Jakarta, CNBC Indonesia – The collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States (US) immediately became the world’s spotlight. From that incident, there were many differences of opinion between analysts, economists and market players regarding the collapse of the two banks. Some say the banking crisis will spread, others think it won’t happen.
An economist Nouriel Roubini or known as “Dr Doom” aka “Doctor Doomsday” stated, in the current conditions gold is one of the right investment assets.
Roubini received this title after predicting the 2008 global financial crisis and it actually happened.
Now he predicts that inflation in the United States will remain in the range of 6%, very far from the US central bank’s (The Fed) target of 2%.
“If I am correct, average inflation will not be 2%, but 6%. The slump we saw last year in stocks and bonds will become even more severe in the next few years,” Roubini said in an interview with CNN. , Sunday (19/3/2023).
Roubini said investors should now get out of stocks and bonds, and invest in assets that are hedged against inflation such as gold.
He saw that the current economic conditions were similar to those of 2007/2008, judging from the high state and corporate debt. This could trigger a severe crisis.
The US central bank (The Fed) which continues to raise interest rates is said to create many ‘zombie companies’, companies formed during the era of low interest rates, but until now have not been able to generate profits to pay debts.
“Many zombie institutions, zombie households, companies, banks, shadow banks and zombie states will go bankrupt as a result of continuously rising interest rates,” Roubini said last October.
The zombie company has been mentioned many times in recent years. These companies grew a lot during the era of low interest rates, cheap debt costs, but have not been able to record profits or finance their debt.
In addition, Dr Doom sees there is a risk of a recession that occurred in combination with the stagflation of the 1970s and 2008.
In a Time Magazine article published Thursday (13/10/2022), Dr. Doom said the world was heading for a “massive bankruptcy and protracted financial crisis”.
The collapse of SVB and Signature Bank made Dr Doom’s prediction come true. The Fed’s high interest rate became one of the causes of the collapse of the SVB. Many startup companies withdraw their deposits at SVB due to current conditions making it difficult for IPOs. Withdrawing funds placed in a bank is a way to stabilize financial conditions.
As a result, SVB became short on capital. In order to increase liquidity, SVB sold its bonds even though it had to lose up to US$ 1.8 billion. Again, the Fed’s high interest rate became the culprit of the loss.
High interest rates make the current price of US bonds (Treasury) fall, reflected in the yields (yields) which shot up. Understandably, investors see that the new Treasury issuance will offer higher yields, even placing deposits in banks with more attractive interest rates.
As a result, Treasury prices available on the market immediately fell, and SVB’s sales resulted in huge losses.
The problem now is not only in the United States, almost all countries apply high interest rates. What happened to SVB and Signature Bank, of course, could also happen to other countries.
Evidently, at this time the Credit Suisse bank is now in turmoil.
President Joko Widodo (Jokowi) has even warned about the domino impact of the collapse of US banks.
“There was a bank bankruptcy in America, Silicon Valley Bank. Everyone was horrified when one bank went bankrupt. Two days later, the next bank that collapsed, Signature Bank, appeared again,” Jokowi said at the opening of Business Matching Domestic Products, Jakarta, Wednesday (15/ 3/2023). The President also asked all parties to be vigilant considering the huge impact of the banking crisis.
“All countries are currently waiting for the domino effect to go where, therefore we are careful,” he added.
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