Bitcoin & Geopolitics - Week 20

Will the United States default on its debt? Sooner than we think. But to whom?

First, the banking default

American depositors at Silicon Valley Bank (SVB) were able to recover their money, except those from the Cayman Islands…

That’s what the Wall Street Journal reports in this article: The Pain of Silicon Valley Bank’s Collapse Is Being Felt by These Depositors.

As a reminder, banks are required to hold a portion of deposits in liquid assets to meet day-to-day withdrawal demands. However, this is far from sufficient in the event of a bank run.

As a result, a bank unable to raise funds must quickly sell assets (usually US Treasury bonds) to obtain liquidity.

SVB’s mistake was to prefer long-term Treasury bonds. The rates are more lucrative, but their value is more sensitive to a rise in interest rates than short-term Treasury bonds.

That’s why the Fed had to intervene as a lender of last resort. Liquidity had to be provided in exchange for SVB’s long-term Treasury bond wallet, which had a substantial unrealized loss.

The Fed to the rescue

American depositors at the Californian bank were protected by the FDIC (Federal Deposit Insurance Corp). This government agency took control on March 10 in tandem with the Fed.

The Fed’s Bank Term Funding Program (BTFP) is a mechanism for lender-of-last-resort loans. It was created to manage the failures of SVB and Signature Bank.

This mechanism allows banks to exchange Treasury bonds for cash at their face value, without taking into account the unrealized loss. Without it, SVB would have been forced to sell at a loss. Some customers would then not have recovered their money.

By the way, emergency loans from the Fed are usually obtained through the “discount window.” Banks prefer not to have to resort to it to avoid attracting attention. And unlike the BTFP, Treasury bonds offered as collateral are evaluated at their market value.

In short, all this to say that clients of SVB’s branch in the Cayman Islands were not covered by the FDIC. Its depositors, including many Chinese investment companies, remain uncertain.

The clear message from the FDIC is that foreigners should not keep their money in an American bank. If you do, prefer a “too big to fail” bank.

Such a policy pushes for consolidation in the banking sector, a prerequisite for the transformation of money into CBDC. But that’s another story.

The default is approaching

The billions not reimbursed by the FDIC are ultimately dollar reserves belonging to the Chinese central bank.

Thus, after siphoning off around $150 billion in foreign exchange reserves from Russia, China would do well to be cautious, as it holds $860 billion.

Quoting a major American fund, an article in kikkei highlights that US sanctions against Russia are one of the main factors that led China to reduce its holdings of Treasury bonds.

China is preparing for “similar measures being taken when the confrontation between China and the United States deepens in the future,” the article says.

In the past decade, China has already divested one-third of its US debt holdings. The dollar now accounts for less than 28% of its reserves:

China's US treasury holdings are at the lowest level since 2010. pic.twitter.com/DglvnvcFZ5

— John Oates ⚡️ (@johnpaxtonoates) April 14, 2023

This raises concerns in Washington, where they fear that China’s holdings may drop to around $100 billion.

Preventing this scenario was the main mission of Treasury Secretary Janet Yellen when she visited Beijing in early February. The former Fed chairwoman even hinted at the possibility of a default against China.

Senator Lindsey Graham had already declared on Fox News in 2020, “They should be paying us, not us paying China,” expressing his support for Senator Marsha Blackburn, who suggested not repaying China.

Similar threats have also been made in the past against Saudi Arabia. It is therefore not surprising that the kingdom has recently decided to accept the yuan as payment for its oil.

New world order

According to NATO’s statements, the objective remains a complete victory for Ukraine, and even a return of Crimea under Kiev’s control. This means the war could still continue.

A Chinese diplomat will visit Ukraine, Poland, France, Germany, and Russia this week, but there is little chance that this mediation will bear fruit.

China may actually have an interest in prolonging the war. The more the United States depletes its ammunition stocks and strategic oil reserves, the less likely a war will break out in the Taiwan Strait.

For the United States, the initial objective was to disrupt Eurasia and bring about a regime change in Russia. From that perspective, even if things don’t go as planned, the strategy hasn’t changed. They must fight until the last Ukrainian to try to overthrow V. Putin.

Vladimir Putin, on the other hand, is comfortable leading the global rebellion against the Empire. China is on his side, as well as India, which has become the main importer of Russian oil. This is actually a problem, as we discussed in Bitcoin & Geopolitics – Week 19.

🇷🇺Russia's oil exports are rising again, despite the production cuts. Flows are up by 10% since the first week of April and hit a new high for the period since the beginning of 2022.
Almost all Russia’s crude going to🇨🇳China and🇮🇳India, volumes to Asia also reached a new peak. pic.twitter.com/TdTLKAP7LU

— Francesco Sassi (@Frank_Stones) May 16, 2023

Most emerging countries refuse to choose sides. However, some significant players are seeking to join the BRICS and the Shanghai Cooperation Organization, which de facto aligns them with the BRICS and thus with Russia.

In the end, this new world order will result in the default of the United States on the approximately $6 trillion of dollar reserves held by the rebels. This will raise the question of the next international reserve currency. Bitcoin is eagerly waiting its turn.