Our economy heavily relies on credit, and banks play a crucial role within this system. As such, the proper functioning of the banks is absolutely essential. Recently, however, our banks have found themselves in dire financial straits due to the historic crash in the bond market over the past few years. This has resulted in hundreds of billions of dollars in unrealized losses for these financial institutions. Treasury bonds, which the government issues to fund its spending, have been deeply affected by this crash, with investors expressing concerns about rising interest rates and the long-term sustainability of the US’s massive deficit.
The BlackRock’s iShares 20+ Year Treasury fund has plummeted by 48% since April 2020, and as of September 30th, financial institutions were sitting on $650 billion in unrealized losses. Amidst this sell-off, some of the largest banks in the US are holding on to unrealized losses worth hundreds of billions of dollars rather than offloading their bond investments. Moody’s estimated that US financial institutions had accrued $650 billion in paper losses on their portfolios, and while this figure doesn’t account for the turbulent October that followed, we can conclude that the actual number today could be even higher.
In the short-term, there won’t be a major problem unless a run on the banks occurs. However, if a run on the banks does happen, the affected banks would be forced to start selling off their bonds at a significant loss, which would create a financial nightmare. We’ve already seen the fallout from this scenario with Silicon Valley Bank earlier this year when its depositors sought to withdraw funds. Our largest banks now represent a ticking time bomb, with Bank of America disclosing a potential $130 billion hole in its balance sheet due to the crash in bond prices.
The deteriorating economic conditions are becoming increasingly evident, with retail layoffs jumping 258% compared to the same period last year. Economic conditions are steadily worsening, and a recent survey indicated that 50% of Americans believe their financial situation has deteriorated since the 2020 presidential election.
As dire as these circumstances appear now, the reality is that they will soon be considered rip-roaring prosperity compared to what’s coming next. It’s clear that the nation is on the brink of an unprecedented economic crisis, characterized by overwhelming debt and a devalued currency. Notably, this situation is elaborated in the book “Chaos” by Michael Our, highlighting how America is unprepared for the economic turbulence on the horizon. With this in mind, individuals need to be adequately prepared for the challenges ahead.
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