The Fed's massive debt shift is triggering a global debt crisis.
Amid chaos in emerging market and eurozone credit markets, the Fed has said it will continue to aggressively raise interest rates and shrink its massive balance sheet. It's crazy.
Larry McDonald, a New York Times best-selling author and founder of The Bear Hunt Report, warns that the true cost of capital has been distorted for so long that scholars are ignorant of the potential risks within global markets today.
According to the International Finance Association, the global financial industry association, global debt reached a record $303 trillion in 2021. As the IMF reports in its Global Debt Database, this has surpassed the record 226 trillion yuan of global debt in 2019.
Larry argues that many economists are too idealistic, which is dangerous. When the Fed raises interest rates sharply in the face of a strong dollar, the risk of interest rates increases exponentially. The current rate hikes and a strong dollar are 100 times more damaging than they were in the Reagan era.
At the same time, the dollar's surge has fueled credit risk in emerging markets, as most of the assets of multinational banks are denominated in dollar terms. If global interest rates rise again and remain high, some countries will be caught in a sovereign debt crisis. Lila noted that the lehman Brothers bankruptcy and the impact of the covid-19 pandemic have left a large amount of debt for subsequent generations. The Fed is unlikely to raise interest rates on a massive scale without disrupting the global economy.
He said that the new crown epidemic has led to a historic level of macro leverage ratios in various countries. Emerging-market countries currently owe more than $100 billion to the IMF. And Fed policy and a strong dollar are causing this capital to shrink rapidly.
Global dollar-denominated agricultural prices have soared, and the dollar has soared, which is a huge tax for emerging market countries. The Fed is exporting inflation to countries that are least able to afford it.
The $250 billion in distressed debt threatens to drag some emerging-market countries into historic debt defaults. The number of developing countries in trade distress has doubled, with El Salvador, Ghana, Egypt, Tunisia and Pakistan particularly vulnerable.
For low-income countries, debt risks and debt crises are real, and they are struggling to exchange their local currencies for expensive dollars to buy oil. According to data compiled by Bloomberg, one in five emerging-market countries (or about 17%) of their external debt is denominated in dollars, euros or yen.
In fact, there is an automated detection and estimation system for global credit risk dynamics, and the IMF's lending capacity is close to $1 trillion, but the Fed's interest rate hike has evaporated 10% of the world. In the worst emerging-market credit crisis in decades, losses in equities, U.S. bonds, European bonds, cryptocurrencies, private equity and venture capital were about $20 to $30 trillion in market capitalization.
Notably, it all happened after the Fed only raised rates by 150 basis points. The Fed is "shifting" debt everywhere by raising interest rates, and Egypt's borrowing from the IMF has expanded to $13 billion.
If The United States sticks to its policy path, Sri Lanka's bankruptcy is just the beginning, and the global economic shock will increase tenfold over the next six months.
This article is derived from Golden Ten Data