Its A Wonderful Life
A yearly lesson
This is an extraction from a piece we wrote a few years back and have adapted as our yearly monetary lesson. Every year it seems Magnelibra Econemotions is proven correct in its ongoing thesis that the only important news driving the markets or shall we say that the “only game that matters” is how much liquidity central banks are adding during times of monetary stress.
Now therein lies the caveat “during times” well it seems every month and especially every quarter we are seeing more and more liquidity needs. (Covid just this years excuse) What this tells an astute investor that is privy to market mechanics is that without the liquidity and access to overnight balance sheet funding, all the games being played via short term financing, all the interest rate arbitrage, asset based financed arbitrage, would expose the true fallacy of our system. The fallacy is simple, that the markets can function without central banks providing daily funding,(cough, cough) or in more simple terms, “rigging” the system.
Well not that a fractional reserve system isn’t rigged already, because by inherent design, it can only be rigged else the system fails miserably. Which brings me to sharing a little classic movie that I’ve grown up watching, “it’s a Wonderful Life” the Frank Capra, Jimmy Stewart classic.
As a kid it was mandatory yearly viewing with my mom. Now as a kid you just take things for face value, but as I grew up, the meaning of the movie became evidently clear. You live your whole life trying to do the right thing and then in one instance and sometimes not even upon the heels of your own volition, things can take a drastic and often accelerating turn for the worse. Please indulge me a bit as I go through one of the most important scenes of the movie. As far as a brief background to the scene, we have poor virtuous George Bailey played by the iconic Jimmy Stewart, he owned a small-town savings and loan. George’s Building and Loan had its credit called in by its lending bank and was forced to make good on full payment. However, this depleted the banks cash (think reserves) and word hit the street that their doors were going to close (think panic).
Fast forward in the scene where depositors begin cramming into the savings and loan demanding their money. Well, this is where George comes in and calms the fears and explains in the simplest terms, the true nature of fractional reserve lending. As the depositors lined up and as George grabbed his chin, desperately trying to solve this problem, Frank Capra tosses in some fire engines whizzing by outside blaring their horns and all the people rush to the window to have a look, as if they were going to see something. Looking back now I know Capra’s intent here was to merely install in the viewer the feeling of chaos, fear and alarm, that the house is about to burn down, sheer classic move.
Anyway George took to the counter and explained to a disgruntled depositor who asked if George could guarantee the money, George said, “Your thinking of this place all wrong, as if I had the money back in a safe, the money’s not here, well your money’s in Joe’s house, that’s right next to yours and in the Kennedy house and Mrs. Maclin’s house and a hundred others. Your lending them the money to build and their gonna pay it back the best they can, what are you going to do foreclose on them?”
What George Bailey just explained right there is the entire crux of our central banking, fiat fractional reserve lending system and what happens next is the most obvious and unnerving outcome from a system designed like this.
A gentleman named Randall walks in and says, “hey Tom, Tom did you get your money? Tom says No, the man says, well I did, old man Potter is willing to pay 50 cents on the dollar for every share you got, cash.”
When George asks Tom to stick to the original agreement of waiting 60 days (think term repo) Tom says “Ok Randall.”
Then a concerned woman asks if he is going to Potter and Tom responds with the typical (think panic equity seller or retail investor) “Better to get half than nothing!”
Then George, leaps over the counter, slams the door shut and tells Tom and Randall the truth about what is truly happening here, ”Tom, Randall, wait, now listen to me, I beg of you not to do this thing, if Potter gets a hold of the Bailey Building and Loan, there will never be another decent house built in this town. He’s already got charge of the bank, the bus lines, the department stores and now he is after us (Think Google, Media Giants, Amazon, Walmart), why? Because it’s very simple we are (think mom and pops) cutting in on his business, that’s why, because he wants to keep you (commoners) living in his slums, and paying the kind of rent he decides (Elites).”
Now George really breaks down the God’s honest truth by asking another patron, “here Ed, you know, remember last year when things weren’t going so well and you couldn’t make your payments, well you didn’t lose your house did yah, you think Potter would have let you keep it? Can’t you understand what’s happening here, don’t you see what’s happening here? Potter isn’t selling, Potter is BUYING and why because were panicky and he’s not that’s why, he’s picking up some BARGAINS.”(think market downturns and bottoms and who comes in to save the day, think Buffett, Soros with government guarantees of course)
Ok, I won’t ruin the rest and I truly hope you watch this movie, link to the scene IAWL Bank Run Scene for many of life’s great lessons exist within its classic confines.
I truly appreciate my parents given me this gift even if as I hit adolescence, I most likely complained about watching it every year. I have continued this tradition with my own children in hope’s that one day it means as much to them as it has to me.
The movie is so much more than just a holiday classic it is an investment in life, despair, courage, faith and it is something I will cherish for all my days.
I appreciate it more and more, especially as I have matured and become educated upon the very constructs that define our systems. The control mechanisms that shape our deterministic values by which so many truly believe they have freedom of choice. As Edward Bernays famously said, "it is they who pull the wires which control the public mind."
When you break things down today, do we really have much of a choice or are the narratives so shaped and so perfectly gift wrapped that we only have a mere figment of choice? Propaganda and subliminal, targeted ads, 24hr inundation of media, makes it obvious that the only choice we truly have is whether to turn things on or off as everything is truly binary at this point, just 0s and 1s.
We hope that you stay the course with Magnelibra Econemotions and continue your education and learning on the things we feel matter. Please share our work, please think about subscribing and supporting our efforts. If you are a an investor or experienced trader and want to follow Magnelibra’s Global Futures Benchmark Program proxy designed specifically for the newsletter Founding Subscribers, then sign up! We feel that the program delivers high quality cross asset correlation strategies that can benefit those do it yourselfers. If you want to make an inquiry to Magnelibra the CTA, feel free to reach out and learn more at www.magnelibra.com
We wish you all a safe and prosperous New Year and Merry Christmas and Happy Holidays to everyone!
-Magnelibra Econemotions
DISCLAIMER: For educational purposes only. This is not a solicitation to buy or sell commodity futures or options on neither commodity futures. The risk of trading securities, futures and options can be substantial and is not for everyone. Such investments may not be appropriate for the recipient. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. Nothing contained in this message may be construed as an express or an implied promise, guarantee or implication by, of, or from the author Michael Agne owner of Magnelibra Capital Advisors. All rights are reserved. We will never claim that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Although care has been taken to assure the accuracy, completeness and reliability of the information contained herein, we make no warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, reliability or usefulness of any information, product, service or process disclosed.