Rising inflation is an indicator to even those who don’t pay regular attention to the economy that the world is awash in money. And the amount of money circulating throughout the economy today is staggering.
The Federal Reserve’s balance sheet has more than doubled from its pre-COVID days, to over $8 trillion. That’s about ten times the size of its pre-2008 balance sheet. The M1 and M2 money supplies increased 70% and 25% respectively last year, and even with the Fed’s recalculation of money supply figures, both continue to increase significantly.
Adding fuel to the fire are the three rounds of stimulus payments that were made to individuals over the past year. And if that weren’t enough, there are still enhanced unemployment benefits being paid for the next few months, and families with children are now getting direct payments from the government until the end of the year.
You would think with all this money flowing into the financial system that banks would be looking for every opportunity they can to capitalize on this opportunity. With interest rates remaining at historic lows, you would think that loan demand would remain healthy. Yet, increasingly, many banks are beginning to pull back on loan activity, shutting down what should be profitable product lines. What is going on?
There are concerns that these pullbacks are an indicator that not everything is well with the economy, and that some financial institutions are paring back on their loan offerings in order to reduce their risk exposure in the event of a financial downturn. If these are the first rumblings of unquiet in the financial system, it could be a warning sign to investors that another financial crisis could be just around the corner.
Is Wells Fargo the Bellwether?
If you remember how the 2008 crisis began, it all unfolded rather innocuously. One unit of Bear Stearns began to experience some issues in mid-2007 and needed a bailout from the parent company. By July 2007, Bear Stearns had to announce that two of its subprime mortgage hedge funds had lost nearly all of their value.
Over the next few months the crisis continued to unfold, as Bear Stearns was finally liquidated and sold in March 2008. And by September 2008 Lehman Brothers, at the time the fourth-largest investment bank in the US, was on the verge of bankruptcy. Everything started small and snowballed, and that pattern could repeat itself.
Right now the focus is on Wells Fargo, the third-largest bank in the US. Wells Fargo has just recently announced its decision to shut down its personal line of credit business. It’s a confusing move for a company desperately in need of revenue.
Allegedly the move is the result of a desire to focus more on credit cards and personal loans. And the excuse is the order from the Federal Reserve forbidding the bank from expanding its balance sheet until regulators judge that it has fixed compliance issues stemming from its unauthorized account opening scandal. That was the same excuse behind Wells Fargo’s decision to stop offering home equity lines of credit last year.
But these decisions have some wondering if the real reason Wells Fargo is discontinuing these products is because they’re considered too risky, and the bank is trying to minimize its risk exposure ahead of a financial downturn. Remember that Wells Fargo took over failing bank Wachovia in 2008 and absorbed its exposure to subprime mortgages. Those issues have never fully resolved, so that Wells Fargo, despite its size, remains a bank exposed to a lot of risky loans.
Are Other Banks Affected?
Wells Fargo isn’t the only financial institution that has made such a decision either. Some credit unions seem to have suspended home equity loans, no doubt worried about the rising price of real estate and the ability to recoup value on those loans in the event housing prices fall. If other financial institutions follow suit, it could be part of a generalized de-risking trend that indicates that banks and financial institutions are worried that another financial crisis could be just around the corner.
Of course, this de-risking may be too little, too late, at least for large financial institutions. Their risk exposure is enormous, and you can almost guarantee that another 2008-style financial crisis will have Wall Street coming to the government once again with hat in hand, looking for a bailout.
Are You Heeding the Warnings?
With the money supply and inflation rising, and banks pulling back on loans, the warning signs are starting to increase. Everything seems to be pointing to increased uncertainty about the future of the economy, the future of the financial industry, and the possibility for slow economic growth in the future. What we are witnessing could be the rumblings of an economy on the verge of crisis.
As with the last crisis, investors who diagnose the problems and take action to protect themselves and their assets ahead of time stand the best chance of coming out in good shape on the other end. If you had moved some of your assets from stocks into gold in 2007, for instance, not only would you have cut much of your losses, you also would have seen significant gains in the aftermath of the crisis.
The time to protect yourself is always before a crisis, before everyone starts heading for the exits, before asset valuations start to plummet, and before markets end up freezing. And defending your hard-earning savings can be done with relative ease.
With a gold IRA, for instance, you can invest in physical gold coins or bars while still enjoying the same tax advantages as any conventional IRA account. And to protect your retirement savings, you can roll over or transfer assets from existing retirement accounts into a gold IRA tax-free.
If you’re watching these warning signs with trepidation, don’t wait until it’s too late to protect your wealth. Talk to the precious metals experts at Goldco today and find out how you can benefit from buying gold to safeguard your savings.