Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Today the California based First Republic Bank was seized by the FDIC (Federal Deposit Insurance Corp.). It had 229 billion dollars in assets, making its demise the second largest bank failure in US banking history. Only a month ago, the number two spot was held by another California based banking institution, Silicon Valley Bank.

The FDIC worked out an agreement whereby First Republic’s assets will be taken over by JP Morgan Chase. In return, the FDIC will pay out about 13 billion to cover losses. Under the agreement worked out by the regulator, all of First Republic’s 84 locations in 8 states will reopen as branches of JP Morgan,

With the collapse of First Republic, the FDIC has had to grapple with three major bank failures in just over a month. This is further evidence that a banking crisis is underway in the United States, it is accelerating and is reflective of deep seated financial and economic weakness in the national and global economy.

It should be recalled that the Great Depression, which began with the stock market crash of 1929, became far worse and spread globally when a major Austrian bank, Creditanstalt, collapsed in 1931. The collapse of 3 American banks during the past month, including the second and third largest banking failures in American history, is the canary in the coal mine as the Global Economic Crisis worsens.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The collapse of SVB (Silicon Valley Bank) has sent shock waves throughout the financial world. It has also aroused a morbid sense of deja vu harkening back to 2008, when the global banking system seized up, leading to the Global Financial Crisis. With 175 billion dollars on deposit as of December 2022, SVB was the largest regional bank in Silicon Valley, playing an important role in financing the hi-tech sector.

The highly speculative model employed by SVB (high level of unrealized losses accentuated by Fed rate hikes)) led to its failure, being forced to close after a run on deposits. Unable to engineer a quick sale of SVB, the Biden administration, in a fit of panic which may be justified, took extraordinary measures. About 85 percent of deposits at SVB were not insured by FDIC, which has a cap of $250,000 . The Treasury Department decided to ignore the cap and guarantee that all deposits at the failed bank would be covered. It added, as strictly PR, that U.S. taxpayers should not worry, as they would not cover the cost, leading to the question of who will.

The SVB deposit resolution had barely been announced when New York state regulators shut down Signature Bank, which had 80 billion dollars on deposit and was involved in speculative assets, in particular cryptocurrency..

Both these bank failures, occurring withing days of each other, took the financial world by surprise. The risk of contagion is real, explaining why entities such as the U.S. Treasury are taking extraordinary policy measures.

One likely casualty of these bank failures is the war on inflation being waged tardily by the U.S. Federal Reserve. Only days earlier the Fed had convinced the markets that another rate hike of up to fifty basis points was on the way. Now this seems doubtful, and if more bank failures occur the Fed may even go in reverse. This means that in addition to the danger of a banking collapse, an alarming acceleration in inflation is a serious possibility.

I have recently read MEGATHREATS, a new book by renowned economist Nouriel Roubini. If this book were fiction, it would be a chilling horror thriller. However, what makes this book far scarier than a horror novel is that it is non-fiction; a deep dive into ten threatening trends and developments, each one of these evolving threats, which the author categorizes as a mega threat, in itself a force that imperils human society. Taken together, as they are interconnected in the author’s analysis, they represent a ten-by-ten matrix, as Roubini has pointed out.

Nouriel Roubini came to public note before the onset of the 2007-09 Global Financial Crisis when he warned about a looming financial disaster triggered by subprime mortgages. For that prognostication, Roubini was dismissively dubbed “Dr. Doom.” History proved that Roubini, who prefers to describe himself as “Dr. Realist,” to have been unerringly prescient in his dire financial and economic forecast.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

In MEGATHREATS, Roubini begins with economic and financial trends that threaten a severe and enduring stagflationary recession for the global economy. He points out that central banks and sovereigns have created what is described as the “mother of all debt crises,” creating debt to GDP levels in advanced economies and China that are far in excess of what occurred during the last great stagflationary recession during the 1970s. Unsustainable debt ratios, combined with negative demographic trends and ill-conceived policies portend a dark and uncertain future for the global economy. Added to this is currency instability, including the weaponization of the U.S. dollar which will likely debilitate its standing as the global reserve currency. Roubini also looks at the phenomenon of cryptocurrencies, which he has long excoriated as being illusionary.

The matrix in MEGATHREATS encompasses other developments that feed into the economic malaise that Roubini convincingly prognosticates on. The emerging cold war between China and the U.S., exacerbated by other revisionist powers, increases geopolitical instability and fractures global supply chains. These developments further add to inflationary pressures which, in the context of negative supply shocks, augments the severity of the coming stagflationary crisis.

Among the other mega threats Roubini explores is the likely impact of climate change, rendering many coastal areas, including in the United States, uninhabitable. Furthermore, the author sees climate change exacerbating the conditions in which pandemics such as Covid will become far more common. The author also discusses the transformative impact of artificial intelligence or AI and machine learning, which will likely lead to the elimination of vast numbers of human jobs, not only unskilled but also highly skilled, as technological means displace humans.

Nouriel Roubini presents to the reader an ominous but convincing case for a dangerously dystopian and unstable future for human societies globally. Does the author offer any hope humanity can avoid the dire future he lays out with such clarity? He does, principally in the area of technological advancement that could lead to much higher than trend economic growth, which would resolve issues such as sustainability of the massive debt to GDP levels that have been accumulated in advanced economies. However, the tone of the author’s conclusions indicates he is not excessively optimistic that the right policies and developments will occur in an effective timeframe.

Without a doubt, MEGATHREATS is the most important book thus far written in the 21st century. It is a penetrating look into the dystopia that lies ahead, supplanting the long period of relative stability that occurred after the Second World War. The author is not a modern-day Cassandra offering prophecies conjured from a crystal ball; he is one of the most impressive intellectual minds of our era, offering deep analytical insights into the dark global malaise that is unfolding. As he states in the book’s epilogue, “the snooze button invites catastrophe.”

MEGATHREATS should be required reading for every policymaker on the planet.

The unfolding Global Economic Crisis has stricken most economies, large and small, with the bitter twins of high inflation and recession. This phenomenon of stagflation, amid the destabilizing war between Russia and Ukraine and broken supply chains resulting from both war and Covid restrictions, is spreading like wildfire. Record levels of inflation are occurring in virtually every developed economy, including the United States. However, it is in the United Kingdom that the most disastrous repercussions are unfolding.

After Boris Johnson was forced to resign as British prime minister, he was succeeded by Liz Truss. Her hand-picked Chancellor of the Exchequer, Kwasi Kwarteng, released a proposed budget that immediately sent the British pound plummeting, sovereign bond rates soaring and fear and loathing manifesting in all leading UK financial circles. This is amid annual inflation exceeding double digits and an ongoing retraction within the UK economy.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The key component of Kwarteng’s budget package was major tax cuts targeting high net-worth taxpayers, to be financed by substantial borrowing despite the British government already facing large budget deficits. The whole ill-conceived package was an example of political ideology triumphing over economic reality. The markets swiftly provided a painful response, making the proposed budget untenable.

Truss has now fired her financial minster, a desperate move to save her weeks-old prime minister tenure by making Kwarteng the scapegoat. Already there is talk of a palace coup to remove Truss by desperate members of her Conservative Party. All this is another example of incompetent politicians doing everything possible to make a very bad economic crisis into an unmitigated global catastrophe.

The U.S. Bureau of Labor Statistics reported that the CPI for August exceeded the consensus expectation, registering a figure of 8.3 %. Though slightly lower than the June figure of 9.1%. a dive into the details reveals disturbing trends.

The modest reduction in the CPI for August was almost entirely driven by a pullback in oil and gas prices, a phenomenon driven by market forces. However, other core components of the CPI accelerated their inflationary trend. Food prices registered a sharp rise of 11.4 %, the largest level of inflation in this critical category in 43 years.

The continued high level of inflation in the United States is being replicated globally. In the UK the official rate of inflation exceeded double digits and has only slightly receded to above 9% due to fuel price retrenchment, as in the U.S. Virtually every other economy on the globe is experiencing levels of price inflation not previously witnessed in decades.

The most recent data in the U.S. will compel the Federal Reserve to continue to significantly increase interest rates. Other central banks will follow in lockstep. All these moves will instill a fiscal drag on the global economy, further increasing the likelihood of a global recession. All trends remain on track for global stagflation and the worst world economic crisis since the 1930s.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Jerome Powell, Federal Reserve chairman and Fed officials unanimously agreed to hike rates by three quarters  of one percent (75 basis points), bringing rates to between 2.25 and 2.5 %. This is still very low considering the last report from the U.S. Labor Department, which tabulated inflation in the United States at 9.1%. The Fed in effect admitted this by indicating further hikes are likely.

Having missed  the train repeatedly by claiming inflation was only transitory, Powell and his minions are compelled to bring up rates in desperation as inflation domestically and internationally spirals almost out of control. This is where America’s central bank faces a conundrum. As weak economic data points to a recession in the U.S. economy, there is a growing chorus urging restraint by the Fed,  as higher rates will further  enable recessionary forces. Bu they are too late.

Yes, higher Fed rates will create a fiscal drag on the domestic economy. But having been so wrong in its previously unjustified lack of concern about inflation, failure to bring rates much higher will not prevent a recession; it will merely guarantee stagflation-a recession with high inflation.

For the Fed rate hikes to have any effect, they will need to go much higher, at the very least  in excess of 5 %. Unfortunately, current global inflationary pressures are not only derived by  demand . There is a supply shock, independent from demand forces and unimpeded by rate hikes enacted by central banks. The supply shock was initially brought on by Covid lookdowns, which created supply bottlenecks. Now, added to this is the Russia-Ukraine war and the resulting sanctions and blockades. These forces are unpredictable but will likely be enduring. This ensures that the coming recession will be  both severe and sustained, concomitant with elevated inflation. In  essence, a stagflationary depression is threatening the global economy, and all central banks, including the Federal Reserve, can do no more than nibble at the edges.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

The U.S. Labor Department   released its latest CPI  data On July 13, indicating that in the previous month inflation in the United States had surged to 9.1 %. This is the highest rate for inflation in the U.S. in more than four decades and harkens back to the stagflation that ravaged the American and global economy during the presidency of Jimmy Carter.

The elevated rate of inflation defied the prediction of many economists who have largely engaged in wishful thinking rather than macroeconomic analysis. With inflation not only remaining high but continuing to accelerate, it is very likely that inflation the United States is about to enter double-digit territory, if it has not already done so.

It is very likely that organized labor will soon make demands during collective bargaining for wage increases  vastly higher than what has occurred in several decades. That in turn will unleash powerful new inflationary pressure, adding to what is already impacting price instability, including supply chain bottlenecks aggravated by Covid-induced lockdowns and geopolitical tensions.

There are some economists and investors who have been hoping  that the Federal Reserve would defy economic logic and greatly moderate its planned rate increases. However, with inflation surging at unprecedented rates, and the sovereign powerless to arrest its momentum with its feeble fiscal interventions, it is almost certain that the Fed will have no choice but to rapidly raise rates, abandoning once and for all it s near zero rate policy. The next rate increase may very well be 75 basis points.

The latest data and the likely policy response from the Federal Reserve further solidifies the likelihood of prolonged global economic stagflation, and more likely than not, a global economic depression.

The U.S. Federal Reserve  on June 15 upped its key interest rate by three quarters of a percent, its largest increase since 1994. When Fed chairman Jerome Powell  announced the policy decision, he had a look of panic  as he boasted that America’s central bank remained committed to its historical mission of price stability. Yet only a short time ago this same Powell boasted that the emergence of high inflation in the U.S. economy was merely transitory.

Powell’s misstep replicated an earlier misread of economic trends by a Fed chairman. In the early stages of the 2007-09 Global Financial Crisis that nearly took down the global economy, then Fed chairman Ben Bernanke boasted that there was no prospect of a recession. How wrong he was.

When inflationary trends began spiraling out of control, leading economist Mohamed El-Erian warned that inflation was not transitory, and unless the Federal Reserve and other major central banks rapidly phased out their Covid-induced loose monetary policies including essentially zero interest rates, inflation would spiral, meaning future efforts to control it would likely lead to a far worse economic recession.’

Despite Powell’s feeble attempts to reassure markets and consumers, the rate increase of 75 basis points came on the wake of Labor Department data indicating that inflation in the U.S. stood at 8.6 % and was accelerating. Only far higher rate increases will slow its momentum, and with supply chain bottlenecks  complicated by geopolitical tensions including a full-scale war in Eastern Europe, nothing short of a severe recession bordering on a depression will dampen economic activity to a level that arrests the powerful inflationary forces now ravaging the global economy. These forces have been nourished by the Fed’s  policies for years, yet now Powell is attempting  to convince the world that this same Federal Reserve will engineer and end to inflation with a soft landing, avoiding a long and severe recession. At this point, the Fed lacks any credibility  to sustain such reassurance.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Sheldon Filger-blogger for GlobalEconomicCrisis.com

As governments  globally boasted of their speedy transition to a “Green” economy, in the process doing everything possible to discourage future oil exploration and extraction, they suddenly were confronted by a painful realization. The economically developed nations in the world are still highly dependent on fossil fuels, and will likely be for several decades to come. That, and the Covid-induced supply chain disruptions coupled with  geopolitical shocks, in particular the Russian invasion of Ukraine, have created a perfect storm. Every element leading to elevated oil prices is in play, an economic torrent driving up consumer prices for gas to unprecedented levels.

Just over a year ago, in May 2021, U.S. crude oil was priced at under seventy dollars per barrel. Only one year later, that price exceed in $113.00, and has continued to accelerate into June.  This has had major inflationary impacts throughout the global economy. Virtually every form of major  economic activity, from manufacturing to land and air travel and maritime shipping of exports and imports, is reliant on oil. Renewable energy is but a small fraction of the energy consumption required for sustaining global economic activity. To give but one example, food prices, already experiencing high price increases due to supply disruptions, greatly exacerbated  by the war in Ukraine, will be further hammed by  energy price inflation. Agriculture and food processing , along with its transpiration to market, is a highly industrialized process  involving staggering levels of carbon energy consumption.

The oil price spikes will create a tsunami of inflationary pressures. The immediate impact most visible to consumers, however, will be at the gas pump. No other economy in the world is as depended on cheap gasoline  as is the United States. One year ago the average price of a gallon of gas in the U.S. stood at just over $3.00.A year later that average is just under $5.00.In California the average cost of a gallon of gas exceeds six dollars.

In response to the exploding cost of oil, the Biden administration has attempted band aid solution, such as releasing some of its strategic petroleum reserve  into the market. This has only brought about a marginal and brief amelioration in the cost of oil. In effect, the U.S. and the other major  energy consumers have no policy prescriptions. There remains only one force that will ultimately retard price inflation in the carbon  fuel sector: demand destruction resulting from a severe global recession.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Earlier this week the Labor Department released statistics on the CPI (consumer price index) for the period March 2021 through March 2022. The news was dismal,; the CPI data revealed that inflation in the United States had reached 8.5 percent. This is the highest level of CPI growth in the U.S. over a one year period registered since December 1981.

As bad as the official figures are, the reality is probably much worse. Typically, American government statistics reflecting inflation are lagging indicators. What is clear is that inflation in the U.S., as in most of the world, is accelerating at a quickening pace. It probably has reached double digits in the U.S., with every indication that it will continue to increase, probably well into double digit territory.

As to be expected, the Biden administration is blaming the Russia-Ukraine war for spiraling inflation. No doubt, Russia’s invasion of Ukraine has had a major negative impact on price stability. However, contrary to the spin of President Biden and his officials, the primary driver of the worst inflation spiral in the U.S. in more than 40 years has been policy missteps  of both a fiscal and monetary nature.

On the fiscal side the U.S. government responded to the Covid pandemic with levels of deficit spending that, in real terms, exceeded the debt spending required to fight World War II. In addition, government mandated lockdowns and restrictions on economic activity, both in the United States and worldwide, disrupted  supply chains. Added to all this has been the non-stop money printing by the Federal Reserve. In defiance of economic logic, the Fed unleashed an unprecedented floodtide of liquidity, while publicly claiming that the resulting inflationary upsurge was merely “transitory.”

The accumulation of policy missteps by sovereigns and central banks, especially as had occurred in the United States, has created a vicious negative feedback cycle. On the one hand, inflations is at its worst in more than 40 years, and accelerating. On the other hand, labor will demand massive wage increases to match the CPI , which will in turn add further pressure on the inflationary trend. Only recently has the Federal Reserve begun to comprehend its massive policy errors, and is beginning to play catch-up. With interest rates set to rise sharply over the next several months, policymakers have crafted the perfect storm: high inflation and a severe recession, leading to a likely stagflationary depression.