High Rates Mean More Bankruptcies

09 Mar

High Rates Mean More Bankruptcies

Think of this as a bank shot.  You hit the cue ball into another ball that bounces off the rail and goes into the pocket.  

Fed interest rate policy will drive an increase in bankruptcies, corporate and personal.  But banking off the rail, its subsequent effect is that it will drive people to gold.  

Let us explain.

Led by US monetary policy and the money manipulators at the Federal Reserve, the entire world became dependent on artificially low-interest rates.  But the era of interest rate suppression is over – at least for now. 

Chairman Jerome Powell was explicit in congressional testimony this past week that the Fed would drive interest rates higher than expected in its battle against inflation.  “We will stay the course until the job is done,” he said.  But the higher interest rates have their own knock-on effect:  


Last month ZeroHedge reported on a January spike in large corporate bankruptcies (defined as those with $50 million or more in liabilities): “In the first month of the year, the number of US bankruptcies topped 20, the highest in any other January dating back to 2010,” it said.

Unfortunately, January wasn’t a one-off, says ZeroHedge.  “According to Bloomberg data, one month later – as of the end of February – no less than 39 large companies had filed for bankruptcy in the US so far this year, as February’s pace matches that of January; the YTD total represents the fastest pace of companies filing for bankruptcy since the immediate aftermath of the global financial crisis in 2009.”

That’s not all.  The number of Americans filing Chapters 7, 11, and 13 bankruptcies in January rocketed up 20 percent from a year earlier.  Along that line, we are republishing a chart from last week about rising credit card delinquencies.

At some point, troubles become apparent among banks themselves.  Most recently, Silvergate, a federally insured bank deep into banking Sam Bankman-Fried’s crypto enterprises, has filed a notice of doubts about its “ability to continue as a going concern.” 

Credit Suisse, the global investment bank headquartered in Switzerland, is also a train wreck.

Some major banks are setting aside reserves for the rocky road ahead, but higher rates are like termites eating away at the entire industry.  We presume many financial institutions have mismatched portfolios (since they almost always do), which means they have borrowed short-term money but have made long-term loans.  Now they must pay higher rates in the next round of borrowing that we’re not part of their plan. 

When these problems begin to cascade, to spill over from one bank to another, our troubles really begin.  Things quickly get out of control.  A rising number of bankruptcies and consumer debt delinquencies are a sign that that day is getting closer.  

You will be very glad that you own gold and silver on that day.