EDITOR NOTE: In the eyes of the average depositor, cash deposited into a bank is like physical money stored for savings and eventual withdrawal. In the eyes of the bank, however, your cash is a liability. You have surrendered the legal title to your cash, and it becomes both an asset to the bank while your account transforms into its liability. So, how does the bank make money off this liability? Well, it’s much more complicated than simply issuing loans to another customer and collecting that money back plus interest. It has a lot to do with how much leverage a bank is allowed to engage in profitable yet risky ventures. What your money transforms into can either be a systemic opportunity or a powder keg of risk, depending on how it circulated to other banks (with whom your bank may be transacting), other customers, non-bank corporations, and the Federal Reserve. The risk depends on what kinds of other assets (or liabilities) your “cash” transforms into and how banks make it circulate throughout the entire system. As the presenter below tries to explain with utmost clarity, your money, which is more malleable and transformable than you’d even think, becomes a component in an ultra-complex game of “Jenga” between the Fed, between banks, and between customers. All it takes is an asset of leverage to be withdrawn in the wrong way (e.g. Biden’s corporate tax increase) to force the entire banking system to collapse. And right now, the banking system, with changes happening to its leverage ratio (Statutory Leverage Ratio) starting on April 1st, is about to become more fragile than ever before. How will this affect your money, portfolio, and wealth? Watch the video.
Originally posted on George Gammon