“Popped Bubble leading to Financial Tsunami” or The Big Short 2?
The central bank has been referred to as the “lender of last resort,” which implies it is giving away free money to those “Too Big to Fail” companies that require an immediate boost of funding to prevent from collapsing. To put it another way, the central bank keeps the country’s banking system from collapsing.
However, the fundamental purpose of central banks is to use monetary policy to manage inflation and provide stability for their countries’ currencies. A central bank is also the sole provider and printer of notes and coins in circulation, as well as the regulatory authority over a country’s monetary policy.
Sadly in 2008, the Great Financial Crisis (GFC) happened when American real estate market collapsed from the Subprime Mortgage Bonds and Securitization.
So, what happened during the Great Financial Crisis?
Bear Sterns was bought out by JPMorgan Chase, AIG was bailed out by the Federal Reserve and Lehman Brothers was announced close of business…The crisis not only showed severed economic uncertainty within US economy but rapidly spread into a global economic shock, resulting in a collapse of the global financial system.
In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US as a response to the crisis to “promote the financial stability of the United States. A new capital and liquidity standard called Basel III was introduced to increase lower risk-weighted assets to be adopted by financial institutions around the world. To further increase the confidence in the market and stimulate the economy, the central bank artificially lowered the interest rates. This has much higher risk in borrowing and lower returns for savers in the economy. The interest rate has been that low, practically zero, for past 13 years, beginning in 2008.
What happens when interest rates continue to decrease?
Lowering rates makes borrowing money cheaper. This encourage consumers and businesses to continue spend and investment and boost overall asset prices. Lowering rates, however, can also lead to problems such as inflation and liquidity traps, which undermine the effectiveness of low rates.
And now, as inflation rises and we fear hyperinflation, just because we issued money, their currency surged in value, making paper money value worth “less”.
Earlier this year, US President Joe Biden signed a massive Covid-19 stimulus bill into law this year touting provisions that will put money into the pockets of millions of Americans.
But the bill is more than stimulus payments and jobless benefits. It also includes a litany of programs: health insurance subsidies, a cash-for-kids allowance to slash child poverty, state, and local aid (which can’t be used to cut taxes) and money for schools, restaurants, pensions, homeowners, renters, farmers and funerals.
However, an analysis of how the fiscal package would affect the overall economy is instructive, although subject to a great deal of uncertainty. In all, with the $1.9 trillion package, government project that cumulative real GDP between 2020 and 2023 would end up close to its pre-pandemic projection; over the next two years households and businesses would make up some of the economic activity foregone during the pandemic.
By late 2021, it would likely see the economy operating above its maximum sustainable level. That positive output gap would likely put upward pressure on inflation, which the Federal Reserve has said would be welcome. A risk worth noting is that the return of GDP back to its maximum sustainable level may create a difficult economic period after 2021.
So, from all these things, all these factors contribute to the economy in America has affected the whole world with inflation.
To be able to control this, the central bank tightened monetary policy, which essentially implies that the central bank must stop producing money and begin rising interest rates.
New Predictions by Michael Burry – The Big Short 2:
A well known investor named Michael Burry from the blockbuster movie called “The Big Short named” – he is an American investor, physician, and hedge fund manager.
Michael Burry made his name during the financial crisis of 2008 by making shorting the subprime mortgage bonds suing credit default swaps and made huge profits during a time when most of his peers suffered heavily.
He made over US$750 million in profits for his investors and approx. US$100 million personally when his bet against subprime mortgages paid off in 2007 and 2008. He was portrayed by Christian Bale in the movie adaptation of Michael Lewis’ book.
Now, Michael Burry is making a move again for another prediction of potential investment opportunity for those who follow closely. He expects the post-pandemic economic recovery and another round of stimulus to drive up prices…
“Prepare for #inflation,” Burry said in a now-deleted tweet: “Re-opening & stimulus on the way. Pre-COVID it took $3 debt to create $1 GDP, and it is worse now. In an inflationary crisis, governments will move to squash competitors in the currency arena. $BTC #gold.”
Burry highlighted passages from the book about the recurrence of inflation throughout history, how it’s usually preceded by an economic boom and a spike in overnight fortunes, and how it leads to soaring crime, surging living costs, and poverty.
The investor compared Germany’s path to hyperinflation in the 1920s to America’s current trajectory.
“Germany [the US] started by not paying adequately for its war [on COVID and the GFC fallout] out of the sacrifices of its people – taxes – but covered its deficits with war loans [Treasuries] and issues of new paper Reichsmarks [dollars]. ‘ #doomedtorepeat,” Burry tweeted.
He added “#History is not useless,” he said in another tweet. “This text explores the 1970s American #inflation, which is more relevant today than one might think.”
(Reference: https://markets.businessinsider.com/).
So, what’s the relevance of this?
How should you prepare for another potential upcoming catastrophic financial crisis.
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