Recession fears are starting to pop up.
One of the IMFs indicators just started flashing. Researchers found "Fragility Indicators" that could be cause for great concern.
This all stems from the dominance of the U.S. Dollar. According to the researchers, the spread of the dollar is far outpacing its economy. This is putting those institutions, especially banks, at risk.
The vulnerabilities to the system go back more than a decade yet have not been addressed. This is no surprise since many feel the actions taken over the last 10 years by central banks amount to nothing more than window dressing. The same structural issues are still present.
Global financial services depend upon the US Dollar. The same is true for the commodities markets. This can put a tremendous strain on those institutions doing business in the USD. Banks have the added burden in that most of the outflows are long term loans yet the situational volatility happens in the short term. This can cause a mismatch.
The impact could be spread throughout different economies.
Financial institutions, unfortunately, have little choice in the matter. The USD is the reserve currency, hence provides a margin of safety. It also tends to offer liquidity that might not exist in other currencies. Global acceptance also means international business costs by dealing in one currency.
Of course, this all changes when markets freeze up.
This shock could affect cryptocurrencies. Designed to operate outside the banking system, crypto is faster and less expensive to utilize. As development takes place, the number of options is increasing. The first generation of decentralized blockchains, specifically Bitcoin and Ethereum, now see a host of other opportunities. As entrepreneurs and developers expand their offerings, a new financial system could result.
A shockwave sent through the banking system will certainly be felt globally. Business cycles are secondary these days to financial ones. With so much financial "engineering" taking place, credit markets are driving the show. Central banks are keeping interest rates low, even going negative in many instances, in an effort to keep credit markets flowing.
The problem is that a liquidity crisis could happen at any moment. We already saw some of this in the RePo market a couple weeks back, forcing the U.S. Fed to pump tens of billions into the overnight market.
Fasten your seatbelts, some bumpy waters could be ahead.
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