Into the collapse

Why is the economic situation so dire

I met an economist-friend of mine the other day and we quite expectedly ended up discussing the current economic situation. She iterated the general thinking among many European macroeconomists by stating that “everyone’s wondering where the banking crisis is?”

Well, as those who are my or our (GnS Economics) subscribers know, it almost re-emerged in September/October with the near-collapse of both British pension funds and the venerable Swiss banking giant Credit Suisse. However, the really interesting (worrying) thing is, like I warned previously, that according to the global bank loan data we are probably already in a banking crisis.

In the figure below, you find the growth rate of global bank loans running from the second quarter of 2000 to the second quarter this year.

There we see the declines in the bank loans during the Global Financial Crisis (GFC, 2007-2009), the European “Debt” Crisis (2010-2012), which was actually a hidden banking crisis, and during the Corona Shock (2020). The interesting (worrying) question is, what is happening in the banking sector now?

Global lending by banks has now declined for three consequtive quarters, which has not happened since the GFC. This quite straight-forwarly implies that we have been in another global banking crisis since, at least, Q4 2021, but it has been hidden by liquidity support operations by the central banks. This seems to be exactly what happened with Credit Suisse.

We are approaching a situation, where such support operations to uphold the financial sector are becoming more and more difficult. There are five reasons to this:

1. Global QT is here.

2. Energy crisis about to worsen (peak inflation may not be “in”).

3. Recession is rolling in, heavy.

4. Fracture lines in global finance are widening.

5. Peace seems to be unreachable in Ukraine.

I go through each in turn.