The financial crisis in the United States has erupted, and the multiple crisis signals are alarming. The U.S. financial system is in jeopardy, the commercial real estate market is battering, and a wave of defaults is emerging. Credit card debt is a trap where borrowers are burdened with a heavy interest burden that doubles in three years if not repaid in time.
The dollar shortage hit and China sold US bonds for cash aggressively, and the euro, yen, renminbi and pound depreciated. The second phase of the banking crisis is about to erupt, and investors are on the lookout. With a global recession and financial crisis looming, how far is catastrophe away?
In economic crises, we often hear about losses for banks and consumers, but did you know that even the central bank of the United States, the Federal Reserve, is losing money? And not a small amount, but up to $100 billion!How did this happen?
The Fed is not only the best bank in the United States, but also a bank with a balance sheet. Its primary income** is interest earned on U.S. Treasury holdings. Its main expense is interest payments on the Excess Reserve Rate (IOER) to large commercial banks with deposits with the Federal Reserve. These excess reserves are the funds that the bank has excess after meeting the statutory reserve requirements.
There has been a rare inversion of the Treasury yield curve. This indicates that the market is concerned about the outlook for the US economy. An inversion means that the yield on short-term Treasuries (e.g., IOER) is higher than the yield on long-term Treasuries (e.g., 10-year or 30-year). This is a very unusual situation, because usually both long-term Treasuries and rewards should be higher than short-term Treasuries. This inversion is especially pronounced in the Treasury bonds issued in 2021 and 2022, as the interest rates on those Treasuries were set after the Fed cut interest rates aggressively and are well below current levels.
If the interest on your liabilities (IOER) is as high as 5% and the yield on your assets (Treasury bonds) is only 3%, then when your balance sheet size reaches $5 trillion, you are at great risk of losing money. That's the Fed's current predicament.
The Fed's financial crisis remains unresolved. The Fed's losses will reach $200 billion next year. The reason for this is that the Federal Reserve offers a special lending policy to member banks: as long as the bank holds U.S. bonds, they can get loans at face value, regardless of their market value. This means that even if the market value of some Treasuries falls to 70% of face value, banks can borrow the full amount from the Fed. In this way, the Fed is subsidizing the banks while incurring huge losses for itself.
The Fed's losses not only affect itself, but also exacerbate the US fiscal woes. According to the rules, the Fed must hand over its surplus to the US Treasury. And now, due to rising interest rates and bonds, the Fed has seen huge losses on its balance sheet. This means that the US Treasury will not be able to receive the expected revenues from the Fed, leading to a further widening of the US budget deficit.
In the current economic crisis, you may feel like you're in a difficult position, but it's the Federal Reserve and the U.S. Treasury that are the worst. Not only do they have to face huge debts and deficits, but they also have to bear the pressure of inflation. You might think that the Fed has succeeded in curbing inflation, but that's not ...... that way
In June 2022, inflation in the United States soared to 91%, a new high in nearly 40 years. This is due to the imbalance between supply and demand caused by the pandemic and the impetus of fiscal stimulus. In the face of this serious challenge, the Federal Reserve has taken a series of measures, including increasing money**, lowering interest rates, buying bonds, etc., to stabilize the market and**. After more than a year of hard work, the Fed finally brought inflation down to 3 in June of this year0%, which was restored to normal levels. Does this mean that the Fed has succeeded in curbing the threat of inflation?Economists and Fed supporters cheered and even opened champagne to celebrate. But do they really have a reason to celebrate?
The Fed's target rate is 20%, so 3The figure of 0% seems to be only a little bit off. However, an interesting thing happened. In July, inflation rose to 32%。In August, it soared to 37%。It remained at 37%。
Recently, international oil prices have continued to rise, hitting a new high in nearly seven years. Brent*** has already broken through the $91 barrel mark, compared to $67 three months ago on June 27. This means that in less than 90 days, oil prices have skyrocketed by 36%, which is a staggering increase. Moreover, these wholesale products have not been fully reflected in all links of the chain, and there is still room for upward adjustment of gasoline and other refined oils. Therefore, from the point of view of oil prices, it makes sense that the CPI (Consumer Price Index) in the United States will continue to rise in the coming months.
The Fed's plans to raise interest rates have failed, and they are facing intense pressure from inflation. To avoid triggering an economic crisis in 2024, they must raise interest rates as soon as possible to bring inflation down to target.
The Fed wants to control inflation, but it won't be easy. Inflation is rooted in consumer expectations. At present, inflation is mainly caused by the ** chain crisis, including the ** war, the epidemic and the Russia-Ukraine conflict, the Palestinian-Israeli war and other factors. This inflation is self-regulating because consumers save money, avoid spending on non-essential items, and cope with necessities. However, there is a danger if inflation shifts from the ** side to the demand side. At that time, consumers will panic spend and rush to buy all kinds of goods in the hope of getting their hands on it before ***. This happened in the late 70s of the 20th century, when first-end inflation (the Arab oil embargo) led to demand-side inflation (a spike between 1979 and 1981).
Fed's Jerome Powell faces a difficult choice: Should he raise interest rates again this year?Although the United States is not yet on the verge of an economic crisis, the danger of inflationary pressures and financial bubbles is real. Powell is well aware of this and plans to raise interest rates sometime this year to keep the situation stable. However, the market is not optimistic about this.
The Fed faces a dilemma. The good news is that if the economy falls into a deep recession, the Fed still has room to cut interest rates. Typically, for the Fed to effectively stimulate the economy, it needs to maintain interest rates at 4% to 5%. This is their "tool" to deal with the crisis. Now, the Fed's interest rate range is 525% to 550%。I expect them to continue to raise interest rates so that their interest rates will be higher. This means that the Fed can respond to a recession by cutting interest rates aggressively without resorting to negative interest rates. The downside is that the "tools" available to the Fed will be completely ineffective.