According to the Australian Broadcasting Corporation's website on October 16th, the financial market has been in turmoil for most of this year, and volatility has increased in recent weeks.
Affected by geopolitical forces in Russia, the Middle East, and other regions, the direct consequences of regional conflicts have brought short-term shocks through commodity markets.
In the long run, they have overturned trade patterns, ended the nearly 30 year era of global trade liberalization, and launched a new cold war that may turn into a hot war. This is enough to slow down growth and push up prices.
Greater forces are spreading in the global financial system.
For over 30 years, interest rates have been falling. The trend of interest rate cuts is driving a change in investment models, allowing available funds to be invested in increasingly risky destinations.
Now, this trend has come to an end, and the rate of interest rate increase is the fastest in recent years.
After experiencing a generational upheaval, the era of ultra-low currencies came to an abrupt end, leading to huge losses in the global bond market last year, with its performance being the worst in nearly 400 years.
This has caused confusion and confusion among currency managers, which has been particularly evident in the past month. With global interest rates soaring to a 15 year high and then suddenly reversing when everyone expected the United States to end interest rate hikes, the direction changed again over the weekend.
There is a panic indicator on Wall Street. It is a volatility index called VIX. Although this index is far from reaching the level at the beginning of the global financial crisis in 2008 or the COVID-19 epidemic in 2020, it has been rising in recent weeks.
The main financial risk at present is unusual volatility, "said Mohammad Erian, the chief consultant of Allianz, in an interview over the weekend
Some analysts are trying to downplay the danger of the Middle East conflict. They believe that after Russia's invasion of Ukraine, although energy prices initially soared, they later returned to normal.
Although this is indeed true, the surge in oil prices that accompanied the Ukrainian war was one of the catalysts for the surge in inflation, which has not yet been controlled. Moreover, the prospects for global economic growth are already very weak, and another large-scale surge in inflation is undoubtedly not welcome.
Even before the tragedy in the Middle East, the sudden change in interest rates had exposed serious problems in the global economy. Now this problem has suddenly escalated.
As former JPMorgan executives pointed out over the weekend, "This is the most dangerous moment in the world in decades
There is an old saying in the banking industry: can't you afford to owe a bank one million dollars? You're in trouble. But if you can't afford to owe the bank one billion dollars, the bank will be in trouble.
Bad debts are a disaster for those who cannot repay their loans. But when enough small borrowers or a group of borrowers with significant debts are unable to repay, the situation quickly becomes a crisis, as we witnessed in 2008.
This is not just about families getting into trouble. In recent decades, with interest rates plummeting, global government and corporate borrowing has significantly increased.
Long after the global financial crisis, the European debt crisis is likely to resurface, and the underlying problems have never disappeared. Some of the biggest problems lie with the banks themselves, especially in the United States.
Many banks hold US government debt as assets. Until the beginning of this year, this was considered the safest asset and a haven for people to seek refuge in uncertain times, just like now.
The only problem is that the capital value of these bonds plummets as interest rates rise. But the commercial banks holding these bonds did not write them down at market value. They still hold these bonds on their books and are priced at the purchase price. This only becomes a problem when credit runs out or customers request to withdraw their deposits.
If banks had to sell any of these bonds, just as Silicon Valley Bank and two other banks were forced to do so in March this year, they would be aware of these losses and trigger a dead cycle.
This may quickly affect the banking system. The idea of a bank collapse can trigger panic, causing people to run on banks, to the point where financial institutions are afraid of trading, leading to the entire system being paralyzed.
That's why the Federal Reserve stepped up its efforts to quickly extinguish financial fires in March.