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Economics

عدوى مالية على الأبواب

Jan 2, 2023 Kenneth Rogoff

كمبريدج ــ لم يشهد العالم أزمة مالية جهازية في عام 2022، وهذه معجزة صُـغرى نظرا لارتفاع التضخم وأسعار الفائدة، ناهيك عن الزيادة الهائلة في المخاطر الجيوسياسية. ولكن مع ارتفاع الديون العامة والخاصة إلى مستويات غير مسبوقة خلال الحقبة التي انقضت الآن من أسعار الفائدة الشديدة الانخفاض، وارتفاع مخاطر الركود، يواجه النظام المالي العالمي اختبار إجهاد شديد الوطأة. وسوف يكون من الصعب احتواء أزمة في أي اقتصاد متقدم ــ في اليابان أو إيطاليا على سبيل المثال.

صحيح أن الضوابط التنظيمية الأكثر إحكاما قللت من المخاطر التي تهدد القطاعات المصرفية الأساسية، لكن ذلك أدى إلى انتقال المخاطر إلى مكان آخر في النظام المالي. على سبيل المثال، فرضت أسعار الفائدة المتزايدة الارتفاع ضغوطا شديدة على شركات الأسهم الخاصة التي اقترضت بكثافة لشراء العقارات. الآن وقد أصبحت العقارات السكنية والتجارية على أعتاب انخفاض حاد ومستدام، فسوف تنهار بعض هذه الشركات في الأرجح.

في هذه الحالة، قد تصبح البنوك الأساسية التي قدمت قدرا كبيرا من التمويل لمشتريات شركات الأسهم الخاصة من العقارات في مأزق حقيقي. لم يحدث هذا بَـعد، وهو ما يرجع جزئيا إلى أن الشركات الخفيفة التنظيم تخضع لقدر أقل من الضغوط لتقييم دفاترها تبعا لسعر السوق. لكن لنفترض أن أسعار الفائدة ظلت مرتفعة على نحو عنيد حتى أثناء فترة من الركود (وهو احتمال واضح مع خروجنا من عصر أسعار الفائدة الشديدة الانخفاض). في هذه الحالة، قد يتسبب انتشار حالات التأخر عن السداد على نطاق واسع في زيادة صعوبة الحفاظ على المظاهر.

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Kenneth Rogoff

Writing for PS since 2002
243 Commentaries

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. He is co-author of This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2011) and author of The Curse of Cash (Princeton University Press, 2016).

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0 Comments on this paragraph, 18 Comments on this article

vic lai Jan 10, 2023

How will higher-for-longer interest rate affect the property market ?
First, it will discourage new property buyers.
Second, it will affect the people who already have properties and mortgages, especially those that have second or third mortgages who used to converting house equities into cash.
This practice was very common during the pandemic.
At that time, some people's family incomes dropped, but property prices kept rising, so they re-mortgaged and used the fund to help with their expenses.
But remortgage or refinance is short-term, usually lasting 1 - 5 years.
A few years ago it looked like a good plan in the low-interest-rate environment then, since one only needed to pay 1 % or so.
But recently the interest rate suddenly increased by 3 %, so when the plans expired, the new mortgage rate quickly became more than 5 %.
---
Since property prices kept rising sharply in the past few years, FOMO investors worried that if they didn't jump on board quickly, they would miss the gravy train.
Afterall, the interest rate had always been so very low, property-buying seemed like a sure-win one-way bet.
Many people used variable-rate mortgages at that time.
Mortgage rate rises and falls together with the central bank's policy interest rate.
In March of 2022, Canada's central bank hiked rate by 3 percentage points only in a few months, and the country's 5-year variable mortgage rate quickly jumped from 1.5% to 5.5 %.
According to the Bank of Montreal, there are more than $200 billion of mortgages, and 20 % of the entire market uses variable rates.
---
What's bad about variable rates ?
Suppose you borrow 1 million Canadian dollars (CAD) for 25 years.
When you borrowed 2 years ago, the interest rate was 1.5 %, and your monthly payment was around $4,000.
But now the interest rate has risen to more than 5 %, and your monthly repayment becomes about $6,200, which is a 55 % increase.
For the whole year, the repayment jumps from $48,000 to $74,400, compared with the average household income in Ontario of $80,322.
Not everyone has extra savings to cope with this sudden increase in repayment, and even if they have, most people have to reduce other expenses to make ends meet.
Some people who can't afford the much higher repayments are then forced to sell their properties, which drives down the market property prices.
---
A mortgage with a variable interest can have a fixed payment.
You can set your fixed payment to a monthly amount of say $4,000, regardless of the market interest rate.
But this kind of mortgage can't really buy you more safety.
Though you pay the same amount each month, when interest rate increases from 1% last year to more than 5% this year your monthly repayment is mainly used to cover the interest as opposed to repaying the principal.
Sounds like the subprime mortgages of 2007, right ?
---
The banks' Trigger Rates now come into play.
If your monthly mortgage repayment fails to repay the principal, your bank has the right to ask you to pay more than $4,000 per month, even though you already have a fixed $4,000 monthly repayment scheme, once your trigger rate is hit.
The Bank of Canada published a report last November, showing that three quarters of the variable-rate mortgages used the fixed-payment method, and half of those fixed-payment mortgages had touched their trigger rates.
This year, if interest rate continues to go up, more than 60 % of this kind of mortgages will hit their trigger rates.
Imagine what will happen if the banks force those people to pay back more money.
Many people thought fixed-payment means fixed amount of payment, which will always be say $4,000 per month.
Since they FOMO-ed when real-estate market was rising sharply in the last 2 years when every asset market (stocks, cryptos, and property markets) was going up, they chased in to buy their houses, but their incomes were just barely enough to pay off their mortgages.
If this year more mortgages hit the trigger rates, and the banks force those people to pay more, some people will be forced to sell, which will increase the market supply.
Given the fallacy of composition, when everyone is scrambling to sell the houses quickly to raise money, a deeper correction of the housing market will occur, and the bubble may even burst.
When the bubble does burst, many of the homeowners will have negative housing equities, creating the negative wealth effect.
---
Both Australia and the UK are very fond of mortgages with variable interest rates.
Mortgages in Australia in recent years mainly used variable rates, because interest rates have been very low there, so it's been much cheaper if floating rates were used.
The situation in the UK was similar, they tended to do short fixed terms for 2-5 years, and after that they would go to variable rates, or would refinance using a new interest rate.
In other words, those interest rates will much increase after maturity.
The current forecast is that there would be about 600,000 fixed-rate mortgages last year that needed refinancing, which will increase to 1.8 million this year.
So, both Australia and the UK are at high risk in this regard.
---
Will this year's global real-estate markets, led by that of Canada's Toronto, resemble the US technology stocks in 2022 ?
---
- vic lai Jan 10, 2023
  
  Talking about re-financing, the US federal government will have to
  (a) borrow likewise from the private market by issuing new government treasuries at (much) higher interest rates in the future than in the good old days of close-to-zero interest rates, or
  (b) roll over her old debts at higher and higher interest rates,
  or both.
  Since the US Fed will have to keep subduing the inflation monster in the domestic US economy in the foreseeable future, the central bank could no longer, and shouldn't, finance the federal government's new deficit spending in the coming years by buying outright her newly-issued treasuries dictated by her deficit budgets.
  The central bank instead has to keep trimming her own balance sheet by selling old treasuries back to the market every month in the coming quarters, mostly at a loss, and so there will be no more transfer of Fed profits back to the US Treasury every financial year as in the good old days.
  ---
  Since, given the Fed's coming likely higher-for-longer interest rate policy, the US dollar may re-strengthen sometime in the future, countries like Japan and the EU may therefore have to keep selling US treasuries and hence US dollars to support their own currencies in the global FX markets, and the resulting depreciating pressure on the US dollar will mitigate or offset the appreciating pressure on the US dollar from the increased carry-trades caused by the re-strengthening of the US dollar.
  In other words, the increased inflowing capital into the US to partly buy the US Treasury's then newly-issued treasuries will be offset by a concomitant but opposite perhaps-similar-sized capital outflow from the US.
  Without increasing the US federal government's tax revenues and/or reducing the country's fiscal expenditures, deficit-spending US may have to resort to instigating local wars on some part of this planet to lure much more foreign capital to flight to the US to buy the US government treasuries both newly-issued and rolled-over by the US Treasury.
  ---
  Very few countries under the sun today are rich enough to be owning lots of US-dollar-denominated FX reserves to be able to increase the expected appreciating (or to reduce the expected depreciating) pressure on the US dollar just mentioned : Japan, the EU countries, China, and the OPEC+ countries led by Saudi Arabia.
  The US has already been manufacturing capital flights away from Europe and into the US through the ongoing Ukraine War in the Continent.
  The US may also instigate similar capital flights both from China
  and from Japan, through the coming likely Taiwan agency war in Asia, so that
  (i) there'll always be enough net-buyers of government treasuries newly-issued or rolled-over by the US Treasury,
  (ii) even though the US Fed will have to once again use inflation-prone new-money-printing new QEs to help finance the federal government's coming new deficit spending in the future years, the US dollar will not depreciate too much (or will even keep appreciating) in the global FX markets,
  (iii) the US remains the only DM country on this planet that can still sit comfortably and sustainably at the Impossible-Trinity corner of free capital flow, flexible exchange rate, and independent monetary policy, and
  (iv) the global hegemony of the US dollar can still be maintained in the foreseeable future.
  ---
  In short, by instigating a local war somewhere under the sun, the US federal government can still keep deficit-spending en masse, even at much higher domestic interest rates than before, without (much) depreciating or debasing the US dollar (and hence without hurting the King Dollar) at the same time.
  ---
  - vic lai Jan 10, 2023
    
    Zoltan Pozsar suggested lately that the US Fed may have to re-enact a new round of QEs later this year to help finance the US Treasury's coming new deficit spending this year, given the relative lack of traditional buyers of those newly-issued US treasuries in the private market.
    According to him, this time around the Fed's QE will no longer serve as the Fed put of the good old days to support the country's stock and other risky asset markets, but will instead mainly be used to support the country's lack-of-liquidity government treasury market, which resembles Janet Yellen's recently suggested Treasury QE.
    ---
    The Fed's doing so
    (i) will once again invigorate the country's inflation monster,
    (ii) will further weaken the US dollar in the global FX markets, and so the US will no longer be able to keep exporting domestic inflationary pressure to the rest of the world,
    (iii) will be at odds with her balance-sheet-shrinking QTs,
    (iv) will keep debasing the US dollar in the long run (resembling the declining west Roman Empire two millennia ago), inducing the BRICS countries to further develop their own denominating, transacting, accounting, and reserve global currency (and their own sophisticated domestic bond and FX markets and marine insurance companies) that will compete more and more fiercely with the US dollar and the US treasury market in the rest of this century (Bretton Woods II will increasingly have to co-exist with Bretton Woods III), and bifurcating the global economy both financially and geopolitically as a result.
    ---
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  - vic lai Jan 10, 2023
    
    The latest "too-fast" weakening of the US dollar in the global FX markets, measured by both the US dollar DXY and the Trade Weighted US Dollar Index, no longer allows the overheating US economy to keep exporting domestic inflation out to the US's trading countries, which in turn will prop up the US's merchandize (imported) inflation if this trend persists into the future.
    Such re-strengthening goods (energies, and commodities) inflation in the US may combine with the country's refuse-to-retreat service (and wage) inflation to keep sustaining the country's CPI inflation rate at a relatively high level in the current year, which will be contrary to the current widespread market expectation of the peaking of the country's inflation any time soon, and which may also force the Fed to sustain her higher-for-longer and staying-at-the-top non-pivot interest-rate policy during the whole of this year.
    ---
    The Fed's such unexpected-by-the-market interest-rate policy may therefore re-strengthen the US dollar relative to most other currencies perhaps later this year.
    Hence the eventual breaking out of a credit or liquidity event somewhere under the sun sometime in the future will be much higher than otherwise.
    ---
    - vic lai Jan 11, 2023
      
      "Federal Reserve Chairman Jerome Powell said Tuesday that it would be “inappropriate” for the central bank to plunge itself into the fight against climate change.
      In brief Tuesday remarks during a summit in Stockholm, Powell said while the Fed must make sure banks are prepared for climate-related financial risks, it must not take measures to steer money toward green energy or away from the fossil fuel sector.
      Powell argued that going beyond the Fed’s basic mandate of stable prices and maximum employment would “undermine the case” for the bank’s independence from Congress and the White House, which allows it to raise and cut interest rates without approval from elected officials."
      To me, Powell this time is both correct and incorrect.
      He's correct in the short run, but incorrect in the long run.
      Why ?
      ---
      (i) He's correct in the short run because, he doesn't want the US federal government's current expansionary fiscal policy (more deficit spending) to contradict her current paramount strive of fighting the runaway inflation in the US.
      His latest speech in Stockholm was indirectly and skillfully criticizing Biden's Inflation Reduction Act, the increased inflation-prone deficit spending of which will much complicate the Fed's current mandate of maintaining the country's inflation rate at a 2% level, by forcing the central bank to maintain her higher-for-longer policies for a much longer period time than is generally expected by the market, thereby eventually exploding the precarious time bomb of the US's overheating real-estate market.
      (ii) He's incorrect in the long run because, if the US central bank in the future keeps refusing to "print more new money" (or using MMT) to help finance the US's coming industrial and other policies, the US will
      (i) increasingly lag behind China in the coming decades, and
      (ii) have a harder time successfully culminating in the 4th Industrial Revolution (however defined) mainly inside the US territories perhaps in the 2030s, and China may become the next IR world leader.
      ---
      This time, almost everything is different.
      The US Fed can no longer ignore what's been happening both economically and geopolitically outside the US territories.
      China in particular, through the close cooperations of her central bank, the PBOC, her China Development Bank, and her numerous local commercial banks, have in the past decades been very successful in quickly industrializing and urbanizing their country.
      China's "structural money policies" have been very versatile in financing the money needs of the country's different individual sectors in the past decades, resulting in China's economic miracle as we see it today.
      Just take a ride in one of China's high-speed trains, and you'll know what I mean here.
      Relative to the PBOC's versatile monetary policies, the Fed's current traditional monetary policies, which care mainly about the two set mandates, have been too monotonous and simple, the continuance of which will enable China to more easily overtake the US in the coming Marathon Race between the 2 countries.
      The same is also true for the other DM countries in the West.
      ---
      If the US Fed finds it inconvenient to directly intervene in the country's industrial and other "non-monetary" policies in the coming years, it may encourage the US authority to say set up a new Infrastructure and New Energy Bank, which is similar to China's China Development Bank.
      The fact is that both the booming Eurodollar markets and China's fiercer and fiercer competitions are dictating the US Fed to take the country's external environment much more into account, rendering the Fed's two good old mandates quite anachronistic in today's increasingly Prisoner-Dilemma-like global economic and geopolitical games.
      For one thing, "the US dollar is our currency, your problem" will have to compete increasingly with "they're our energies and commodities, your problem" in the rest of this century.
      ---
      - vic lai Jan 12, 2023
        
        In order to compete with China and other countries, the coming US "entrepreneurial state," if any, needs more and more MMT-like fiscal-cum-monetary policies, not more "independent" monetary policies.
        Afterall, in the increasingly interactive Prisoner-Dilemma-like economic games between China and the US in the coming decades, if China keeps "cheating" to her benefit but the US honestly sticks to the good old anachronistic monetary rule, the eventual winner at the end of this fierce bilateral game is quite obvious to all of us.
        ---
        Going to the opposite extreme, today's US authority can even seriously consider Milton Friedman's advice ------ folding the functions of the central bank into the Treasury, by rendering " the central bank a bureau in the Ministry of Finance under the head of the Ministry of Finance" (similar to China's PBOC, which is a cabinet-level executive department of China's State Council), thereby creating the country's formal,
        genuine, and cooperative fiscal-cum-monetary policies, partly in order to fully subdue quickly rising China before the middle of this century.
        ---
        
        vic lai Jan 13, 2023
        
        Given the US's latest December inflation statistics, the US market's risk-on mode (re-bouncing of the US stock markets, falling in the interest rates of US treasuries, weakening of the US dollar) will probably continue in the near future.
        But this time around, will the US economic plane have a hard(er) landing , which is comparable to the economic crisis in 2008 ?
        ---
        Recently the US housing market has already dropped quite a lot, when measured by the NAHB (National Association of Home Builders) index, the extent of the drop has been close to that in 2008.
        But the quarterly adjusted NPL (nonperforming loans) ratio for the real-estate sector for all commercial banks in the US remains at the near-zero level, which hasn't started rising yet (as in 2008).
        According to the leading indicators, the critical point should probably arrive any time soon.
        ---
        
        vic lai Jan 13, 2023
        
        Both the relatively large drop in yoy inflation rate in December 2022 relative to December 2021, and the negative mom inflation rate in December 2022 relative to November 2022, has been due mainly to
        (i) the relatively large CPI base in December 2021, and
        (ii) the Biden administration's deliberate strong suppression of the US's energy prices near the end of 2022, which in turn should have been the result of the administration's intention to
        (a) continue to much reduce the energy-exporting revenues of Russia, and
        (b) cope with the mid-term Congress re-election in November last year.
        ---
        The coming crucial economic question is whether the US CPI-U will continue to drop almost in a linear straight line in the coming months, which in turn will depend mainly on whether the Biden administration will continue to strongly suppress the energy prices in the US by keeping releasing the government's smaller and smaller oil reserves.
        As of Jan 6, 2023, the US's strategic oil reserves has dropped to only 371 million barrels, which is around one-half of the recent highest plateau.
        If
        (a) the oil reserves are no longer released by the US government en masse this year,
        (b) the OPEC+ grasps today's chance to much reduce the global supply of oil in the coming months in order to re-bid up the global oil prices,
        (c) food prices in the US (led by the latest biggest egg recall in recent history) props up once again,
        (d) the coming drop in housing rents in the US is not too big,
        then the coming rebound in US's CPI inflation is still highly likely, which in turn may prolong the Fed's coming higher-for-longer rate-hiking cycle.
        Afterall, the country's core CPI inflation rate (excluding food and energy) in December 2022 was as high as 5.7%, which is still 2.85 times the Fed's policy goal of 2%.
        ---
        
        vic lai Jan 16, 2023
        
        The US inflation can be separated into 2 parts : manufacturing-industry inflation (MI) and service-industry inflation (SI).
        The US MI has been following an almost linear straight-line and relatively-fast declining trend recently, dropping from near yoy 14% in June 2022 to only around yoy 5% in December 2022.
        But the US SI has been keeping its unabated slowing rising trend ever since August 2021, which was around yoy 3%, up to near yoy 8% in December 2022.
        Hence the US's newly announced headline CPI inflation rate of yoy 6.5% in the last month.
        ---
        Today's US therefore needs not so much a recession in her real economy as one in her virtual economy, the persistent negative wealth effect of which, as a result of the eventual non-trivial popping of the country's everything-asset bubbles, will have to be strong enough to help bring down the country's SI in a persistent manner in the near future.
        ---
        One way for the US to do so is for the Fed-cum-commercial-banks to pierce the country's real-estate bubble, so that the average new-home price will be lowered to a level that most younger US couples can afford to pay, so that they will no longer keep bidding up and sustaining the country's average rent (an important component of SI) at a higher and higher level.
        ---
        
        vic lai Jan 17, 2023
        
        The Fed's last two incremental interest-rate hikes have almost completely failed to guide the US financial markets lower.
        This is represented by the recent divergence between the Federal Funds Target Rate --- Upper Bound and the Goldman Sachs US Financial Conditions Index, showing that the market financial conditions have recently become looser rather than tighter even though the US central bank has been trying hard to further tighten her monetary policies.
        This kind of divergence was seldom seen in the past.
        --
        There've been at least 3 reasons for the above divergence.
        (i) The US Fed has somewhat lost part of her good old authority when she has under-predicted the proximity and severity of today's runaway inflation in the US after the breakout of the pandemic.
        (ii) Data show that the US commercial banks have kept on lending en masse to the US private sector last year,
        (iii) Japan's non-trivial QEs hasn't really stopped so far, meaning that there's been an obvious loophole in the global central banks' in-sync fights against the global inflation genies this time around.
        ---
        The financial market shouldn't forget that the Fed still has many sharp QT arrows in her quiver.
        ---
        
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Jeremiah Hartnett Jan 4, 2023

Sort of a weak article.
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vic lai Jan 3, 2023

Unlike the GFC of 2008-09, this time's US housing crisis, if any, will probably be caused by the county's institutional investors (iis).
---
In the past decade, many of the US's iis, like the big companies Opendoor and Zillow, have entered the country's residential housing market, and as a result they have completely changed the investment rules of the market there.
Through the iis' iBuyer program, a house-seller in the US received a bid from an iBuyer Company in cash outright, and the bid-price was usually higher than the prevailing market price by a non-trivial amount.
As a result, the US's housing market prices had in the past years been bid up to quite a high level, and this rising trend had further been invigorated by the Fed's recent 4th round of pandemic QE.
---
Up until the first quarter of 2022, the share of the iis in many of the US's cities already exceeded 15%, with their share in Texas as high as 28%.
If the trend persisted, many of the houses in the country's smaller cities would mostly have been bought out by the iis, which with their large market share could then have controlled the sources of housing supplies and arbitrarily raised the housing rents.
Given the US's long low-interest-rate environment and policy supports, the above situation had persisted for many years.
The rise in both home prices and rents in those areas chosen by the iis also attracted a lot of individual investors who jumped onto the same buying bandwagon, further pushing up the home prices and rents there.
As a result, investor home purchases spiked in 2021, with 1/4 of the homes having been bought by the iis.
---
When in early 2022, the Fed started her rate-hiking and QT cycles, almost everything and everyone started to unwind, and many iis started to sell their inventories en masse, even when incurring a (big) loss when doing so.
Just like they were paying too-high prices when they were buying the houses in the past, they were then selling their houses at too-low prices relative to their values.
In the 3rd quarter of 2022, 15% - 20% of the houses were sold by the iis.
Individual investors also jumped onto the selling bandwagon.
Once again, the fallacy of composition came into play.
It's said that Redfin has already sold off all of her company's owned residential houses, while the other companies are still in the process of selling their inventories.
The coming US housing market won't improve before all those iis have finished their current selling spree.
---
According to the country's "Home Builder Cancellation Rate," a very important housing market statistic seldom noticed by the person in the street, with the rise in the country's borrowing rate and the drop in house prices, more and more new-home buyers have chosen to cancel their buying contracts, signifying the buyers' declining confidence in the country's housing market, which will also adversely affect the confidence of the country's home builders.
Starting from May of 2022, this Rate had been rising persistently, up from a normal 10% to 25.6% in October last year, meaning that every one of four buying contracts had been cancelled.
In the US's Southwest, the rate jumped to as high as 45%; Texas's was 39%.
Twelve months ago, the rates in those two places were only 9% and 12% respectively.
Due to the inelastic nature of a country's housing supply, the price-falling pressure in the market there has been further aggravated.
The bear housing market of the US is yet to reach its true bottom.
---
Whether the coming US housing market will cause a credit or liquidity event in the US in the near future remains to be seen.
---
- vic lai Jan 4, 2023
  
  The coming unexpected (or expected) liquidity or credit event, which may come from either the US's housing market or from somewhere else on this planet, if any, may be prompted by the Fed's coming more-hawkish-than-market-expected higher-for-longer and staying-at-the-top interest rate policies throughout this year.
  ---
  It's often said that the Fed seldom surprises the market, and this is usually true during normal times, when the country's inflationary or recessionary pressure is by no means acute.
  But this time is probably different.
  Today's Fed may probably have to surprise the market before she can more easily and quickly tame fully the inflation monster in the country.
  ---
  According to a Taiwan economist, after the Japanese asset bubbles had popped in the early 1990s, the Bank of Japan slowly reduced the country's interest rate step by step, one ratchet after another, without "surprising" the Japanese market, and so the central bank had been ineffective in quickly changing non-trivially the market expectations at that time, and had therefore failed to more quickly pull the Japanese economy out of the following decade-long recessionary and deflationary trap.
  Ben Bernanke had probably learnt this lesson from Japan, and so after Bear Stearns had run into trouble, he immediately lowered the Fed's policy interest rate by 3 ratchets.
  Such a surprising big movement of the Fed was immediately noticed by the US market then, and so had been much more effective in changing the US market's expectations, transactions and directions thereafter.
  And so, viewed from this angle, will the coming rate-hiking actions of Powell's Fed be surprising enough for the US market so that runaway inflation in the country can more easily and quickly be tamed by the central bank fully ?
  ---
  (i) If the answer is yes, then the sudden cropping up of a non-trivial credit or liquidity event either in the US housing market or elsewhere is much higher than most people are now expecting, while the Fed's inflation-fighting mission will more easily and quickly be accomplished fully.
  (ii) If the answer is no, then the market (especially the US housing and other asset markets) will have more time to adjust according to the coming expected policies of the Fed, and so the breaking-out of a credit or liquidity event in the near future will be less likely, but the Fed's inflation-fighting mission will take a much longer time to be fully accomplished, which in turn may also increase the probability of the eventual breaking-out of even more credit or liquidity events in the longer run somewhere under the sun.
  ---
  Which means, one way or the other, some thing will have to give ------ there's simply no escape.
  Economics is always about tradeoff, and so it remains forever a dismal science.
  ---
  - vic lai Jan 5, 2023
    
    (a) Paul A. Volcker, in his autography “Keeping at it”, valiantly confessed :
    “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support : sovereign credits and home mortgages.”
    (b) The (highly) misleading minimum capital requirements stipulated in Basel I - II - III Accords have been enforced by the Basel Committee on the new-credit-creating commercial banks over the past decades ------ more risk, more capital, and less risk, less capital.
    ---
    (a) and (b) have combined to have encouraged and allowed the commercial banks in the US (and in many other countries) to keep leveraging more, and therefore to keep earning higher risk-adjusted returns on equity, by lending much more to both
    (i) the US federal government, and
    (ii) the US housing markets.
    And so, in the commercial banking system of the US, both the supposedly "safest" central government treasuries and the government-financed mortgage securities sectors have received the large majority of bank credits over the years, at the expense of the country's much more innovative but risky (lack-of-collateral) SME sectors.
    ---
    - vic lai Jan 7, 2023
      
      Relative to the US's real-estate markets, those in the cities of Toronto, Frankfurt, Zurich, Munich, Hong Kong, Vancouver, Amsterdam, Tel Aviv, and Tokyo, according to the UBS Global Real Estate Bubble Index 2022, are all bubbling and so are now even more precarious, especially if their central banks' coming interest-rate policies are becoming more and more stringent.
      The real-estate markets in some of those cities in 2023 may resemble the US's bubble-bursting technology stocks in 2022.
      Note that the overall adverse effects on the macroeconomy is (much) bigger when a real-estate bubble bursts than when the stock market there implodes.
      ---
      So far as house prices are concerned, a person's Marginal Propensity to Consume (MPC) is approximately 3%-5%, which means, when the home-owner's house rises by $100, he or she will spend $3-$5 more in the same period of time.
      But when one's owned stock-market shares rise by $100, the stockholder will only spend $0-$3 more.
      So, the coming sudden popping of the real-estate bubble in any of the above cities, if any, will generate a non-trivial negative wealth effect which in turn will adversely affect the people's future consumption there.
      The drop in consumption will also be accompanied by all the resulting adverse chain effects on many other parts of the macroeconomy, which may then even produce a systemic crisis in the country of that city, since so many sectors of the domestic economy, including the country's banking system, are typically closely related to the real-estate market there.
      ---
      - vic lai Jan 9, 2023
        
        Many of the asset bubbles had already popped last year,
        (i) Bitcoin, the most speculative cryptocurrency market, has now dropped 80% from the plateau,
        (ii) once-very-famous Upstart and DocuSign, two of the hottest US technology stocks last year, have dropped 90%,
        (iii) Tesla, most people's favorite stock, has lost 60%,
        (iv) Nasdaq has dropped 35%,
        (v) even the supposedly safest and most stable bond market, after a 15-year rise, eventually popped last year, having dropped by 20%, which is a very big amount in this kind of market.
        ---
        Recently, only one asset remains, the bubble of which hasn't been (fully) pierced yet, and the investors have still been bold enough to keep buying the dip ------ the real estate market.
        But perhaps not for long.
        ---
        
        vic lai Jan 9, 2023
        
        Of all the countries, Canadian home prices posted the largest gain over the past 25 years (starting from 1997), with her % change in home price index having increased by a whopping 553% (versus the US's 192%, Japan's -31%).
        The hottest market in Canada has been Toronto, which has now become the leading indicator of home prices in all of the world's major cities.
        ---
        Toronto's home prices have risen so much because
        (i) after the GFC of 2008-09, the QEs enacted in many western countries have caused the real-estate markets there to accelerate after 2008,
        (ii) the Canadian property market, unlike those in the US and other places, has not been much affected by the financial turmoil during 2008.
        Canada didn't have a major subprime problem, her banks didn't lose a lot of money, nor needed government bailouts, and so during 2007-08, Canada's housing market didn't fall as much.
        (iii) Canada's population, relative to most other DM countries, kept growing quickly in the past decades.
        Many DM countries have been experiencing stagnant population growth, since their birth rates are barely higher than their death rate (even without considering the recent global pandemic).
        Japan, always not willing to accept new immigrants, (and hence has had both the most homogeneous population and the least racial problems in the world), is experiencing population decline.
        Canada is the opposite of Japan. In the coming 3 years, she plans to accept 500,000 new immigrants each year.
        Canada's current population is only 38 million, so its population will grow by 1.3 % each year.
        The new immigrants' demand for houses will keep supporting the house prices there.
        (iv) The property market has risen for so many years that many people expect the trend to continue and so jump on the bandwagon, causing those markets to be overheating (just like today's US economy).
        ---
        But the fun time is now over.
        Beginning March 2022, the market has eventually started adjusting, temporarily having dropped by more than 10 %.
        If the interest rate continues to be maintained higher for longer, the property prices may continue to fall even further.
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      - vic lai Jan 8, 2023
        
        According to Chris Irons, the US is right now perhaps at its most precarious financial position ever in the country's peacetime financial history, with the amount of sky-high remaining government debts that she has, the amount of domestic inflation that she's now still facing, the lack of progress in real productive capacity that has been caused by the country's past under-investments in both physical and human capital, the perennial trade deficits the country has always had (until recent quarters), the carefree government deficit-spending over the years (some of them have been funneled out of the country to finance unproductive local wars elsewhere), the already much-overvalued stock markets before the pandemic had further been propped up to a sky-high level by the central bank’s latest round of unlimited QE, ......
        According to him, the US ship has completely lost her financial or Econ-101 compass out in the global open sea, which is really stunning.
        ---
        In turn the above may also have been caused by the dominating American always-going-to-extreme philosophy (relative to say China's middle-of-the-road philosophy) in the past decades:
        (i) history has ended, and the world will continue to be ruled by America alone, and by her unilaterally,
        (ii) America's military prowess will keep leading that of all other countries by at least one human generation,
        (iii) neoliberal free-market economics will forever reign supreme, accompanied by trade and financial liberalization, deregulation, and privatization,
        (iv) America can always do whatever and whenever she likes, can always have the best of all worlds, and there will always be plenty of free lunches out there for the Americans to enjoy that are denied to all the other countries under the same sun.
        ---
        Well, the much-worsening balance sheet and cash-flow positions of today's American Company seemingly doesn't bother most of today's always-very-happy Americans because, so far, every time a global financial crisis broke out somewhere on this planet, even when it mostly originated in America, the country could always come back with a vengeance, and eventually became even much stronger economically, militarily and geopolitically than before and relative to the rest of the world.
        But, can this American geopolitical and economic nirvana-like global position always remain unchallenged for the rest of this century ?
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