Tuesday, October 07, 2008
"Disintegration of Global Finance Within Days" Updated
"Germany takes hot seat as Europe falls into the abyss
We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.
by Ambrose Evans-Pritchard
Last Updated: 11:05AM BST 06 Oct 2008
Star-crossed bankers: The European Central Bank played a shockingly destructive role
Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.
Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.
Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.
During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.
The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.
As the unflappable Warren Buffett puts it, the credit freeze is "sucking blood" out of the economy. "In my adult lifetime, I don't think I've ever seen people as fearful," he said.
We are fast approaching the point of no return. The only way out of this calamitous descent is "shock and awe" on a global scale, and even that may not be enough.
Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.
The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.
The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
It could have offered "cover" to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.
Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.
The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.
Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.
Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.
In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.
Her comments echo word for word the "we're alright Jack" attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.
"We have to make sure Europe takes its responsibilities, like the US: action must be taken quickly and in a concerted manner," said IMF chief Dominique Strauss-Kahn.
As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
"The US government has a technology, called a printing press," said Fed chief Ben Bernanke in November 2002. (His helicopter speech).
In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can "expand the menu of assets that it buys."
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.
Japan entered its Lost Decade as the world's top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.
But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets "delevers" with a vengeance.
This is a "short squeeze" on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.
The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus "a l'outrance" without being slapped down by the currency, debt, and commodity markets. Take comfort where you can."
The global economic structure that is imploding is the 1944 Bretton Woods Global trade system.
In 1944 the US Dollar was made the global trade medium of exchange and by default the US consumer bacame the demand of the world...
Everyone else was the supply...The rest of the world wanted to rebuild at the end of the 1933-1945 Bankruptcy reorganization of the global system that collapsed 1929-1933...
Well if you needed something from the global market...then you needed US dollars to buy stuff from the global market....according to Bretton Woods.
Well then what is the source of US Dollars?
US consumers...If you need US Dollars ultimately you need to give something to US Consumers to consume...
So in the beginning there was a massive influx of cheap imports of raw materials into the USA to obtain US dollars so that the rest of the world could "inflate" out of the rubble...
And they did...by the late 1950's the rest of the world was mostly rebuilt and the flow of cheap raw materials began getting bid up in price due to increased global demand.
The cheap raw materials were becoming more expensive...But everyone in the world was dependant upon US consumer debt inflation exports to sustain their economies...
The US dollar was the global trade medium of exchange...but it was also fixed to gold at 35 Dollars an ounce...and all the rest of the currencies of the world were fixed to the US dollar.
How the plan was to work...Was any US Dollar reserves held in foreign Central banks could be exchanged at the FEDERAL RESERVE for Gold to balance trade.
But to balance trade the USA would have to cut imports into the USA to stop hemorrhaging Gold...or run out of Gold and stop trade anyways...and if the USA stopped consuming...it would collapse and the rest of the world that had become dependant upon US exports of inflation would collapse without US consumer debt inflation...the problem kept getting worse all during the 1960's...the gold kept flying out of the USA...In 1971 the rules were changed to stop the hemorrhage and to prevent (postpone) the implosion.
Now the US dollar would float against gold and all the currencies of the world would float against the US Dollar and all the dollar reserves could be exchanged for US Treasuries...
If that change was not made...the USA along with the rest of the world would have imploded to oblivion back in the 1970's
Zeigeist is a sales pitch...A just think positive ignore the negative delusion.
The vast majority of you would need to be eliminated from the equation...That is not mentioned.
The entrance would be the Ministry of Truth and Understanding...the exit would be a burning pit of diesel for most that were foolish enough to enter.
Plus, the guy is an idiot...the problem is that US consumers after 64 years have maxed out...They are no longer willing or able to request the commercial banking system to manufacture the required amount of new money to sustain the continued existence of the previously requested money.
That's the actual problem...All the rest are effects from that problem.
He says to drop all the rates in the world...
Consumers request commercial banks to manufacture money...when they do an the bank agrees...the bank creates an asset and a liability and attaches interest to it.
As the consumer pays it...the principle causes the liability and asset to shrink...the bank keeps the interest as profit.
Interest rates are driven by consumer demand...to sustain rates you need volume...
Dropping rates will do nothing if banks currently can't obtain a profit from current yields.
It's like an all you can eat buffet...you keep lowing the price and make massive profits as the volume increases but once everyone is full the volume collapses...You can offer to pay people to consume the food and they will decline.
The US consumer basically maxed out almost 2 years ago and is just now finally collapsing from the strain...(the just think positive ignore the negative religion is crumbling because the negative has become impossible to ignore any longer)
There is no action listed in the article that comes close to actually addressing the actual problem or the cause.
Posted by Cheryl-Lynné at 7:09 PM