• Byron King commandeers the Rude for a day!
• The Harvard-educated geologist gives a wonderful history lesson.
• Biden Bucks or pounds in the ground? It’s the question of our time.

Good morning from a lovely Northern Italy.

Good friend, ace energy and ores expert, and Rude reader Byron King is taking over the Rude today.

Yesterday, Byron sent over the piece you’re about to read. But instead of waiting for his monthly contribution to Jim Rickards’ Strategic Intelligence, I asked him if we could print it in the Rude.

There’s no better way to learn about finance than through reading financial history.

And I don’t think there’s a better storyteller in all the markets than Byron.

Although this column is slightly longer than you’re used to with me, I can assure you it’ll go by quickly.

I hope you enjoy it as much as I did.

All the best,

Sean

Solid as a Rock: Another Form of Deposit Insurance

By Byron King

Lately, you’ve heard much about the term “deposit insurance.” As in, how U.S. bank accounts are insured to $250,000 by the Federal Deposit Insurance Corp. (FDIC).

Most of the discussion has been in the context of the failed Silicon Valley Bank (SVB) of Santa Clara, California, the second-largest bank failure in U.S. history.

Let’s discuss bank failures for a moment. Then, I’ll tell you about an entirely different way to look at deposit insurance; meaning a form of deposit insurance that is solid as a rock.

Indeed, this other kind of deposit insurance goes way beyond the political whims of federal bureaucrats and monetary policymakers. But let’s not get too far ahead. First, here’s some quick background.

The idea of traditional deposit insurance is that your bank accounts are… well… “insured.”

It goes back to the Great Depression of the 1930s, when thousands of U.S. banks failed. That is, a bank would encounter a “run,” in which large numbers of people wanted their money back all at once.

Of course, that couldn’t be it. It had to be Trump!

Customer “run” on American Union Bank, New York, 26 April 1932. National Archives.

Unless the bank was flush with cash (which was almost never), it could not pay everyone back; not all at once, anyhow, and definitely not in a panic scenario. So, lacking sufficient funds, the bank would close its doors and, in essence, go out of business. The depositors’ money was gone. Poof. Nothing.

In the early days of the Depression, large numbers of bank failures were a nationwide financial calamity. Entire groups of people – even entire regions – were left broke and impoverished. So in 1934, Congress established the Federal Deposit Insurance Corporation (FDIC), to backstop deposits to a certain amount.

Under the original 1934 law, FDIC covered $5,000 per account, which was not bad for those days but by no means overly generous. By 1980, the limit had moved up to $100,000. And today it’s $250,000.

The idea has long been to protect large numbers of small and modest-scale depositors up to some level, more or less appropriate to the economic tenor of the era, whether the Great Depression, or 1980s, or currently. If a bank fails, depositors will have access to funds up to the insured limit, with almost no questions asked.

With that background, you’ve likely followed the news of how SVB failed. Headquartered in the heart of the South Bay Area, it has branches as far away as New York, Wellesley, Massachusetts, and even a subsidiary in Great Britain.

I’ll skip the gory details of why and how SVB failed. Suffice it to know that management was a petting zoo of incompetent boneheads, emblematic of our era. They totally failed at Risk Management 101, and their business cratered.

In the immediate hours after SVB went under, word quickly spread that depositors were limited to “only” $250,000 under FDIC guidelines. Whoa!

Suddenly, an entirely new element of the story cracked open, namely that over 97% of SVB deposits exceeded that $250,000 limit. Huh? Wait a sec…

Think about that… Who has over $250,000 in the bank? Well yes, wealthy people. And one heck of a lot of them banked at SVB, which catered to customers seeking “wealth management” services.

Now step back and think about your own life, or about people you know; people with whom you went to school, or with whom you work or associate. Who has over $250,000 sitting in a bank account?

Okay, some people have big bucks in the bank. But certainly not most American families. Indeed, the average American has more or less zero savings. You’ve probably seen stories about how most Americans cannot afford $500 to repair their car or move from one apartment to another. That’s the general, sad state of the U.S. economy these days.

At any rate, it’s fair to say that these well-heeled, over-$250,000 clients of SVB were not exactly Joe the welder down at the factory, or Nancy the single mom who works at a diner. Not to put too fine a point on it, but there’s no SVB branch in East Palestine, Ohio.

Indeed, per news accounts, most SVB customers included the very top of the proverbial One Percent of American society. Okay, more like the top one-fiftieth of the One Percent. People like uber-wealthy television celebrity Oprah Winfrey, and the privacy-seeking duet of Harry & Meghan, who deposited their multi-million-dollar book advance into SVB.

Of course, SVB also catered to businesses, many of which are Bay Area or national-scale tech companies with money in the kitty, working on the next big thing, if not one of those “killer apps.” That’s the type of business customer that SVB cultivated, along with an intriguing sub-category of high-end wineries in California’s Napa Valley, one of which is owned by Nancy Pelosi and her husband. And another by California governor Gavin Newsom.

Basically, SVB dealt with people who control a lot of money, mostly in accounts with many zeroes at the end of the numbers. Which made facing that $250,000 FDIC upper limit a truly frightening moment.

For Joe at the factory or Nancy at the diner, that $250,000 limit is plenty to cover any loss. But for Oprah? Well, she was looking at a loss of over $500 million, per news accounts. While Harry & Meghan were looking at tens of millions up in smoke, if British tabloids are to be believed.

There are many more SVB customers whose names we don’t know and likely never will. Some of them could be seen in photos in news accounts, lined up outside the doors of numerous SVB branches, obviously hopeful to withdraw their funds from the ruins of the institution.

And these customers could be anybody, although likely not the above-mentioned Joe or Nancy. Think of well-compensated tech bros, Silicon Valley executives, and the entire ecosystem of people who swim in those kinds of ponds: well-off lawyers, doctors, accountants, investors, and trust fund recipients.

And here’s where it gets dramatic. This modern SVB bank failure presented an old-fashioned heart attack to the wealth system in this country.

In a matter of hours after SVB failed, many people went from being bank account millionaires to having a claim on a mere $250,000. They transitioned from being rich, to “about to be” poor.

But to borrow a famous phrase, “don’t cry for me, Argentina.” Because by Sunday evening, about 60 or so hours after word broke that the feds were taking SVB into receivership, President Biden and Treasury Secretary Yellen announced that the $250,000 limit was no longer in effect. Everybody would have access to “all” of their money.

Indeed, with a hasty, history-defying policy decision, the Biden administration magically transformed the 90-year-old, Depression-era, FDIC deposit insurance backstop into a total, 100% guarantee. That is, no losses for anyone. Everyone gets back every dime.

According to the publication American Banker, “In a stunning decision, federal regulators issued a systemic risk exception to protect uninsured customer deposits at (SVB) in the wake of the bank's sudden failure.”

And somehow, it’s not a “taxpayer bailout” said the president, because the money will come from an assessment on the rest of the banking industry.

Well, are you reassured yet?

Something tells me that we’re not getting the entire story from our government functionaries. We’re still in the midst of a massive risk event within the banking sector, and of course the U.S. economy at large. It’s the early innings of this new ball game in banking and insurance.

Whether it’s merely pencil-whipping new bank policies over a Sunday afternoon, or routinely spending the U.S. Treasury into astronomical levels of debt, in so many ways the U.S. government is just plain out of control. Over 70% of the budget is entitlements like Social Security and Medicare, essentially growing on an open throttle. And the other 30% of the budget is also exploding.

Meanwhile, U.S. monetary policy simply tosses dollars into the spending furnace, stoking the economy with quantitative easing while working to contain inflation with interest rate increases.

The bottom line is that the federal government is blowing the roof off of the economy, as just illustrated within the banking sector and certainly the FDIC insurance program.

It cannot end well. This brings me to the point with which I began, “solid as a rock” deposit insurance.

No, I don’t mean some new government program, subject to change by the U.S. president whenever a large collection of political donors run into a financial brick wall.

This other version of “deposit insurance” is far more down to earth, both figuratively and literally.

The idea is to focus on minerals and ore deposits. Think in terms of how many million ounces are confirmed as recoverable in a gold deposit, or how many millions of pounds are confirmed as recoverable in a copper deposit.

When exploration geologists map and drill, and engineers calculate the resource, they come up with measured numbers of grams per tonne, ounces, pounds, or whatever other metric. All of these are locked up in the rocks, in ore zones amenable to mining over time.

That’s what I call rock-solid deposit insurance. It’s a real, tangible substance of value, sitting in a deposit in the ground, awaiting mining and extraction, then refinement into something that people will buy in whatever currency holds value in the years ahead.

Name your material: gold, silver, platinum groups, copper, nickel, zinc, uranium, lithium, cobalt, rare earths, tin, tungsten, antimony, and many more. Much of the Periodic Table, in fact.

Sure, it’s good to have money in the bank. Well, most of the time, and not when we’re in the midst of panics and runs against cash. And yes, there’s FDIC insurance, although now, post-SVB and the new policy of open-ended access to funds, what does that even mean anymore?

Looking ahead, if you want real, rock-solid deposit insurance, find an exploration, development, or mining play with pounds in the ground. Start thinking in terms of real, tangible things that hold value in an economy and political system that clearly has gone nuts.

That’s all for now… Thank you for subscribing and reading.