Will the United States default on its debt? Earlier than you think. But against whom?…
First the bank default
American depositors of Silicon Valley Bank (SVB) were able to recover their money, except those in the Cayman Islands…
This is what the Wall Street Journal reports in this article: The Pain of Silicon Valley Bank’s Collapse Is Being Felt by These Depositors.
As a reminder, banks are required to keep a portion of deposits in liquid assets to meet day-to-day withdrawal requests. However, a bank may not have enough liquidity in the event of a bank run.
If the bank cannot raise funds, it must quickly sell its assets (usually US Treasuries) to obtain cash.
SVB’s fault is that it preferred long-term American debt. Their rates are juicier, but they are more sensitive to a rise in rates. The value of long-term debt (30-year treasury bills) falls much more heavily than short-term debt when rates rise.
The Fed must then act as lender of last resort. It must offer liquidity in exchange for these long-term debts which show a substantial unrealized loss due to the rise in rates.
The Fed to the rescue
American depositors of the Californian bank were finally protected by the FDIC (Federal Deposit Insurance Corp). This government agency has taken over since March 10 in tandem with the Fed.
The Fed’s Bank Term Funding Program (BTFP) is a lending mechanism of last resort. It was created to handle the failures of Silicon Valley Bank and Signature Bank.
This mechanism allows banks to exchange treasury bills for cash at face value. That is, without taking into account the latent loss. Without him, the SVB would have had to sell its treasury bills at a loss and would therefore not have been able to meet the withdrawals of its customers.
[Soit dit en passant, les prêts d’urgence se font généralement à la « discount window ». Les banques préfèrent ne pas avoir à y recourir pour ne pas attirer l’attention. Et contrairement au BTFP, les bons du Trésor apportés en garantie sont évalués à leur valeur de marché, et non leur valeur nominale.]
Anyway, all this to say that the customers of the SVB branch in the Cayman Islands were not covered by the FDIC. Its depositors, including many Chinese investment firms, remain uncertain.
The clear message from the FDIC is that you should not keep your money in a US bank if you are foreign. If you do, prefer a bank “too big to fail”.
Such a policy pushes for the consolidation of the banking sector, a prerequisite for the metamorphosis of money into the CBDC. But that’s another subject.
The fault is approaching
These billions not reimbursed by the FDIC are ultimately dollar reserves belonging to the Chinese central bank.
So, after having stolen around 150 billion dollars from Russia, China would do well to be wary, it which has 860 billion dollars in the form of US Treasury bonds.
Quoting a large American fund, this kikkei article points out that the US sanctions against Russia are one of the main factors that led China to reduce its holdings of Treasury bonds.
China is preparing for “similar measures be taken when its confrontation with the United States escalates”can we read.
In ten years, China has already parted with a third of its stock of US debt. The dollar now represents less than 28% of its reserves:
This is causing concern in Washington where there are fears that China’s holdings will drop to something like $100 billion.
Preventing this scenario was Treasury Secretary Janet Yellen’s main mission when she visited Beijing in early February. The former Fed chair even suggested in the press that the United States could default if this continued.
Senator Lindsey Graham had already declared on Fox News in 2020: “It’s up to them to pay us, not us to pay China”expressing his support for Senator Marsha Blackburn who suggested not reimbursing China.
Such threats have also been made in the past against Saudi Arabia. It is therefore not surprising that the kingdom recently decided to accept the yuan as payment for its oil.
New world order
According to NATO statements, the objective remains a complete victory for Ukraine. Even a return of Crimea to the bosom of kyiv. Suffice to say that the war could still go on.
A Chinese diplomat will visit Ukraine, Poland, France, Germany and Russia this week, but this mediation is unlikely to bear fruit.
China may also have an interest in prolonging the war. The more the United States empties its stockpiles of ammunition and its strategic oil reserves, the less likely it is that a war will break out in the Taiwan Strait.
For the United States, the initial goal was to disrupt Eurasia and effect regime change in Russia. From this point of view, and even if things do not go as planned, the strategy has not changed. You have to fight to the last Ukrainian to try to overthrow V. Putin.
For his part, Vladimir Putin adapts to lead the global rebellion against the Empire. China and on its side, as well as India which has become its main importer of oil. Which, moreover, poses a problem, as we talked about in the Bitcoin & Geopolitics – Week 19.
Most emerging countries refuse to choose sides. That said, some, and not the least, seek to join the BRICS and the Shanghai Cooperation Organization, which amounts de facto to advocating for a new world order.
Ultimately, this new world order will result in the default of the United States on some 7,000 billion dollar reserves held by the rest of the world. The question of the next international reserve currency will then arise. Bitcoin is chomping at the bit.
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