Simone Wapler – La Chronique Agora (France) –
Has the financial world become weird enough that the same causes do not produce the same effects?
Let’s start with a little quiz, dear reader.
Remember your memories of the subprime credit crisis .
Consider that the official beginning of this crisis was August 9, 2007: BNP Paribas froze the withdrawal of its clients in three of its funds.
-1- How long did it take between the moment the Fed started raising its key rates and the moment the crisis broke out?
Six months, one year, two years?
At what level of interest rates did subprime credits explode in flight?
2.5%, 3%, 5%, more?
-3- What was the yield on 10-year US Treasuries?
1%, 2%, 3%, 4%, more?
-4- What was then the global indebtedness
$ 110 trillion, $ 150 trillion, $ 200 trillion?
Here are the answers.
The Fed raised its key rates from 2004 to 2006 for just under two years , from 1% to 5% . When the first alarming signals appeared, she stopped her hikes. The yield on the US Treasury bill slightly exceeded 5% before falling back in 2007 to 4.5%. Global debt was just under $ 140 trillion.
The bubble of bad credit piled up since 2001 collapsed as a result of rising interest rates.
Let us admit that – even in the delirious world of central bankers and interventionist economists – the same causes produce the same effects.
Subsidiary question to my quiz of the day:
How long and what rate will it take this time for the rotten credit pyramid to collapse?
An index, the rotten credit pyramid now stands at $ 233 trillion.
So a priori, it’s less time and it will crack at a lower rate …
<img src=”https://cdn.publications-agora.com/elements/lca/newsletter/images/contenu/180222-lca-taux-directeurs.jpg” alt=”Evolution des taux directeurs de la Fed depuis 2000″ width=”550″ height=”320″ />
That being said, Jerome Powell is different from Ben Bernanke and Janet Yellen. He is not an academician, he has experience in banking. He is an insider.
Bernanke and Yellen lived in their illusory world of great planners, claiming to control the financial markets and the economy.
Powell’s inaugural speech did not mention “the markets” but the Fed’s responsibility (1) for “the stability of the financial system and the integrity of the payment system”. He also believes that (2) “the financial system is now much stronger than it was before the financial crisis that began about a decade ago”.
Is Powell an impostor too, or a very knowledgeable insider ? Can it be that despite the growth of student loans, subprime car loans and consumer loans, the financial system of 2018 is stronger than that of 2007?
The key rates rise since December 2015. Already more than two years but only 1.5% …
The same causes produce the same effects…
What is abnormal today is the debt pyramid. It will go back to nothing, one way or another. This is what should guide your strategy. And I draw your attention in Bill’s column on what gold is.
(1) We play a key role in ensuring the stability of our financial system, and the integrity of our payment system. (2) our financial system is now stronger than it was before the financial crisist began a decade ago. We intend to keep it that way.