theguardian.com/business/2020/mar/09/coronavirus-crash-monday-is-the-price-were-paying-for-a-decade-of-cheap-money

*most of the following is guesswork on my part, I don’t know this for certain

The triple whammy of lowering interest rates from central banks, cheapening oil prices as Russia and Saudi Arabia engage in a price war and dump cheap oil into markets, and wide impacts of the coronavirus could pose a serious threat to many of the world’s banks, especially those that have struggled with profit opportunities in the wake of perpetually low interest rates and leverage this past decade.

Generally, banks make money by charging people money to access their balance sheets. If they don’t charge enough, there can be problems. If lending rates are higher, they can fudge the numbers a bit more and make more money when dealing with large volumes of loans (at least, as I understand it).

If lending rates are lower, there can be problems.

The author also says that oil shortages in the 70’s caused supply shortages (and therefore inflation), but that current surpluses in oil will have deflationary pressures.

While this may be true, I don’t know if generalized supply shortages caused by the coronavirus could have a counteracting, or more effective inflationary pressure. Should be interesting to see.

These are interesting and historic times to be sure.

Edit: a further note:

I know next to nothing about macroeconomics, but just from what I’ve been watching on Bloomberg yesterday it seems like people are advocating for central banks to immediately drop interest rates to zero and pour dump trucks worth of cash on the emerging recession. I don’t quite know if this would be a good idea.

The stimulus done in ’08 was supposedly very effective, but it’s unclear whether the same could be said for this time around:

Left as a fun exercise for the reader, watch this graph (of the federal reserve’s balance sheet) for the next six months:

fred.stlouisfed.org/series/WALCL

[I think this shows effectively how much money the fed prints (Quantitative Easing)]

Edit 2 (Wednesday): I heard someone saying on NPR this morning that even though fiscal stimulus is likely to be ineffective, it’s important for inverstor’s “feelings”.

This confirms my suspicions that U.S. economic planning (or lack thereof) has been “feelings” based rather than “preventing an obscene train wreck” based for quite some time.

People were quick to say how “well” the economy was doing with such low interest rates, but you can’t eat your cake and have it too. Eventually, you have to face reality.

In other words, candy may taste sweet, but if you eat too much of it, you’ll get sick.

412 total views, 3 views today


Previously:




Subscribe to be notified of new posts:


Krupczak logo

Home

Join the Conversation

1 Comment

Leave a comment

Your email address will not be published. Required fields are marked *