Is a financial crisis coming?
There are fears in the U.S. and worldwide about a new banking crisis creating a significant domino effect. Many of these concerns are not unfounded but have to do with what has happened in recent years. There are several factors to consider, and here at Capifinders, we explain them to you.
The pandemic that we all suffered, being such a catastrophic event, caused the financial market, in this case, led by the U.S. Federal Reserve, to inject a lot of cheap money into the market, lowering interest rates to almost 0% and putting lot of cash into circulation to avoid an economic collapse due to the lack of production.
What is this consequence in the financial market, which can generate inflation (prices go up). When there is a higher demand, i.e., more people with cash to buy a service or product, these can become more expensive. To prevent inflation from getting out of hand, the Federal Reserve raises interest rates to reduce or compress excess cash and keep inflation under control.
Year-over-year inflation is at 6%, which is a high percentage. The standard rate was 2% or 2.5%, and we are talking about that inflation generates that the purchasing power of salaries, of people, of workers, is less and less, that is to say, that you buy fewer products and services with the same amount of money, explains Andrés Zambrano, co-founder of Capifinders.
When you put your money in the bank, for example, $100,000, and it goes without moving or for a while, that money lost 6% in one year, that is, what you can buy with that $100,000, the following year is reduced by 6%. Even if you put it in a certificate of deposit or policy, it also pays an average of 3% or 4%. And it needs to make sense to invest.
But the Federal Reserve's aggressive interest rate hikes have led to other complications. For example, to safeguard their assets, several financial institutions bought investment instruments such as U.S. government bonds, which, in theory, are the safest in the world.
They bought them when rates were lower, and now that they are higher, these bonds lose value because the market no longer requires them with the same speed. This causes a loss of assets, and the increase in interest rates has meant that the banks need more time to establish strategies to solve these losses.
In addition, problems in specific sectors of the economy have been overheated, such as the technology companies that boomed during the pandemic. But, when the pandemic ended, the behavior of society was not only digital, but there was a hybrid system. The rates of use, users, and clicks went down, which generated that all the people hired en masse to attend in 2020 and 2021 were within the layoffs, a drop in the shares, and the banks that had interests in it began to be affected.
The Fed raised its rate by 25 basis points. It is an increase but less aggressive than what they had been doing because before, it was 100 or 50. But, how the Fed communicated generated a more optimistic and conservative transmission and led to the market's tranquility.
"There are likely other banks in trouble, but the Fed is trying to provoke a minimum recession to balance inflation to the same levels that existed before the pandemic, which was 2%." adds Andres.
"I think the banking system will not allow a systemic collapse because that would generate a crisis of confidence like the one in 2008 and a recession. Besides, what happened in 2008 was more associated with misbehaviors of individuals, specific to industries," he says.
Is It A Good Time To Apply For Financing For My Business?
It will depend on what you want to use the funds for. If you need the loan for something that will generate a return in the short term, you need to calculate that return to be higher than the cost of capital.
If the cost of capital is 15%, your return should be above 50%. So, if you are going to use $30,000 and the price of capital will cost you $4,500, you have to calculate that at least that transaction you want to do will generate a return of $15,000 to $20,000.
When buying a property, you will likely find higher rates than in other years, such as 7%, 8%, or 9%, but the recommendation is that you can measure with a variable rate. The important thing is to get active, to be moving financially.
Phrases that will inspire you
1. "No one can predict what will happen; no one can predict if you will see a banking crisis."
2. "What the Federal Reserve is trying to do is to cause a minimal recession, to somehow balance inflation to the same levels that existed before the pandemic."
3. "Always any crisis can generate opportunities, and that's the most important thing you must do."
