Scott Horton Show - Just the Interviews - 3/31/23 Mike Swanson on the Bank Failures and the Strength of the Dollar

Episode Date: April 4, 2023

Mike Swanson is back on the show to talk about the state of the economy. Scott and Swanson discuss some of the forces behind the recent banking failures and examine how they complicate the Fed’s fight against inflation. They then explore some of the claims being made about the imminent collapse of the dollar as the world’s reserve currency. Swanson shares his insights on each of these topics and then explains what he thinks is in store for the economy in the near future.   Discussed on the show: Wall Street Window Principles for Dealing with the Changing World Order by Ray Dalio Mike Swanson provides investment advice at wallstreetwindow.com and is the author of The War State: The Cold War Origins Of The Military-Industrial Complex And The Power Elite. He also works with the Neopolis Media Group, a group of historians, educators, authors, researchers, and free speech advocates who endeavor to provide original and engaging content, including The Ochelli Effect, and The Lone Gunman Podcast. This episode of the Scott Horton Show is sponsored by: Tom Woods’ Liberty Classroom; ExpandDesigns.com/Scott. Get Scott’s interviews before anyone else! Subscribe to the Substack. Shop Libertarian Institute merch or donate to the show through Patreon, PayPal or Bitcoin: 1DZBZNJrxUhQhEzgDh7k8JXHXRjY Learn more about your ad choices. Visit megaphone.fm/adchoices

All right, y'all, welcome to the Scott Horton Show. I'm the director of the Libertarian Institute, editorial director of anti-war.com, author of the book, Fool's Aaron, Time to End the War in Afghanistan, and The Brand New, Enough Already, Time to End the War on Terrorism. And I've recorded more than 5,500 interviews since 2004. almost all on foreign policy and all available for you at scothorton.4 you can sign up to the podcast feed there and the full interview archive is also available at youtube.com slash scott horton's show okay you guys on the line i've got my buddy mike swanson and he's of course from wall street window.com sign up for his great email list there and learn all about what the hell's going on with the economy and for years you heard my ad for his great book, The War State, which is an awesome history

of the Truman Eisenhower and Kennedy years there and the dawn of the national security state after World War II and all that. I just know you'll love it. And then his latest book is called Why the Vietnam War,

nuclear bombs and nation building in Southeast Asia, 1945 through 1961. And I'm so sorry, Mike, I haven't read this yet. I really want to. I know you believe me because it's true, and I would never lie. I just haven't had a chance to stop and change gears to Vietnam in a while.

But one of these days, I'm going to take a lot of notes, and I'm going to interview you for a long time about that thing. I know. But anyway, welcome the show, Mike. How are you? I was great to talk with you. I looked, and we last spoke in October, and it's like every six months, the market, the economy.

economy goes into a hail spin, tailspin that is. Yeah, well, a hail too. Listen, I don't understand what's going on. I know it's booming and busting at the same time, basically, is what it looks like to me. But, you know, when they talk about curves and yields and all of these different futures and stuff, man, I admit that I get lost because I don't have any money. So what the hell do I know about these things? But it does seem to me like they had, we were overdue for. for a bust and then they deliberately inflicted one in the form not of interest rates but of

the lockdowns but then they made up for that by creating way more even more money and leading to a much bigger even inflationary boom but then they got afraid because they inflated too much so then they started raising the interest rates but then that caused people to panic and recessions to start kick in in certain sectors anyway but then I think maybe they chicken out and decided that now they're going back to boom already because they're afraid of the bus so they're going to keep inflating. But then that's pretty bad too. But I probably got that wrong. So why don't you stream me out? Well, yeah, they're really in a bind right now because as you've described, I mean, it's a good description of what's transpired. But they are caught

kind of in a contradiction of having to fight inflation, while at the same time there have been cracks in the financial system that have just appeared because of the failure of this Silicon Valley Bank, it revealed that there were something wrong in the banking system, and they took extraordinary measures to prevent a broad-based banking panic. Now, I'll tell you, I'm not an economist. I'm a stock market, former hedge fund manager.

So I have a trader's mentality, and that's what I look at. You know, I still trade money in the markets. But people like me will try to look at the past to try to compare what's going on. now to previous eras and me and you and almost all your listeners we have all lived through the 2000 bust the 2008 bust and we're accustomed to seeing the federal reserve lower interest rates everything booms and then it goes too crazy and they start to raise rates then you get a bust in a certain sense that has been playing out not exactly exactly like it did in his previous bus cycles, but in 2020, as you pointed out, they lowered

rates to zero. They engaged in all these stimulus programs. I mean, this is quite amazing. And the stock market boomed similar to it did in the 1999. You had the meme stocks, the rise of the Robin Hood person, and all of them have since been almost completely wiped out. um just like the day trader was in 2000 and 2001 but this bear market cycle that uh or bus cycle is really going a lot slower than those ones we lived through did and it's being accompanied

by huge inflation the biggest inflation in my memory and you have to really go back to the 1970s, I believe, to find a comparable time period. And that right now, you know, the news headlines are dominated by the failure of the Silicon Valley Bank and the stock market did decline for a short period of time. And the Fed took these extraordinary measures. And there has been a blame game, let's say, in Congress. some of the Democrats are saying, oh, these banks haven't been regulated enough. Trump lowered the regulations. Republicans, at least on Fox News, some of these networks were saying it was the

management practice of the Silicon Valley Bank. But I think all that is not an apt. I think they're spinning this to the way they want. And the cause of it is what I've really would like to try to explain. So in the 70s, there was high inflation, but if you look at the stock

market, the sectors in it, gold, mining stocks, silver, energy stocks, material stocks, they were the best performing sectors. However, bank stocks were among the absolute worst performing

sectors. And what was funny was that they actually were making more revenue. Their revenue was growing, but the stocks were going down. And the revenue was going up because as rates went up, they could charge

more interest, you know, for people that are taking loans out, higher fees, just as they are doing now. But the stocks went down anyway. And the reason why is because banks have balance sheets, and on those balance sheets, you know, are bonds,

mortgages, securities, and so forth. And in 2008, the banking crash that occurred then, that was caused by banks having these subprime securities that by 2007 were worse zero, and 10% approximately of the balance. sheets of the major Wall Street investment banks was full of these things. The small regional banks weren't holding securities, you know, the subprime mortgages, not at a, you know, not that much of them. So they kind of just didn't have any problems. And back then there was talk, oh, they should just let the big banks fail and let the small guys, you know, continue to exist and do okay, because they weren't holding this junk.

Well, now it's the small banks that have gotten in trouble or were in trouble. And what has happened is that it's similar, in my view, to the 1970s. And that's why it doesn't surprise, didn't surprise me. But what has happened is that banks have to buy treasury bonds and they make up the bulk of their balance sheet. And those are their assets. And then when they take a loan out, it's, you know, a debit on that balance sheet. Well, bonds, they go down in value when interest rates go up.

And then they go up in value when interest rates go down. The reason why is if you, say, buy a CD and it pays 5% interest. Well, if interest rates were to go up to 10%, that 5% interest just ain't that great anymore. And that would make the CD fall in value. The same thing happens with these treasury bonds. And what happened was over years, and particularly 2020, these local banks and banks all over the world, for that matter,

they were buying all these treasury bonds when rates were very low. And now that the rates have gone up over the past year and a half, the value of those bonds and subsequently their own balance sheets fell in their worth. Now, there's a saying that in these bull markets and bear markets, it's like when the bear market comes, it's like looking at the ocean and the tide coming in, and now you see what was out there. You see the people, when the tide comes in, let's say there's people out in the ocean there near the beach, and you can't see, you can only see their chest. Well, when the tide comes in, now you see who's wearing clothes, it isn't, so to speak. So the tide came in and the most vulnerable bank, respective bank, as far as what it had, who is lending to and what happened to its balance sheet. You blew up, basically. And that caused everyone to go, then look and say, well, does my bank have a problem?

And so there is a risk in the 24-40 hours after the failure at Silicon Valley Bank the other week that there could have been a broad-based banking run across the whole country. I went and looked at my own several of the local banks where I live, and their balance sheets had shrank by 5% in the past 12 months. Well, the Fed stepped in and said, well, we're doing an emergency lending program for all banks. If they need money in order to pay depositors who want to take their money out, they don't have enough, they can now lend from us at a 0% rate. and this program's good was good for 12 months so it's still into effect but all that's

that's what's happened uh the big news and um quite remarkable i mean the fed has never stepped in and said here's this massive program for all banks and it's pretty pretty wild uh the stock market at the moment you know it's kind of going up a little one of the reasons why is that the Fed, because of what's happened, economists know the Fed, and the Fed has said this, that these banks are now in a position where they're going to be less prone to lend out money. They may start to foreclose on people. They're going to basically tighten up so that may constrict the supply of new money coming into the economy. and that could start to have an effect pretty soon within a month or two. So the Fed has had to fight inflation because we've had this annualized official CPI rate went over 9% the other year.

That's why they had to raise all these interest rates. And historically, inflation doesn't go down until the Fed funds rate gets above that annualized CPI rate. rate, and it's still below it. Right. But as a result of this banking problem, they raised rates two weeks ago, but announced that, you know, we may not do it again. They use the word may. We may raise it at the next meeting, which is in May.

And if they do, it most likely be the last rate hike. So they're at the end of the rate hiking cycle, this one that we've gone through. And that call, I would say, causing a question whether they're really going to be able to defeat inflation completely. I really doubt it. So that's kind of a bind that we're in now. Yeah. So in other words, if they wanted to, well, not in other words, what you just said is they'd have to raise the rate high enough so that it doesn't make sense for businesses to keep taking out loans anymore, right? that um right now as long as you know if you're for whatever reasons you take out a loan you're

maybe not paying off uh dimes for dollars but still you're beating inflation if the if they're not willing to raise the rates so high to really crush it so in other words that's the worst of the recession at least for now because they're going to are they going to start lowering rates and do like new stimulus and all that or are they going to need to announce new QE 234 to fulfill that program that you just talked about that announced they're going to make all these banks whole like is it this situation that bad i mean they've already given them like hundreds of billions of dollars or something i read right oh yeah yeah it's it's hundreds trillion uh theoretically is is what's you know the loss of these banks in the value of these treasury bonds. But no, they're not planning on doing another QE. To me, though, you know, I do think the economy is likely to slow down a little bit.

I'm not saying we're going into the Great Depression or something. But any slowdown in the economy, due to these banks simply, you know, tightening up on lending, is likely to help the rate of inflation continue. It's been going down for six months, barely. but it could help it to fall a little bit more and get it above the current Fed funds rate. If it does, the Fed would say this is a victory. But to me, the real problem is that, say, the economy does slow down

and at some point, you know, the stock market fell quite a lot last year. It hasn't given back, taken back those losses yet. And it could go down again. to me the danger is that the economy, the markets do fade a bit before the end of the year and then the Fed lowers interest rates in response. And the bond market's actually forecasting that they will do that by the end of the year. But in my view, the danger is that after doing that, that all the inflation would just simply explode all over again.

And we just, I just think we're in a mess similar to the 70s. That's what happened then. Rates would go up, you know, you have high inflation. They'd raise the interest rate. And it would get above the CPI rate for a short period of time. And then everything would just get slant. The economy would just grind a halt. They'd be lowering rates again.

And this whole process would start over. And it happened like four or five times. until Volker came in and, you know, raised them up so high that it was way above the rate of inflation and crushed things, so to speak. But that caused a bare market in the stock market and a slowdown in the economy that lasted for two years. It didn't really end to 1982. So it's just a mess, I think, that we're in. And to me, it's a consequence of not this Silicon Valley bank and making stupid loans,

but, you know, decades already of crazy low-rate monetary policies that, you know, overstimulated everything and made all these bubbles. Hey, guys, Scott here for Leo Hamill find jewelers out of San Diego at Jewelry StoreSD.com. They do business nationwide. They sell jewelry and watches, specializing in engagement rings. You know, in case you're in love with somebody. They also specialize in one-of-a-kind vintage and antique jewelry, fully serviced pre-owned fine watches, such as Rolex, Patech, Philippe, Cartier, and any high-end brand.

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It's Scott Hortonshow.substack.com, and if you do that, you'll get the interviews a day before everybody else, but not only that, they'll be free of commercials. How do you like that? Pretty good, huh? Scotthorton'show. dot com. Hey, y'all, libertasbella.com is where you get Scott Horton's show and Libertarian Institute shirts, sweatshirts, mugs, and stickers and things, including the great top lobstas designs as well. See, that way it says on your shirt, why you're so smart. Libertas Bella, from the same great folks

who bring you ammo.com for all your ammunition needs, too. That's Libertasbela.com. Now, so back a couple years ago when the banks were buying all these bonds at these low rates, did they know that, geez, once all this inflation hits and they raise rates, we're going to be sitting on all these worthless bonds. But, oh, well, we don't have to worry about that because we know that the government will create more money and bail us out. Well, I'll tell you, I don't know. Well, okay, the banks where I live at, I have a friend that was on the board of directors

of one of them. and he quit like a year ago or maybe a year and a half ago and asked me if I wanted to try you know maybe give me a chance to get on there and take his place I think you get paid like $2,000 a quarter or something and you know

I would have the before he quit he I would ask him these questions you know what do they think about all these bonds because he didn't he believed that they would fall in value eventually because of inflation blowing up as has happened. But he just said these people, they just feel like they have no choice but to buy these bonds. And to do anything different, risk making what would be a catastrophic career mistake

because no other bank's doing it. And treasury bonds are the safest thing, you know, you can buy. they're backed by the government safest in theory. The risk is inflation to them when you buy them when rates are zero. But to these people, they had no other choice. They're not like central banks that are going out with the ability to buy currencies and, you know, gold and put this on the balance sheets too. All they can buy is different mortgages or different bond mortgages can be bonds too. but different, you know, bond-type securities.

So the only choice they can make is how long the bonds were in duration, just, you know, 90-day bonds, one-year bonds, two-year bonds. And then at the same time, whereas making them shorter term would be how you deal with this inflation risk or the risk of them falling in value. But they're mandated to own all these treasury bonds, too. so they're kind of just like stuck and trapped and they can't really do anything differently and I was like I'm not a economist and what am I going to go on a board it'd be telling these people that this is all going to blow up one day and so that's it's just a group think I guess yeah all right so there's been a lot of hype lately about the world terms turning away from the dollar.

And the last time that they talked about this a lot was about 10 years ago. And I know there are people who think that this is what caused America to pull the trigger on Saddam Hussein and Omar Gaddafi. I'm not sure if I buy that, but it sure may have played into the motives against them that they wanted to diversify out of the dollar. And they say that, you know, he got off the gold standard, got on the oil standard. And the Saudis promise to always denominate all. their sales and dollars and then to spend all their profits on u.s. debt and this kind of thing and then but

now they're all turning away from the dollar but the last time they were talking about this the answer seemed to be that yeah turn away from it toward what they said well we'll put together a market basket of this and that other kind of we'll have roubles and wands and different things and then it turned out that most of the central banks in the world at the time still still, I guess, preferred dollars. But then now that they're talking about it again, they're saying, yeah, but that's really changing. And everybody's diversifying out of the dollar

because the empire is going down in flames. And now it's the rise of the bricks and all their friends and the Shanghai cooperation organization and all of these things. And they're going to figure out a new currency to keep in their vaults instead of dollars. And that then, I guess, so one, is there any truth to that? or what is the truth to all of that?

And then, too, if you really think that that's a problem, does that mean a full crack-up boom and all those dollars come floating home and then we have inflation up in the absolute catastrophic percentages or am I riding off the rails here? What's the deal? Well, I'm... First of all, I say, like, what you said people used to say

the dollar was no, you know, was going to fall in value, it was going to be displaced on the, you know, as a reserve currency of the world, you know, in the 2000s, early 2000s, you know, that's when I was learning about this kind of stuff. And that was a commonplace view. And one thing I learned, you know, recently in the past couple years, that this wasn't just a view of what I'm seeing on the Internet, you know, libertarians or alternative financial media people. But this was actually the view of the central banks. I read a book by a former governor of the Bank of England, and he said this is what people, what they believe was going to happen, and it didn't happen.

That's then. Now, and at the time, the head economist, I think of Morgan Stanley, was predicting that, you know, the dollar was going to take a big, like, 20% hit and so forth. but I'm convinced there's a you know I'll give you the exact figures of this in a minute but there's a Ray Dalia came out with a book that got real popular last year called the changing world order and it's looking at the history of empires has lots of charts in it and what happened you know one of the things it looks at is what happened with the reserve currencies of all these things going back to the Dutch Empire the Spanish Empire after that the

the British Empire and ours, and all of them had, at one time, they were, those previous empires, they had the reserve currency. So the British pound was the reserve currency of the world, really before World War I. Now, what's interesting is that the way these countries lost their reserve currency status was it happened slowly over decades, didn't just like happen overnight in a sudden crash. So the pound lost that reserve status from really World War I to about 1960, really in a slow manner, just kind of erode. What happens is this reserve currency, it becomes the currency that it's not simply that central banks are holding it, but that it's being used to do all the transactions in the global economy. it's the the words you know uh so our currency displaced it um starting it did it slowly from

war one and then it just completely took off and we displaced it really during world war two and breton in the breton wood system and even with the sort of failure that breton wood system in the 70s the dollar still wasn't displaced so the dahlia book he he he He's asserting that we're slowly, we're going to go through the same thing, and it's just going to take decades for the dollar to get displaced as the most important currency being used around the world. And it appears that that's starting to happen. I mean, the war in Russia has probably helped speed that up. China is trying to, you know, use less dollars than they were in the past. Russia can't now.

So those are just two examples. And other countries see this and, you know, Iran's obviously can't use U.S. dollars too. Now I'm looking at a chart that has the U.S. dollar share of global reserve currencies. And in 2014, it was 66%. And at the end of last year, it was 60%. So it's slowly fallen by this chart by about 10%. over eight years. So I would use that model to figure out what's going to happen. It's just a slow process. It'll take decades. And I don't know, is really the wand going to take its place as that

reserve currency, or is it just going to be a bunch of them floating around together? So there isn't really one dominant one. That may be the more likely scenario. That sounds more likely to me. I mean, really, every government has the same problem as the U.S. government, right? All they know how to do is print money. So that's the same for the Russians and the same for the Chinese and the same for Singapore and everybody else, right? Yeah, yeah. And it's what I was talking about earlier with this banking problem in the United States. That's Silicon Valley Bank failed on a Friday, and they bailed out our, or the analysis is programmed to backstop all the banks over the weekend.

And then a day or two later, all the banks in Europe crashed. So they had the same problem. Yeah. So all these problems, it's such as the U.S., it's definitely a global thing going on. Yeah, so, I mean, I could see that. I have the same emotion about turning my back on the American Empire. I could see why, you know, people all over the world feel that way. But, you know, I remember Robert Higgs.

I asked him years ago, the libertarian economist, about all this, about, you know, the oil standard propping up the dollar and all that. And he said, yeah, you know, really, since World War II, it's not that the dollar's greater. We're right when we complain about how inflationary it's been this whole time. But compared to what? And compared to the rest of the world, if you're a central bank. or just a major banker somewhere where you don't have gold bars, you keep wads $100 bills because other currencies are more likely to get devalued in larger percentages sooner. Not that it's perfect, and I'm paraphrasing very roughly here, but they all have all these

built-in problems with them. So it doesn't make the dollar great, but it just means that, you know, if you are, you know, in that position where you've got to hold however many billions of dollars or hundreds of billions of dollars in reserves for your sovereign government of what currency you're going to denominate it in. You know, you kind of

don't really have any choice. Yeah. I mean, you really don't. To me, though, the thing as an investor, I guess, is to try not to have as many. it's difficult

it's almost like there are no good investments you know I think people might be puzzled Mike why gold and silver and other metals aren't doing way better in these times is the game rigged there no I don't

think it's rigged they since I mean they're not going to the moon silver's still under $30 but since the start of let's say

over the past two years they are outperforming the stock market so I mean they're acting better than just about they might be the best performing thing at the moment

over the past six months they are that's good all right well so when can we expect the next shit coin bubble right I want my doge coins to go to 35 cents.

I don't know. I mean, I'm someone that's skeptical of everything they say about the crypto coins. But when I look statistically, they have the closest trading relationship to the NASDAQ. Like you can track, you can just do a statistical analysis of how closely something moves with something else. So when the NASDAQ goes up, they tend to go up. When the NASDAQ that goes down, they go down. So last year, the crypto coins crashed. I mean, they fell worse than the NASDAQ.

Now they're rowing. And the NASDAQ's been rallying since around, since New Year's, really. So they may go up a little more. But I don't know if they'll ever go to a, you know, I don't know if Bitcoin's ever going to a million or whatever. Might go back to 67 again. Let's hope that. Yeah, yeah. Yeah, sure. Seriously, man. I need a new catalytic converter.

Not that mine got stolen. It's just rattling. Hey, it's 25, 27 years old. Hey, 28. What else is I going to ask you? Oh, yeah. So, but then I guess on the back to the slow kind of move away

from the dollar, does that mean we're going to avoid a crack up type boom where all those dollars come flying back at once and our economy's decimated? I always say yeah, I think the odds of that are low, that there's just going to be this hyperinflation

sort of situation. What do you think about the idea that kind of one morning, the animals spirits get to the central bankers and they all start panicking and selling their dollars to try to beat everybody else or all their government debt and then that just destroys the currency. Well, I tell you, that was one of the interesting things about last year when the war in Russia started. He wasn't clear how the United States was actually going to react or NATO for that matter or Europe um and i mean honestly it appeared to me the first hours of the war

we may not have been doing well let me put this way right when the war started or the days leading up to it the weekend leading up to it there are articles uh coming out of germany basically saying that they shouldn't do as harsh of sanctions uh as they ended up doing And supposedly the story was that someone in the Biden administration on the National Security Council, I forget the guy's name, but he got together with someone at the European Union and they planned all these harsh sanctions out that had the effect of completely locking Russia out of the swift banking system. That was what the Germans were saying, don't do that. It's too extreme. So we basically made it so all those banks that the Russian Central Bank owns cannot sell them. Now, I heard reference, I mean, I was shocked that they went that far.

And I heard reference on a podcast where someone, you know, right after this, someone, and I couldn't verify this though, but they said that there was a good. U.S. government report, the Defense Department study, that advocated doing that on the basis that this would prevent the Russians from selling the dollars or the debt that they own, that, that's, you know, U.S. treasuries. So it would, and an argument was that, well, this isn't, the guy doing the talking about this was saying, this isn't really about Russia. This is about China. We've basically sterilized and prevent the Chinese from using the bonds that the American treasuries they have as a weapon against us by doing, we could, in theory, do just exactly what we did to them and make it so they can't sell them. So that would be, it makes complete sense, and that that's an answer to your question. Man, crazy.

All right, well, listen, I got to run. dude, I'm sorry I'm out of time here, but thanks so much for doing the show again and thanks for making me worry a lot about the short, medium, and long-term future of America, as always. Well, it's a mess. It's no doubt about it. Everyone knows

that. Tried to warn them, at least, so we got that going for us. Thanks, man. Good talk with you. The Scott Horton show, anti-war radio, can be heard on KPFK, point seven fm in

LA. APSRadio.com anti-war.com Scott Horton.org and Libertarian Institute.org. Hey Richard, great to speak to you. That moment right there, that's what it's Yeah. That moment right there,

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