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 Milestone

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

How do we upskill a billion people by 2025? Leadership and collaboration will be key

The Commission calls for a climate neutral Europe by 2050*

COVID-19: Budget MEPs call for quick progress on post-2020 contingency plan

4 steps towards wiping out cervical cancer

These are the best MBAs if you want to be an entrepreneur

China-EU Special Report: Chinese Premier Li Keqiang endorses China’s big investment on Juncker’s plan at 10th China-EU Business Summit

Sochi not far away from Ukraine

Why are Black people in the UK more at risk from COVID-19?

UN member states express their will to tackle global migration but specific actions are still missing

International Women’s Day: Where does she belong?

COVID-19 is an unmissable chance to put people and the planet first

In Pakistan, Guterres urges world to step up climate action, praises support to Afghan refugees

1 in 4 Africans had to pay a bribe to access public services last year

A Young student assesses the Programme for International Student Assessment (PISA)

‘Over-reacting is better than non-reacting’ – academics around the world share thoughts on coronavirus

Berlin cannot dictate anymore the terms for the enactment of the European Banking Union

OECD’s Gurría calls for overhaul of economic thinking to address global challenges

Finnish Council Presidency priorities debated in plenary

7 innovative projects making cities more sustainable

ECB settles the bank resolution issue, makes banking union tangible

Tobacco-free Public Space in Africa’s Most Populous Country

There are more than 1 billion guns in the world and this is who owns them

UN lauds special chemistry of the periodic table, kicking off 150th anniversary celebrations

How video games can reunite a divided world

Brussels wins game and match in Ukraine no matter the electoral results

The true EU unemployment rate may have soared to 21.9%

Landmark EU Parliament – ECB agreement on bank supervision

GSMA announces first speakers for Mobile 360 Series-Middle East and North Africa

OECD sees rising trade tensions and policy uncertainty further weakening global growth

Does hosting a World Cup make economic sense?

How governments and mobile operators are easing network congestion during the COVID-19 crisis

Macron leads EU-wide minimum wage call as Merkel, Medvedev warn of global injustice

Coronaviruses: the truth against the myths

Sustainable fisheries: Commission takes stock of the EU’s Common Fisheries Policy and launches consultation on the fishing opportunities for 2021

Hungary: Commission takes next step in the infringement procedure for non-provision of food in transit zones

Do we need a new Marshall Plan to rebuild Europe after COVID-19?

Summertime Consultation: 84% want Europe to stop changing the clock

Groundbreaking cancer-fighting drugs now included in updated UN list of essential medicines

First-ever global conference of national counter-terrorism chiefs will strengthen cooperation, build ‘resilient’ States, says top UN official

Stricter rules to stop terrorists from using homemade explosives

3 innovations which are leading the fight to save our ocean

During the coronavirus pandemic, we must fight for LGBTQ rights more than ever

New rules make household appliances more sustainable

The world is failing miserably on access to education. Here’s how to change course

The ECB ‘accidentally’ followed IMF‘s policy advice for growth and job creation by printing more money

Don’t compare data to oil – digitization needs a new mindset

Q&A on extraordinary remote participation procedure

What kind of action on social justice should we expect from companies in the future?

Banks get new capital for free and citizens pay the bill

The widely advertised hazards of the EU not that ominous; the sting is financial woes

David Attenborough: The planet can’t cope with overpopulation

The future of suicide and depression prevention

These 5 start-ups are shaping the future of Africa’s cities

Migration and asylum: EU funds to promote integration and protect borders

Here’s how sustainability can make you stand out from the crowd

Dieselgate: Parliament calls for mandatory retrofits of polluting cars

It’s not summer holidays what lead to the bad August of the German economy

We need to deep clean the oceans. Here’s how to pay for it

As people return to work, here’s how we can make commuting more inclusive and sustainable

International Literacy Day: What you need to know about youth literacy

More Stings?

Advertising

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