What happened with Sillicon Valley Bank and what it means for the economy

I was asked to share my thoughts about the Silicon Valley Bank situation. I want to convey that, um, it's very, uh, indicative of what the whole economy is like.

So, there's its particular situation and the FED coming in and guaranteeing all depositors, but it's a common situation. It exists pervasively. What is it that I'm talking about? That there has been a lot of creation of debt to make investments.

Um, so for example, banks and insurance companies borrow money at a certain rate, and then they go out and they make investments. When those investments have lower returns, go down in value as stocks and bonds have gone down in value, or they don't have adequate yields relative to the cost of funding those assets, you have everybody losing money.

That is a pervasive situation that exists throughout the con—the economy, the world economy, the U.S. economy. In other words, the world is long—so long holding assets that they're betting go up, and they're leveraged long. This means that they have borrowed money to hold those positions.

And so, that set a circumstance, as we've been talking about, has put the Federal Reserve in this—and our country in a situation where, um, there's—um, that it's very difficult to create an interest rate that is high enough to provide a real return.

In other words, a return after inflation that is high enough to compensate you for holding that asset. To provide that interest rate that's high enough, at the same time as not damaging those who have borrowed that money, that balancing act is difficult.

And there's this big supply-demand means that there's a need to borrow a lot of money. If you look ahead and you say how much money needs to be borrowed by the Federal Reserve, by the government, uh, in order to deal with this situation—big deficits—that means they have to sell debt.

There's a supply-demand imbalance. In other words, those who want to buy that debt, what are they going to buy it for? They need to have a high enough real return. If they don't have a high enough real return, they can sell the debt, or their debt that they're holding, rather than buying that debt, and that creates a terrible imbalance.

So that imbalance is the nature of what's going on. You—and they're not marked to market. A lot of these, if you mark to market, a lot of entities are in financial difficulty.