The Rich Get Richer and the Deplorables Pay for the Bailout

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Hi. I’m Peter Navarro, it’s March 14, 2023, and a lot of very rich hedge fund managers and venture capitalists are getting even richer even as the Deplorables in MAGA Land grow ever poorer.

Just in the last few days, big hedge funds and the so-called “Smart Money” on Wall Street have made billions of dollars on rising bond prices and a plunging dollar. Meanwhile, the response of President Joe Biden, Treasury Secretary Janet Yellen, and Federal Reserve Chairman Janet Yellen has been to engineer an unprecedented bailout of the US banking sector that will saddle we Deplorables with trillions of dollars of obligations even as the Biden-Yellen-Powell knee-jerk so-called “solution” will simply further fuel inflation.

In this podcast and substack, I’m going to work through the economics and politics of this mess. Now let’s get down to the business at hand.

The pivotal event in US and global financial markets over the last week was the collapse of Silicon Valley Bank.  But SVB really wasn’t a bank. It was a grossly overleveraged casino that served as an ATM for the Democrat billionaires in Silicon Valley. And now the Biden regime has bailed it out and thereby saddled America’s middle class with trillions of dollars of additional debt.

As Donald Trump once said, this is a politician-made disaster that really began on January 20, 2020.  That’s the day Joe Biden entered the White House and began to undo everything Donald Trump had done to grow our economy and keep inflation near zero.

On the energy front, Biden canceled pipelines and prohibited leasing on government lands. This helped spark what has been a dramatic rise in oil and gas prices; and that rise has of course been followed by a rise in food prices because a key ingredient of food production, fertilizer, is petroleum-based.

This kind of inflation is what economists call “cost-push inflation” which not only causes prices to rise but also growth to fall. It is precisely this kind of food and energy cost-push inflation that helped spark the stagflation in the 1970s.

Biden and his feckless Department of Transportation Secretary Pete Buttigieg also went AWOL when it came to the critical task of securing our global supply chains and bringing American manufacturing home, further contributing to cost-push pressures.

On top of this, the Biden regime, with the help of then Speaker of the House Nancy Pelosi and Republican traitors like Mitch McConnell in the U.S. Senate, undertook a series of unprecedented government expenditure programs that have generated the other kind of inflation that can rip an economy apart – demand-pull inflation, which is too much money chasing too few goods.

The coup de inflationary grace has been Joe Biden’s endless war in Ukraine which is further exacerbated oil and gas prices, drained America’s defense arsenal, and dedicated billions of taxpayer dollars that would be better spent on US soil than given to a corrupt Ukrainian regime.

Not surprisingly, Biden has unleashed the worst set of stagflationary forces since the 1970s. The obvious solution to this crisis is to reinstitute Trumpian structural reforms that would jumpstart our oil and gas sector, bring our supply chains home, and strengthen American manufacturing. Instead, Biden and Janet Yellen are rolling the dice on a Federal Reserve that does not have enough arrows in its quiver to deal with both inflation and recession at the same time.

On the one hand, if the Federal Reserve wants to control inflation, as it has been trying to do, it does so by raising interest rates and tightening credit. But that only makes any recession deeper.

On the other hand, if the Federal Reserve decides that it wants to fight recession, it can cut interest rates and loosen credit, but that only sparks more inflation. The bottom line is that we cannot and should not rely on the Federal Reserve to get us out of this inflationary mess – yet that is exactly what Biden and Yellen and Jerome Powell have been doing.

To wit: Joe Biden’s hyper-inflation led the Federal Reserve to engage in an aggressive round of interest rate hikes. Over time, these interest rate hikes caused substantial drops in bond prices. Remember here that bond prices and interest rates move inversely.

As bond prices have fallen dramatically, those banks and other financial institutions using bonds to hold their bank reserves have suffered unrealized losses that, for the entire banking sector, conservatively total over $600 billion.

The important point to note here is that any given financial institution does not have to actually sustain these losses if it can hang onto the bonds until their maturity. But, and this is the big but, banks have been under increasing pressure to cash out these bonds to reimburse depositors who want to take their money out of their banks and run. The result has been a classic bank run scenario, and it hit Silicon Valley Bank with a vengeance.

In fact, as I noted, Silicon Valley Bank is not really a bank but rather a casino for the Democrat billionaire elites.

A traditional bank is supposed to have a reserve ratio of around 20%. That is, at any one time, it has to have at least 20% of its total deposits on hand in cash in case depositors need to take their money out. Silicon Valley Bank had nowhere near that. It was a grossly mismanaged, wildly overleveraged bank with virtually no attention to managing its risk as interest rates rose; and once the bank run began, it was game on for the Smart Money on Wall Street.

This Smart Money saw immediately that the Biden regime would not do what it should have done, which was to let Silicon Valley Bank fold and have its wealthy elite depositors take the loss. Instead, this Smart Money bet big that the Biden regime would immediately bailout not just Silicon Valley Bank but also the entire US banking sector.

Biden would of course do this because he is beholden to the big Democrat donors who stood to lose the most big bucks but also because useful globalist idiots like former Obama advisor Larry Summers and any one of a number of touts on CNBC and FOXBusiness would be clamoring for such a bailout.  And this is what economists call a classic case of “moral hazard” on steroids – now that banks believe they will get bailed out even if they engage in reckless, ultra-risky behavior like Silicon Valley Bank, they will indeed take on excessive risk.  And thanks to JD Vance on Capitol Hill for being the only Senator who seems to understand the nature of this moral hazard.

Within a nano-second of the Biden bailout, the smartest of the Smart Money would also immediately see that the collapse of Silicon Valley Bank would likely freeze the Federal Reserve’s rate hikes strategy in its tracks. At first glance, it is quite easy to blame the Federal Reserve for what happened because it was the Fed’s hiking interest rates to begin with that led to the big paper losses on the balance sheets of the banks and now subsequent bank runs.

But of course, let us remember here, that the Biden regime effectively gave the Fed little choice – although I would say here that if I had been Federal Reserve Chairman at the time, I would’ve been screaming every day from the bully pulpit of the Fed that the solution to this inflation could not be found at the Fed but rather on Capitol Hill and the White House by a return to Trump policies.

Of course, in the last few days, the Smart Money has made billions off our backs by going long treasury bonds and shorting the dollar.  And yes, we have seen all this market movement on the intense speculation that Federal Reserve Chairman Jerome Powell will do a mea culpa and use this crisis to reverse his rising interest rates policy.

So where does this all leave us?  In four words: Joe Biden’s stagflationary hell.

If you believe to begin with that the Federal Reserve interest rate hike policy was prudent and a useful control on inflation, and the Federal Reserve stops raising interest rates, the only thing that can happen is that inflation will continue to spiral upward; and this is all the more true given that the bailout itself represents a very significant expansionary monetary policy in that it provides the banking sector with more reserves and therefore more ability to lend out those reserves.

Of course, if you believe like I do, that the real solution has to be structural, then we all remain screwed except the big hedge fund managers because the politicians in Washington really don’t understand the nature of this crisis. 

We must remember here that Speaker of the House Kevin McCarthy has an important role to play by holding firm on his promise to trade substantial expenditure cuts from the Biden programs in exchange for lifting the debt ceiling.  That will at least help with demand pull inflation.

But other than that, don’t expect Biden to be acting like Donald Trump anytime soon to restore our economy. And that is where we stand.

Peter Navarro. Out.