Monday, August 29, 2011

From Green to Red - Is Credit Crunch 2.0 Imminent?

Satyajit Das

In Crosstown Traffic, Jimi Hendrix sang: "can't you see my signals turn from green to red, And with you I can see traffic jam straight up ahead." In global financial markets, the signals have changed from green to red. But rather than a simple traffic jam, a full scale credit crash may be ahead. In financial markets, facts never matter until they do but there are worrying indications.

Fact 1 - The European debt crisis has taken a turn for the worse. There is a serious risk that even the half-baked bailout plan announced on 21 July 2011 cannot be implemented.

Fact 2 - Problems with banks have re-emerged. Banks globally, especially European banks, are seen as increasingly vulnerable to European debt problems. The total exposure of the global banking system to Greece, Ireland, Portugal, Spain and Italy is over $2 trillion. French and Germany banks have very large exposures.

Fact 3 - Money markets are seizing up. Banks and financial institutions are finding it increasingly difficult to raise funds. Costs have risen sharply.

Fact 4 - The broader economic environment is deteriorating. The global economic recovery is stalling. The risk of a recession or minimal growth is significant. The favorable stock market reaction to the latest report of growth in orders for durable goods in America misses an essential point. At around $200 billion an month, it is still around 20% below its peak in 2007 and only at 2000 levels.

If market seize up again, then "this time it will be different". There might just not be enough money to bail out everyone and every country that may need rescuing. Government policy options are severely restricted. Government support is restricted because of excessive debt levels and the reluctance of investors to finance indebted sovereigns. Interest rates in most developed countries are low or zero, restricting the ability to stimulate the economy by cutting borrowing cost. Unconventional monetary strategies - namely printing money or quantitative easing - have been tried with limited success. Further doses, while eagerly anticipated by market participants, may not be effective. The global economy may muddle through, but a second credit crash is now distinctly possible. But the trigger and timing is unknown. As John Maynard Keynes remarked: "The expected never happens; it is the unexpected always."


  1. The future of money
    As weeks go by, it seems more and more nations are facing possible default on unsustainable debt levels, most notably Greece. Interest rates are at an all-time low and governments are continuously bailing out banks that have screwed up trying to make a quick buck, most notably on MBSs: paper backed by worthless assets.
    Meanwhile, deficits are growing exponentially and it seems no one has a clear answer on who will end up picking up the tab. As it stands now, the world is relying in a never ending Ponzi scheme of artificial growth fuelled by governments over-liquefying the economy. In other words, quantitative easing; compounded annually.
    It’s like using morphine to ease the pain of a stage 4 brain tumor. The pain will effectively be numbed, but eventually the patient will die. This allusion has helped me justify why the markets have not yet crashed. The real question is when governments will run out of morphine; when the pain will be ever-present until the economy as we know it dies.
    Now the second problem, what happens when the doctor is broke after buying all this morphine to make the pain go away? In other words, when quantitative easing will run out and governments will be left with trillions of debt. Simple... PRINT THE MORPHINE!
    But governments aren’t stupid, there’s a backup plan: gold. It seems central banks are stocking up on gold; investors have followed suit. Why gold? What is so special about gold?
    It doesn’t really do much, honestly. Gold does not pay dividends, cannot be used to feed, house, and clothe people, nor contribute to anything essential to basic life.
    The thing with gold is that it cannot be created out of thin air (or paper) like money can. Gold is a scarce metal that is only found in limited supply. What also differentiates gold from currency is that it is essentially the same everywhere in the world and recognized everywhere in the world.
    In essence, when nations just start printing away money, it will dramatically lose its value. To a certain extent, people will lose confidence in paper money since they will be unsure whether or not it will have any purchasing power in the future. Other forms of payment for goods and services will be needed. While traditional barter seems like a logical alternative to money, it isn’t practical. Hence, the rise of gold.
    This doesn’t mean the world will veer back to medieval times and trade with gold; it means that the currencies the most heavily backed by physical assets such as gold are the ones that will retain their value. As a result of this, theses currencies will be the ones which will have higher chances to survive endless waves of quantitative easing.
    This is obviously an overly pessimistic (although still possible) view of the future; but there is a way out. Governments will have to stop QE and start cutting costs. Essentially letting the economy run its course and correct itself. This can possibly lead to another recession or even a depression but it will be for the best of the future economy. Capitalism is cyclical. Depressions and recessions are a part of it and trying to stop them will never amount to longer term stability. Recessions and depressions allow the economy to emerge with a clean slate by wiping out artificial value and maintaining what really represents value to society.

  2. Simple answer if YES. Check out these two stories that will make u go hmm:

    Remember, Bank of America has hundreds of billion of dollars in European bank derivatives. We knew this because Timothy Geithner told Ireland not to default or risk contagion of US economy last year. We don't know about other big US banks that has exposure to Europe financial institutions. Credit crunch 2.0 will likely to take place in September or October because historically the market crashes around the 4th quarter of the year. Be prepared everyone and good luck. QE1 and QE2 have not help a bit. QE3 will not going to help either. What we have here is a debt problem. Western nations are suffering a debt problem.

  3. Pessimistic? You made that sound like a recess for grade schoolers, in comparison to how harsh our world will truly turn out.

    The whole technology argument is irrelevant, it has no bearing to economy. Life does NOT improve with technology, nor does it get worse. Things can become more convenient, but people can also get worse in ways. (Cell phones, TV, and Internet make people dumber = FACT)

    Overall, it does not make life happier for people in any way. Kids in America, for example, use more drugs and booze, commit suicide and have mental disorders more than any other nation's youth save perhaps Russia's.

    To say we we're not going back to the Medieval Age is no different than saying we're not going back to the 1940s, or 1980s. You could even throw in that we're not making a quantum leap into the 3020s. Any time line can be used there. Why should we compare this with any time period when this is something totally different, far greater in extent, and hell of a lot more complex?

    If anything, thanks to the superior tech in the information age, we could end up in an extortionately perilous scenario radically altered from any trace of safety - rather than a more primitive, former age as if to say we lost what we built.

    So when all the central powers reveal their impotence, the monetary system/Fed crumbling, all local structure disintegrates consequently. People, we are not heading for a police state, that is far gone from being possible in America. We are heading for utter anarchy. Cops are targets today, people kill them. Prior to the 1970s nobody attacked cops.

    You see the average "middle class" neighborhoods lately? They've been infested with junkies and trailer trash, kids are barely safe playing out front. Colleges likewise, have become a place to score dope. Even for those few in universities whom are dedicated learners, if they graduate they wasted their time and energy.

    With all the technology we have in this age, things will get incredibly chaotic as reality unfolds. Here's something, back in the Medieval Age and such, weapons were weilded by strong men, battles with thousands of men on the field would have low casualty percentages. Decapitations were rare, blood was hardly common. Weapons today turn people into mist for crying out loud...

    Imagine a group of 300 men charging a line with bayonets, the enemy have M16s, AK-47s, mounted machine guns, rocket launchers... those men would dissolve into thin air within a second. Maybe their shoes would remain.

    Funny, though I'm rambling. When people think of either America or China invading one another. If countries with a full military (unlike Iraq), were to be invaded WW2 style with paratroopers... those guys would not even make it to the shores. Each ship would be decimated by long range missiles, all the infantry aboard wasted.

    Good day...

  4. The reason why I compared to midieval times is just to say that i don't beleive we will be using gold coins to trade.

    On another note, i beleive we are both saying the same thing (with the exception of technology) but to a different degree of pessimism. No one can really tell how bad the situation will get as this depends on our future governments. One thing is for sure though: we are just entering the tunnel and wont see the light at the end of it for a while.

  5. Since governments get more corrupt every day I have no hope in them at all.

  6. Oh my gosh - what an idiot ! You dumb assed Amish with a laptop; if it wasn't for technology you lamebrained arsehole; your sorry ass woulda plopped out on the sand bank and yur momma woulda jist left ya there!

    Technology IS MAN - get it !Without the larger brain to utilize resources and make them better at a task ( knapping flint to make a razor edge to kill animals, skin them and harvest meat) we would still be wrestling with the apes for the best plots of overgrown vegetation.

    We have used technology every step of the way - literally --- try walking 2 miles thru the forest with nothing on your feet!

    You jest with ignorant ramblings about bayonets vs AK-47's and yet it was those very technologies that got us here in the first place

    Dumb ass Amish - should stick to hoeing corn

    Where did the hoe come from?
    Who domesticated the corn ?
    On and on and on and on


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