Deposits at U.S. commercial banks have fallen to lowest figure in nearly two years, according to the Federal Reserve. This figure has fallen by $500 billion since the Silicon Valley Bank collapse. However, total banking credit has risen to a new record high of $17 trillion, according to the U.S. central bank. Fewer deposits, but more credit. What could go wrong?

The inevitable credit crunch is only postponed by a consensus view that the Fed will inject all the liquidity required and that rate cuts will come soon. It is an extremely dangerous bet. Bankers are deciding to take more risk expecting the Fed to return to a loose monetary policy soon and expecting higher net income margins due to rising rates despite the elevated risk of increasing non-performing loans.

The Federal Reserve’s balance sheet reached its all-time high in May 2022. Since then, it was supposed to drop at a steady pace and shed three trillion US dollars by 2024. The normalization of monetary policy was built on the idea of a soft landing for the economy. However, the Fed may be killing the private sector to save the government.

Curbing inflation requires a significant reduction in the money supply and aggregate demand. However, if government deficit spending is left untouched, the entire burden of normalizing monetary policy will fall on families and businesses.

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?