Direct Translation via Google Translate. Edited.
[REGNUM] In any case, America will face political instability during the presidential election race, and if against this background a new recession breaks out, coupled with the collapse of an increasing number of banks, then this could already threaten the most painful consequences for the country.
In the US, the fourth bank has failed since the beginning of 2023. Following Silicon Valley Bank, Silvergate and Signature Bank, another regional bank, First Republic, went to the bottom. He has become another victim of the deteriorating financial situation in the United States, which is already threatening a new recession and aggravating general instability in America - and in the midst of the presidential race.
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The current banking crisis has flared up against the backdrop of a sharp increase in the key rate in the US and many other countries of the world due to the rise in inflation. During the COVID-19 pandemic, the Federal Reserve injected more than $4 trillion in unsecured cash into the American economy. This led to a surge in prices, which was expected by everyone except the US financial authorities themselves.
At first they tried to turn a blind eye to this, calling the inflationary crisis a "temporary phenomenon." However, in the end, they had to start seriously fighting inflation. For 2022 and early 2023, the Fed de facto turned off its printing press and raised its key rate from zero to 5%.
For the American economy, the increase in rates to the highest level in 15 years has become a real "shock therapy".
This partly helped to cope with the inflationary crisis. If in the summer of 2022 the growth of consumer prices in the United States reached a local maximum of 9.2%, then by the first quarter of 2023 the inflation rate had already almost halved to 5%. However, such a tough fight against inflation has already led to new economic problems.
The real estate market began to shake strongly, which was the first victim of the rise in key rates.
After all, it is one thing to buy real estate at exorbitant prices, but with a mortgage rate of 2-3% per annum. And it's a completely different matter when mortgage rates rose above 7% - to a maximum in almost 20 years. Sales activity in the real estate market has gone down sharply, and housing prices in many US cities - San Francisco, Seattle, Portland - have fallen by an average of 10% over the past year.
Debt markets were next in line to be hit.
In the context of increased rates, it is becoming more and more difficult to service their debts for both credited private corporations, and individual municipalities along with entire states, and even the US federal government.
In 2022, a record $860 billion went to pay interest on the US national debt - this is comparable to the annual US military budget. And in 2023, payments could reach one and a half trillion dollars, which is equivalent to 20-30% of the entire US government budget.
Private business has already fully felt the lack of access to cheap money. The number of bankruptcies of small businesses in the United States in the first quarter of 2023 jumped to the level of the start of the pandemic in February 2020. Large corporations began to go bankrupt.
For example, the giant in the furniture and home goods market Bed Bath & Beyond collapsed - in fact, the American analogue of Ikea. He, like many other companies, was unable to attract new loans at high rates and service their old debts in the current environment.
Regional banks were next in line.
All of them - be it SVB or the now bankrupt First Republic - have the same story. In recent years, they have attracted a lot of money from investors who have built fortunes on the rise of financial markets and the crypto industry. These billions of dollars were invested by banks in accordance with all the rules of financial management in the "most reliable" bonds - US Treasuries and mortgage derivatives.
The problem happened the moment the Fed started raising rates.
Demand for old bonds with low rates and low yields fell sharply. After all, why buy them if you can already take new bonds with higher rates.
Banks began to lose first billions and then tens of billions of dollars on declining bonds. Then rumors about their problems became public knowledge. And wholesale raids on banks began, with an attempt by depositories (professional participants in the securities market that provide services for storing securities certificates - ed.) To withdraw money in time before they collapse.
For example, since the fall of SVB in early March and until the end of April, depositories withdrew more than $100 billion from the First Republic. The bank itself lost 97% of its capitalization - and it became obvious to everyone that it was not a tenant.
As a result, financial authorities intervened and sold the bank's assets to Wall Street giant JPMorgan Chase. So ingloriously ended the 38-year history of the First Republic, which survived both the financial collapse of 2008 and the pandemic, but not today's banking crisis.
At the same time, the Fed and the White House are trying to convince Americans that bank failures are only exceptions to the rule, but in fact the banking industry is quite stable for itself.
However, in reality, up to 200 more regional banks in the United States are experiencing similar financial problems that sent SVB or First Republic to the bottom. And the total losses of the banking sector due to the growth of key rates already exceed a record two trillion dollars.
Of course, different banks feel differently. The largest representatives of Wall Street - JPMorgan or Goldman Sachs - really do not have any special financial problems. Things are somewhat worse for Bank of America, which also invested a lot of money in losing bonds.
Well, the most deplorable situation is with banks of the second and third echelon, which are now beginning to go bankrupt. And there is every reason to believe that the current bankruptcy of the First Republic will not be the last collapse of significant US banks in the coming months.
Much will depend on the future policy of the Fed and key macroeconomic indicators of America. The inflationary crisis is already clearly weakening, although in the summer the US and Europe may expect another jump in prices for energy, fuel and electricity.
The main danger comes from the fact that economic growth simply stops.
In the first quarter of 2023, the US economy grew by only 1.1%. Almost near-zero growth is expected in the next quarters. And by the end of the year, the American economy, suffocating without a constant influx of new money, may be in danger of starting another recession.
The situation is aggravated by the fact that next year the United States will have a very stormy presidential race, where Joe Biden and Donald Trump may clash again.
In any case, America will face political instability, and if against this background a new recession breaks out, coupled with the collapse of an increasing number of banks, then this could already threaten the most painful consequences for the country.
If the US financial authorities start pouring money into the economy again, they can lead to another jump in inflation. Washington has found itself in a deadlock of stagflation, a way out of which is not yet visible.
May 2, 2023
Malek Dudakov
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