U.S. Banking Sector: $500 Billion in Unrealized Losses Represents a Considerable Risk

At the recent Austrian Economic Research Conference hosted by the Mises Institute, Dr. Steve Hanke emphasized the critical role of commercial banks in money creation and the broader economy. While public attention often focuses on the Federal Reserve, the reality is that around 80% of the money supply—measured by M2—is generated by commercial banks through lending. However, delinquencies on loans, including mortgages, credit cards, and auto loans, are rising, prompting banks to increase provisions for loan losses. Though concerning, Professor Hanke believes the banking system remains generally safe for now.

The stagnant money supply—flat since mid-2022 and growing only about 4% annually—signals economic slowdown and declining inflation, now at 2.3%. This monetary stagnation and increased bank provisioning indicate a likely recession. Another key concern is “regime uncertainty,” a term that describes rapid, unpredictable policy changes, including tariffs, fiscal plans, and regulations. This uncertainty discourages investment and has led many companies to stop issuing earnings guidance. Corporate profits may remain flat or even decline in 2025.

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Impact of New Banking Regulations: Basel III and the Supplementary Leverage Ratio

There is a growing risk within the U.S. banking system, particularly the $500 billion in unrealized losses on investment securities held by banks. While these losses remain off the income statement for now, if it's deemed unlikely that they’ll be recovered within a reasonable timeframe, banks may be forced to recognize them, posing a potential threat to financial stability. This scenario mirrors the problems faced by Silicon Valley Bank, though a full-scale banking crisis remains unlikely. Instead, the broader concern is that such balance sheet strain makes banks more conservative, dampening their willingness to lend. Combined with tepid loan demand, this results in sluggish credit growth.

Regulatory changes are another key issue. Basel III regulations, scheduled to take effect in July 2025, and the supplementary leverage ratio could further tighten credit conditions. However, there’s uncertainty over whether the U.S. will fully adopt these measures. The Trump administration has hinted at repealing the supplementary leverage ratio, which could ease lending constraints—a move supported by banks and some economists.

Dr. Hanke commented on the post-2008 regulatory approach, arguing that heavy capital requirements have made banks risk-averse, stifling economic expansion. A more balanced framework, detailed in the book Dr. Hanke co-authored with Matt Sekerke, Making Money Work: How to Rewrite the Rules of Our Financial System, advocates for smarter, not stricter, bank regulation. The book urges a renewed focus on the central role of commercial banks in money creation and economic health, asserting that more pragmatic oversight would enhance both financial stability and economic performance. Stay tuned for a detailed review of the book with Dr. Hanke on World Affairs in Context!

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Money Supply

The money supply is currently weak, which is contributing to falling inflation. Since inflation responds to changes in the money supply with a lag, bond yields—predominantly the 10-year—would also typically decline. However, yields are rising due to regime uncertainty and fiscal concerns. Many investors mistakenly expect higher inflation due to tariffs, but tariffs only shift relative prices, not the overall price level. This has led to market confusion and mispricing. Ultimately, Dr. Steve Hanke believes that inflation will eventually bring 10-year bond yields down, correcting the current market mispricing as inflation continues to decline.

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Trade Deficit: Foreigners Are Not “Ripping Americans Off!”

Contrary to popular belief and political rhetoric, particularly from former President Trump, the U.S. trade deficit is not caused by foreigners "ripping off" America. Instead, it results from Americans spending more than the nation produces (its Gross National Product). To balance this excess spending, the U.S. runs a trade deficit—an accounting necessity, not a sign of economic failure. The deficit is financed by capital inflows, as foreigners purchase American assets, such as bonds and equities. This inflow of capital makes the trade deficit sustainable and even beneficial in some ways.

The trade deficit is thus not a policy failure or threat, but a reflection of broader macroeconomic choices. Efforts to "fix" it through tariffs are misguided. Tariffs do not reduce the overall trade deficit; they only shift where imports come from, distorting trade patterns rather than correcting any imbalance. For instance, heavy tariffs on Chinese goods would reduce imports from China but increase them from other countries. Ultimately, the misunderstanding of basic accounting identities leads to unnecessary concern and harmful trade policies. The focus should be on smarter economic policy, not blaming foreign nations or relying on counterproductive tariffs.

Follow Dr. Steve Hanke on X (former Twitter): https://x.com/steve_hanke.

Thank you to all my subscribers for being part of World Affairs in Context. Your support makes the newsletter happen, and your questions, ideas, and suggestions inspire it. Please consider becoming a paid subscriber, which will help contribute to the resources needed to produce more content on the platform. If you’d like to make a one-time contribution, please do so via PayPal or Buy Me a Coffee.

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Trump Watch is a new weekly “report card” on all things Trump hosted by Scott Ritter for paid subscribers only. Scott interviews one guest on one topic in each episode. In Episode Three, Scott discusses the phone call between President Trump and President Putin, the prospects of peace between Russia and Ukraine, and the possibility of improving US-Russi…

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Greetings, All!

It’s been a long and very eventful week. Let’s catch up on the latest top headlines, opinions, and recommendations.

Global Geopolitics and Declining US Power: How China Won the US-China Economic War with Einar Tangen

Donald Trump’s trade war, especially with China, was a failed bluff rooted in economic nationalism and zero-sum thinking. Einar Tangen points out that the unilateral tariffs aimed to intimidate, but transparency in trade data revealed the U.S. had little leverage. Contrary to his claims, tariffs hurt American consumers, fueling inflation and deepening middle-class decline. Globally, erratic policies shattered trust in the U.S. as a reliable economic partner, destabilizing markets and raising doubts about the dollar's reserve status. Meanwhile, China positioned itself as a stabilizing force, favoring diplomacy and multilateralism. The episode highlights the perils of populist bluster over pragmatic, cooperative leadership.

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$2.5 TRILLION in Deals: Big Win for U.S. Weapons Industry as Persian Gulf Buys More Arms

President Trump reshaped regional dynamics in a dramatic Middle East tour with billion-dollar deals and controversial diplomacy. Starting in Saudi Arabia, he secured a $142 billion arms agreement and encouraged massive Saudi investments in the U.S. In Qatar, Trump oversaw a record $96 billion Boeing deal and major defense contracts. AI took center stage in the UAE with a landmark deal for Nvidia chips. Most shocking was Trump’s handshake with ex-terror ISIS/ al-Qaeda leader Mohammad al-Jolani, signaling the end of U.S. sanctions on Syria. While geopolitical tensions simmer, the military-industrial complex and tech giants emerged as clear winners in this high-stakes journey.

Thank you to all my subscribers for being part of World Affairs in Context. Your support makes the newsletter happen, and your questions, ideas, and suggestions inspire it. Please consider becoming a paid subscriber, which will help contribute to the resources needed to produce more content on the platform. If you’d like to make a one-time contribution, please do so via PayPal or Buy Me a Coffee.

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• The U.S. housing crisis is worsening:

  The U.S. housing market has officially reached the most unaffordable level in history.

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Russia has informed Ukraine of its baseline condition for conflict termination—the withdrawal of all Ukrainian troops from the territory of lands which, from the perspective of the Russian Constitution, constitute part of Mother Russia. These include Kherson, Zaporozhia, Donetsk and Lugansk. Russia has also made it clear that if Ukraine does not accept these terms, the next time Russia is willing to sit down and negotiate with Ukraine their demands will include four additional Ukrainian oblasts, or administrative regions—presumably Odessa, Nikolaev, Dnepropetrovsk, and Kharkov. We have reached the Odessa Moment.

Back in January 2023, while appearing on “The Gaggle” with George Szamuely and Peter Lavelle, I postulated that Russia was approaching what I called “the Odessa Moment,” that confluence of military and political circumstances which, once reached, would trigger a strategic decision by Russia to expand the Special Military Operation (SMO) beyond the geography defined by the territories absorbed by Russia following a controversial referenda held in September 2022 on the territory of Kherson, Zaporozhia, Donetsk and Lugansk, in which the question of self-determination was answered by a vote on whether these territories should be incorporated into the Russian Federation or not.

As originally conceived, the SMO was not about territorial acquisition but rather defending the rights of the Russian-speaking population of Ukraine. In negotiations which began less than a week after the SMO began—first in Gomel, Belarus, and later in Turkey—Russia simply sought to achieve that which had been promised as part of the Minsk Accords entered into with Ukraine, Germany and France in 2014-2015, in which Ukraine promised to make the appropriate changes to its Constitution guaranteeing that the rights and status of Russian-speaking Ukrainians would be protected.

Ukraine, backed by both Germany and France (and the United States as well) opted to treat the Minsk Accords as an opportunity to build up military power sufficient to reclaim parts of the Donbas region (comprised of the oblasts of Donetsk and Lugansk) as well as Crimea which were lost in the aftermath of the CIA-backed Maidan coup of February 2014 which saw the Russian-speaking lawfully elected President, Victor Yanukovych, ousted and replaced by US-backed Ukrainian nationalists. Between 2015 and 2022, the US and its NATO allies trained and equipped hundreds of thousands of Ukrainian soldiers for the sole purpose of reclaiming by force the territories of Donetsk, Lugansk and Crimea.

In April 2019 Volodymyr Zelensky, the former comedian-turned politician, won the election for the office of President of Ukraine, ousting the incumbent, Petro Poroshenko. Zelensky ran on a platform of peace, winning over the Russian-speaking population on the promise that he would “crawl on his knees” if necessary to work out a peace plan with Russia. Instead, within months Zelensky was convening a war council where he promised to use the Ukrainian military to reclaim the parts of Donetsk and Lugansk that had freed themselves from Ukrainian rule.

This was Zelensky’s first mistake.

The path he chose led to Russia, in the days before the initiation of the SMO and after Ukraine began mobilizing its forces to attack the Donbas, recognizing the independence of both Donetsk and Lugansk and entering into a collective security agreement, actions which guaranteed that the Donbas would never again be part of Ukraine.

This was Zelensky’s Donbas moment.

Zelensky’s second mistake came in April 2022, when he walked away from the negotiations that Russia had initiated immediately after the start of the SMO which culminated in a finalized signature-ready peace agreement which has become known as the Istanbul communique. This agreement would have recognized the independence of the Donbas republics, but returned all other Ukrainian territory that had been occupied by Russian troops during the SMO.

Zelensky, pressured by his US and NATO supporters, rejected this agreement, and instead took tens of billions of dollars in military aid from the US and NATO which he used to rebuild his depleted military force, which he then used to launch a counterattack against Russian forces which had already began their withdrawal from Ukraine as a good faith measure in keeping with the terms of the Istanbul communique.

Russia responded by organizing referenda in both the Donbas and the two oblasts, Kherson and Zaporozhia, that constituted the land bridge connecting Crimea with Russia proper. These referenda were on the question of these territories becoming part of the Russian Federation; all four voted yes, and after the appropriate legal action was taken by the Russian parliament, President Putin signed a decree which made all four oblasts part of the Russian Federation.

This was Zelensky’s Little Russia moment.

And now Zelensky finds himself at a new crossroads.

His Odessa Moment.

He has a chance to end the SMO on the most favorable terms possible, terms which reflect the harsh reality the Ukrainian President and the nation he leads faces due to Zelensky’s prior poor decision-making regarding Russia.

The Donbas is gone. So, too, is Little Russia. These losses are irreversible, politically and militarily.

Ukraine has a chance to end the conflict now. But to do so it must respect the reality of the moment.

Unfortunately, the same “friends” and “allies” which encouraged Ukraine to walk away from the Minsk Accords and the Istanbul communique are now urging Ukraine to do the same when it comes to Istanbul 2.

But the promise of European support is illusory—the armories have long since been stripped bare, and the potential for meaningful military intervention never existed, either militarily or politically.

Moreover, any European action would, by necessity, require backing from the United States. While this may have been a possibility during the presidency of Joe Biden, it is a non-starter under the new administration of Donald Trump—even as the Istanbul 2 meetings were underway, the US announced that it was going to be withdrawing its forces from Europe.

Russia is to be taken seriously. While the challenges that Russia will face in occupying the four new territories it has put its sights on if Ukraine balks yet again regarding a peace agreement are many and not to be minimized, this is a military question which is best answered by the political resolve of the Russian leadership and nation, which at this juncture is unassailable.

Last year Vladimir Putin won a mandate to governing as a wartime President.

As the recently concluded May 9 celebration clearly demonstrated, the determination of the Russian people to defeat Ukraine is rock solid.

As the lead Russian negotiator in Istanbul made clear to his Ukrainian counterparts, Russia is prepared to fight for however long it takes, even alluding to the 21 years it took Peter the Great to defeat Sweden.

Ukraine will be lucky to survive the summer.

Zelensky faces one of the greatest tests of leadership he will ever face.

Nationalist forces in his government are willing to commit national suicide in pursuit of the failed Banderist cause.

Ukraine’s erstwhile allies, whose objectives continue to center around Cold War fantasies of strategically defeating Russia, are pushing Zelensky to reject the Russian conditions for peace, all too willing to sacrifice Ukraine as a proxy in pursuit of their unattainable goal.

If Zelensky truly cared about his nation and his people, he would swallow his pride and make the only decision capable of saving them—surrender.

But Zelensky is not a leader who cares about his nation or its people—he has already sacrificed Ukraine’s national integrity and more than a million of its citizens in pursuit of his EU and NATO driven fantasies of relevance and fortune.

This is Zelensky’s Odessa Moment.

And he will fail.

Again.

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The Bluff That Failed

Donald Trump’s trade war, particularly targeting China, was rooted in a flawed bluff. By imposing unilateral tariffs and treating global trade as a zero-sum game, U.S. President Trump sought to intimidate countries into economic submission. Einar Tangen points out that the President’s strategy mirrored “a schoolyard bully” demanding tribute, hoping to create a world where America was the central hub and all other nations acted as dependent spokes. However, the transparency of trade data meant that other nations could clearly see the U.S. had no "royal flush" and called its bluff.

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Economic Decline in the United States

Contrary to President Trump’s claim that foreign nations would pay the tariffs, American consumers and businesses would bear the brunt. Importers face higher costs, pass them on to consumers, and, as we’ve seen over the past several weeks, even stop shipments due to risk, leading to inflation and empty shelves. Middle—and working-class Americans, many living paycheck to paycheck, suffer deeply, resorting to payday loans for groceries. The middle class, once a majority in 1971 at 61%, had fallen to just 40% by the last census.

Global Distrust and Financial Instability

Trump’s erratic trade policies led to a profound erosion of global trust in the United States. Countries and markets viewed the U.S. as an unreliable partner, undermining institutions like the WTO. The fallout extended to concerns over the U.S. dollar’s future as the global reserve currency. Bond markets began to tremble as debt soared, expected to surpass $38 trillion. Investors fear rising interest payments and a potential run on bonds.

China’s Measured Diplomacy

In contrast, China has been the adult in the room. Rather than escalating tensions, it removed tariffs on certain goods and invited discussions on a "Phase Two" deal, meeting in Geneva, home of the WTO. While not perfect, China emphasized stability, multilateralism, and global economic cooperation—values that starkly contrasted with Trump's extractive and transactional approach.

Lessons for the Future

Trump's strategy has shown the dangers of populist economic nationalism disconnected from reality. The economic pain it inflicted on average Americans, the distrust it bred globally, and the instability it created in financial markets serve as a cautionary tale. Responsible leadership rooted in cooperation, trust, and long-term planning is urgently needed to restore America's economic and moral credibility.

Donald Trump’s tariff-driven trade war, especially against China, has become a strategic miscalculation based on bluffing and intimidation. Attempting to recast America as a dominant global hub surrounded by tributary nations, Trump’s unilateral actions backfired when other countries, seeing through the bluff, retaliated or withdrew. Contrary to his claims, American importers and consumers, not China, would pay the tariffs, leading to inflation, halted imports, and growing economic insecurity.

Domestically, the middle class has been disappearing further as many Americans struggle to afford basic necessities. Globally, Trump’s erratic policies eroded trust in the U.S. as a stable economic partner, raising concerns about the long-term credibility of U.S. Treasury bonds and the dollar as the global reserve currency.

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Follow Einar on X: https://x.com/ehtangen and Substack, Asian Narratives: https://asianarratives.substack.com.

Thank you to all my subscribers for being part of World Affairs in Context. Your support makes the newsletter happen, and your questions, ideas, and suggestions inspire it. Please consider becoming a paid subscriber, which will help contribute to the resources needed to produce more content on the platform. If you’d like to make a one-time contribution, please do so via PayPal or Buy Me a Coffee.

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Trump Watch is a new weekly “report card” on all things Trump hosted by Scott Ritter for paid subscribers only. Scott interviews one guest on one topic in each episode. In Episode Two, Scott discusses the selection and performance of U.S. Secretary of State Marco Rubio with Col. Lawrence Wilkerson, former Chief of Staff to U.S. Secretary of State Colin …

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Greetings, All!

Let’s catch up on the latest top headlines, opinions, and recommendations.

The Maidan Massacre in Ukraine: How Ukraine Became a U.S. Client State | Dr. Ivan Katchanovski

In our conversation, Professor Ivan Katchanovski reveals the truth about the violent Maidan regime change in Ukraine, which enabled the West to use Ukraine as a proxy tool against Russia. Professor Katchanovski notes that after the brutally orchestrated overthrow of the democratically elected Ukrainian President Viktor Yanukovych, the West transformed Ukraine into a client state, whose political leaders were selected by the United States and other Western officials to further their geopolitical agenda in Eastern Europe.

WORLD WAR II VICTORY: Inside the Soviet Triumph & Demise of Hitler's Empire | Dr. Vladimir Brovkin

May 9, 2025 marked the 80th Anniversary of the Allies’ Victory over Nazi Germany. I spoke with Dr. Brovkin about the key turning points in the history of World War II, the Eastern Front vs. the Western Front, and the Soviet offensive that broke the Wehrmacht. The conversation was truly fascinating (I love history!) and is a must-watch!

US Dollar DROPS 9% as Trump Pushes for INFLATION and Fed Alerts STAGFLATION Is Here | Ryan McMaken

The U.S. economy contracted 0.3% in the first quarter of this year, and the Federal Reserve just warned of growing stagflation risks. In the meantime, President Donald Trump is pushing the Federal Reserve to lower interest rates.

The push for low interest rates and monetary inflation benefits Wall Street at the expense of Main Street. These policies disproportionately serve the wealthy by inflating asset prices, boosting disposable income for top earners, and rewarding those with significant debt and investments. Meanwhile, lower-income Americans, who own fewer assets and benefit less from such policies, face rising costs and minimal income gains.

Ryan McMaken notes that Fed Chair Jerome Powell's latest warning is a major red flag, as the Federal Reserve habitually downplays economic risks and misrepresents warning signs.

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$2.5 Trillion Dollar Avalanche: Asia Prepares to Dump U.S. Currency as Global Trade Fragments

A massive shift in global finance may be underway as Asian nations, holding over $2.5 trillion in U.S. dollar reserves, consider moving out of the currency. Economist Stephen Jen warns that these unhedged dollar investments are increasingly vulnerable amid political tensions, particularly U.S. policies targeting China. With the Federal Reserve lowering interest rates and the dollar weakening, countries like China could repatriate large sums, triggering a broader selloff. This could lead to rising U.S. inflation, falling bond prices, and shifts toward emerging market currencies or digital assets. Meanwhile, BRICS+ nations, especially China and Russia, are accelerating de-dollarization in trade settlements. I further discussed the underlying causes in this new video.

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Let’s move on to the week’s top geopolitics, economics, and finance headlines.

• Markets Pause After Rally: The S&P 500, Dow, and Nasdaq ended the week down 0.3–0.5%, snapping a nine-day winning streak. Investors remain cautious amid ongoing U.S.-China trade talks and President Trump’s renewed tariff proposals.

• Tariff Concerns Impact Earnings: Berkshire Hathaway reported a 14.1% decline in Q1 operating earnings. CEO Warren Buffett announced plans to retire by year-end and criticized proposed tariffs.

Remember to tune in to World Affairs in Context for more news, analysis, and upcoming interviews available on YouTube, Rumble, Patreon, Locals, and Spotify.

Thank you to all my subscribers for being part of World Affairs in Context. Your support makes the newsletter happen, and your questions, ideas, and suggestions inspire it. Please consider becoming a paid subscriber, which will help contribute to the resources needed to produce more content on the platform. If you’d like to make a one-time contribution, please do so via PayPal or Buy Me a Coffee.

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• Federal Reserve Holds Rates Steady: The Fed maintained interest rates, while Treasury yields remained flat. During my discussion with Ryan McMaken, economist and editor at the Mises Institute, Ryan noted that Fed Chair Jerome Powell's latest warning is a major red flag, as the Federal Reserve habitually downplays economic risks and misrepresents warning signs.

• The Federal Reserve’s balance sheet runoff slows: The Federal Reserve’s balance sheet declined by $17 billion to $6.7 trillion since March 2025, the lowest since April 2020. In March, the Fed announced it would slow the average pace of Quantitative Tightening from $60 billion monthly to $40 billion. (If you’d like a refresher on how this works, Ryan McMaken did a great job explaining the basics here.)

  

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