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The Coming Banking Collapse

The Fed admitted a month or so ago that it's losses on it's bond holdings and agency debt were $330 billion. That's quite a lot of a sudden dent, especially as their balance sheet equity equals $50 billion. Those figures were for march, but since then bond yields have risen further, which means their value has fallen, so it would seem the Fed is in a hole to the tune of nearly half a trillion dollars. That's T for trillion. So it is technically bust.

Of course, the Fed can refinance itself by lending money to the government, and the government can then apply those funds back onto the Fed's balance sheet. A wonderfully useful con, of course. We can't do that, but the government can. But it is also akin to the emperor's clothes. He isn't wearing any, and the Fed isn't really kidding anyone that it has some useful assets. We are just waiting for the equivalent of the little boy shouting out that the emperor is actually in the altogether.

But what about Japan?

Their banks asset to equity ratio is such that a further slide in the value of their assets will push them under. With raging inflation and assets invested in bonds their value is steadily sinking, so these banks are not in any way stable.

Basically the investments are all in financial assets so a few more tanking financial stocks takes these banks further and further into a black hole.

The Bank of Japan is also, because of its decades-long QE, holding tanking equities, and a short while ago is debts exceeded its equity by some 150,000 times. That's a fairy tale figure bearing no relation to sense.

Of course the Japanese central bank can recapitalise itself in the same way as the Fed, but unless it does so pretty soon how is it going to backstop those bankrupt commercial banks? And as bond yields rise, so it sinks further and further into what appears to be a bottomless pit.

The figures for banks in the euro zone are almost as bad. For instance, Société General's price is at a discount of 30% to its book value, while the figure for Credit Agricole is 80%. How can they raise money in these circumstances?

The ECB is in a worse position. It has been buying bonds like there's no tomorrow, and those prices have fallen quite substantially. Probably in the region of about 35% of face value.

The ECB cant recapitalise itself as it has no government to turn to. Its shareholders are the national central banks, which are all already under water for the same reasons. So why would the Bundesbank for instance want to recapitalise the ECB when under the T2 system it is already owed €1.2 trillion, which it will never be paid.

The financial powerhouse of the EU is Germany where producer prices have risen by 30% and look to be going higher, and the economy is collapsing, so where does the euro go from here?

At some stage the financial system locks up, and markets shut down. That cant be all that far away. If you've got more than £5k on deposit in a bank, you may well find that money is used to prop up what is left of the banking system. We are looking at what happened a decade ago in Greece and Cyprus, but on a far grander scale.

Next week I'll make a few suggestions as to what you need to do to be prepared.

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