ARE WE IN FOR A PERIOD OF HIGH INFLATION AND MORE BANK FAILURES?
What happens when you print trillions of dollars during a health crisis when every business in the world is shut down? You have the recipe to create massive inflation. You need to raise rates higher than the inflation rate to bring inflation down. Jerome Powell mentioned the fact that they will keep raising rates until something breaks while, in reality, they just really broke the banking system. Silicon Valley Bank (SVB), Silvergate Bank, and Signature Bank are the first big banks of this crisis but not the last.
The recent bank runs and bank failures have brought attention to the problems of the centralized banking system in the face of inflation and uncertainty. Banks play a critical role in the economy as they are responsible for providing credit and financial services to individuals and businesses. When banks fail, the consequences can be severe and far-reaching.
So where is it safe to invest if banks don’t have your best interests in mind? Real estate has long been considered a proven store of value and wealth generation for investors, making it an excellent investment during periods of inflation and uncertainty. In contrast to other assets that may fluctuate in value due to market volatility or currency devaluation, real estate’s physical property means that it remains a valuable and secure investment even during questionable times.
In this article, we will discuss how the recent bank runs are affecting inflation and where people can look to invest their money safely while making a profit. Read on to discover:
Negative Effects of Bank Failures and Inflation
Bank runs occur when a large number of depositors withdraw their funds from a bank at the same time, often from concerns about the bank’s financial stability. Moreover, bank failures occur when a bank is unable to meet its financial obligations and is forced to close its doors.
Bank runs can lead to a decrease in the amount of money available for lending, which can make it more difficult for people and businesses to get credit, which can, and often does, slow down economic growth and lead to higher unemployment rates. Additionally, bank failures make consumers lose trust in the banking system and question where to store and invest their money.
Inflation is also a factor that can contribute to bank runs and failures. Inflation occurs when there is a sustained increase in the prices of goods and services over time, which can lead to a decrease in the purchasing power of consumers. When inflation is high, individuals may withdraw their funds from banks in an attempt to protect their wealth from being eroded by rising prices. However, this can have a ripple effect on the economy, leading to a decrease in lending and an increase in interest rates that slows down economic growth.
*Graph provided by American Century Investments.
The centralized banking system, which relies on a small number of large banks to provide credit and financial services, is particularly vulnerable to these types of events. A more decentralized system, which would allow for a greater number of smaller banks to compete and provide financial services, could be more resilient to these types of shocks.
Why All The Bank Runs?
In March 2023, the US banking system was hit by a series of bank runs and bank failures, including SVB, Silvergate Bank, and Signature Bank all experiencing significant withdrawals of deposits, highlighting the vulnerabilities of the centralized banking system during times of inflation and uncertainty.
Silicon Valley Bank, a commercial bank that focuses on providing financial services to technology companies, experienced a run on its deposits. The bank was forced to borrow funds from the Federal Reserve Bank to meet the demands of its depositors. The run on the bank’s deposits was likely triggered by concerns about the bank’s exposure to the technology sector and the potential for a downturn in the industry.
Silvergate Bank, which focuses on providing financial services to the digital currency industry, experienced a run on its deposits, as well. The bank was experiencing strong growth in its deposits due to the rise in popularity of digital currencies, like Bitcoin. But, concerns about the volatility of digital currencies and more importantly the regulatory crackdown by the FDIC and SEC led to a run on the bank’s deposits.
Signature Bank, a New York-based bank that focuses on providing financial services to commercial real estate and private banking clients, also experienced a run on its deposits in March 2023. The bank had been experiencing strong growth in its deposits due to its focus on the commercial real estate market. However, concerns about the potential for a downturn in the New York real estate market and the impact of rising interest rates led to a run on the bank’s deposits, thus leading them to the same fate as SVB and Silvergate Bank.
Some also speculate that the US government wanted these gateway banks to crypto shutdown to avoid competition for the US Dollar. In fact both Signature Bank and Silvergate ran 24 hour real-time payments platforms that were popular with institutional crypto clients. The cryptocurrency industry has named this Biden administration effort to cut the banking onramps to crypto “Operation Choke Point 2.0”.
The stock prices of Silicon Valley Bank, Silvergate Bank, and Signature Bank were all negatively affected by the runs on their deposits. SVB’s stock price fell by more than 12% in the days following the run on its deposits, while Silvergate Bank’s stock price fell by more than 16% and Signature Bank’s by more than 13%.
The recent bank runs and closures highlight the importance of investing in stable and secure assets during periods of uncertainty. But, where is safe to invest?
Real Estate as an Inflation Hedge
One of the primary advantages of real estate is that it provides consistent cash flow, which helps to offset the effects of inflation and is a valuable tool for investors looking to hedge against rising prices. Rental income tends to increase with inflation, allowing investors to maintain their purchasing power. Additionally, real estate investments offer tax benefits, such as depreciation, which can reduce the investor’s tax liability.
Real estate is an ideal inflation hedge because it is a tangible asset that appreciates over time, providing investors with a potential source of long-term capital gains. Real estate prices tend to increase with inflation, making it an excellent investment option during periods of rising prices.
Related Article: Blockchain Technology – The Future of Real Estate Investing
Currencies like dollars, Euros and Yen have never been a good store value over the long term. Real estate has always been the premier asset for maintaining and generating wealth.
While real estate is a strong investment option during periods of inflation and uncertainty, it is not the only asset class that investors should consider. Other popular investments during these times include gold, silver, other precious metals, commodities, oil & gas, and even Bitcoin as a new contender.
Precious Metals as Safe Investments
Precious metals, such as gold and silver, are considered safe-haven assets during periods of economic uncertainty. These metals tend to retain their value during market downturns, making them an ideal investment option for risk-averse investors.
Gold and silver have been used as stores of value for thousands of years, and are often considered safe havens during times of economic uncertainty. They are not subject to the same market forces as stocks and bonds, making them a valuable tool for diversifying portfolios. In addition, precious metals tend to appreciate in value during periods of inflation, making them an excellent hedge against rising prices.
But, the value of precious metals is largely driven by investor sentiment, which can be unpredictable. The price of gold and silver can fluctuate significantly, making it a risky investment option for investors seeking long-term returns. Unlike real estate, precious metals do not provide any cash flow, making them less attractive for income-seeking investors.
Commodities and Bitcoin For Investing
Commodities such as oil & gas are also often considered valuable during times of economic uncertainty. As prices rise, the value of these commodities tends to increase, providing investors with a potential source of cash flow. Oil & gas can also be used as a hedge against inflation since rising prices tend to increase the value of energy stocks.
More recently, Bitcoin has emerged as a new contender for investors looking to hedge against inflation and uncertainty. While still relatively new, Bitcoin’s decentralized system and limited supply have made it an attractive investment option for investors. Its price has been known to fluctuate greatly in a short amount of time, making it a high-risk/high-reward investment option.
However, investors should also be cautious when investing in Bitcoin, as the cryptocurrency is subject to market forces that can be unpredictable. In addition, its decentralized nature means that it is not backed by any central authority, which could make it a less secure investment option than more traditional assets, like real estate or gold.
Where Should You Invest?
The recent bank runs and bank failures highlight the need for a more resilient banking system that is better equipped to withstand periods of inflation and uncertainty. With bank runs rampantly inflating the economy, the centralized banking system is being called into question and you need to decide the best ways to store and grow your wealth.
Does This Sound Like A Good Idea ⇩
Real estate is not immune to market instability, but it is often considered a more stable and secure investment option than other assets like Bitcoin or commodities. Real estate investments provide consistent cash flow through rental income, which can help to offset the effects of inflation and tends to appreciate in value over time, providing investors with a potential source of long-term capital gains.
Eliminate The Banker Middleman With This ⇩
Real estate is a valuable tool for investors looking to hedge against inflation and uncertainty. While other assets like gold, silver, commodities, and Bitcoin can also be valuable during these times, real estate’s physical nature and consistent cash flow make it an attractive investment option. However, investors should always be cautious and diversify their portfolios to minimize risk and maximize returns.
*Note: Invest On Main, IOM.ai and Invest On Main LLC (collectively investonmain.com) have made every attempt to ensure the accuracy and reliability of the information provided. Invest On Main cannot not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained herein. The information herein is not considered legally binding legal advice, tax guidance, or financial counsel.
About the author
Michael Flight was named the Godfather of Blockchain Real Estate by Forbes Crypto. Michael achieved that distinction by co-founding Liberty Real Estate Fund, the World’s First Net Lease Security Token Fund, creating the Blockchain Real Estate Summit. More recently co-founding Invest On Main (IOM.ai) the Real Estate & Alternative Asset marketplace of the future and AcceleratedLaw a faster, cheaper way to create and tokenize securities offerings!
Michael is a real estate entrepreneur and real estate tokenization pioneer who is an expert in retail real estate investment, redevelopment and real estate on the blockchain. He started his commercial real estate career in 1985, and then co-founded Concordia Realty Corporation in 1990, which continues to partner with some of the world’s most well-known banks, insurance companies, hedge funds and institutional investors in many successful investments.