While a recession only impacts one nation at a time, its extension harms other economies that are connected to the impacted one. The USA is already in recession and immensely impacts the European and world economy. Here are the five things about the USD and the world economy to consider in 2023.
1) In the USA, the FED will continue to hike interest rates up to about 5% and then hold them at that rate in order to control inflation and stop the rising prices.
US bankers like Jamie Dimon (JP Morgan CEO) think that more than raising rates will be needed in order to hold inflation low. He believes that inflation will remain high and might even spike higher. If the FED cannot slow the inflation, they might start a second-rate hiking cycle by moving up to 7% or 8%, or even 9%.
2) US consumers’ savings are dropping by the day. Specifically, the US consumers’ savings of about 1,5 trillion USD will run out sometime by mid-2024. This event will be another reason to derail the economy and cause a mild to brutal recession.
3) In this unstable environment, other problems might arise, such as worsening geopolitical tensions (Ukraine, Russia, China, Taiwan) and humanitarian crises.
The people will pay a heavy price for the strong dollar and the higher oil prices.
4) An estimated 2.2 trillion USD in capital held by Banks worldwide today is worth a mere fraction of that when the actual values of these assets are considered. Further, the book equities cut that 2,2 trillion USD of capital down to just over 1.5 trillion USD. Certain bonds and assets provide negative returns to their investors, while the banks need to update their values on their books, bringing that 1.5 trillion USD down to just over 1,2 trillion USD. Further, some assets lost substantial market value over the last few years. For example, Tesla’s stock fell 69% in 2022.
5) The 1,2 trillion USD has just been cut down by a further 1,7 trillion USD to negative 500 billion USD, forcing banks worldwide into insolvency. To those losses, these banks have taken further losses on their holdings of US Treasury Securities, which is about 800 billion USD now putting banks worldwide into a 1,3 trillion debt.
I want to know how ready the taxpayers are to bail out their banks. Back in 2008, when Lehman Brothers and Bear Stearns collapsed, there was one bubble in the housing market (i.e., housing prices and mortgage assets). In the post-Covid economy, we’ve seen bubbles pop up anywhere imaginable. Real Estate prices grew ridiculously, and tech stocks exploded; cryptos and NFTs went from not even existing in the years before suddenly being worth multiple trillions of USD, and even car prices exploded along with weird luxuries. Our economies went insane as money printers were turned on all over the globe, and we are finally now weeping in the whirlwind.
People are still waiting to hear what will come next. Crashing does not occur overnight, though. Hence, continuing to follow the news is the best thing we can do to safeguard ourselves. Investing is no longer a means of making money safely.
Georgios Ardavanis – 07/03/2023