Blog with MAE Capital

Today’s topic might be a bit confusing to some, but rest assured if you know, you can make the right decisions with your money.  We are all seeing a tightening of money lately due to inflation which is where prices of goods and services go up faster than income does.  Inflation is the worst possible economic effect on any society as the people who are affected by inflation have less disposable income left over after they pay for housing, food, gas, and services.  In America, there is a significant amount of people that live paycheck to paycheck meaning that they spend every dollar they make on housing, food, fuel, and services every month.  When these prices go up and their income does not follow then people have to go to other sources to make those essential payments such as credit cards and this puts the average American in a deficit.  Although this is not good for the average American it is also not good for the banking system as the banks rely on the deposits of Americans so they can lend out that money to keep the banks in an income stream.  

This brings us to the banking system itself and most see the system as confusing and have no idea how banks actually work.  In America and other Western countries, the banking system is what is called a Fractionalized Banking system.  That is a big word that means that the banks can lend out most or all of the depositor’s money.  For example, if a bank has $100,000 in deposits from 5 customers ($20,000 each) and it pays 3% interest to those customers the bank then can lend out a good portion of that money at higher interest rates.  Remember that the banks have to keep cash on hand in case their customers need cash and in the past banks have held back about 10% of that money for cash.  The other 90% is lent out at a higher rate than they are paying the customers that have savings in their bank.  In our example, there is $100,000 from 5 people paying them a 3% return to keep their money in the bank.  The bank can lend out $90,000 and only keep $10,000 for cash reserves and when they lend out the money they collect say 6% on the money they lend out.  This process should leave the bank positive in income and has throughout the history of fractionalized banking.

Here is the problem with the system.  Banks currently have no reserve requirements meaning that in my example the banks can legally lend out every dollar of your savings.  This should not happen, and most banks will not lend out 100% of their customers’ deposits as they want to stay open in case there is a day when there is a heavy amount of withdrawal money.  Banks are in charge of regulating themselves based on their lending models and most banks do a good job of regulating this.  Here is the biggest problem facing the banking system today and that is inflation.  As we talked about earlier when prices go up faster than incomes the bank’s customers are spending more than they make and they do this with credit cards and equity loans.  There will come a point where the average American can no longer pay their debt due to inflation.  Human nature is to make sure they have food on the table first and foremost.  When the consumer can no longer pay their debt, they default.  This means that if Americans can’t pay their credit cards they go into default and the bank receives no money.  This holds for mortgages as well.   

This is where things start to get crazy so hang on.  Remember, that Banks will lend out around 90% of depositor’s money and if those loans start to go bad there is only 10% of cash left for banks to operate.  So, a bank’s reserves may get eaten up quickly if there is a high default rate.  Banks lend out money for Credit Cards, Residential Mortgages, and Commercial Real Estate loans and lend to other banks.  When customers start to default on their loans the income stream to the bank is greatly diminished and they still have to pay interest on the deposits they have for their customers.  If the bank has not held enough in reserves to account for this then the bank will fail.   Or as we saw in 2008 when this started to occur the government stepped in to save the larger banks not through the use of the Federal Deposit Insurance Corporation (FDIC) but actually printing money to put back into the system.  The smaller banks were bought up by the bigger banks.  In 2008 we had other factors going on to bail out the system as we were not in an inflationary time it was more of a recession meaning the economy was retracting with no inflation.  Real Estate values during this time went down the stock market sold back and there was high unemployment due to the recession.   Interest rates went down during this recession as there was no real inflation so with lower interest rates those who had the means bought homes and commercial real estate as the cost of money was cheap and this brought the economy back.  

Fast forward to 2020 when the COVID crisis hits.  This was a forced recession by the government telling people they could not work.  We had never seen anything like this in American history and the result was that the Government and the Banking system were faced with something they had never dealt with before.  The mistakes that were made have led us to where we are today.   The biggest mistake was to shut everything down that was not essential.  The next mistake was that the government did not take into consideration where we were in the business cycle with a healthy economy at the time before they shut the economy down.  The Government printed and sent out money to every American and it may have helped some in the short run the long run is what we are paying for today.   The Government also lowered interest rates to stimulate the economy and it sure did with people buying houses and freeing up equity to buy more stuff.    The money was flowing through the economy and people were buying things at a crazy rate until inflation hit people had to slow their buying habits and in addition to that the Federal Reserve saw the inflation and the only tool they had to slow inflation was to raise interest rates and they did.

Today all that stimulus money is gone, however, the government has continued to spend money by sending it overseas and starting foreign wars.  I can guess that the reason for the wars is to get the economy moving again as war requires a lot of money to flow.  We could go into the problems of this all day long, but this is not the forum for now.  The problem is, currently with the high interest rates and high inflation the more the government spends the less the dollar is worth on the world stage.   That coupled with the BRICS system that threatens to remove the Petrodollar on the world stage is further devaluing the dollar.  The banks are starting to see their default rate climb with inflation and this is diminishing the bank’s liquidity as this continues to happen, we see a tightening of the availability of money.  Today March 11, 2024, the Bank Term Funding Program (BTFP) which is a way for banks to secure funding from the Federal Reserve will be ending.  This will force the banks to go to the discount window to borrow short-term funds.   This will lead to money being tougher to borrow.  We are also beginning to see defaults start to rise and that coupled with the already tight money supply for Americans high interest rates and rising inflation it is a wonder why this is being done.  Is it being done so deliberately?  You can’t help but think there is some master plan to change the monetary system in America or to create a global currency minus Russia China, Brazil, India, South America, and countries in the Middle East (the BRICS nations).  But why?

I am beginning to think that all this stuff we have never seen before such as wide-open borders, money being sent to some foreign war nobody seems to want, money given to illegals, civil disruption, and propaganda being spread all over, is all part of a plan to make America weak.  The reason is to change the monetary system and move to more globalization that not many Americans want.  I see the UN helping in this destruction of America in that they are funding the illegal migration and to make it worse the US is the largest supporter of the UN.  I mention this not to scare you but to open your eyes to the great sellout of America and a move to the International Monetary Fund or something else, instead of the Central Banking system we currently use and enjoy independently of the rest of the world.  Before this can happen the Banking system in the US must collapse and it appears from someone who has watched and studied this for the last 45 years that this is what is happening.  I don’t want to scare people and I might be stating the obvious, but things are changing fast.  I am not holding out much hope for the Federal Reserve to lower interest rates any time soon as we still have inflation, and this is known not by the numbers the government feeds us but by simply going to the grocery store and filling up my car.  The mortgage business is the slowest I have ever seen, even worse than 2008.  This is also true for the Real Estate market and as things get tighter we should start to see more inventory hit the market as people are having a tough time paying their mortgages even if they have a 2 or 3% mortgage.  I am also seeing more people defaulting on their mortgages creating a higher foreclosure rate.  We as Americans can only do one thing to fix this crisis and that is to vote correctly, although I live in California and the system has been corrupt for decades it’s all we have to save our Constitutional Republic.