With the current optimism in the US stock market one may not know that under the surface there are financial challenges across the globe that can potentially derail any optimism that exists currently in stock prices.
GSIB Banks
What 2008 Great Financial Crisis has taught us is that no bank is too big to fail. Going with that thought there is a list of banks that are big enough that if anything bad was to happen to them and seize to exist then it would create a lot of economic turmoil to many countries. This list of banks is called the Global Systematically Important Banks (GSIB).
Chart above is the latest list of GSIBs based on Financially Stable Board. FSB sets the rules and reviews the stats as to ranking the GSIBs. If there were global escalations such as disputes and even war the banks that are on this list may be effected and in turn cause a ripple effect on multiple countries' economy in a bad way.
The dispute of Taiwan's sovereignty between USA and China is currently in the news more often than not. If at moment notice physical altercation was to escalate it will likely effect many of the GSIBs.
War on Ukraine
When Russia invaded Ukraine it definitely effected many banks. For instance Russian assets that were held by banks outside of its country were locked and inaccessible due to sanctions. Then Russia retaliates by limiting energy delivery to nations that originally put the sanctions on Russia, aka the European Union.
The limit in energy to Europe has caused energy prices to spike and same goes to USA even though USA is on the other side of the globe.
Where there is war there is destruction. Countries who participate would funnel their resources such as energy into the war rather than for productive use. This is what is happening in the war on Ukraine as basic essentials are limited such as food and energy. While the countries Russia and Ukraine are diverting resources to the war. This form of supply destruction will lead to higher prices to the basic essentials.
Conclusions
With a rise in food and energy it would be inflationary toward the operating economies. To add on top of that the USA printed massive amount of dollars to curb the slowdown post pandemic. Yet that amount of dollars is still circulating in current global economy.
The FED is trying its best to curb the inflation but each time it made a prediction it had fail to account for the parabolic rise in inflation.
It was first no inflation then to inflation is transitory only to later say FED funds rates to rise at a rate of 0.25% but then accelerate the rate hikes to try to curb inflation by going 0.75% rise. The signs are that inflation appears to continue to rise.
This is where the fear of hyperbolic inflation is justify. The better term is hyper-inflation which the FED is fighting to avoid. As prices of goods and service continue to rise due to destruction of goods through wars it seems hard to believe prices can go down. In addition tensions between countries are rising like those of USA and China on dispute with Taiwan.
The FED will likely do what ever it takes to deflate the dollar now by increasing the borrowing rates and taking out dollar out of the supply chain. The bottom line here is if the FED is unable to control inflation the USA dollar can potentially go hyperbolic making the dollar worthless. All this clearly sounds like a war has already started or brewing.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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