Sirwin
Sirwin

Will COVID-19 Lead To A Financial Crisis? Let's Look At The Omens Of The Financial Crisis!


You will not be unfamiliar with the word "financial crisis". Every few years, the word will appear in the public view. Just as the world seems to be in a regular cycle, the economic crisis is also going on and on. But before the crisis, most people didn't feel that every day was the same as usual, but in fact, the financial market had already been bloody, but the impact of Finance on entities would always be delayed. When the real crisis came, entities had already been implicated. So what kind of process the capital market will go through before the economic crisis, and what kind of economic indicators can be judged. Today, we try to use a few indicators to judge the eve of the crisis.

Many people regard the stock market as a reference indicator for the occurrence of economic crisis. Although the stock market has certain accuracy as a reference indicator, not every stock market crash will cause a crisis. The real crisis must have a more profound fuse. For example, the subprime mortgage market in 2008 and the credit crisis in 2015 all have a potential fuse to lead to the market The turbulence of the field. Stocks are just one of many markets involved.

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Overnight inter-bank lending rate

Generally speaking, overnight lending is the lending of excess money to banks in need of money (reserves). At this time, the volatility of interest rate is a very lowing in general. Only before the crisis will it rise significantly. For example, the domestic credit crisis in 2015. We use the example of agricultural irrigation.

Suppose the central bank is a reservoir, in which water irrigates a large area of farmland downstream. In normal times, the water volume of the reservoir is very normal, but due to some reasons, the water storage capacity of the reservoir is increased, and the water discharge capacity of the downstream channel is continuously increased. During this period, due to the abundant water, the farmland in the downstream continued to reclaim new land. This process is the central bank to implement loose monetary policy, so that downstream credit continues to expand. Suddenly, one day the reservoir no longer put as much water down as it used to, and the water in the reservoir is only enough to maintain in water consumption of the old land. At this time, people in the lower reaches of the river will find that the water used to be very cheap has become luxurious. At this time, farmers can only try to store water for themselves, and the redundant water will not be put down. The whole farmland is short of water. At this time, water will become a luxury.

In this process, the central bank is a reservoir, water is credit, farmers are banks, and the newly reclaimed land is credit expansion. When the central bank releases water, liquidity is abundant and credit market is expanding. But when the central bank stops releasing water, the bank will store water instead of putting it down, holding cash. Cash is expensive at this time. In the past, those banks that actively expanded credit would face cash shortage. In this case, the cash deficient bank can only borrow from the cash rich bank. (that is, borrowing money from peers). When most banks are short of cash due to excessive lending in the past, the demand for borrowing will exceed the demand for lending, leading to overnight interest rates soaring. The process is like buying and selling water between farmers. In the past, one dollar can buy the amount of water to irrigate one field, but now two dollars can only buy the amount of water to irrigate one field because of the water released from the reservoir has been compressed.

If the inter-bank overnight lending rate rises substantially in a short period, then we can judge the coming of the credit crisis because if the lending rate remains at a high level, enterprises will face loan difficulties, and will be forced to lend, leading to large-scale enterprise bankruptcy.

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Treasury yields.

Because the United States is the world's largest economy and has the most powerful military, this means that the bond issued by the U.S. government is the most secure asset in the world. All kinds of pension fund and foreign exchange reserve of various countries tend to hold us treasury bonds. Under normal circumstances, a $100 bond is worth $100, and the interest income the holder receives is 2%. The yield is 2%. But if the economy is about to collapse, investors will sell uninsured assets, and buy US Treasuries to seek refuge. Wait until the crisis is over before turning the national debt back into cash. As a result of the influx of large amounts of money, the price of government bonds would rise. Say $100 goes up to $101. At this time, by subtracting the rising one dollar from the interest income, the yield of the bonds actually held will be reduced (2% of the yield of $100 minus the bond’s price of $101 = the yield of $1). At this time, the yield of the bonds will be reduced by 1%.

If the U.S. debt yield continues to fall, then the capital market no longer trusts the real economy, no longer trusts the market. Once the US bond yield falls below the threshold, such as 0.7 or lower, the financial crisis will be imminent.

Both of the above situations may lead to an economic crisis, but they will not cause a large-scale crisis or global economic crisis. If the above two situations occur at the same time, the only indicator that can be measured, and the last warning indicator is the dollar index.

The example of irrigation is also used. Assuming that the water discharge of the reservoir is normal, farmers are also farming normally. However, due to natural disasters, farmers will no longer produce harvest in the land, they cultivate. At this time, farmers will tend to put up their hoes, and no longer expand new land. At this time, the TV is still broadcasting the news that the next year's disaster may be more serious. When all the farmers know that the next year's disaster is more serious, they will stop farming. To avoid everyone's passive cultivation, the reservoir side, the central bank, will increase the amount of water released and make the planting cost lower. That is to say, the cost of getting credit is lower, and we are encouraged to expand. But because of the worry about the future, banks will stop credit operation, and the liquidity provided by the central bank will stop at the bank level because of the banks are afraid that the loan money cannot be recovered, and the newly reclaimed land needs water. At this time, you will find that the water released by the reservoir overflows in the upstream, but the land in the downstream is extremely short of water.

At this time, the end of the economy will be extremely short of money, and the central bank is making a lot of money. The middle level is the depletion of the liquidity. It is also called the failure of monetary transmission function. It's fascinating at this time. Due to a large amount of money shortage at the end of the economy, the dollar on the market is robbed, resulting in the rise of the dollar’s price. A lot of money made by the central bank cannot be transmitted to the end of the economy. At this time, it is a step away from the occurrence of the economic crisis. If the money made by the central bank can be smoothly transmitted to the end of the economy, the whole economy will recover. Once the transmission fails, the dollar index will rise. Accelerating cash panic, dollar panic, leading to a larger dollar rush. At this time, the economic crisis has spread all over the world because of the people who rush to buy is desperate to abandon the assets of emerging countries and sell the assets denominated in other countries, currencies in exchange for dollars.

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Now we are in such a situation that the Federal Reserve has taken quantitative easing actions for several consecutive days and issued US dollars on a large scale, but the US dollar index is rising, which shows that the liquidity slump has begun. For some time to come, it will depend on how the US solves the liquidity problem. If this situation is not alleviated, then we believe that the recession has begun.


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I hope that covid-19 will not bring about the financial crisis. Money must be valuable!

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Willson-D
Willson-D

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