A new Gold Standard? - Billionaire Boy's bank update.

Metal backed money in a world of debt and fiat currency?

Debt and fiat currencies go together much like alcohol and headaches. Too much of the former has a bad effect on the latter. Every drinker knows this but somehow they never learn.

So… Jan. 29th a Hong Kong judge declared that Evergrande, once China’s biggest property developer, is officially gone, bankrupt and in liquidation. Evergrand collapsed because it had piled up $300 billion (a third of a trillion!) in debt and then could not pay. Of course it has assets which once had a value of $245 billion. I say ‘once had’ because what is the value of an unfinished building when the developer has gone bankrupt? Evergrande left thousands of unfinished flats in hundreds of unfinished buildings. And massive though Evergrande’s default is, it is only a part of an even more immense problem across the whole Chinese property sector. According to a study done by the investment bank Nomura, reported by Reuters,

“… in November [2023\ there were around 20 million units of unfinished homes across China, left by Evergrande and other failed developers. The total funding gap for completing those projects stood at around $446 billion, the report estimated.”

Even at the most optimistic valuation there is just not enough to pay everyone Evergrande owed. And the decision of who will and who won’t get any of their money back will likely not be decided in a Hong Kong court but at the highest levels in Beijing. Why? Because whatever the usual pecking order of who gets their money back, this default is so large that it is a political problem. The customary and expected pecking order says the first to be paid should be the secured creditors - ie the banks that lent to them. Then the workers wages, then the government itself, then bond holders, - by this point the money might well be running out - then come the suppliers and contractors then and only then the ordinary retail investors. But how will it play put if hundreds of thousands of ordinary people, who unwisely invested, get nothing while the banks are made whole?

The courts and banks in Hong Kong - China’s main financial centre and its conduit to international investment might prefer this, but on the mainland things might look very different. The entire modern Chinese dream has been built around ordinary people ‘making it’ by investing in CHINA.

Then again, what will happen to China’s international standing if the Chinese government decides to pays its people and stiff the banks, especially foreign ones? Foreign investment in China has been declining, as has its stock market.

The Chinese government will come under pressure to bail out its banks, its property sector and even foreign investors. But a complete bail-out would be massive; far bigger than the infamous AIG bail-out or the entire Irish government bail. It would require a massive injection of new Yuan. And would probably still not happen fast enough to stop the inevitable wave of down-stream bankruptcies fo small suppliers contractors and retail investors.

At the same time, across the other side of the world the FED has said it is going to end its Bank Term Funding Program (BTFP) . This is the emergency funding it brought in when it looked like the collapse of Silicon Valley Bank and others might lead to another bank debt crisis.

Just another in the endless conveyor belt of ‘emergency measures’ that our solvent and responsible banking system has needed as its regular ‘fix’ every few years since 2008.

And yet even as the Fed says this is going to happen New York Community Bankcorp sinking under a weight of debt, announced it would have to cut its dividend by 70% and promptly lost about 46% of its share price. (It has recovered some of it). They had actually bought many of Silicon Valley Banks ‘assets’. Now people are worrying that other regional banks might also be in trouble - again. Who knows. Apparently not the regulators

And then, finally there is the non-banking financial sector. The non-banking financial Intermediaries sector (NBFI) is essentially the world of investment and money funds, including heh whole world of Exchange Traded Funds ETF’s. People like Blackrock. They are money intermediaries. The funds are not banks though almost all the major global banks are intimately tied into them, many run by and financed by them. But because they are not banks they are not regulated like the banks are. And at least in part due to the difference (read absence of) regulatory oversight, they have grown. The funds are now so systemically massive, they now sit at, in fact they ARE the centre of the global financial system.

In 2008 the NBFI sector was already worth €72 trillion. A sum which dwarfed all and every government’s ability to bail it out let alone control it. By 2021 risk and rewawrd seeking money had flooded into the poorly regulated sector and it had grown to €212 trillion.

And every single penny, cent, yen and yuan of that growth has been and is, in fiat currencies. It is paper wealth, printed by paper governments. Now I’m not any kind of gold bug. I don’t have a fetish for hard money. But in a world of such fiat excess, might a new currency which advertised itself as being backed by precious metals - not gold but the metals without which our phones would not exist and electric cares would not run and which would be mined from asteroids - might not such a currency and the sovereign bank which created it have a certain appeal? Just a thought.

A New Gold Standard? - Billionaire boy’s bank update.