Has the Federal Reserve come to the rescue of big, influential banks and their large and even more influential depositors? Yes.
Does this rescue operation put smaller, less influential banks at a steep competitive disadvantage since their depositors don’t get bailout guarantees? Yes.
Has this bailout by the Federal Reserve kicked off another round of money printing? Yes.
We will provide visual evidence in a moment. But first, consider this:
Almost anything the Fed does in a crisis like this is a win for gold.
What a Bailout Really Means
If the Fed didn’t bailout the banks, other depositors would flee their banks en masse, the historically astute among them turning to gold as a safe haven from failing financial institutions.
But the bailout is not free. It requires more money printing by the central bank, which means more inflation and more dollar devaluation.
Of course, we call it money printing for convenience. But it is mostly done digitally these days, without the messy business of paper and ink. This modern form of money printing goes by many names: liquidity operations, interest rate suppression, deficit funding, debt monetization, or, more recently, quantitative easing (QE).
A year ago, with inflation raging, the Fed promised it would undo its money printing, replacing QE with quantitative tightening (QT). You can see on the following chart that last year Fed assets—basically things like Treasury bonds the Fed purchased with printed money—began to turn down in pursuance of that policy.
Not surprisingly, gold topped out at the same time and moved lower. But it was evident that the Fed’s new tighter monetary policy couldn’t last. The cost would soon prove to be too high, said bond market icon Jeffrey Gundlach in February. “My suspicion is that they’re going to keep raising rates until something breaks, which is always the case.”
Now big banks—SVB, Signature, Republic, and Credit Suisse—look more like toppling dominoes than rock-solid financial institutions. Something has broken.
Bailouts and Gold
As the Committee to Unleash Prosperity (CTUP) writes this week, “Much of the Fed tightening of the last year to combat inflation has been undone by Fed Chair Jerome Powell’s actions to rescue troubled banks.” In other words, the Fed has pivoted back to quantitative easing. Not surprisingly, gold has marched higher. It is back over $1,900 per ounce, where it was before the Fed began tightening.
This explosive growth in Fed assets has Doug Noland of Credit Bubble Bulletin writing that “a $10 trillion balance sheet by year-end would not be surprising.”
That might be only the beginning. Right now, the Fed is trying to figure out how to backstop the total $18 trillion in bank deposits, thus bringing smaller, regional banks under the Fed’s umbrella.
The next chart shows the Fed’s sudden and massive credit provision to banks in the current crisis. To give it some scope, the 2008 mortgage/banking crisis was the worst downturn since the Great Depression. Now, in just days following the collapse of Silicon Valley Bank and Signature Bank, CTUP notes, “lending from the Fed directly to banks smashed those previous records by more than 30%.”
No wonder Gundlach says gold is a good long-term hold. “I think that the inflationary policy is back in play with the Federal Reserve…putting money into the system through this lending program,” he told CNBC.
“The Fed is broke. The Fed’s balance sheet is negative $1.1 trillion. There’s nothing they can do to fight any problems except for printing money.
“They have nothing left. The Fed used to send money to Treasury. Now Treasury sends money to the Fed.
“We’re at this point in time where we don’t have any road left to kick the can on our mismanagement of finances and monetary policy.”
More bank failures or more inflation? Either way, gold represents enduring wealth, just as it has for thousands of years. It never goes bankrupt.
If you’re interested in investing in precious metals, let us provide you with a free one-on-one consultation.
Red Rock Disclaimer
The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment or tax advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.