August 24, 2022
The recent weakness in many speculative stocks and Bitcoin, together with the continued statements from the Federal Reserve that “fighting inflation” is their top priority, should send strong warning signs to all investors, that difficult economic conditions are ahead.
At first glance one would think this would benefit Banks, as they can lend out money at higher interest rates, while still taking in deposits at very low interest rates. However, the problem is that borrowers are facing increasing difficulty making required interest payments forcing Banks to increase reserves for loan losses.
In fighting inflation, by raising interest rates, the economy is slowing down and corporations and individuals with record amounts of outstanding debts, are facing increasing difficulty in making payments and rolling over maturing bonds.
As the economy slows, corporations are starting to lay off staff and we are starting to see an uptick in unemployment rolls.
This problem is greatly amplified in China, where a good percentage of their growth over the years, has been fueled by property and real estate developments. In some ways the Chinese growth miracle has been fueled by a Ponzi like scheme, which is now starting to unwind.
Banks in China are starting to restrict withdrawals from bank accounts and people are resusing to make mortgage payments on housing units that they have contracted for, but have not been completed yet. In turn, the Property Developers are not able to make their own interest payments on their huge debts leaving their investors stranded.
The economic stagnation in China is very likely to spread thorughout the world’s economies.