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08 May 2023  (1146 Views) 
Out of the box

Inflation will remain high
Many US banks, including the large ones, are in financial trouble. They have lent a few trillion dollars in 30 year mortgages at fixed interest rates of 3% or less. Based on the current high interest rates, the value of their mortgages could have fallen by 30% or more. The loss is staggering.

The banks are able to mark these mortgages as "held to maturity". They can spread out their losses over the next 30 years, but it will still be a painful loss.

If there is a large withdrawal of deposits, they have to sell off their mortgages at steep loss to pay the depositors. They have to recognize the losses immediately.

Not all banks are caught in this financial crisis. Some may be less exposed than others. However, if some of the more exposed banks fail, they will affect the other banks due to "contagion". The whole banking system could be in crisis.

To avoid the fall of the banking system, the US Fed will have to lower their interest rate and allow inflation to remain high. The high inflation will mean that the ordinary people will pay for the losses through higher cost of living.

This is not fair to the ordinary people, but it is likely to be the outcome. I cannot see anyway that it can be avoided as the alternative is a collapse of the banking system, which will be disastrous.

The banks in Singapore are less exposed to this financial crisis, compared to the US banks. The Singapore banks do not offer long term mortgages at fixed interest rate. Some may fix the interest rate for up to 3 years, but the interest rate will be adjustable, i.e. floating, after this initial period.

The floating rate mortgages protect the banks from the fall in the property values (due to high interest rate). However, it does not protect the owners, who have to bear the loss. The owners who cannot afford the higher interest rate have to give up their property at large losses. It will impact the economy and the property market badly as well.

If the US Fed lower the interest rate to protect the banking system, it is likely that other countries will follow. The global economy will have a long period of high inflation, but it is probably better than a collapse of the banking and financial system.

Disclaimer - this is a personal view. I may be wrong.

Tan Kin Lian


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yes, you are right as the IR increased to 6% in very short time to fight the inflation of about 9%. most of the 20-25 yr bond rate was 1- 1.5 % (maybe). and about 60% of usa bond total issused were took up by USA, the rest by other counties.

tan koon min  21 May 2023  

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