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Alasdair Macleod: The great credit unwind and the Fed's hidden pivot
By Alasdair Macleod
GoldMoney, Toronto
Friday, March 24, 2023
We are all now aware that the global banking system is extremely fragile. Driving bank failures is contracting credit, which in turn drives interest rates higher. Though it is not generally appreciated, central banks have failed to suppress them.
Some regional banks have failed in the US and the run on Credit Suisse’s deposits has forced the Swiss authorities into forcing a reluctant rescue by UBS. Undoubtedly, as the great credit unwind plays out, there will be more rescues to come.
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In this, the earliest stages of a banking crisis, some questions are being answered. We can probably rule out bail-ins in favour of bail outs, and we can assume that nearly all banks will be rescued -- they must be to prevent systemic contagion.
In this article I quantify the position of the global systemically important banks (the G-SIBs) and point out that the central banks that are meant to backstop them are themselves bankrupt — or rather they would be if properly accounted for.
Because even a minor failure in the banking system could undermine the entire global banking system, the much heralded pivot is now here, but not in plain sight. Because central banks have lost control over interest rates, the focus on preserving the financial markets underpinning the banking system has shifted to supressing bond yields. This is why the Fed has introduced its Bank Term Funding Programme, likely to be copied in other jurisdictions.
It is Powell's hidden pivot -- his line in the sand. But it is the last desperate throw of the dice and depends entirely on inflation being transient and interest rates not rising much more.
The price of even a successful preservation of the banking system is the destruction of fiat currencies, because the bigger picture is still of the greatest credit bubble in history unwinding. And that process has only recently started. ...
... For the remainder of the analysis:
https://www.goldmoney.com/research/the-great-credit-unwind-pivot?gmrefcode=gata
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