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What are the fundamental risks in the US financial system?


By raising rates, the Fed does not affect demand and investment in the way that standard monetary theories could have. Exactly this is happening. After six months of tightening, the Fed still failed to break consumer patterns, knocking down an overheated labor market and demand.

Yes, there are record layoffs in technology corporations, but the economy is still “floating in an unknown direction” by inertia, which is confirmed by statistics on open vacancies and the labor market, where there are no crisis processes yet.

Instead of cooling off in a consumer frenzy, American society, in a fit of madness, brought down the savings rate to a multi-year minimum of 3% and absorbs loans like crazy (more on that separately). All in order to maintain the unsecured consumption level formed during the 2020-2021 helicopter money period.

All of this was made possible by the Fed's reckless policy over the course of 15 years, creating a cumulative and intractable problem of excess liquidity (deposits with zero rates, bank loans decoupled from the Fed rate and beneficial in the current inflationary picture).

As a result, the Fed, by raising the rate and trying to bring down the credit and consumer momentum, on the contrary, accelerates. In the context of inflation and a blocked capital market (IPOs at zero, bond placements at zero, businesses are replacing the funding gap through bank lending, and the population is actively taking out loans that have become more affordable amid rising prices and incomes.

All this accelerates demand and maintains inflationary pressure, because. the supply of goods and services from business is not increasing due to the erosion of confidence in macroeconomic and financial policies, not seeing the long-term demand potential.

▪️Second, zero deposit rates create an uneven competitive distribution of capital. With an alternative in bonds at rates of 3.5-4%, deposits lose out in a competitive comparison, which should inevitably lead to a redistribution of financial flows from the money market to debt, stimulating the flight of cash from banks.

With the current liquidity surplus (, this is not the biggest problem, but much more dangerous - it is the undermining of confidence in cash, in the dollar, as a tool to preserve purchasing power in the future.

Having undermined confidence in the dollar, economic agents will start looking for an alternative, surrogates, creating pockets of liquidity distortion, which will inevitably lead to market inefficiency and a liquidity breakthrough. By withdrawing money from banks, the population can redistribute into current consumption, increasing the circulation of the money supply and inflationary pressure, or again produce bubbles on financial assets.

There is a trend of a massive exodus from deposits, which is gaining momentum as the Fed's key rate breaks away from the money market.

▪️Third - earlier the risk was distributed in the system through the bond market and derivative add-ons to loans (for example, MBS), when the financial system redistributed the risk to investors.

Now all credit risk is concentrated in the banking system. It poses a threat. Why? Because the growth in lending is predominantly in the segment of toxic participants - unprofitable zombie companies cut off from the bond market, a business that has decided to play ahead of inflation by speculatively accelerating debt in the hope of outstripping income growth.

Well, and the population, which seeks to maintain an unsecured standard of living in 2020-2021, getting into debt against a favorable market background of credit expansion, when the illusion of a successful maneuver is created.

Therefore, behind the seeming success of banks, there are fundamental medium-term problems.