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How The Financial System Is Sructured

How The Financial System Is Sructured

Is The US Financial System a House Of Cards?

Casey does an excellent job in this explanation. This is the first video in a multi-part series. Our thanks to Casey for allowing this repost.

How The Financial System Is Structured

How The Financial System Is Sructured

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Structure of the Financial System (Inverted Card House?) – Beginners’ Guide

25,852 viewsJul 5, 2021

Crypto Casey

218K subscribers

This is a beginners’ guide where we will break down step-by-step how the traditional financial system is structured, how the cryptocurrency market is structured, what stablecoins are, their role in the cryptocurrency market, and why stablecoins will both drive massive global adoption of cryptocurrencies, while also potentially threatening mass global adoption of cryptocurrencies. Our goal by the end of this video series is for us to understand the traditional financial system’s relationship with the cryptocurrency market, and if a crypto collapse can happen, how and when it could happen, and what we can do to protect ourselves as investors in the space.  SUMMARY ======== 00:00 – Introduction 01:00 – The Problem with Most Crypto “Investors” 02:16 – What is Speculation in Crypto? 03:02 – What is Investing in Crypto? 04:37 – What is Fractional Reserve Banking? 06:35 – Federal Deposit Insurance Corporation (FDIC) 08:38 – What are US Treasury Bonds? 11:13 – The US Treasury Bond Market 11:51 – The Repo Market (Repurchase Agreement) 13:30 – Rehypothecation of US Treasury Bonds 15:53 – The Reverse Repo Market 22:02 – The US Financial System Card House 23:52 – Outro ======== LINKS TO ACCESS SITES SAFELY  ESSENTIAL CRYPTO RESOURCES ======== ♦ Recommended Malware Protection for Computer & Mobile Devices: MalwareBytes Link –… ♦ Recommended Encrypted Email Account for Managing Cryptocurrency Accounts: ProtonMail Link – ======== SOCIAL MEDIA LINKS ======== ● Twitch – ● Facebook Page – ● Twitter: ● Instagram: ● Telegram: ● Business Contact – ● Website – ● Podcast –


00:00Is the cryptocurrency market a card house that could collapse at any moment?00:04And if so, what’s underneath the card house?00:06A strong foundation?00:07A rickety table?00:08Or worse, another card house…00:10Hello, I’m Crypto Casey and this is the first video in a three-part series where we00:14will investigate whether or not the cryptocurrency market, as well as the entire global financial00:18system, is indeed on the verge of collapse.00:21This is a beginners guide where we will break down step-by-step how the traditional financial00:25system is structured, how the cryptocurrency market is structured, what stablecoins are,00:30their role in the cryptocurrency market, and why stablecoins will both drive massive global00:35adoption of cryptocurrencies, while also potentially threatening mass global adoption of cryptocurrencies.00:42Our goal by the end of this video series is for us to understand the traditional financial00:45system’s relationship with the cryptocurrency market, and if a crypto collapse can happen,00:50how and when it could happen, and what we can do to protect ourselves as investors in00:55the space.00:56Awesome.00:57So let’s get started.01:07So most people that venture down the rabbit hole into the crazy crypto world are fascinated01:12by the idea of getting very rich, very quickly, with little-to-no effort.01:17After some time, then they become mesmerized by the charts, and want to learn how to read01:22the charts, and use the charts to predict the future, and use margins, options, and01:27leverage to make even more money very quickly with little-to-no effort.01:31And 99.9% of the time, they get rekt, absolutely rekt.01:35And either crypto becomes the bane of their existence and they vow to never touch it again,01:39or they get up and try again only to experience the same fate.01:42Unfortunately since the development of easy, gamified user interfaces in investment applications01:47like Robinhood coupled with the covid lockdowns over the past year,01:51a lot of people’s first exposure to and interaction with self-directed investing practices01:56happened recently and on a massive scale during a time when both the stock and crypto markets02:02pretty much only went up and up and up.02:04Everyone was a winner and everyone became an addict.02:08Only recently, have a lot of the new crypto investors experienced some seismic, gut-wrenching02:12pullbacks.02:13And what do they do?02:15Usually, they sell.02:16So I wanted to paint this picture of the average “investor” in crypto for you, to better02:20explain why they are in fact the complete opposite of an investor.02:24What I just described is a crypto tourist at best.02:27They bought in less than a year ago and sold in less than a year.02:30And THAT is not investing at all.02:33It’s not even a bastardized version of investing.02:35It is absolutely speculation, or glorified gambling.02:38So before we get started, it’s important for us to understand the difference between02:42speculation and investing in cryptocurrency.02:45What is Speculation in Crypto?02:48Speculation in crypto is when someone throws money into a project without doing extensive02:51research with the hopes and prayers of making a profit in a short period of time, which02:55is usually less than 12 months.02:57Now, what we need to be in crypto is not speculators, but rather investors.03:02So, let’s clarify what investing is.03:05What is Investing in Crypto?03:07Investing in crypto is when someone allocates money into a project after conducting extensive03:11research with the intention of making a profit in the long term, which is usually over a03:17year,03:18but since the technology and asset class is still so new and high-risk, serious investors03:21in crypto should realistically be planning to invest for a 2 to 5+ year timeframe, and03:27all the while remaining active in the space.03:30Investors in crypto are not only investing their money, they are investing their time03:34by learning about how finance & economics work, as well as keeping up with global news03:38affecting the crypto markets,03:40the ever-changing regulatory landscape around crypto, progress of the projects they’re03:45invested in, potential competitors of those projects, activity in the traditional stock03:49market, and a myriad of other things that influence the cryptocurrency industry at large.03:54It’s not easy, and as the saying goes, if it were easy, everyone would do it.03:58So with any self-directed investment activity, work is required to reap a reward.04:03And the more risk you take on, the more work required to potentially realize more gains,04:08because you could also lose your investments.04:11So another key characteristic of a serious investor in the crypto space is to never invest04:16more than you can afford to lose.04:18Nice.04:19Now that we have clarified the difference between a speculator and an investor, let’s04:23investigate whether or not crypto is a card house that could potentially: collapse in04:27the short or long term for a short or long period of time, collapse in the short or long04:32term forever, or not experience a collapse whatsoever, all from the viewpoint of an investor.04:38Chapter 1: The Structure of the Traditional Financial System04:42In this chapter we will break down 7 concepts to help us better understand the foundation04:47upon which all available investments reside, including crypto.04:52Concept 1: Fractional Reserve Banking04:54Fractional Reserve Banking is just a fancy term that describes the system where banks04:58are required to keep a certain amount, or fraction, of the amount of money people deposit05:03into their bank accounts.05:04For example, let’s say for every $100 you deposit into your account, per the fractional05:09reserve banking system, the bank only has to keep $10 of the total deposit and is allowed05:15to lend out the rest.05:16This fraction of deposits banks are required to maintain are known as reserves.05:22So the $10 dollar fraction of the $100 dollars you deposit into your bank account, is held05:26as reserves.05:27And the fraction of deposits banks are required to maintain are known as reserve requirements.05:32Hence the term, fractional reserve banking.05:35The fractional reserve banking system was created as a way to allow for the expansion05:40of the economy.05:41Here’s how:05:42For example, imagine a business deposits $100,000 into their bank account.05:48Assuming a 10% reserve requirement, the bank keeps $10,000 of the deposit to maintain the05:54reserve requirement, and then loans out the other $90,000 to a person.05:59This person then deposits the $90,000 loan into their bank account and their bank keeps06:05$9,000 of it to maintain the 10% reserve requirement, and then, what happens next?06:10Yes, that bank lends out the other $81,000 to another person or company etcetera.06:16So that single $100,000 deposit by the business at the beginning of this analogy effectively06:21created $271,000 in the financial system.06:26And this process can keep repeating over and over again, creating more money in the economy,06:31all courtesy of the fractional reserve banking system.06:34Interesting, right?06:35A little unsettling?06:37What happens if a large percentage of people or businesses want to withdraw their bank06:41deposits and not enough money is available to cover it?06:44Well, this happened once during the Great Depression and it caused the single largest06:47bank failure in American history.06:50Since then the Federal Deposit Insurance Corporation, or FDIC, was formed to insure deposits in06:56US banks in the event of bank failures.06:58Nice, what a relief right?07:00Our money in our banks is safe and secure in the event of another massive bank failure.07:05Kind of… there are three caveats to be mindful of when assessing whether your deposits are07:10insured: 1) your banking institution must be a member firm with the FDIC to qualify.07:16Following that, 2) the FDIC only insures deposits made into certain types of accounts which07:22generally include checking, savings, CD’s, money market accounts, IRA’s, revocable07:27and irrevocable trust accounts, and employee benefit plans.07:31The FDIC does not insure mutual funds, annuities, life insurance policies, stocks, or bonds.07:38So assuming your banking institution is a member firm of the FDIC, and your deposits07:43are in a type of account covered by the FDIC, the final caveat 3) is that only $250,00007:50per person or depositor is insured.07:53Meaning if you as an individual have, let’s say $300,000 deposited in a checking account07:58with an FDIC member bank, in the event of a bank failure, $50,000 of your money is not08:04insured and could be unrecoverable.08:06So here’s a quick tip if you have more than $250,000 you choose to keep in a banking account:08:11consider opening accounts with several different banking institutions that are FDIC members08:16to spread out the deposits to have more FDIC coverage.08:20Awesome.08:21Now that we know how the fractional reserve banking system works and the fail safes put08:24in place with the FDIC to mitigate some damage if the system collapsed, next let’s talk08:29about other ways all of this money we earn, spend, borrow, lend, withdraw, and deposit08:35with banks is created and how the government manages it.08:39Concept 2: US Treasury Bonds08:41The Federal Reserve is the central bank of the United States and in control of the creation08:46and management of money.08:47And the Federal Reserve controls the US money supply in two ways: one, by digitally adding08:53and subtracting money to and from major banks, and two: by issuing, buying, and selling US08:59treasury bonds.09:00So let’s break down what a US treasury bond is and its role in the management of money09:05in our economy.09:06First, what is a bond?09:08A “bond” is just a fancy word for a loan.09:11So bonds are loans, or debt instruments.09:13And “US Treasury” bonds refer to debt issued by the US Government.09:17So the Federal Reserve issues debt in the form of US Treasury bonds, and also engages09:22in buying and selling these US Treasury bonds to control the money supply.09:26Let’s talk about how this is done.09:28Imagine the current state of the economy, where there’s a certain amount of US dollars09:32circulating between banks, hedge funds, and other financial institutions.09:36When the Federal Reserve issues US Treasury Bonds, these entities can use some of their09:40dollars to buy the bonds.09:42And the dollars they give to the Federal Reserve in exchange for the bonds is then taken out09:46of circulation and locked up with the fed.09:49The Federal Reserve uses the money it receives to pay down debts or to fund improvements09:53to infrastructure or similar.09:55When financial entities buy US Treasury bonds, the amount of money in circulation decreases.10:00And when financial entities sell US Treasury bonds back to the Federal Reserve, the amount10:05of money in circulation increases.10:07So why would financial entities want to buy US Treasury bonds in the first place?10:11Well, treasury bonds are assets similar to blue chip stocks like Apple that pay their10:16stockholders dividends over time; except by holding treasury bonds, the holder receives10:21set interest payments over time.10:23And instead of these assets being backed by a single corporation like Apple, they are10:27backed by the US Federal Reserve, making them a safer, more pristine asset.10:32In fact, US Treasury Bonds are deemed the safest and most pristine asset by many, especially10:36right now which will be important to stay mindful of throughout this video series.10:41So when financial entities or people feel uncertain about markets and the economy at10:45large, they typically choose to buy and hold treasury bonds because they are less risky10:49than other assets.10:50Cool.10:51So we know why financial entities want to buy US treasury bonds, because: they are deemed10:55safe, pristine assets that pay guaranteed fixed interest over time, they’re backed11:00by the government, and thinking back to how the fractional reserve banking system works,11:04banks have both requirements and incentives to keep assets on their balance sheets so11:08they can create loans, which are income generators for them.11:12And this brings us to our next concept.11:15Concept 3: The US Treasury Bond Market11:17So it’s important to understand that when new US Treasury Bonds are issued by the Federal11:22Reserve, they go up for auction.11:24This is the primary place where new bonds originate.11:28Financial entities can bid on the bonds and if they acquire bonds, they can choose to11:32keep them or sell them in a secondary market known as the US Treasury Bond market.11:37The US treasury bond market is where financial entities like banks, hedge funds, and other11:42financial institutions can buy and sell US Treasury Bonds that were already previously11:47issued by the Federal Reserve.11:49Simple enough, right?11:50Cool.11:51Onward to:11:52Concept 4: The Repo Market11:54The work “Repo” stands for “repurchase agreements.”11:56And a repurchase agreement is just a fancy word for a short term collateralized loan.12:01The repo market is where financial entities can sell assets like US treasury bonds for12:06the short term in exchange for cash with a promise to buy back or repurchase the assets12:11at a higher price.12:13The buy back or repurchase term is usually overnight, but can be a week, two weeks, or12:18one month depending on the terms of the repurchase agreement.12:21So when banks, hedge funds, or financial institutions need cash to meet reserve requirements or12:26for liquidity, they can temporarily swap treasuries they have, for cash from banks in the repo12:32market.12:33And when the term of the loan expires, the entity buys back the treasury at a higher12:37price, similar to an interest payment.12:39The price to repurchase the treasury can be dictated in a few different ways.12:43One, by the amount of money in circulation.12:46The more money in circulation, the lower the interest rate, and vice versa; the less money12:50available, the higher the interest rate.12:53Two, the supply and demand of money.12:55If there’s more demand for cash than the circulating supply, interest rates can get13:00too high.13:01And when this happens, the Federal Reserve usually steps in and buys treasuries in exchange13:05for cash to put more cash into the ecosystem, which, in turn, lowers interest rates or the13:11cost of borrowing money.13:12And three, how risky the buying or borrowing entity is.13:16So if the entity entering into the repurchase agreement is not financially stable, or possibly13:21close to insolvency, the repurchase price of the treasuries will be much higher, because13:26they are a much riskier borrower.13:28Which brings us to the next concept -13:30Concept 5: Rehypothecation13:32When there are a lot of risky borrowers in the repo market, the price to repurchase treasuries13:37or essentially borrow money, increases.13:40And when there is high demand for treasuries in a market with a lot of high-risk borrowers13:44with no collateral, the available supply of treasuries decreases.13:49Banks will flat-out refuse to lend money to high-risk borrowers that don’t have any13:52treasuries or other good collateral to secure a loan.13:55So when the amount of available treasuries is low, and the demand for cash is high among14:00a lot of high-risk borrowers on the brink of insolvency, entities will engage in what’s14:06called rehypothecation.14:08Rehypothecation is just a fancy word that basically describes an entity letting another14:12entity use their treasuries to secure a loan.14:15For example, let’s say a hedge fund needs cash, but doesn’t have any treasuries to14:19secure a loan themselves.14:21The hedge fund can call in a favor from one of their financial institution buddies that14:25has treasuries and essentially borrow it from them to use as collateral for the loan.14:31When financial institutions let other entities borrow their treasuries, the treasuries are14:35deemed rehypothecated.14:37And as you can imagine, rehypothecated treasuries aren’t exactly a safe form of collateral14:41because, at the end of the day, the banks lending the money don’t know who actually14:46owns the treasury.14:47And they also don’t know how many times that treasury has been rehypothecated, because14:51yes, the same treasury can be hypothecated multiple times allowing multiple entities14:57to essentially re-use that same exact treasury as collateral.15:02Meaning a single treasury can be on multiple entities’ balance sheets simultaneously.15:07This would be like you and 20 other people sharing the same bank account, and let’s15:11just say the bank account has $100 in it.15:13And you and 20 other people are telling lenders you are trying to borrow money from that you15:18definitely have $100 in your account in case things go awry.15:21Yeah, not ideal.15:23So imagine the difference between a treasury and rehypothecated treasury, as a treasury15:28being hard cash or a debit card transaction, versus a rehypothecated treasury being a credit15:33card transaction.15:34Would you rather someone pay you with cash or with a credit card?15:37Exactly.15:38So since covid, the Federal Reserve has been adding record amounts of cash into the economy,15:43by merely printing it out of thin air and through buying US treasury bonds, which is15:47further decreasing the available supply of pristine collateral.15:52Which brings us to the next section.15:54Concept 6: The Reverse Repo Market15:56A huge supply of cash and low supply of pristine collateral like US treasuries has caused the16:01“reverse repo market” to explode recently.16:04A reverse repo is just the other side of a repo.16:07For an entity selling a US treasury to someone for the short term, the transaction is a regular16:12repo or repurchase agreement.16:15For the entity buying a US treasury for the short term, the transaction is a reverse repo,16:20or reverse repurchase agreement.16:22Why is the reverse repo market exploding right now?16:25Well, as we described earlier, it’s because there has been both an increase in demand16:29for collateral versus cash, and a supply shortage of preferred collateral, US treasury bonds,16:35in the repo market.16:37Since the fed has been both printing news dollars into the ecosystem and buying up all16:41the treasury bonds from the repo market in exchange for cash, further increasing the16:45amount of dollars in the ecosystem: banks and financial institutions are bursting at16:50the seams with excess cash.16:52As a result, all these entities with excess cash are now saying to other entities, hey,16:56we will pay you interest to borrow our cash, in exchange for treasury bonds.17:01So instead of the borrower having to pay the lender interest on the cash loan, the lender17:05is literally paying the borrower to take their money.17:08This is because the cash lender wants to pay the cash borrower interest to borrow their17:13collateral.17:14Strange right?17:15So all the financial institutions would rather pay to borrow US treasury bonds than hold17:20cash.17:21They want the collateral, not the cash.17:23Now, why is it so?17:24Well, they could be making a profit from taking the treasuries to the secondary bond market,17:28but also with so much cash in the ecosystem there is nowhere else for it to go.17:32But Casey, what about other less-risky assets like physical properties, mortgage-backed17:36securities, or corporate bonds.17:38Well, financial institutions aren’t daft and see the writing on the wall.17:42First of all, look at the housing market.17:44Financial institutions have been buying up physical property like crazy, sending prices17:48for homes to record highs.17:50So yeah, they’re buying property.17:52Next, mortgage-backed securities?17:53Which are bundles of home loans… in the midst of the longest rent, mortgage, and eviction17:58moratoria the US has ever seen?18:00Financial institutions know what’s going to happen when it supposedly ends at the end18:03of this month, July 2021.18:06Lots and lots of defaults on mortgages.18:08Nobodies going to be able to pay several months of mortgage payments all at once, and even18:12if repayment deals are worked out, there’s still a lot of risk to be mindful of.18:17So mortgage backed securities are far from being pristine collateral right now.18:20From there, corporate bonds and stocks: yeah, we all know they’ve been artificially propped18:25up from covid stimulus packages.18:27Big zombie corporations that should’ve failed years ago still have a pulse, for now.18:32In addition, the overall traditional stock market is well overdue for a correction.18:36So yeah, US treasury bonds are where it’s at.18:38In a pick your poison economy, US treasury bonds are the least poisonous right now.18:43But if entities are scrambling to buy up all of the treasuries from the treasury market,18:47what happens to the repo market?18:48Well, it basically has what caused this whole issue in the first place: a shortage of sufficient18:54collateral.18:56Then what happens is more of the same we discussed earlier: more rehypothecation, where entities19:00start borrowing each others’ collateral in order to stay liquid.19:04And if 5 or 10 or 20 entities are using the same exact treasuries as collateral to stay19:09liquid, what happens if one of them goes insolvent?19:12Yeah, it’s basically a game of musical chairs with, like, 1 chair per 20 people trying to19:16sit in it when the music stops.19:18And that’s just assuming banks with cash would be willing to lend to all of the entities19:23using treasuries that have been lent out to god knows how many others.19:27And what if it’s not just the second bond market where rehyophecated treasury bonds19:30are being circulated?19:32What if the Federal Reserve itself is also redistributing rehypothecated treasury bonds?19:37Check out this interesting idea I came across from one of my favorite sources, George Gammon’s19:41YouTube channel.19:42Here’s an excerpt directly from the New York Federal Reserve’s website about Reverse19:46Repurchase Agreement Operations:19:481 – When the Desk conducts RRP, or reverse repurchase agreement, open market operations,19:54it sells securities held in the System Open Market Account (SOMA) to eligible RRP counterparties,20:01with an agreement to buy the assets back on the RRP’s specified maturity date.20:06And here’s the key sentence to soak in: This leaves the SOMA portfolio the same size,20:11as securities sold temporarily under repurchase agreements continue to be shown as assets20:16held by the SOMA in accordance with generally accepted accounting principles,20:21but the transaction shifts some of the liabilities on the Federal Reserve’s balance sheet from20:25deposits held by depository institutions (also known as bank reserves) to reverse repos while20:31the trade is outstanding.20:33These RRP operations may be for overnight maturity or for a specified term.20:38Wait, so did the Fed just admit to allowing a single treasury that they have on their20:43balance sheet to remain on their balance sheet while they sell it to another entity?20:47Or even multiple entities?20:49Have they started implementing a fractional reserve system with US treasury bonds to keep20:53the music playing?20:54Probably, because the Fed knows that if there isn’t enough pristine collateral or US treasury20:59bonds to keep the reverse repo market going, the whole global financial system comes crashing21:03down pretty much.21:04I mean look at this:21:052 – This is a graph showing the total amount of money in billions being transacted in overnight21:11reverse repurchase agreements since 2016.21:14Just this past Wednesday on June 30th, it hit over $990 Billion dollars worth of overnight21:19reverse repos.21:21Meanwhile 3 – On June 24th, the Federal reserve released their latest balance sheet showing21:25$326 Billion dollars worth of US treasury bonds.21:29And if we refer back to the excerpt from their website, this number on their balance sheet21:34remains unchanged regardless of whether or not they sold treasuries in the reverse repo21:39market.21:40Also keeping in mind that these are just reverse repos done with the Fed.21:43The entire reverse repo market where financial entities like banks and hedge funds can transact21:48between each other is over $4 trillion dollars.21:51So is the whole traditional financial system propped up on unlimited, baseless cash and21:56just a few treasuries that have been rehypothecated into oblivion?21:59It’s possible, which brings us to our final concept in this chapter:22:04Concept 7: The US Financial System Card House22:07At the time of this video, the crypto markets are still highly correlated with the traditional22:11markets and on an abstract, conceptual level, still utilizing the traditional global financial22:17system as a foundation.22:19So let’s take a look at the current state of the US financial system in this analogical22:23visual representation of 3 – an inverted or upside down card house.22:28The bottom and lowest rows represent assets with less perceived risk, and as we move higher22:33up the inverted card house, these assets have more perceived risk.22:37So at the bottom here, we have a few real deal US Treasury Bonds being propped up by22:41Fed Chair Jerome Powell and Treasury Secretary Janet Yellen.22:45Above that, we have a slew of rehypothecated US treasury bonds,22:49all of which we have no idea who actually owns the actual treasury, and no idea how22:54many different balance sheets the treasury exists on simultaneously.22:57Here we also have physical property like houses, apartments, buildings, and other types of23:03real estate.23:04On top of that we have mortgage backed securities representing all of the liens against the23:07real physical property, as well as some commodities like gold, oil, corn, cattle, etcetera.23:13Above that, we’ve got corporate bonds, blue chip stocks and equities like Apple, Google,23:18Amazon, and similar.23:19As well as stocks, equities, and corporate paper of smaller, more risky corporate entities.23:24And finally, representing the largest quantity of assets harboring the highest risk are options,23:29futures, and derivatives, which in the traditional markets is just legalized gambling, where23:34people pretty much make bets on what the prices of all the other assets in this chart will23:39be in the future.23:40So yes, calling spades, spades here: behold the structure of the current traditional financial23:45system, that also currently serves as the foundation of the entire cryptocurrency market.23:51Fun fun.23:52Awesome.23:53Congratulations for making it through chapter one in this video series.23:56Yes, it was long, tedious, and boring, but now we will better understand and appreciate24:01how this relates to the crypto market and what we can do to protect our investments.24:07This is the first video in a three-part video series, so make sure to check them all out24:11to get the full scoop.24:12If you enjoyed the video make sure to like this video and subscribe to my channel for24:15more crypto content.24:17So what do you guys think about the current structure of the traditional financial system?24:20Was the video explanation clear or do you have other questions?24:23How about that inverted card house analogy?24:25Clever or concerning?24:27Let me know in the comments below.24:29Be safe out there.English