The United States economy needs monetary liquidity to run efficiently.
If the banking system isn’t in good shape, it creates a serious ripple effect that has implications for every single American.
And now a staggering number should cause every single American to sound the economic alarm that this system is in trouble.
Banks see massive losses
Without a healthy banking system, Americans would not be able to use or get credit cards, buy homes, or purchase new vehicles.
Banks must be in good financial shape and function properly to keep the country out of serious financial trouble.
But now, banks are currently sitting on hundreds of billions of dollars in unrealized losses thanks to a historic bond market crash that has taken place over the last several years.
Ever since the pandemic, treasury bonds have been on a run, while investors worry about rising interest rates and the viability of the massive US deficit.
Treasury bonds are debt instruments that the government issues to help fund its spending.
And as of September 30, America’s financial institutions are sitting on $650 billion in unrealized losses.
These “paper” losses show that the value of banks’ bond holdings is plunging, but the institutions have chosen to hold onto them, rather than offload them.
Last month, Moody’s estimated that U.S. financial institutions had amassed $650 billion worth of paper losses on their portfolios, which is up an eye-watering 15% from the end of June this year.
This number doesn’t even account for October, when the bond prices spiraled even further.
That means that the current dollar amount of losses could be even greater, potentially reaching $700 or even $800 billion.
If there is a run on the banks, any banks that are affected would have to sell their bonds off at a massive loss.
Most bonds are bought and intended to be held until they mature so that investors can reap the biggest possible return.
However, if banks see a surge of withdrawals, also known as a “run on the banks,” they’ll need to sell them, similar to what happened to Silicon Valley Bank earlier in the year.
SVB was forced to sell its bonds as the bank’s depositors scrambled to withdraw their funds.
The big banks are in serious trouble
Four of the nation’s largest banks – Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo – have all racked up massive unrealized losses.
Bank of America has seen the worst of the crash in bond prices, with an approximately $130 billion loss on its balance sheet.
A sixth bank failed just a few days ago, and that failure now exceeds the combined assets of the 25 banks that failed back in 2008 during the financial crisis.
Lawyer and investment banker James Rickards said that “this last failure won’t be the last” and that “once the dominos start falling, they keep falling until some government intervention of a particularly draconian kind is imposed.”
And the economy is suffering in other ways, as retail layoffs just jumped a whopping 258% compared to the same time last year.
Mark Hamrick, senior economic analyst at Bankrate, said, “The plight of the economy over the next 12 months may help to dictate whether it was wise, or not, for President Biden to trumpet the branding of ‘Bidenomics.’”
Informed American will keep you up-to-date on any developments to this ongoing story.
