The West lost an opportunity to save the world from an economic crisis –

/ world today news/ The West hastily tries to put out the fire of the banking crisis and prevent it from spreading to the world economy. However, the markets do not believe that the West will make it. Rising gold prices and falling oil prices signal preparations for another global recession. Why does the situation seem worse than in 2008-2009?

The price of gold and bitcoins are rising, while the price of oil continues to fall. Thus, gold exceeded the level of $2,000 per troy ounce for the first time since April 18, 2022. Bitcoin breaks above $28,000 for the first time since June 12, 2022. While the price of Europe’s benchmark Brent oil fell to its lowest level since 2021. to 70.6 dollars per barrel. For the week, the variety fell by $10 a barrel, or about 15%. That’s a high drop rate. However, the OPEC+ oil cartel has taken a wait-and-see approach, at least for now, and is unlikely to act until the Federal Reserve holds its next monetary policy meeting on Wednesday, March 22.

“There is only one reason for the rise in gold prices and the fall in oil prices – the confidence in the markets that a global recession will soon occur,” explains Fyodor Sidorov, a private investor and founder of the School of Practical Investments.

The US and the EU are trying to put out the fire in the banking sector so that it does not grow further and lead to an economic crisis. The EU even reached a historic deal in which Switzerland’s largest bank, UBS, bought the country’s second-largest bank, Credit Suisse, in an attempt to save it.

The Federal Reserve first established such a network of swap lines in 2007 to help fund global banks during periods of acute market stress. Lenders outside the US can use swap lines to access dollars in exchange for their local currency by providing collateral at the relevant central bank.

“There are currently two scenarios: a quick end to the banking crisis in the US and Europe or its uncontrolled growth and transition to the stage of a global economic crisis,” says Vladimir Evstifeev, head of the analytical department of Zenit Bank.

And now the markets do not believe that the West will be able to put out the fire. “The markets are waiting for the crisis according to the scenario: the rescue of American and European banks by the Federal Reserve and the ECB will fail, high interest rates will continue to increase losses in the financial system. And then we can expect a global economic crisis, the main manifestation of which will be a drop in demand and consumption – accordingly, this will lead to a decrease in oil prices. “Markets are already betting on these trends, as a result of which oil is falling, and gold, as the main hedge asset of all time, is rising in price,” says Sidorov.

Why do investors and markets doubt that the economy can be saved? “Because regulators are in a very different situation to, say, 2008, when central bank rates were at their lowest levels in decades and so was inflation. Then they had the opportunity to inject liquidity into the financial system, to save systemically important banks, without fearing consequences in the form of a rapid increase in inflation,” says Sidorov.

Now the situation is different. The West has long struggled with high inflation, so the stakes are already high. And further rate hikes could exacerbate the problems in the banking sector: they could collapse like a house of cards.

“Regulators themselves, by actively raising interest rates, provoked a crisis among banks, and now emergency measures are designed to extinguish this fire,” says Alexander Bakhtin, an investment strategist.

“However, it is impossible to fight inflation and inject money into the financial market at the same time – these are two opposite processes. It is this contradiction that causes mistrust, since the first can intensify the banking crisis in the West, and the second can increase the risks of a stagflation scenario,” notes Evstifeev.

The ECB has already raised rates, and the Federal Reserve is likely to do the same on Wednesday. “It means regulators are putting banks under the knife that will continue to teeter on the brink of failure.” Nearly 200 banks in the US are already expecting such a prospect. Therefore, there is no doubt that one way or another the whole current situation will develop into a global financial crisis,” says Sidorov.

“For 15 years, the banking system of the West has been in a series of rounds of quantitative easing and accumulated problems. It’s hard to say how significant. But balance sheets and reports may be skewed and not show the full depth of the problem as it did in 2008-2009. And now the situation is aggravated by increased inflationary risks,” says Evstifeev.

According to Sidorov, although the Federal Reserve and the ECB are still trying to do something, they have no real methods to save the situation.

“Western central banks either fight inflation by sacrificing part of the banking system or bail out the banks by inflating inflation again. In chess, this situation is called zugzwang – every move of the player will worsen his position on the board. It’s not really a crossroads: it’s just that there’s still time before everyone realizes that the global financial crisis has begun. A year ago, no one wanted to hear that the tightening of monetary policy would lead to a recession, and a week ago, some famous economists were already talking about it,” concludes Sidorov.

The impending recession was warned in particular by the strategists of “JP Morgan” and “Morgan Stanley”.

The high interest in gold in such a situation is logical, this precious metal always saves investors in times of crisis. A relatively new trend is the concurrent rise in demand for cryptocurrencies. “Despite the fact that this is the riskiest asset, many decided that they could save their savings by withdrawing them from the banking system not only in gold, but also in a digital asset,” says Sidorov.

The price of gold may continue to rise moderately, and if it fixes above the $2,000 mark, we may see a move towards $2,100, says Bakhtin. “This precious metal remains one of the few assets that can protect investments in the event of a full-blown crisis in the world’s financial system. Therefore, the price of gold is proportional to the fears of the world markets, it will grow if the risks increase”, says Evstifeev.

By the way, even without the intervention of OPEC, oil could just as quickly return to above $80, since the current price crisis is purely financial, not fundamental, Bakhtin believes.

But faith in digital currencies will eventually bring many surprises to investors: countries will continue to fight crypto, introducing stricter regulations, so the current growth of bitcoins is short-lived, Sidorov believes.

Translation: V. Sergeev

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