Could we see Inflation lead to a Credit Crisis?
What happens if inflation persists as a result of War and Supply chain shortfalls, and then you get a credit crisis as the result of crypto? Platforms not allowing fund withdrawals?
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Answer
Hi Shayne,
The rate of inflation will come down at some point given it measures the rate of change on things. For example, if energy prices stay at the same levels as they are today which is high, time will solve the rate of inflation. The other aspect here is the deflationary impact of technology – i.e. using tech to become more efficient. This was a big theme 12/24 months ago that has lost prominence, but it is real. I suspect tight labour markets globally will simply drive more adoption of technology which improves efficiencies overall.
In terms of crypto, we don’t believe the problems are pertinent to the real economy, funds tied up on crypto platforms are extremely small compared to money in stocks, bonds or with banks for example i.e. it’s a highly speculative space where some people are unfortunately looking likely to lose money on top of the collapse in Bitcoin etc, and we think some crypto businesses will fail, but its unlikely to impact the overall banking system.
We have seen credit crunches in the past with the GFC the most recent with the genesis of that being subprime loans that were securitised and sold – as they went bad that caused a lack of confidence in the financial system and institutions stopped lending money – which ultimately led to the collapse of Lehman’s – we saw equities plunge 50% in 2007/8. Since then, lending standards have improved significantly over recent years hence MM doesn’t believe a credit crisis will follow on the heels of a recession but money certainly might become tighter as the banks factor in more downside risk to assets & businesses. That said, major events such as the GFC generally come from areas we have not thought of, so that is always a risk – i.e. it’s only when the tide goes out that we see who has been swimming naked!
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iShares High Yield Corporate Bond ETF (HYG US)
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iShares High Yield Corporate Bond ETF (HYG US)
