The new crisis is already creeping into the financial system

President Donald Trump and French President Emmanuel Macron participated in a joint press conference Monday, Aug. 26, 2019, in Biarritz, France, site of the G7 Summit. They both tried to let some steam off the financial system, but in vain. (Official White House Photo by Andrea Hanks)

Unquestionably, everything is wrong in the international financial system, even though the major central banks have actually donated trillions to the banking ‘community’. The US central bank, the Fed, has lent almost free of charge $4.5 trillion to the American banking hub. On this side of the Atlantic Ocean, the European Central Bank has done the same in the euro area with €2.7 trillion at flat zero interest rate. On top of that, according to a latest ECB decision, it charges negative interest rate for its loans to banks. Obviously, this means at maturity that the banks return to the ECB less than what they borrowed.

The odds are so precarious that the slightest likelihood of a mild recession of one or two GDP percentage units cannot be tolerated by the global financial system. The reason is very simply that the world is immensely deep into debt and risky placements, much more so than in the period ahead of the 2007-2008 financial meltdowns.

Distorted markets

All capital markets are in such a bad shape and distorted, that over-indebted and more or less receding Italy can borrow money at a lower cost than the US government. Last Tuesday, the Italian ten year bond was traded at a yield of around 1.2%. On the same day the 10-year US Treasury was turning out for the investors 1.488%. This is exactly one important and characteristic symptom, signaling the utterly unhealthy status of the global financial markets.

Why are investors willing to risk billions for half a percentage point more in returns? The answer is very simple: they bet with other people’s money. The major banks have created complex financial instruments and are thus able to risk the money they have received from the central banks for free, although in reality illegally. By the same token, they cash in very large commissions for intermediation in complex financial bets. It’s rarely clear and practically not lucid at all if it’s proprietary trading or on customers’ account.

Inverted rates curve

Not to say anything about the much advertised inversion of the rates curve, yielding less for the longer maturities than for the shorter. The economically correct is, of course, the other way around and such a worsening of this unhealthy tendency preceded the previous crisis. The reason is that investors don’t mind getting less (30 years US treasuries) or even pay (German government bonds) to park their money in safer placements, like low risk prime government debt.

Returning to exploding indebtedness, turn and twist as the banks may, a time comes when some debts and interest must be paid. For as long as there is growth in the real economy, interest for refinancing a growing debt can be paid. In the good times, then, everybody on rising incomes by 2% to 3% can easily pay interest to recycle their growing obligations. So, every banker will be more than willing to refinance his clients’ debts, for as long as they can pay interest out of rising incomes. This way, everybody is happy.

Taking refuge

When incomes of all kinds stagnate, however, or even fall in a recession, paying interest on rampant debts becomes an increasingly difficult exercise. Some of the more reckless lenders and borrowers may then find themselves in a difficult position and possibly go bankrupt. Unfortunately, insolvency is a contagious disease and soon leads to a general fallout, as happened ten years ago.

That’s why the slightest indication of a recession poses so many problems and has already touched the US stock market. In a later phase, a fall in stock market values will surely have repercussions on many borrowers and undermine their ability to honor obligations. This is already happening. That’s why many investors accept negative returns for their placements in highly secure government bonds.

Paying for safety

This phenomenon has acquired dangerous dimensions having reached levels of tens of trillions of dollars and euros. An increasing number of investors accept to pay interest in order to safely park money. They are not stupid; they predict a general fallout, where only governments like the US or Germany will continue honoring their obligations.

Practically, then, the next financial crisis is here. It hasn’t yet touched the real economy or the taxpayers, who will be again asked to act as insurers of last resort for the imprudent bankers.

the sting Milestones

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Top UN rights official urges transparent probe into Khashoggi disappearance

Neither side stands to benefit in US-China trade spat, UN says

Questions and Answers on issues about the digital copyright directive

EP President calls for emergency assistance to migrants stranded on Open Arms boat

Women’s rights face global pushback from conservativism, fundamentalism – UN experts warn

Team Europe: €34 billion disbursed so far to tackle COVID-19 in partner countries

Here’s why China’s trade deal with Mauritius matters

Data marketplaces can transform economies. Here’s how

Eurozone: Even good statistics mean deeper recession

Primary Care: a way to provide Palliative Care in Universal Health Coverage

To solve the climate crisis, we need an investment revolution

Creating shared value: an opportunity and challenge for entrepreneurship

Bulgaria: MEPs call for EU values to be fully and unconditionally respected

JADE President opens JADE Spring Meeting 2014

Being blinded by labels stops social change. Art helps us see a better future

As threats to IoT devices evolve, can security keep up?

Innovation and entrepreneurship can cut waste and deliver the circular economy

EU Budget 2020 conciliation talks suspended

Global immunization is having its annual check-up. What can we learn?

UN cooperation with League of Arab States ‘pivotal’, UN chief tells Security Council

EU Budget 2019 to focus on young people

Three experts on why eradicating plastic pollution will help achieve gender equality

Berlin wants to break South’s politico-economic standing

This is where teachers are most (and least) respected

Understanding the gender gap in the Global South

European Parliament approves new copyright rules for the internet

Chile ups foreign bribery enforcement but flawed case resolutions are insufficient to ensure transparency and accountability

India’s economy is an ‘elephant that is starting to run’, according to the IMF

What will Germany look like after the next election?

Half the world’s population is still offline. Here’s why that matters

As G7 calls time on coal, have you checked your supply chain?

Campaign kicks off with High-level Event on #FairInternships

Could 2021 be a turning point for forests and climate change?

New UN Syria envoy pledges to work ‘impartially and diligently’ towards peace

The sustainable fashion revolution is well underway. These 5 trends prove it

Arrest of three Libyans wanted for grave crimes ‘would send strong and necessary message’ to victims, urges top Prosecutor

Rule of Law mechanism applies without further delay as of 1 January, MEPs stress

Indonesia has a plan to deal with its plastic waste problem

Rise in violent conflict shows prevention ‘more necessary than ever’: UN chief

Yemen: ‘A great first step’ UN declares as aid team accesses grain silo which can feed millions

Using CO2 as an industrial feedstock could change the world. Here’s how

Protecting European consumers: toys and cars on top of the list of dangerous products

MEPs call for the protection of fundamental values in the EU and worldwide

The West and Russia accomplished the dismembering and the economic destruction of Ukraine

WHO chief underscores need to address climate change following visit to Bahamas

After the George Floyd protests, what next for racial justice in the US?

80,000 youngsters at risk in DRC after forcible expulsion from Angola: UNICEF

Don’t take African generosity towards refugees for granted, says UN refugee chief

Humanitarian action: New outlook for EU’s global aid delivery challenged by COVID-19

Food choices today, impact health of both ‘people and planet’ tomorrow

From DIY editing to matchmaking by DNA: how human genomics is changing society

How global tech can drive local healthcare innovation in China

Here’s why the tech sector could be the next target for Chinese investment in Africa

Is South Korea set to lose from its FTA with the EU?

Artificial Intelligence raises ethical, policy challenges – UN expert

The future of manufacturing is smart, secure and stable

European Semester Autumn Package: Bolstering inclusive and sustainable growth

Can the world take the risk of a new financial armageddon so that IMF doesn’t lose face towards Tsipras?

GSMA Mobile 360 – Africa: Rise of the Digital Citizen, Kigali 16 – 18 July 2019, in association with The European Sting

Universal Health Coverage will ‘drive progress’ on 2030 Development Agenda

More Stings?

Comments

  1. Capitalism just selling the rope it’s hanging itself.

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: