Though the threat of an exponential liquidity crisis is a conversation that Bloomberg should have been seriously addressing two years ago, it’s good to see that reality is finally hitting the mainstream media. Nouriel Roubini, also known as “Dr. Doom” because he’s one of the few mainstream economists that’s not constantly touting the soft landing narrative, has been rather consistent in terms of covering the clash between credit liquidity, rising inflation and rising interest rates. Now, he’s talking about an incoming stagflationary “megathreat” that will crush credit while prices continue to rise, compelling central bankers to continue raising rates.
The Catch-22 scenario that central banks have triggered should have been obvious to every economist as soon as they began tightening into the financial weakness and instability created by the covid lockdowns. Instead, the narrative has been an ever escalating waiting game – Everyone was simply biding their time until the central bank pivot they assumed was coming. Except, it didn’t happen. As long as interest rates remain higher or continue to climb existing debt and new debt will continue to grow more expensive and less desirable. The lifeblood of markets for the past 14 years has been near-zero interest rates and easy fiat money circulating through banking conduits. Now, the dream is dead.
Roubini addresses the deeper problem in part when he notes the exposure of banks like SVB to bonds with declining value caused by rising rates. What he misses, and it’s surely something Bloomberg does not want to talk about, is the issue of ESG related programs and lending that made up a sizable portion of SVB’s portfolio. It was a vast array of climate change investments as well as woke equity and diversity projects and far-left tech businesses that were all losing money and sinking the mid-tier bank into the red as the easy money from the Federal Reserve ran out.
While some economists have fumbled right back into their old habits and have declared the recent banking crisis “over,” the reality is that banks like SVB and Credit Suisse are only the smoke before the fire. How many more banks have similar exposure not only to a stagnating bond market but also a host of ESG related investments that are ready to explode? Did the Fed backstop really change anything, or did it merely stave off a larger bank run until the next institution goes down?
The problem is both simple and complex: Central bankers engineered a systemic addiction to easy credit while delaying the pain from the 2008 derivatives crash. In the process, they fomented the very inflationary/stagflationary disaster we are facing today. There is no such thing as free money; someone somewhere will eventually have to pay the price.
This means that central banks have two choices – Hike rates or keep them higher, strangle liquidity and watch as various banks and companies drop like flies. Or, return to near-zero rates and let the inflation avalanche unfold. So far it would seem that the bankers are choosing to keep rates high and Roubini notes that they may very well be forced to continue forward with QT as labor market issues push wages higher.
In either case the only possible outcome is a hard landing. The fantasy of a soft landing sold by many in the corporate media for the past year is being abandoned.
Tyler Durden
Mon, 04/03/2023 – 05:45
