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It's a normal that pandemics both accelerate the decline of empires and devalue currencies.
But it's interesting to consider if a bank panic resulting in the insolvency of the financial system is still possible. I believe the answer is yes, but only on a global level.
/1 https://twitter.com/lildeebo4/status/1248337723850731524
But it's interesting to consider if a bank panic resulting in the insolvency of the financial system is still possible. I believe the answer is yes, but only on a global level.
/1 https://twitter.com/lildeebo4/status/1248337723850731524
In the aftermath of the the great depression and WW2, the international financial system was built up to be much stronger and more resistant. That the system was based on a gold backed, US dollar as the world reserve currency is well known. What is less well known, is the...
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...international mechanisms established for propping up individual central banks and currencies.
The central bank acts as a lender of last resort in the event that private banks don't have enough cash to cover depositors demands.
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The central bank acts as a lender of last resort in the event that private banks don't have enough cash to cover depositors demands.
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But what happens if the central bank runs out of money? Well, they can't, because they can simply print/issue more. But doesn't this lead to inflation? Yes, but inflation is already programmed into the system, so depending on how that money enters the economy, it may...
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...or may not actually cause additional inflation. It also depends on how inflation is measured, and some argue that the method of measuring inflation hide the real rate of inflation.
So how does a central bank prevent inflation if it is forced...
/5 https://thinkmarkets.wordpress.com/2018/08/06/dont-trust-the-cpi-inflation-is-hidden-somewhere-else/
So how does a central bank prevent inflation if it is forced...
/5 https://thinkmarkets.wordpress.com/2018/08/06/dont-trust-the-cpi-inflation-is-hidden-somewhere-else/
...to create a large quantity of new money and inject it into the economy?
This is where the international dimension comes in. Countries with smaller currencies maintain exchange rate stability by means of foreign currency reserves. This means they buy currencies like...
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This is where the international dimension comes in. Countries with smaller currencies maintain exchange rate stability by means of foreign currency reserves. This means they buy currencies like...
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...dollars or euros, and then when their currency begins to be devalued, they use the foreign currency to buy large quantities of their own currency on the market, which pushes up its value.
So since the beginning of the coronavirus financial crisis, countries around...
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So since the beginning of the coronavirus financial crisis, countries around...
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...the world have seen their foreign currency reserves depleted, as they seek to offset stimulus programs (ie. new money creation).
For this reason, the Federal Reserve (American central bank) has expanded lending to the central banks of other countries in response...
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For this reason, the Federal Reserve (American central bank) has expanded lending to the central banks of other countries in response...
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...to the coronavirus, in addition to a large wave of new money creation inside the US.
The channels through which all of this money flows were established at the end of WW2 through the Bank for International Settlements, a private bank in Switzerland.
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The channels through which all of this money flows were established at the end of WW2 through the Bank for International Settlements, a private bank in Switzerland.
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Just as the central bank is the lender of last resort for national private banks, the BIS is the lender of last resort for national central banks. It doesn't have a lot of funds of its own, but if there is a shortage of cash in one of its member countries, it can draw...
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...funds from members that have surpluses, and funnel that money to the country experiencing a cash shortage.
This means that it is much more difficult for bank runs to happen, in which depositors demand their money back and banks shut their doors, which happened in the...
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This means that it is much more difficult for bank runs to happen, in which depositors demand their money back and banks shut their doors, which happened in the...
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...aftermath of the Great Depression in the US.
So the question we need to know is "What is the breaking point of this system?"
In response to the economic effects of the coronavirus shutdown, the US dollar has strengthened, since many countries needed to buy dollars...
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So the question we need to know is "What is the breaking point of this system?"
In response to the economic effects of the coronavirus shutdown, the US dollar has strengthened, since many countries needed to buy dollars...
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...to prop up their own currencies. This is the system working exactly as intended. This enables the US central bank to create trillions of new dollars without triggering hyperinflation, because the dollar is strengthened by international demand.
This is compounded...
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This is compounded...
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...by investors who understand this situation moving their funds into USD, since it is perceived as a safer place to keep funds.
So the source of this systems strength is from how distributed it is. Currency stability is achieved in the US economy by passing inflation...
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So the source of this systems strength is from how distributed it is. Currency stability is achieved in the US economy by passing inflation...
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...off to other countries. So the periodic instances of hyperinflation in poor countries act as escape valves which release pressure that could otherwise cause the system to explode.
This pressure can be directed towards particular countries as a punishment.
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This pressure can be directed towards particular countries as a punishment.
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Venezuela, Iran, Sudan, and Syria are some of the most heavily affected, and also some of the countries that are not good servants of the international order. This tactic doesn't work as well with larger countries, because they can generate enough demand with exports...
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...to manage inflation on their own, since other countries need to buy their currency to buy things from them (oil/gas/weapons in the case of Russia, manufactured goods in the case of China).
But overall, steady inflation is a burden carried by everyone, which prevents...
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But overall, steady inflation is a burden carried by everyone, which prevents...
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...it from flaring up and triggering a panic in any one country, most of the time.
Could a system wide, global panic occur? Yes.
It probably would not be caused by bank runs alone, but more likely by a domino effect in asset values (real estate, stocks, bonds).
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Could a system wide, global panic occur? Yes.
It probably would not be caused by bank runs alone, but more likely by a domino effect in asset values (real estate, stocks, bonds).
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This is why much of the money created goes to support the value of assets, rather than direct stimulus, because the bulk of the paper value of the world economy is in derivatives whose value is directly tied to asset prices.
/19 https://www.visualcapitalist.com/worlds-money-markets-one-visualization-2017/
/19 https://www.visualcapitalist.com/worlds-money-markets-one-visualization-2017/
Inflation of asset prices does not directly affect consumer prices in the short term. It does, however, affect consumers in the long term. The most obvious example of this is increased rent. It also results in increased competition in business, which makes it harder...
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