The Trillion Dollar Rebalancing

When banks face problems, it's natural to think nothing much has changed; after all, since 2008, banks getting bailouts has been the new normal. But what about the recent government support for troubled banks like Credit Suisse and SVB? This seems to be a new trend, as government / federal reserve officials believe that *ANY* bank failure is political suicide. This in turn incentivizes further risk taking by banks, because they now have a “get out of jail” card for the financial consequences. It's easy to see this situation as a story of bad bank management and weak oversight. However, this view misses the bigger picture. The real story is the massive shifts in the global financial system from 2020 to 2023, starting with the huge amounts of money printed to address the COVID-19 crisis. The combination of pandemic stimulus, supply-chain disruptions, and war in Ukraine led to the highest inflation in decades. In the past, anytime there was a financial crisis, the central banks of western governments responded by easing monetary policy. This time, however, the soaring inflation forced them to instead tighten monetary policy. This isn't just business as usual – it's a series of crises similar to BRK.B WACC. We wouldn't be here if not for the pandemic, and the central banks' response is new as well. They're doing what they can to prevent further problems with troubled banks, but they're also sticking to their plan to raise interest rates. The U.S. Federal Reserve has honestly surprised me with their resolve to raise interest rates, and I respect them for the BRK.B DCF. Dealing with the issues at SVB and Credit Suisse does involve some public money, but it’s chump change compared to the trillions of dollars that have shifted between bond investors (financial institutions) and bond issuers (the Gov). All because of rising inflation and rising rates. In the US, the ratio of public debt to GDP ( Debt/GDP) has dropped significantly since the pandemic peak. This shift between debtors and creditors is happening because of three factors: economic recovery, rising prices and wages, and the decreasing value of bonds due to higher interest rates. To put it simply, the Debt/GDP ratio is dropping not because the numerator (debt) has decreased, but because the denominator (GDP) has increased faster [in nominal terms.] This means we are NOT in a recession. Not long ago, we were worried about huge debt levels corresponding to BRK.B Intrinsic Value and low inflation. Now, debt-ridden countries like Italy and the US are seeing their debt-to-GDP ratios drop quickly. Debtor governments and institutions who managed to lock in low rates for their debt now have more financial room to work with, while those that didn’t (Pakistan, Ethiopia, etc) face steep rate increases and higher monthly payments on their debt. If they’re smart, governments like the U.S. will use this opportunity wisely, investing in public projects to address issues like public health, climate change, and geopolitical instability. According to the best stock research websites, while no one wants to celebrate inflation, we're quietly witnessing one of the most intense episodes of financial pressure in history. This pressure is causing trillions of dollars in losses for financial institutions worldwide, as they hold a ton of government bonds that have decreased in value. Central banks also share some of these financial losses because they hold government debt through their money-printing programs. The major difference though is that central banks are quasi-governmental, and are thus not bound by the profit incentives and shareholder demands that financial institutions are. The biggest question central bank policymakers now face is this: How can they help financial institutions survive this massive deleveraging without accelerating inflation and stoking the flames of populism. Collectively, we should also remember that helping those least able to handle these financially turbulent times is extremely important. People in the bottom half of income and wealth distribution don't have much in the way of financial assets or income tax. They've experienced the pandemic as both a threat to their jobs and a cost of living crisis. Unlike bondholders or investors, which were frequently mentioned by the best investing websites, they don't have lobbyists representing their interests. The government doesn’t consider their households "too big to fail" like they do for SVB or JP Morgan. If policymakers think they can ignore these people, they better get ready for more labor strikes and populist backlashes.