or more of the links below.
Key Takeaways:
- Reality eventually reasserts itself—even in economics
- Could bailouts become the monster that devoured the economy?
- The Fed gets it—way too late
- Gold still wants to break out, but might wait a bit longer
The McAlvany Weekly Commentary: If you reap what you sow, and the fruit of low interest rates is malinvestment—as David and Kevin have been asserting for years—then what we’re seeing in bank failures is natural and should be expected. Beyond that basic principle of life and banking lays a world of contributing factors, some of the most important of which the hosts explore on this week’s program. Mary Poppins and It’s a Wonderful Life introduced some of us to the concept of bank runs, today’s news introduces us to the real-life version, and David and Kevin acquaint us with the details. As just one aspect of the matter, you won’t believe who was on the board at Silicon Valley Bank and who was on the board at Signature Bank. If prestige were wisdom, those banks might not be in their current straits.
Credit Bubble Bulletin: In his poignantly titled (“Fire”) post for the week, Doug shoots straight to the heart of the matter in his first paragraph, which ends with the cogent observation that, “ ‘money’ – monetary inflation – is the problem, not the solution.” This assertion pits him against the entire substance of modern economics, which believes that government action can create lasting prosperity and cure any market ill. Specifically, Doug traces the bailout mentality from 2008 to present, highlighting some of the utterances and actions of its staunchest proponents. And by tying in some of the news reports on government response to the recent bank failures, he shows that the road we’re on looks an awful lot like a taxpayer-funded federal guarantee of all deposits, of all amounts, in all banks (or at least all governmentally favored banks)—despite government protestations to the contrary.
Hard Asset Insights: This week Morgan chronicles the crocodile tears being shed by various Fed governors and other financial lights as they rue the policy of zero interest rates forever. Observing that such insights might have been helpful ten years ago, he intimates that 20/20 hindsight is not necessarily rare or effective. Now, having for years chosen the easier wrong over the harder right, the Fed, the government, and the global financial system are having to play the hand they have dealt themselves—and it’s a losing hand whether they hold ’em, fold ’em, or walk away. Of particular interest, Morgan gives specifics on what the delay between implementation and impact might mean as far as the Fed’s interest rate raises are concerned. In short: There’s much more to come.
Golden Rule Radio: Miles welcomes Rob back to the program this week, and the hosts briefly review the banking news from last week and then look more deeply into the gold market. For those not familiar with how gold—or any asset—acts in normal or abnormal markets, Miles’ comments are highly instructive. Regarding gold’s recent decline, for instance, he notes that the retrenchment is counterintuitively not deep enough to be healthy. If such an observation surprises you, then you would benefit from the analysis and instruction offered by this program on a regular basis. You would also likely benefit from such big-picture investment observations as they offer in this week’s program.
