Silicon Valley Bank and FTX Fail. Inflation is Transitory.

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Originally Posted by CitizenBBN

Yep, all is well. Remain calm. Uh huh.

The math is pretty easy. Banks hold a lot of longer term investments including bonds, commercial loans, etc. For years those rates are low so they are locked into a lot of low rate financials. then rates shoot way up. They can't unload their low rate stuff, but they can't attract depositors offering lower rates than you can get for t-bills.

So depositors move money to those other things, their liquidity ratios go to heck and start to violate FDIC minimums, and boom they are in trouble.

Raising rates this much this fast has created a serious liquidity/funding problem for the entire banking system. This is why using interest rates to fight inflation is a last resort sledgehammer solution and should never be used this forcefully.

The reason for inflation is a) 7 million able bodied men who refuse to work b/c the government will allow them to sit on their asses, and b) government policies aimed at choking off the oil and gas industry which is the single most economically impactful input into our entire economy.

So labor rates are skyrocketing and the government decides to skyrocket energy costs at the same time, and we wonder why we have inflation?

The only way raising rates will impact that situation is to slow the economy, i.e. by reducing demand for labor and oil/gas b/c we slow consumer spending and investment. The problem is that it causes hell with things like banking, and of course lowers growth. That's IF you can avoid a full blown recession from it, which is extremely tricky and basically random chance.

Our country is run by people who think they are smart, but don't have the common sense to come in out of the rain.

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Well stated. In another knee jerk reaction you will see the Fed end or slow the rate hikes. At the moment everything out of DC is radical.

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but don't have the common sense to come in out of the rain.

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Very true as when it rains Jill always carries Joe"s umbrella so he will only have to think about walking.

I feel sure that sloppy Joe and Yellen are willing to stand in front of live cameras and state that inflation is transitory. I think they have a valid point as inflation has always been transitory. It always lasts as long as it takes to recover from it, and they both neglected to mention that the transition might take a few years not months.