Seeds of Destruction?

If you want to see where the seeds of inflation were planted, as well as the conditions that set the stage for the bank troubles we are seeing today, look at this graph of deposits at U.S. commercial banks.

These seeds were planted by the Covid relief payments by the U.S. government and Biden's $1.9 trillion stimulus package in early 2021, which were made possible by the Federal Reserve's monetary policy, that accommodated the spending.

Banks were flooded with cash as government Covid payments were made to businesses and individuals in 2020 and 2021.

Between the beginning of 2020 and the end of 2021, bank deposits increased from $13.3 trillion to $18 trillion---$4.7 trillion in additional cash deposits.

How much were the Covid relief and stimulus payments approved by Congress and signed into law in that time?

$4.5 trillion.

Funny how that works.

Of course, that much additional money in the system meant there was a lot of money chasing after stocks, real estate and general goods and services.

Inflation was the result. Too much money chasing too few assets, goods and services.

Most of the deposits in the banks were earning little interest for the depositors.

As inflation because entrenched, the Federal Reserve began increasing interest rates to try to slow the economy.

As treasury rates started to increase in the second half of 2022, more and more depositors started withdrawing their bank deposits to invest in treasury securities that were earning higher yields.

When is the last time we have seen net bank deposit outflows before?  1948.

As bank depositors withdraw cash from the bank it is necessary to have the liquidity to satisfy the demands.

However, in a fractional banking system ready cash is in short supply as most bank assets are invested in loans, mortgages or investment securities that are not liquid.

It also doesn't take much for a trickle to turn into a flood when the confidence of depositors in a bank's safety is shaken.

That is what happened at Silicon Valley Bank.

That concern has spread to other banks.

Banks often use the Federal Reserve's Discount Window to address temporary funding shortfalls. It allows banks to access funds quickly, often the same day.

Borrowing from the window is usually considered a last resort. It can signal that a bank is having financial difficulties.

You can see what has transpired recently at the Discount Window.

Source: https://twitter.com/Malone_Wealth/status/1636736907605336066

Compare what was happening to the stock market at the same time that banks were hitting the discount window in the past.

Late 2008-Early 2009 S&P 500 performance.

Spring 2020 S&P 500 Performance

Will history repeat itself?

I guess we will find out.

In the meantime, perhaps we should all take comfort by what our current Treasury Secretary Janet Yellen said in 2017 when she was the Federal Reserve Chairman.

Or perhaps not.

You may also recall that Yellen was one of the so-called experts who told us that Biden's stimulus bill would not cause inflation, and even if it did, it was going to be transitory.

Credit: https://twitter.com/charliebilello/status/1446858352638763019?lang=en

This is the brain atop the brain trust overseeing our financial and economic policy?

The lesson here is that seeds grow.

They also often grown in unpredictable and unexpected ways.

Let's just hope that these are not seeds of our own destruction when all is said and done.