“The Banks Are Melting”, And Signs Of A Major Credit Contraction Are Already Starting To Emerge
When there is fear in the air, banks start getting really tight with their money, and right now there is lots of fear in the air. A major credit contraction would be a nightmare scenario for the economy, and as you will see below, there is evidence that this is already starting to occur. And we all remember what took place during the last financial crisis. Banks decided to substantially tighten their lending standards and that really deepened the economic downturn. So our leaders should be doing what they can to support the stability of the system, but strangely they end up doing just the opposite.
For example, U.S. Treasury Secretary Janet Yellen publicly admitted that blanket coverage of all uninsured deposits in U.S. banks is not even under consideration.
In response to a direct question about whether the Treasury would circumvent Congress to insure all deposits, Yellen replied, “I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.”
When she made this statement, she poured even more lighter fluid on small and mid-size banks all over the country.
Wealthy people and large companies have already been pulling billions of dollars out of such banks, and a lot more money will inevitably be pulled out in the weeks ahead.
Now that these banks are bleeding deposits at an unprecedented rate, what do you think their approach to lending will be?
Needless to say, they are going to be extremely averse to taking risks at this point.
And that means that lending standards are going to be getting a lot tighter.
In response to a tweet in which Joe Biden touted the accomplishments of his administration, Elon Musk warned that “the banks are melting”.
In my first year in office, we protected more lands and waters than any president since John F. Kennedy.
We’ve also made the largest investment to fight climate change – ever.
Today, we’re building on that momentum by protecting additional natural wonders. pic.twitter.com/bMwc915fuG
— President Biden (@POTUS) March 22, 2023
Musk is quite correct.
Our banks are definitely in the process of melting, and hundreds of them could soon be in very serious jeopardy.
And just to make sure that hordes of banks will soon be teetering on the brink of disaster, the Federal Reserve hiked interest rates once again recently.
As CNN’s Richard Quest has pointed out, our banks “are stuffed to the gills with these government bonds”, and every time rates go up those bonds become even less valuable.
Quest said, “Now, if inflation was your goal and your number one target, then you’d have gone 50 [basis points]. But, obviously, the overriding concern is the banking sector. And remember, Zain, the problem with the banking sector is that all the banks are stuffed to the gills with these government bonds. Raise the interest rate, and the bond becomes less valuable.”
Later, he added, “More banks are going to go out of business. More state and regional banks in the United States will need to be resolved — to use the technical phrase — they’ll be taken over, they’ll be wound up, they’ll be taken into ownership, among other measures.”
So is there evidence that all of this banking turmoil is starting to directly affect the behavior of U.S. consumers?
Well, it appears that credit card transactions are already starting to tumble quite dramatically.
As Citi’s Paul Lejuez writes in the Citi’s Credit Card Insights report, the bank’s credit card data for the 16 sub-sectors it tracks show that total spending in March week 3 (ended 3/18/23) decreased 10.3%, a big deceleration vs March week 2 (-6.8%), and driven by a high-single digit decline in transactions. Ex-Food, spending decreased even more, tumbling by 13.0% vs -8.1% in March week 2.
As Lejuez notes, “This was the first week of data following the disruption within the financial sector, and we were curious if it might have had an impact on the consumer. It sure did” and as Citi goes on to note, the third week of March, and the first week after America’s regional banks imploded, “was the biggest decline in total retail spending we have seen since the pandemic began (April 2020).”
As economic activity slows down, companies all over the nation will be forced to slash payrolls.
We have already been witnessing a tsunami of layoffs in recent months, and it appears that this tsunami is gathering even more momentum.
For example, Walmart has announced that it will be giving the axe to hundreds of e-commerce fulfillment workers:
“Hundreds of workers at five U.S. Walmart facilities that fulfill e-commerce orders are being asked to find jobs within 90 days at other company locations”, a spokesperson confirmed to Reuters.
About 200 workers at Pedricktown, New Jersey, and hundreds of others at Fort Worth, Texas; Chino, California; Davenport, Florida; and Bethlehem, Pennsylvania were let go due to a reduction or elimination in evening and weekend shifts, the spokesperson said.
And Accenture just announced that it will be laying off a whopping 19,000 workers worldwide in the months ahead:
“Professional services company Accenture plans to cut 19,000 jobs worldwide over the next 18 months in order to trim costs amid the tumultuous economic environment.”
Most of the cuts will impact those working in the company’s non-billable corporate roles, Accenture said in a filing with the Securities and Exchange Commission (SEC).
Even Disney is being forced to slim down. In fact, we are being told that the coming wave of Disney layoffs will be a “bloodbath”. Insiders tell Deadline that multiple rounds of cuts are being prepared.
Needless to say, this isn’t normal.
We haven’t seen anything like this since 2008, and every month this crisis just seems to escalate even more.
You know that events are bad when one of the largest employment websites in the entire world starts conducting mass layoffs:
“Job search platform Indeed announced that it plans to lay off 2,200 employees, or roughly 15% of its staff.
Indeed CEO Chris Hyams said in a letter shared with employees that the cuts come from nearly every team at Indeed and Indeed Flex, noting that the decisions were carefully made with human resources, the legal department, and Diversity, Equity, Inclusion and Belonging teams.”
As economic activity slows down, it is inevitable that many more Americans will suddenly lose their jobs.
Unfortunately, most Americans still assume that our leaders know exactly what they are doing, but the truth is that way too often they are taking actions that are making our problems even worse.
May 25, 2023