USA: No one can predict how the world financial markets along with the US and global economies will perform in 2023.
Given what we know about the volatile economic issues in Europe, China and emerging economies, we should be very concerned about the collapse of global economic and financial markets this year. And that's without bringing up the unknown world economic unknowns.
How the world economy will respond from unusually loose monetary policy by major central banks to aggressive monetary-policy tightening to regain control of inflation is one of the more important known economic unknowns.
Also Read: Oil recovers from an early decline, but China and the global economy cast a shadow over the future
The Federal Reserve is currently raising interest rates at the fastest rate in forty years, making this question even more important. This becomes relevant now that the Federal Reserve and the European Central Bank have switched from a strategy of supplying liquidity to the markets by buying bonds to which they are currently reducing their maturing bond holdings by refusing to roll over them.
There is now a real risk that the world's central banks will challenge financial markets with an undesirable combination of higher interest rates and declining existing home sales, as evidenced by the fact that existing home sales fell for the 10th month in a row due to higher mortgage rates. has fallen ,
This seems especially true now that central banks are warning us that they will not lower interest rates until they clearly see that inflation is falling toward their target inflation rates.
The average annual energy bill in Europe has risen 96% over the past year due to the energy crisis caused by Russia, and economic growth in China has come to a grinding halt due to the Covid crisis and its multi-trillion dollar real deflation . asset bubble.
When the world is in debt, high interest rates and recession will come together. The International Monetary Fund estimates that global debt currently stands at about 250% of GDP, or about 20% more than during the 2008 Lehman crisis.
The Bank for International Settlements estimates that large positions in foreign exchange derivatives by non-banking financial institutions around the world have resulted in $80 trillion in hidden debt.
Also Read: IMF:Recession to hit a third of the global economy in 2023
After a time when vulnerable debtors borrowed abnormally large amounts of money at extremely low interest rates, there is now a chance that a wave of defaults will shock financial markets. This is especially true because a recession and higher interest rates will make it challenging for those borrowers to roll over large loans.
Emerging-market economies are one of the areas where we may soon see a wave of debt defaults, as the World Bank often reminds us.
High US These nations will likely continue to experience capital outflows as a result of interest rates. But due to the strengthening of the dollar, the debt burden on them may increase further.
The following information is even more scary. In the event of a European recession with high interest rates, the euro area could experience new issues with debt repayment.
Until recently, the ECB issued all of Italy's net bonds in order to keep the country afloat. It should be only a matter of time before there are serious doubts about who will pay for the Italian government's significant gross borrowing needs this year, given that the ECB is now looking to reduce the size of its balance sheet by ending its primary quantitative easing policies. reducing.
The recent bankruptcy of Evergrande and 20 other Chinese real estate developers has raised the possibility that China itself is a source of credit issues.
This could very well happen if the Covid crisis worsens in that nation as it abruptly ends its zero-Covid policy or if the asset gets busted.
Undoubtedly, commercial banks around the world are better capitalized today than they were in 2008. They are better equipped to face the international debt crisis.
Also Read: Most global markets increase ahead of the Fed report and US jobs data
The issue is that a significant portion of global debt is controlled by the non-bank financial sector, including hedge funds and equity funds, and is largely unregulated.
As we discovered during the protracted capital management crisis of 1998, issues in that financial system can spread to the rest of the financial system.
It is to be expected that the Fed and the ECB are closely monitoring developments in the world credit market. Maybe then they can quickly move away from their current accommodative monetary policy stance and save us from an unnecessarily hard world-economic landing.