I am republishing here an essay I alluded to in my previous post on post-capitalism, that was begun in May of this year, and completed closer to July. While the events are now six months in the past, I don’t think the message is dated. We are compiling a book on Empire in modernity, from which this essay is drawn, that can be purchased in digital form here should you wish to follow these trails deeper into the primal forest.
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
-TS Eliot, The Hollow Men
On March 9, 2023, after a fairly classic bank run, Silicon Valley Bank (SVB) collapsed and went into federal receivership.
On April 28, 2023, the US Treasury’s official fiscal data website declares the national debt to be $31,458,014,678,320. For those not well versed in decimal placeholders, that is thirty-one trillion, four hundred and fifty eight billion, fourteen million, six hundred and seventy two thousand, three hundred and twenty dollars. A million is a thousand thousands. A billion is a thousand millions. A trillion is a thousand billions. So 31.45 thousand billions. At the time of this writing, the federal government is debating how to raise the debt ceiling, which they have hit, in order to permit them to make this number larger. Neither side here is interested in compromise. The US government runs out of money June 5, 2023. Interesting times.
On December 31, 2022, SVB held $152 billion in uninsured deposits. These were deposits that exceeded the Federal Deposit Insurance Corporation (FDIC) cap of $250,000 per account. As the federal reserve raised rates, and capital conditions tightened, many of the startups SVB banked experienced increases in their funding costs as debt became more expensive, in tandem with significant valuation contraction because many of them are pre-revenue, which caused them to need to withdraw more cash, putting increasing deposit outflow pressure on the bank. In tandem, the bank’s book of loans was losing value due to interest rate hikes. When forced to sell $21 billion in securities to fortify their cash position, this resulted in a $1.8 billion loss, in the wake of which the bank talked about raising funds, and severely bungled a communication with customers, which is what set off the run. Hindsight being 20/20, the bank’s risks had begun perhaps years earlier, but of the collapse, these were the immediately proximal inciting events.
During the run, SVB’s venture capital customers, who were the very people SVB had helped make incredibly wealthy, directed their portfolio companies to withdraw all funds from the bank at once.1 This community, which is tightly connected online, acted in a herd-like fashion, led by the one-and-only Peter Thiel: brilliant, gay, obscenely wealthy, libertarian, vindictive, and a prepper. This stampede of withdrawals led to a $40 billion deposit outflow from the bank in one day. The events that triggered the collapse, namely a $1.8 billion loss, and poor communication, which shook depositor trust, created conditions that the US government and Federal Reserve believed created systemic risk in the US banking system, at which point the federal government stepped in and took the bank into receivership. At the moment the bank went into receivership, the catalysing event at SVB, namely a $1.8 billion loss, represented .00006 of the federal deficit (less than one one-hundredth of one percent).
What is money? I confess that I don’t understand it that well. I’m looking at a jar of coins sitting on my breakfast table as I write this, which has been sitting there for some months. It is on its way, at least theoretically, to the bank to be turned into dollars, because we don’t want to walk around with our pockets filled with coins. They are too heavy and awkward a medium of exchange. This jar holds the spare parts of dollars that have been broken up, from the purchase of some odd item, that landed in someone’s pocket, a shirt, jeans, the inside pocket of a jacket, my wife’s purse, and were then rounded up and consolidated there. Most of these coins arrived in the jar years ago, when we were still using cash on the regular, which we are not doing now. They are made of copper and nickel and were, at some point, made of silver, though no longer. But money isn’t the metal, is it? Its value isn’t the coin. On the coin itself, and on every dollar bill, is stamped the Great Seal of the United States.
The value of a dollar isn’t in the paper. The bill, like all fiat currency, is actually a contract backed by the US government. The same government with 31.45 trillion dollars in debt. Fiat currency is a contract tied to a worldview embodied in a nation-state.
Fiat currency is a contract tied to a worldview embodied in a nation-state.
The US government is 31.45 trillion dollars in debt, which makes it by far the largest debtor on earth. The US dollar is also the reserve currency of the world.
Apple, which makes the computer I am typing this on, is the largest company in the world by market cap. This morning, that market cap stands at 2.665 trillion. But that market cap is about thirty times their earnings, which were about $100 billion in 2022, so the amount of money flowing through the company is a fraction of that market cap. Apple’s total debt is $121 billion dollars, which is about half of one percent of the US government’s total debt.
The US government isn’t a company, but its debt is 260X the debt of the largest company in the world. This government had to step in to stabilizing a company whose implosion was set off by a $1.8 billion hole in their books, because in their estimation not doing so risked destabilizing the entire US banking sector.
Since the US dollar is the reserve currency of the world, and the US government is 31.45 trillion dollars in debt, and systemic risk to the US banking system can be set off by a 1.8 billion hole in a modestly sized US bank’s books (as of December 31, 2022, it was the 16th largest US bank), what kind of interventions globally has, and will, the United States government make, and need to make, when and if events in other nation-states act in a manner that might destabilize this hegemony? Can you separate the foreign policy interventions of the United States from its economic interests? In the interests of who, and of what, does the United States therefore intervene? Is its interest primarily in democratic institutions and norms, or, as the largest debt-leveraged entity on earth, and in the history of the world, could there perhaps be other interventional motives?
Stay with me here, I’m still setting the table. Dinner isn’t even served yet. I’ll tell you when the first course is coming.
Have you ever experienced an avalanche? I started to write ‘witnessed’, but that word implies some kind of attending to that is outside of being impacted. I don’t think it is possible to witness an avalanche. If you can see it, you will feel it. There is no direct observational vantage from which you are removed from feeling it.
At the present time, we have recorded a record snowpack in the Sierra. At Mammoth Mountain, in California, this winter we recorded 702 inches of snowfall. There are 12 inches in a foot. From January to March of 2023 there were a series of historic atmospheric rivers. This one particular meteorological outpost has, as a result, recorded 58 feet of snow. The interesting thing about an avalanche, and I suppose we can only use the word interesting, rather than terrifying, if we are not down-mountain of it, is that what sets it off is generally not a large event. In chaos theory, and systems dynamics these amplification effects are often called Butterfly effects. The classic metaphor is that of a butterfly’s wingbeats causing a hurricane. This is a way of speaking about massive amplification loops cascading through a complex system. The snowpack is dynamic. At nearly sixty feet thick it is incredibly heavy. The compressive forces down at the bottom are tremendous. It is not uniformly dense, as different snows of different consistency have been sunned by different warmths, and melted differentially. This entire mass, of inconsistent texture and density is also stacked on hillsides, mounded at acute angles. The sun warms it, night cools it. There are layers and layers of accumulation. In these places, much of the backcountry is closed to humans. It is much too dangerous. But an avalanche, which destabilizes the entire snowpack, can be set off by a mouse.
Sixty feet of snow, thirty one trillion in debt. SVB is a mouse, treading across a snowpack in the Sierra. All it is trying to do is get home with the seeds in its mouth. Let’s pause right here. The mouse is a creature in a context, an ecology. Does it have a deep understanding of this context? Does it know what it is walking on? If it did, would it walk more carefully, place its weight more judiciously? Should it have to? This is, after all, where it lives. It’s not doing anything wrong. SVB was a highly-risk taking mouse. That was, in fact, part of what had made it so successful. Its cousin, First Republic, is a highly-risk averse mouse. Both of them are traversing the snowpack, like all the mice. Many of the other mice are somewhere on the risk continuum between SVB and First Republic. The most risk-taking bank, the most conservative bank. Most of them hold significant loans on commercial real estate, which, up until recently, was not a particularly risky exposure, but now, post-pandemic in a world where people don’t spend their days at the office, is.
I’ve been a customer of First Republic for twenty-one years. First Republic is a highly-risk averse mouse. They are so risk-averse, in fact, that the average credit score in their book of mortgages is 790. I don’t know what you have to do to get a credit score of 790– but let me tell you, folks, those are not your average spenders. A credit score like that means you never miss a payment on anything, and you haven’t for the past seven years. You never pay your phone bill late. Never get a credit card delinquent. In order to have a score that high, you have to also use the correct amount of debt. What is the correct amount? The amount that the banks find most advantageous. If you don’t leverage yourself enough, you won’t get a score that high. Too much leverage? That drops the score as well. So these people, these 790s? They are really proficient at playing by the rules of money. Individually they represent almost no credit risk. They are not going to default on a mortgage. Ok. Let’s serve the first course.
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