Loading ...Macleod: The Great Global Unwind Begins, Part 2
“We are entering a cyclical downdraft of the bank credit cycle which promises to be cataclysmic. And the monetary policy planners at the central banks can do nothing to stop it.”
https://www.zerohedge.com/markets/macleod-great-global-unwind-begins-part-2
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As dealers in credit, banks face the most difficult times in living memory. Austrian economists have long understood that the business cycle is driven by a cycle of bank credit. The root of the credit cycle has been ignored by statist economists and policymakers who respond by suppressing the evidence. This has been going on with increasing intensity since the 1980s, when the Fed under Paul Volcker broke with interest rate suppression to slay the 1970s inflation dragon.
Since then, the era of pre-Bretton Woods price stability has been replaced by the fiat dollar as the reserve currency, with demand for it engineered by Triffin’s dilemma: balancing the export of dollars through budget and trade deficits with global demand for it. The expansion of derivative markets served to conceal the inflationary effects by shifting the supply of dollar credit into financial markets, away from non-financial activities. This lessened the consequences of currency expansion on the prices of goods and services, allowing the monetary authorities to suppress interest rates without apparent ill effects.
That period has now ended, and The Great Unwind of all the distortions accumulated over the last four decades has begun. No one in government and central banking circles saw it coming, and they are still in denial.
Commercial bankers are becoming acutely aware of the dangers to their business models. At the moment, they have only a growing fear of the consequences of interest rates seemingly out of control. Having been protected from free markets by central banks and their regulators, this loss of statist control is immensely worrying for them.
It is now dawning on commercial bankers that they have been left high and dry, with over-leveraged balance sheets, loan business rapidly souring, loan collateral falling in value, and a derivative merry-go-round about to implode. They must stop pandering to regulators and public opinion, and now protect their shareholders from The Great Unwind by dumping credit obligations as rapidly as possible ahead of the wider banking crowd.
From banking deregulation in the mid-eighties, it took nearly four decades to get to this point. The Great Unwind might take only as many months.
The banks will not be allowed to fail.
And guess who is going to bail them out again?
Not the club, that is for sure.