The 2022-23 Economic Crisis Megathread

[Sheilbh]

Sure but now there'll be all kinds of hand-wringing and I wouldn't be surprised to see some kind of a help for people to get out of their risky play once they stop benefiting from it. People shouldn't gamble with their basic living conditions, and shouldn't be bailed out when it goes bad for them.

I was thinking that historically the state's bailed out mortgage providers but generally not mortgage holders. So surely no-one would be so cynical, regressive and shameless.

Enter the Lib Dems
https://www.bbc.co.uk/news/uk-politics-63514047

Renters should riot if this ever comes close.

[Tamas]

Sure but now there'll be all kinds of hand-wringing and I wouldn't be surprised to see some kind of a help for people to get out of their risky play once they stop benefiting from it. People shouldn't gamble with their basic living conditions, and shouldn't be bailed out when it goes bad for them.

I was thinking that historically the state's bailed out mortgage providers but generally not mortgage holders. So surely no-one would be so cynical, regressive and shameless.

Enter the Lib Dems
https://www.bbc.co.uk/news/uk-politics-63514047

Renters should riot if this ever comes close.

In Hungary in the aftermath of the great financial crisis we had a brutal version of this. In the boom years the banks convinced a LOT of people to take out mortgages in Swiss Franks since those had miniscule interest rates compared to HUF denominated ones. They convinced people oh don't worry about the exchange rate that's been stable forever. Then CHF ran away compared to HUF and a lot of people who maxed themselves out on CHF rates found themselves deeply under water.

So the government in 2010 or 2011 introduced some measures that let most people -except the poorest- do early repayment on their CHF mortgages with very favourable terms, the state making up the rest (can't recall the details). So, those who were sane and took out HUF mortgages kept paying the higher interest rates throughout their mortgage term. Those who were gullible/foolish/reckless got to pay much lower rates, and then when it all predictably blew up in their faces, the taxpayers paid them to get out without a scratch.

[Sheilbh]

As we keep going back to this, how does "normal" inflation get affected by the rate hikes? By the rate hikes reducing demand, don't they?

We talk about supply shock as if demand being higher than supply is somehow a separate case from demand being higher than supply.

Just to come back to this because I was thinking about it and I think a key difference is that supply shocks of the past were not necessarily tied to something structural.

While now I think there are structural factors that are making shocks more likely and probably meaning they have a bigger impact - so I'm not sure the same old solutions will necessarily work. For example in energy I think the key fact is the rise of consumption in Asia - unlike previous energy shocks it's not just supply shocks from producer countries but a persistently higher level of demand as well. Similarly I think because of climate change there are going to be more and stronger supply shocks to food production, for example - again I think that's a structural factor that is persistent and not going to shift. I think a similar argument could even be made around China's zero covid policies - not least because from everything I've read they do have relatively broad support in China but are also very closely tied to Xi.

So you're right about "normal" inflation. I think the thing that's missing from previous bouts of inflation is organised labour - this is the first post-war experience of inflation without a strong union presence - and the thing that's new is that there are structural shifts that either make us more exposed to supply shocks or make them more likely. I'm not sure just getting locked into cycles of having to reduce demand by inducing recessions every time that happens is the right solution - it feels like we should be looking to whether we can break out of those structural causes (for example, can decarbonisation or onshoring help?).

[mongers]

The 6 pts of milk I bought today has gone up 16p,that's 7.3% in one go; I noticed as on both occasions it was the only thing I've bought in the last week or so.

Looking back, that milk in the UK as risen by 47% this year, so over 50% annualised.

Makes a mockery of the 11.1% inflation rate just announced.

You can see how struggling households "face difficult choices" / are fucked.

[Tamas]

Yeah we are lucky to earn enough not to have to worry and my wife is pretty good at budgeting (which is good because saving money is not something I excel at), but the jump on our weekly groceries cost this year is quite staggering. Add 10% rent hike and our (big) salary increases the last couple of years are burned in maintaining the QoL and saving levels we were accustomed to before them.

[Tamas]

If this chart is to be believed, Americans have been burning through their excess Covid savings with gusto:




The Fed however have been giving signals that they are ready to slow down the rate hikes, but won't be reducing rates until they get back to 2% inflation.

[HVC]

This can't be good. Smart people explain to me how this is over blown 

85 Trillion dollars "missing"

[Sheilbh]

This can't be good. Smart people explain to me how this is over blown

It's from the Daily Express so we're fine

Their entire business model is whipping up the fears of elderly people, articles about upcoming super-cures for cancer/dementia/alzheimers and updates on Princess Diana.

[celedhring]

This can't be good. Smart people explain to me how this is over blown

85 Trillion dollars "missing"

It's a two-paragraph Daily Express article. I'm willing to not lose sleep on that.

[HVC]

What about Reuters

https://www.reuters.com/markets/currencies/global-markets-bis-urgent-2022-12-05/

Or Wall Street journal

https://www.wsj.com/livecoverage/stock-market-news-today-12-05-2022/card/hidden-dollar-debt-poses-policy-risk-to-financial-system-policymakers-bis-7wtTgmPlaqxLQkZRXwos

[Barrister]

This appears to be the original source of the story:

https://www.bis.org/publ/qtrpdf/r_qt2212h.htm#:~:text=The%20%2480%20trillion%2Dplus%20in,of%20daily%20global%20FX%20turnover.

So it's a concern that there could be a liquidity crisis on foreign exchange swaps (FX swaps).

So it's not a nothing story, but it's well above my knowledge to assess how worried we should be.

[The Minsky Moment]

{BIS} researchers can predict financial crises three years in advance using machine learning to aggregate predictions from different models.

That's trillions of dollars worth of financial comedy right there.

As to the substance, it's reporting the notional dollar value of open foreign exchange swaps.  An FX swap put simply is an agreement to exchange one currency for another at some future date, or to exchange interest payments on one currency for interest payments on another.

While the swap is outstanding - which may be a matter of days or weeks - each party to the transaction owes each other a payment.  The BIS is pointing out that most institutions doing these deals don't record those payment obligations as debt on their balance sheet.  That's the "missing" debt they are talking about.

Again, these are mostly short term deals and mostly major currency pairs like dollar-euro or dollar-pound, etc. So the real exposure is not the notional value of the contract but the likely incremental movement in the currency pair over the time to maturity.

That said there are other risks namely:

+ liquidity - under the typical model agreements, positions have to be regularly "marked to market" - if there is a significant move in currency value or rates, one party may have to make a significant margin call payment in cash on short notice, while the position is still open. 

+ settlement - one of the parties fails on or before maturity, as in Lehman 08.  A cascade of such settlement fails could result in pretty nasty looking exposures.  Hence the Fed decision to back up the market in 08-09 with central bank provided swap lines.

[Tamas]

{BIS} researchers can predict financial crises three years in advance using machine learning to aggregate predictions from different models.

That's trillions of dollars worth of financial comedy right there.

As to the substance, it's reporting the notional dollar value of open foreign exchange swaps.  An FX swap put simply is an agreement to exchange one currency for another at some future date, or to exchange interest payments on one currency for interest payments on another.

While the swap is outstanding - which may be a matter of days or weeks - each party to the transaction owes each other a payment.  The BIS is pointing out that most institutions doing these deals don't record those payment obligations as debt on their balance sheet.  That's the "missing" debt they are talking about.

Again, these are mostly short term deals and mostly major currency pairs like dollar-euro or dollar-pound, etc. So the real exposure is not the notional value of the contract but the likely incremental movement in the currency pair over the time to maturity.

That said there are other risks namely:

+ liquidity - under the typical model agreements, positions have to be regularly "marked to market" - if there is a significant move in currency value or rates, one party may have to make a significant margin call payment in cash on short notice, while the position is still open. 

+ settlement - one of the parties fails on or before maturity, as in Lehman 08.  A cascade of such settlement fails could result in pretty nasty looking exposures.  Hence the Fed decision to back up the market in 08-09 with central bank provided swap lines.

From the Reuters article:

The report also focused on findings from the recent BIS global FX market survey, which estimated that $2.2 trillion worth of currency trades are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability.

The amount at risk represents about one third of total deliverable FX turnover and is up from $1.9 trillion from three years earlier when the last FX survey was carried out.

FX trading also continues to shift away from multilateral trading platforms towards "less visible" venues hindering policymakers "from appropriately monitoring FX markets," it said.

[The Minsky Moment]

The report also focused on findings from the recent BIS global FX market survey, which estimated that $2.2 trillion worth of currency trades are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability

I'm not sure how to intepret that statement.  Technically, every single currency trade is "at risk" of a settlement failure.  you can never be 100% sure of settlement on any kind of trade.  I'm not sure what "issues" Reuters is referring to.  One issue with FX swaps is that the bilateral nature means that you can't usually net risk across counterparties through a central exchange. I guess that's it??

[HVC]

Feel better, thank minksky. What's the point of these short term swaps? Gambling on exchange changes? Or is it supposed to act as a currency hedge?