Inflation in assets inevitably leads to a burst of bubbles. In the period when central banks were glad to see limited consumer price increases despite large increases in the money supply, they created massive inflation in assets. Throughout the quantitative easing era, bond prices spiked, equity valuations soared, house prices increased significantly above affordability levels, and multiples in private equity and venture capital rose to all-time highs. Asset inflation preceded consumer price inflation, and it may be a major source of financial instability.

The U.S. Bloomberg House Price Index has slumped 20% since the beginning of monetary contraction, and the evidence of the burst of housing price inflation is a clear signal of capital destruction. Monetary contraction leads to a decline in asset prices that subsequently creates a re-evaluation of the asset base in financial firms, from banks to venture capital firms.

The world is facing a precarious moment in the oil market. The recent decision by OPEC to extend production cuts has raised concerns about the potential impact on the global economy. While the move may benefit oil producers in the short term, it may be a misguided action that could also have unintended consequences that could harm the broader economy and oil demand with it.

OPEC should remember that after a burst in oil prices due to unnecessary cuts comes a massive slump due to a recession.

Why did OPEC announce a surprise 1.16 million barrels per day (bpd) production cut?

Can BRIC Countries Kill The US Dollar?

Former US President Donald Trump has expressed concern that China could displace the US dollar as the global reserve currency. The warning follows reports of agreements between various nations to use the yuan in commodity transactions.

For years, rumors have circulated about the demise of the US dollar as a global reserve currency, but the greenback continues to be the most traded and extensively used currency in the fiat world.

The US dollar is by far the most traded currency on the foreign exchange market, according to the Bank for International Settlements. In 2022, the US dollar “remained the preeminent vehicle currency in the globe.” In April 2022, it was on one side of 88% of all transactions, unchanged from the previous survey.

Federal Reserve data shows $98 billion of deposits left the banking system in the week after the Silicon Valley Bank collapse. Most of the money went to money-market funds, as the Bloomberg data shows that assets in this class rose by $121 billion in the same period. The data shows the challenges of the banking system in the middle of a confidence crisis.

However, as many analysts point out, this is not necessarily the main factor that dictates the risk of a credit crunch. Deposit flight is certainly an important risk. Many regional banks will have to cut lending to families and businesses as deposits shrink, but in the United States bank loans are less than 19% of corporate credit according to the IMF, while in the euro area it is more than 80%. What will generate a credit crunch is the destruction of capital in the asset base of most lenders.

The slump in mark-to-market valuations of all asset classes from loans to investments is what will ultimately drive an inevitable credit contraction.