The adjustment has consequences, even for the United States

The icing on the cake was added to the current international scenario, the fall of several banks, including some important ones in the United States. But nothing happens suddenly, rather it is a natural consequence of adjustments forced by political factors.

How do you understand what is happening today? The answer, as always, is in the story.

The crisis resulting from the pandemic has generated strong injections of money in almost all economies. Very logical, faced with something absolutely unpredictable and unprecedented.

The end of the pandemic saw low production which naturally led to supply retractions and impacted price increases (please don’t confuse with Argentina, we are not part of the “normal” world today today).

The Fed’s response was a dizzying stream of rate hikes to stem high inflation in the United States.

Boldly, but backed by years of experience and study of the financial/banking industry, we argued that this way of raising the rate was very steep, coupled with somewhat unfortunate statements from the holder of the same, Jerome Powell, almost “threatening” future rate hikes.

What is not particularly understood is the failure to take into account the cumulative effect of a high rate, or “financial hangover”, that this generates.

Let’s start with an example: if the rate had been very low, as between 2009-2015 or during the pandemic, “banking” an investment, as was the case with a startup, was “cheap” and we could “expect” that the project will mature to be profitable.

By increasing the rate, this cumulative effect of interest, which was to be a certain amount after 10 years, reaches the same result in one, two or three years, at most.

Banks, having to constantly reassess their portfolios, must “punish” their assets accordingly. Bad numbers, surely, common to the industry, but the effect will depend on the duration and type of financing they provide. But all of this was absolutely predictable!

Continuing to increase the rate, almost violently, will undoubtedly generate a pendulum effect with recessive characteristics. Inflation can be stopped, but the question is at what cost.

The effect of the rise alone generates an accumulation that will affect the bottom line of almost everyone in business, families, etc., and every day that the rate remains “high” will be a more difficult day for what means production, trade, employment

This could be likened to treatment with vaccines, which act gradually over time. No one has yet thought of giving the same vaccine every month to ensure a result…

In the end, the idea is to lower inflation, in a logical and predictable way due to the “injection” and the consequences of the pandemic, without necessarily generating a major recession, and fewer “financial storms” such as those that we live in these days, we know when they start to become obvious, but no one can tell where they end.

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