/ world today news/ In any case, America will face political instability during the race for the presidential elections, and if a new recession breaks out against this background, combined with the collapse of an increasing number of banks, this can already lead to the most painful consequences for the country.
In the US, the fourth bank failed since the beginning of 2023. After Silicon Valley Bank, Silvergate and Signature Bank, another regional bank, First Republic, went to the bottom. He became yet another victim of the worsening financial situation in the United States, which is already threatening another recession and worsening the general instability in America – and in the midst of the presidential race.
The current banking crisis unfolded amid a sharp increase in prime interest rates in the US and many other countries around the world due to rising inflation. During the COVID-19 pandemic, the Federal Reserve injected more than $4 trillion in unsecured cash into the U.S. economy. This led to a spike in prices that was expected by everyone except the US financial authorities themselves.
At first they tried to turn a blind eye to it, calling the inflationary crisis a “temporary phenomenon.” In the end, however, they had to start a serious fight against inflation. For 2022 and early 2023, the Federal Reserve has de facto turned off its printing press and raised its key interest rate from zero to 5%.
For the US economy, raising rates to the highest level in 15 years has become a real “shock therapy”.
This partly helped to deal with the inflationary crisis. If in the summer of 2022 the growth of consumer prices in the United States reached a local maximum of 9.2%, then by the first quarter of 2023 inflation had almost halved to 5%. However, such a severe fight against inflation has already led to new economic problems.
The real estate market began to shake violently, the first casualty of the rise in prime rates.
After all, it is one thing to buy real estate at exorbitant prices, but with a mortgage interest rate of 2-3% per year. And it’s another matter entirely when mortgage rates rose above 7% – to the highest in almost 20 years. Sales in the real estate market have fallen sharply, and home prices in many American cities – San Francisco, Seattle, Portland – have fallen by an average of 10% in the past year.
Debt markets were next in line to be hit.
In the context of increased interest rates, it is becoming more and more difficult for both creditworthy private corporations and individual municipalities, along with entire states and even the US federal government, to service their obligations.
In 2022, a record $860 billion went to pay interest on the U.S. national debt—comparable to the annual U.S. military budget. And in 2023, payments could reach one and a half trillion dollars, which is equal to 20-30% of the entire budget of the US government.
Private business has already fully felt the lack of access to cheap money. The number of small business bankruptcies in the US in the first quarter of 2023 jumped to the level since the beginning of the pandemic in February 2020. Large corporations also began to fail.
For example, the giant in the market for furniture and home goods Bed Bath & Beyond collapsed – in fact, the American analogue of Ikea. It, like many other companies, was unable to attract new loans at the higher interest rates and service its old debts under the current conditions.
Regional banks were next.
All of them – be it SVB or the now bankrupt First Republic – have the same story. In recent years, they have attracted a lot of money from investors who made their fortunes on the rise of financial markets and the crypto industry. These billions of dollars were invested by the banks in accordance with all the rules of financial management in the “most reliable” bonds – US Treasuries and mortgage derivatives.
The problem started when the Fed started raising interest rates.
Demand for old, low-interest, low-yield bonds fell sharply. After all, why buy them when you can already buy new bonds with higher rates.
Banks began to lose first billions and then tens of billions of dollars from declining bond prices. Then rumors of their problems became public knowledge. And mass attacks began on banks with the attempt of depositories (professional participants in the securities market who provide services for the storage of securities certificates – note ed.) to withdraw their money in time before they collapsed.
For example, since the collapse of SVB in early March and through the end of April, depositories have withdrawn more than $100 billion from First Republic. The bank itself lost 97% of its capitalization – and it became clear to everyone that there were no days ahead.
As a result, financial authorities stepped in and sold the bank’s assets to Wall Street giant JPMorgan Chase. Thus ended ingloriously the 38-year history of First Republic, which survived both the financial collapse of 2008 and the pandemic, but not today’s banking crisis.
At the same time, the Fed and the White House are trying to convince Americans that bank failures are only exceptions to the rule, but in fact the banking industry is quite stable on its own.
In reality, however, as many as 200 other regional banks in the United States are experiencing similar financial problems that sent SVB or First Republic to the bottom. And the total losses of the banking sector from the rise in prime rates already exceed a record two trillion dollars.
Of course, different banks feel differently. The biggest representatives of Wall Street – JPMorgan or Goldman Sachs – really do not have particular financial problems. Things are a little worse for Bank of America, which also invests a lot of money in losing bonds.
Well, the situation with the banks from the second and third echelon, which are now starting to go bankrupt, is the most deplorable. And there is every reason to believe that First Republic’s current bankruptcy will not be the last collapse of major US banks in the coming months.
Much will depend on the Fed’s future policy and America’s key macroeconomic indicators. The inflationary crisis is already clearly weakening, although in the summer the USA and Europe may expect a new surge in the prices of energy, fuel and electricity.
The main danger comes from the fact that economic growth simply stops.
In the first quarter of 2023, the US economy grew by only 1.1%. Almost zero growth is expected in the coming quarters. And by the end of the year, the American economy, suffocating without a constant flow of fresh money, may face the real danger of another recession.
The situation is aggravated by the fact that next year the US will have a very turbulent presidential race, where Joe Biden and Donald Trump may face off again.
In any case, America will face political instability, and if a new recession breaks out against this background, combined with the collapse of an increasing number of banks, then this can already threaten the entire country with the most painful consequences.
If the US financial authorities start pouring money into the economy again, they could lead to another spike in inflation. Washington has found itself in the dead end of stagflation, a way out of which is still in sight.
Translation: ES
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