Centralization of Finance
Here we are, a couple weeks after the second-largest bank collapse in US history. Three banks, named Silvergate, Silicon Valley and Signature were taken over by the FDIC and are now being sold off. Their shareholders have been wiped out. In the meantime, it is not clear whether depositors will be made whole, only receive up to $250,000, or something in between. The FDIC has historically had far less money in its fund than the deposits it insured, so further bank collapses might change the calculation.
Centralized decisions by the people in power have increased instability in their economies. In 2020, the Federal Reserve reduced to zero the reserve requirements of banks, allowing them to issue massive amounts of loans subject only to their own underwriters. Trillions of dollars in stimulus were pumped into the economy. The Congress could have used this opportunity to raise taxes on negative externalities, such as carbon or plastic pollution, removing money from the economy and creating environmental incentives in the process. Instead, it was left to the Fed to rein in inflation. Not being able to control fiscal policy, the Fedâs only tool was monetary: raising interest rates. In the last year, the Fed raised interest rates from 0.5 to 5 percent â as a result, banks like SVB which bought treasuries at lower yields last year ended up effectively insolvent. All it would take was a run on one of these banks to expose it.
The Global Situation
Underpinning the worldâs monetary system are sovereign debts backed by the âfull faith and creditâ of large countries like the United States, and China. These have been, in essence, the financial tools of central planning. Ever since the paper âgreenbackâ was issued by the US Treasury to finance the Civil War, and later made legal tender by the US Congress, the ability for the government to âprint moneyâ has expanded. Now every government does the same. USA and China, heading up G7 and BRICS, have begun to vie for control of the worldâs economy. Both countries are setting up to issue CBDCs (Central Bank Digital Currencies), further consolidating power in the hands of centralized decision makers.
In the meantime, countries like Sri Lanka and Pakistan have gone bankrupt. Whether itâs China or the US holding the leash, these countries experience collateral damage when the centralized hegemon externalizes its costs to them. As countries basing their economy on US or Chinese debts start to experience crises, the world will need an alternative model.