Banking System Instability
Between 1945 and 1971 when the world financial system was still linked to gold under the Bretton Woods system we saw only one banking crisis on the entire planet. Between 1971 and 2000 there were 19 crises! The we had dotcom bubbles, the global financial crisis and more. With the arrival of COVID and almost 20 trillion in new liquidity swimming through the global sea of financial markets we can only wonder how many more crises we can expect.
In this episode I reference some great data from Richard Duncan’s seminal book The Dollar Crisis and a great study from The Bank of England.
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📍 Hey everybody, Jonathan Doyle with you. Once again, welcome aboard to the supply side podcast. Another short episode. Want to keep these. Punchy and short why? Because the single greatest commodity. On this planet we share. It’s time. And one of the interesting things about gold and gold standards is that the.
Extraction of gold from the earth. It’s a function of time. If you look at Gilda’s work. I’ve been going through George Gilder’s recent book, the 21st century case for gold. And he really goes deep on how one of the things that makes gold so important. For those of us who are interested in classical economics is that no matter how much extra technology or CapEx we put into the extraction of gold, it’s still comes out a growth of roughly 2% a year.
So Gold’s interesting. Cause it’s a function of time. And your time is precious. So we’re gonna do these short episodes in between having guests on and today I want to share with you something I came across. If it’s a 2001 study by the bank of England. And it’s called the costs of banking system in stability.
Now 19,000 a month is a while ago, but it’s really quite a prescient document. And when you look at some of the key points in it, it’s fascinating. One of the things it talks about is, since 1945, once Bretton woods came into effect. There was only one banking crisis from the institution of Bretton woods, right through, till the us closed the gold window in 71.
So it’s interesting. And that sort of fought his quarter century from 1945, one banking crisis. Now you ready for this? Ready for the hook? It’s this since then. They’ve been 19. So there’s one in the quarter century between 1945 through to 71. When the the U S dollars pegged to gold and the rest of the world’s pegged to the us dollar. And it all seemed to tick along relative would do a challenges. It wasn’t totally perfect.
No system ever is. Churchill’s famous. Quote capitalism is the worst system ever invented. Except for every other one that’s ever been tried. So then you find that interesting that. The masters of the universe. The the 1500 PhDs at the fed. Managed to give us well, not just them, but the system that came into place since a Bretton woods. And since the centrality of gold was removed from the system, we’ve had 19 banking crisis.
As opposed to just banking. Sorry, banking crises. As opposed to just one before that, in that timeframe. So I want to give you a quote here from Richard Duncan, his seminal book, the dollar crisis. If you haven’t read it, it’s really worth the read. It’s a, it’s really the, a tour de force.
Of current account crises and the sheer amount of excess reserves flooding the global system and the implications. But listen to what he says here. He says the link with the linkages between capital inflows. Accelerating credit expansion. The development of asset price, bubbles followed by systemic banking crisis is so obvious.
That the burden of proof. Should be on anyone who would argue otherwise. I liked that the linkages between these vast sums of capital inflows around the world is that us trade deficit gets bigger and bigger. And. Trillions of us dollars wash around the planet and then have to find a home.
He making the point that the linkages between this credit expansion and asset price bubbles. Really, if people can’t see that, then it’s up to them to prove what we missing. Another important thing is that this banking, instability it’s I came across some interesting data here.
On the cost of these bailouts. So when governments have to bail out their own bank deposit is right. So all those. All the people with money in the bank who, Bank falls over in the government. We’re not prepared to let the bank fall over. So we, the government pledges to give everybody their money back or a significant portion of it. Of course, we’ve got the FDI I see in the U S and we’ve got multiple variants.
Around the world in both developed and emerging markets. But this is this data here for some countries when a banking crisis hits. They spend at the top end 55% of GDP to bail out their banks. Or to give the deposited some money back. And the average for the banking crises, the last 19 banking crises, the average that a country spends on repaying depositers due to bank instability.
Is 16% of GDP and you’ll find those figures and charts in Duncan’s the dollar crisis. That’s fascinating. That the too big to fail mentality, the system that we’ve created since we’ve gone off a classical gold standard. Creates this constant instability in the financial system. And then governments basically. Won’t.
Let it fall. They won’t. Obviously the, they want to get elected. They want to get voted back in. So they’re not prepared to let the system fall over. They’re not prepared to let people lose money. One commentator said what have we did right. Then if we did, and people lost money.
What happens? All sorts of terrible things. Bank runs and deflation, all sorts of stuff, but ultimately. Consumer start to get really. Fixated on the solidity of their banks. It’s called free markets. It’s if you’re, if you got a family and you’ve got 50,000 to put somewhere,
You’re going to start to get really curious about your bank, right? Because if there’s no safety net, there’s no promise that you’re going to be bailed out or they fall over. You’re going to start getting really interested in where your money goes. And I wonder if people. Maybe those at the top of the game don’t want people to get curious like that.
Maybe, this, if we keep PR. Preventing these collapses and fall overs. Then. The system continues. All right. Last thing.
Duncan says this direct quote, as long as the world continues to be flooded with dollar liquidity. Spun off from American trade deficits, new rounds of asset price. Bubbles must be anticipated. New rounds of asset price, bubbles. I don’t know, friend, he’d been paying attention. If you’ve seen Tesla, have you seen just the global equities markets of you saying I’m hearing Australia real estate is at its highest ever.
Ever. Now Mo. Huge part of the population is unemployed. So who’s buying these houses as well. We’ve got a massive public sector that’s growing rapidly whose wages have not only been guaranteed, but increased. So someone’s buying distressed assets. So we’re back in that realm of a wealth transfer, right?
People that lost their businesses and jobs and companies, they lose their assets. And we see that wealth transfer effect kicking in, but it was interesting. The governor of our reserve bank here in Australia. Just this week said nothing to see here, friends, no asset price bubbles on this watch. I’m there going really?
No. I don’t know, we’re in the year of game stop and. Reddit shorters and all sorts of stuff. So friends, that’s all I’m gonna say is share with you today. One banking crisis from 1945 to 1971. And 19 cents. So far, and that’s only the 2000. We’re not even factoring in, the global financial crisis, 2008. I don’t think this data even picked up a, banking, firstname.lastname@example.org bubble let alone where we might be now.
Interesting times, huh? It’s going to make a great historical study when we looked back on all of this. All right. That’s it from me. Let’s stay vigilant. Let’s be aware that Economies and cultures and social fabric flourishes. On the supply side, we’re good men and women produce great goods and services that people actually want where government keeps its prodigious snout out of people’s business.
As much as humanly possible. Best I can tell good things seem to happen when that happens. All right. You can find email@example.com. You can email firstname.lastname@example.org. You won’t find me on social media because. I think it’s basically evil 📍 and it’s just so enormous and repeat Thus
that it’s eating the world. And I’ve decided to step out of it. So the best you can do, if you like, what you’re hearing is to subscribe to the podcast. If you’re on Twitter, post this link. Hashtag at fin twit. And I could do with your help to get it out there. So God bless your friends. My name’s Jonathan Doyle. This has been the supply side podcast. And i’ll have another message for you very soon
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