March 7th, 2023
Today, Fed Chairman Jerome Powell, thru cold water on the hope that an economic slowdown, would cause the Fed to “pause” or “reverse” its current interest rate tightening cycle.
Fighting inflation is still the Fed’s number one priority, and they are no where near achieving their goal of bringing the economy back to a sustainable 2% inflation rate. As inflation continues to look like it is running at between 5% and 7%, it looks like the Fed will have to keep interest rates higher for a longer period of time.
Needless to say, even if they could bring inflation down to their preferred rate of 2% per year, that would mean that your dollars would lose purchasing power, over that period of time.
What you could have bought for $5,000 today, will cost you more than $6,000 in 10 years. If inflation remains at the current 7% level, than you will need almost $10,000 to buy the same goods and services that cost half of that amount today. That is the problem of inflation, and why the Fed needs to try to stop it before it gets out of hand.
However, as the Fed raises interest rates, to contain inflation, it makes it more difficult for borrowers to service their loans. That is the interest the borrower must pay starts to become a growing burden. That puts the borrower on a tredmill where he has to make more and more money, to pay the annual interest on the loan. That is called a “Debt Trap.” To paraphase the lyrics of Hotel California: “You can always come in, but you cannot Leave.”
As borrowers start to default, that puts pressure on the banks that made these loans over the past few years. Some banks are at the point that their depositers no longer trust that their bank will be able to repay their deposits and start to withdraw their funds from the bank. That causes a run on the bank, which may be happening with Credit Suisse (CS) and Starlight Capital (SI).
Because Starlight Capital has become a hibrid bank, with one foot in the unregulated crypto world, and one foot in the regulated commercail banking area, this bank’s possible failure could shake the world’s financial structure.