International Man: Historically, classical banking functioned as a way to safeguard people’s money—banks charged a fee to depositors for holding money and administering transfers.
Today, banks generate enormous profits from making loans to borrowers—by lending out far more than they hold on reserve.
How has the relationship between the depositor and the bank changed over time?
Doug Casey: The banking industry has become totally fraudulent. It has totally left its roots.
As I explained a couple of weeks ago, the banking business is really two separate and unrelated businesses.
One is savings accounts (a.k.a. time deposits), where you deposit your money, gold, with the bank for a fixed period of time. You’re paid a fixed amount of interest. The bank lends it out for the same amount of time for a higher rate of interest. Historically, sound bankers only made short-term, self-liquidating loans backed by assets exceeding the amount of the loan—but there’s still a degree of risk.
The other function of the bank is to store your capital securely. For that, you use a checking account (a.k.a. a demand deposit). The bank doesn’t pay you but charges you a fee for keeping your money safe in a guarded and insured vault and giving you the right to transfer or withdraw it instantly.
These are actually two completely different businesses. But today, accounts of all types have been completely merged. The public—and almost all bankers—don’t know and really don’t care about any of this.
Banking has totally transformed—in 1913 with the founding of the Federal Reserve, then in the 30’s with the devaluation of the dollar and a slew of new regulations, then in 1971 when the dollar was turned into a complete fiat currency—from a relatively small business, where in effect a merchant was providing a service to safeguard and deploy money, to a dominant institution that controls the economy. It’s part of the financialization of everything. The Federal Reserve is now essential to financing government deficits today, much more than taxes or the borrowing of savings.
The Federal Reserve buys government debt with dollars it creates and deposits them in government accounts at commercial banks. The commercial banks then lend the new dollars out many times over through the fractional reserve system. It seems to work until too many borrowers become too indebted. Or too many depositors lose confidence in the system as they did recently with Silicon Valley Bank.
Unfortunately, most people don’t have a clue how this works or what the mechanics of it are, but it’s the main reason why we live in a world which is head over heels in debt.
“Saving” means producing more than you consume and setting aside the difference. It allows a higher standard of living in the future.
“Debt” facilitates an artificially high standard of living now and a lower standard of living in the future. That’s because you’re either consuming capital that others have saved or you’re mortgaging your future.
The bottom line is that the whole financial system—based upon the way currency is created today by the government and the way the banks work, is totally and irredeemably corrupt. I don’t believe it can be reformed. It’s inevitably going to collapse in some way.
International Man: A fractional reserve banking system could only work if there is a so-called “lender of last resort” to create new currency units out of thin air to bail everyone out when things go south.
This is what the Federal Reserve and other central banks do.
It resembles a Ponzi Scheme backstopped by a massive counterfeiting operation.
What’s your take?
Doug Casey: The Fed has become part of the cosmic financial firmament. People react to any who question its legitimacy as they might to a Flat Earther. Regardless of that, I think it’s important to say that fractional reserve banking is a fraud. It’s a criminal activity.
The solution is not to have a lender of last resort to hold everything together, hoping to keep the system intact. The solution is to recognize that anything short of a 100% reserve banking system is a fraud and should be treated accordingly. When a banker mixes savings accounts and checking accounts or creates loans without corresponding deposits, he should be prosecuted as a common law fraudster. But now, these things are integral parts of the financial system. It’s going to be very, very hard to unwind.
Of course, the Federal Reserve itself should be abolished because it’s the actual engine of inflation, but that’s not going to happen either because the government relies upon the Federal Reserve to finance most of its spending today.
With the world as deeply indebted as it is today, pulling the plug would cause widespread bankruptcies and unemployment as embedded distortions in the system are liquidated. But the plug should be pulled because it’s important that the world returns to a sound basis, which is about producing real goods and services as opposed to shuffling money around to the benefit of the paper economy.
Put it this way: If a 100-story skyscraper is poorly built and resting on quicksand, it’s better to have a controlled demolition than wait for it to fall unexpectedly at a random time.
This is going to end extremely badly, likely during the current financial crisis.
International Man: The recent collapse of Silicon Valley Bank was the 2nd largest bank failure in US history.
The US government and media bent over backward to try to convince the public there wasn’t a bailout—but there was. All depositors are supposed to be made whole—despite most being above the FDIC’s $250,000 limit.
What kind of precedent does this set, and what are the implications?
Doug Casey: Banks have become creatures of the State. They’re no longer businesses, among many others, that just facilitate commerce.
The only way to solve this problem is to get the government out of the money system, which is something most people can’t comprehend—and go back to actual specie money, which is to say gold.
The whole system has to be revamped and refurbished.
This is going to wind up with either a deflationary collapse or a runaway inflation of the currency if the government creates more dollars in order to keep the Ponzi scheme going.
The SVB bailout was particularly shameful because it was about protecting the ultrarich around the tech industry—over 90% of SVB’s deposits were over the $250,000 limit. Of course, if the Fed hadn’t bailed out SVB, it would have caused a deflationary collapse. But that would be better than what’s likely coming…
We’ve been on the razor’s edge of a disaster for many years. The massive creation of currency to paper over problems has created bubbles everywhere. In 2000 with stocks; in 2008, with real estate, and a hyperbubble in the bond market. Now the crisis is in the banking system itself. There’s actually no easy way out of this. There’s no soft landing.
What we’re looking at is a gigantic depression, defined as a significant drop in most people’s standard of living. That’s the way it’s going to end, and it’s likely to end soon.
Of course, the government’s going to try to do to paper this over—they’ve tried “quantitative easing,” which they continue by creating huge amounts of digital currency. They’ve tried reducing interest rates to keep things going, which made things much, much worse. Now they’re going to try Central Bank Digital Currencies, which will be the ultimate disaster.
My suggestion is to prepare for a class 5 hurricane in the financial markets, not just this year but over the rest of this decade.
International Man: Are there any practical alternatives to the unstable banking system today?
Doug Casey: I urge people to buy lots of gold and silver, especially in smaller coins. If possible, keep a fair portion of it outside of your native country because your main risks today—as serious as the financial and economic risks are— are political.
You have to insulate yourself politically. Diversify not just into gold and silver but into foreign jurisdictions— where the local government doesn’t see you as its personal possession but rather the possession of some other government.
International Man: The banking system is one giant government-caused distortion in the market. Do you see any smart speculations as these distortions inevitably unwind?
Doug Casey: It’s regrettable that, as the government passes more laws and regulations, creates more currency, and juggles interest rates, the markets will become more chaotic.
People will be forced to second guess the markets just to keep what they have. Most people won’t succeed at this. So it’s important that, even at this late date, you improve your understanding of economics and intelligent speculation, to insulate yourself from these things to some degree.
Most of the real wealth in the world is still going to be here after the current financial system collapses. It’s just going to change ownership. You’re more likely to survive and to prosper by gaining as much knowledge as you can and building as much real capital as you can.