Global Economy, Bye Bye
As the global financial system disintegrates at an ever accelerating pace, the Federal Reserve finds itself in an impossible position. In an analysis in today’s Financial Times, senior Barclay’s Bank economist, Tim Bond, says that on one hand, “U.S. monetary easing [that is, the Fed's two emergency rate cuts in the last two months] is provoking an almost immediate acceleration in inflation” worldwide. The reason, Bond notes, is that the dollar’s fall is so steep already, that Asian (and Ibero-American) central banks are having to keep their interest rates low, or lower them, and to print more of their own currencies in order to buy dollars and slow down the dollar collapse: The net effect, is that the inflation the Fed is creating is pumped directly into those Asian economies, forming speculative bubbles on top of their export growth. So the Fed is threatening these economies with the same super-bubble collapse which has already hit the U.S., Britain, Spain, etc.
But, says Bond, the Fed is under tremendous pressure to do more of the same, because of the credit collapse and bank crisis. So it is pulled hard, in opposite directions, simultaneously.
Inflation is becoming harder to hide for the UK as well, hitting 2.1%, above the government’s target of 2%. So the BoE is in a similar dilemma as the Fed, with inflation pressures increasing on one hand, and a collapsing economy on the other. What’s a banker to do?
In the meantime, Deutsche Bank says that bank losses from the continuing collapse of the subprime mortgage securities could eventually reach $300 billion to $400 billion worldwide. Wall Street alone will be forced to write down as much as $130 billion, with the rest of the losses coming from smaller banks and investors in mortgage-related securities. Already last month, Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley each announced write-downs in the ten’s of billions of dollars, led by Citigroup with write downs of more than $40 billion. The author of the report, Mike Mayo, expects total write downs at HSBC, UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc to be “ballpark $5 billion or so” each. This could cause major problems for banks– HSBC, for example, has a $45 billion mortgage services business, and only $2.1 billion in loss provisions. Mayo apparently makes no estimate of what Deutsche Bank’s own losses might be.
And now, today’s “stating the bleedin’ obvious awards.”
Reuters reported yesterday that unsold goods are piling up in warehouses as the housing meltdown and soaring oil prices strain consumers, “raising fears that already glum fourth-quarter growth prospects may tip toward recession.”
The Independent reported today that Blackstone’s president warned that the sub-prime crisis on Wall Street was getting “deeper, darker and scarier” yesterday as the US private equity firm posted a loss for the third quarter, hit by a fall in real-estate revenues and charges related to its initial public offering.
And the NYSun reported today that Jim Melcher,a Wall Street “superstar” who runs Balestra Capital Partners, says he’s “worried about a recession. Not a normal one, but a very bad one. The worst since the 1930s. I expect we’ll see clear signs of it in six months with a dramatic slowdown in the gross domestic product.”
So there you have it. Not a pretty picture, is it. Its not too late to sort it all out, but we have to recognise that the system is gone. There is no solution within the present system. Its time to act. Call on your elected representative to encourage his government to organise a new Bretton Woods type conference. Today.