Remember the Silicon Valley Bank crisis? Remember how the Fed was “printing” $300B and Balaji said bitcoin would go to $1M within 90 days? I remember.
I posted this and this back in March/April during the peak of the SVB hysteria and Fed announcements, saying the histrionics of Arthur Hayes and Balaji were completely wrong. What they were promoting was abject misinformation about what these programs are and what “printing” actually means.
The emphasis of this Fed series so far has been “your printing is not printing”.
Well it’s been 5 months since then. Inflation has continued to trend down. There was no crisis. Because the Fed is designed to be a backstop for stuff like this. Every single bank alive is structurally insolvent. You could crush JP Morgan right now if everyone asked for their money back.
This is why Arthur, Balaji, and all the other hyperbole about the Fed banking programs are wrong.
SVB Backstory:
Dollars (deposits) were given to banks; this is USD that already existed. The bonds the bank invested the deposits in lost value. The deposits are now trapped until the bonds reach maturity. The Fed provided loans to access them. That’s what the Fed’s BTFP is.
Smart pushback: "What about the time-value of money? $300B now instead of later matters!"
Yes. Just not that much.
None of these banking issues are new. This banking structural insolvency is integral to the very nature of banking. Why do you think Held To Maturity accounts exist in the first place?? It’s because every time rates go up, banks are wiped out on paper. Insolvent. What’s surprising is this was surprising.
The most reasonable way to panic (if there even is such a thing) wasn’t to convulse like this 1-year BTFP loan is "printing". It's to act like the time value of money (TVM) is so gargantuan that it de facto acts like printing.
Let's see how much this TVM really is.
Framework 1:
Those SVB deposits are "trapped" in purgatory. Because of how bank assets lost value as rates rise, the deposits that were given to them are in purgatory until the bonds the banks hold mature and return their principal. When those underwater USTs mature, the money returns. Unequivocally.
The Fed is acting as a temporary backstop to provide those dollars. The dollars they are providing to depositors already exists, and are simply trapped in purgatory. The Fed provides dollars now for stability, and when those purgatory dollars come back to life, the Fed will take them.
The NET amount of dollars in existence is the SAME.
Framework 2:
Think of the Treasurys the banks own like an accounts receivable, guaranteed by the US government. I will circle back on this.
Despite the postmodern melodramatic “everything is a crisis” world we occupy, reality matters. These dollars will be released from purgatory. We're dealing with the concept of time, not the concept of existence. So let's quantify how much TVM impacts $300B now vs years from now.
Providing a loan against incoming future money is called a factoring loan in the business world, it’s done all the time. Businesses do this by borrowing against their accounts receivable, invoices, or money they’re owed but haven't been paid yet.
They know they have dollars coming in the future but they need cash now, so they borrow against this incoming money, pay interest on it, then when the accounts receivable is paid, pay off the loan.
How many foment panic over accounts-receivable loans?
But the Fed did it! And because the financial collective is every bit as obsessed with this institution as it wants you to be, the “money printing” chants flowed. And you bid up risk assets. Because reasons.
Time Value Of Money
However there is a time-value component to money. It’s the bulwark for how almost everything is valued (except art or weird things that have no productive use or cash flows).
So if I’m giving you a loan for USD you were due in the future, we’re dealing with a TIME VALUE OF MONEY argument not a MONEY PRINTING one.
‘Money printing’ would mean all these dollars are new, completely additive to the total dollar supply, and don't have to be paid back. That is not what happened. These USD deposits already existed. These loaned dollars will die within a year. So how do we measure the TVM angle?
The BTFP loans are only for up to 1 year, but I’ll do you one further and pretend like they may be for 8 years. Let’s pretend the BTFP is 8x longer than advertised and see what that means for actual dollar creation. Surely this must be lascivious, erotic, and juicy. Surely.
Important: what exactly is the ‘time value of money’, functionally.
Money sooner is worth more than money later because when it’s in your hands you can do productive things with it that allows you to generate more money from that money.
So the more you have to wait for money, the less valuable it becomes in present terms, as you are missing out on the utility that money could be bringing you today. That’s what “discounting” means in finance parlance.
A common way to calculate the discount is via the ‘risk-free rate’ (RFR), typically the US 10-year Treasury. AKA the discount rate. This is broadly accepted finance/academic theory and not how reality always plays out. People (including banks) often don’t do productive things with their money, including losing it. But we'll assume they do profitable, prudent things that compound at the 10yr UST rate.
This calculation has everyone taking their BTFP loans, investing in the 10-year UST, and compounding. We’re not guessing capital gains/losses, where interest rates go, etc.. Just collecting our interest and continuing to reinvest it at the RFR.
So let’s see how much more money this $300B BTFP factoring loan will generate. The 10-year yield is about 3.5%. If you think the discount rate should be different you can just tweak the 'r' value.
So at the end of year one, the TVM additive amount of USD is $10.5B more. It takes a year to create that extra capital.
2 years from now we’re looking at $21.4B more USD in the world.
And if we are just wantonly lied to and these loans are allowed to remain outstanding for 8 years… $95B. After 8 years. I think I’m sufficiently iron-manning the other side here.
But again, BTFP loans only last 1 year then are repaid. If we’re being sober unsexy people, that means the 1-year TVM calc is what applies… so around $10.5B by Q1 2024.
Damn. My investment thesis from this: BTC to $1M.
Even if we’re egregiously misled for 8 years, we’re talking about roughly $95B more USD in the world. In EIGHT YEARS. I think fiscal policy sent this much to Ukraine this quarter alone, and probably another $1B to install senior-friendly bathtubs in the White House.
But that’s not exciting. Fiscal is lame, and worshiping at the altar of the Fed is far more exhilarating.
The Fed, Part Zero: Become a Fed Disrespecter
The Fed, Part 1: QE Isn’t Money Printing, It’s a Game
The Fed Part 2: The Graveyard Balance Sheet
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