There is an elephant in the middle of the room that no one wants to see, it is a well-known expression that fits like a glove in various themes of society and the financial markets are no exception, in reality, the financial system also has its topics that everyone knows that the problem is there, but nobody wants to take it on until it is too late, which in itself is a strategy, given that when the bubble bursts the world is so focused on getting away from a problem of enormous dimensions that it does not even call into question the means used for its resolution, or even worse, for its postponement in time, as was and is the case of the gigantic liquidity bubbles created by the central banks after the 2007 financial crisis, which in the meantime never got to decrease, despite at the date of the implementation of the stimulus programs the watchword was for normalization in the medium term, however now the noise is quite different and there is already talk of very high central bank balance sheets like the new normal.
The issue is simple, the primary reason for a new financial order is the explosion of debt created by governments in the past ten years, now reinforced with measures to support the economy, due to the disruption caused by the COVID pandemic. This debt has the state’s main creditor today, through the central bank, which ultimately belongs to the state. This diversion of influence in the market’s bond market, which has always acted as a regulator, in the hands of an entity that is still considered too large to fall for now, is creating a serious sustainability problem in the financial system, because there will be a certain time when something or someone will raise awareness that it is not possible for a central bank to inject absurd amounts of money without this having an influence on the credibility of the currency itself.
In fact, in another situation, there would have already been casualties, now this is not happening because almost all the main players are in the same boat and today they act as agents of the political system, namely to finance deficits caused by the inability of governments to balance the accounts. This Monday the UK Finance Minister touched the point of the iceberg, indicating that the substantial increase in debt is worrying, in this case due to the largest deficit in history since the Second World War, promising to balance the “books” as soon as to pass the COVID storm, indicating what two decades ago created cold sweats in investors and government officials, the increase in interest rates will inflate, in some cases to unbearable levels the costs of debt service, which is why central banks cannot reduce their balance sheets, because they are stuck with the need to keep those costs as low as possible, but until when will the great potentials be able to play this game? no one knows, but if any break in the currency’s value will give the first indication of the problems, it is therefore important to be aware of significant variations in the foreign exchange market in the coming years.
