The Looming Bank Collapse

Almost all of the monetary inflation these days shows up in the markets as inflated asset prices and does not show up in the CPI.

If you believe that bare sustenance of the working class is the only thing that matters, you could argue that this distinction is not significant... But growing wealth inequality is causing concentration of political power, distorting markets, regulating small businesses out of existence, creating useless corporate jobs, driving up rents, eroding privacy rights, eroding democracy, eroding freedom of speech, creating division (Milton Friedman even warned us about this in the 70s), encouraging unethical business practices (surveillance capitalism)... I think we're well beyond the point where we can sweep these problems under the carpet. They have become existential problems for society and they are caused by wealth inequality brought about by asset price inflation and accompanying stock buybacks (often paid for using interest-free printed credit from banks).

We live in a feudal society - But unfortunately for the plutocrats, they cannot use god's will as an excuse to justify their current position in society... The more time passes, the more people become aware of systematic cronyism, the more untenable the plutocrats' positions will be.

Or maybe you were born in 2009?

FSB:

"Available data indicates that banks have the largest direct exposures to leveraged loans and CLOs. These exposures are concentrated among a limited number oflarge global banks and have a significant cross-border dimension.

... A number of non-bank investors are also exposed to leveraged loan and CLO markets. These include investment funds, insurance companies, pension funds, broker-dealers and holding companies.

... A comprehensive assessment of the system-wide implications of the exposures of financial institutions to leveraged loans and CLOs is challenging.

... These exposures are generally concentrated among a limited number of banks. These banks’ exposures to leveraged loans and CLOs, on a fully drawn basis, are significant relative to their capital adequacy ratios.

"Similar to other markets, the leveraged loan and CLO markets include direct and indirect forms of interconnectedness, both within and across borders. Direct interconnectedness arises from links in the intermediation chain, from origination and distribution of leveraged loans to securitisation by CLO manager.

... Through these direct links, shocks to the leveraged loan and CLO markets could transmit risks to financial intermediaries not directly exposed to such markets.

... Indirect interconnectedness can arise in the form of common exposures of banks and non-banks to leveraged loans and CLOs, and could provide an avenue for contagion among financial institutions."

https://www.fsb.org/wp-content/uploads/P191219.pdf

Fed:

"Similarly, vulnerabilities stemming from leveraged lending were increasing through mid-February 2020, as demand remained strong while credit standards stayed weak. Issuance came to a halt at the end of February, as investors became more cautious and attentive to volatility in financial markets...

Defaults on leveraged loans ticked up in February and March and are likely to continue to increase, with the specific contour highly dependent on the path of overall economic activity. Such developments would weaken the balance sheets of lenders, including CLOs that hold leveraged loans, and amplify the economic effects of COVID-19."

https://www.federalreserve.gov/publications/files/financial-...

That's basically what's been happening since 2008. The main lesson the Economics profession learned from the Great Depression is that it's better to prevent a full-on depression by any means available than to let it occur and rebuild afterwards. Rebuilding after that level of economic destruction is long and arduous, better to preserve what you have. That's what the 2008 GFC would have caused (or worse) if not for extensive US govt and Fed preventative measures.

The modern means of doing that is for the government to deficit spend and for the central bank to pump the financial system full of cheap or free credit. Problem now is, nobody sees a way of unwinding the deficits and cheap credit without causing the depression they were trying to prevent.

Neither political party has the political will to balance the budget and be the cause of the resulting economic pain. Republicans convince themselves we can outgrow the deficits by cutting taxes, and Dems convince themselves that Modern Monetary Theory will spur growth and limit inflation enough to outgrow the deficits. The Fed tried early in the Trump admin to raise rates back to normality, and the market started crashing again, so they stopped. We're stuck.

It's the most consequential economic experiment since the US left gold standard, and nobody knows how it will turn out. Imho our best hope is for a gradual devaluation of the Dollar and a soft landing, avoiding a major shock. But under precarious circumstances like these, unpredictable shocks are a distinct, if not likely, possibility.