Whoops Yet Another Financial Crisis

January, 2008

The US dollar is in free-fall and many think it was/is a deliberate monetary policy. It was OK to a point to have a weak dollar because, in theory, people will use their currencies to prop up (or buy) dollars and US goods.

The problem is that has not happened.

Indeed this is a case of globalisation doing its own thing, creating markets that the USA no longer controls by sheer might or fiat.

We relied on the Japanese to buy US debt (bonds) in the 80s and 90s and when they got into their own banking and liquidity trouble, the Chinese stepped in.

Simpler answer, we still spend too much, save/invest too little and rely on a bubble of more than $1.5 trillion dollars (with a 't') of consumer spending debt to bail us out.

The problem is now we have a global liquidity crisis because of these crazy sub-prime mortgage backed securities banks sold. This Ponzi scheme created great profits when the market went up. However, when it flattens or (gasp!) goes down, there is a real problem. Banks no longer have the cash to lend to each other and instead hold on to what they have.

So the housing bubble burst and the defaults on those sub-prime mortgages are just beginning to come home to roost in billions of dollars, pounds, euros and yen. So, banks no longer have the cash to cover their obligations and... no place from which to borrow.

Northern Rock bank in Newcastle England was headed to a liquidity failure a few weeks ago when the government stepped in and guaranteed all depositors (a risky strategy if there is more than one bank in trouble and... ooops, there are a dozen large global groups including Citi - who lost their Chairman over this - recently acquired Dutch ABN-AMRO and Barclays to name a few.)

Dollar and market watchers are losing a lot of sleep over this because they have no idea how big the problem really is or when it will hit. So while the US stock market continued until last week to defy gravity and bubbles, there is another shoe or three to drop.

The dollar is no longer the only game in town. China, Saudi Arabia and other cash rich nations are holding more balanced global portfolios to spread risk. In other words, we're being hoisted on our own petard.

We want globalisation when it benefits us and we can set or ignore rules. Truly global markets though fluctuate and we no longer hold the reins of power. While we're still the big dog, the balance is much more finely tuned and I enjoy cheap prices - basically 2 for 1 every trip.

This happened on Dubya's watch, so you could call it economic warfare but it is really the end result of greed, over-spending to fight a war with the coalition of the seduced, threatened and bribed and a lack of fiscal discipline on our part.

And it's much, much more than the sub-prime market. The global economy is a giant balloon balancing treacherously under a modern day Sword of Damocles...

There is a perfect storm brewing of recession, out-of-control energy costs, spiraling war costs, a greying market of disposable seniors unable to find senior positions because all has been outsourced in the global economy, an aging group of boomers who will likely have to work into their 80's to be able to afford to retire, an over-heated and over-priced global real estate market bubble, global tightening of credit, global overheated stock markets and central banks desperate to control interest rates to hold it all together. (Which is also why they ignore currency, they cannot control it, so why worry about it?)

We're exhausting ourselves chasing lifestyles and more, more, more... Blackberry's make us feel indispensable when the truth is if you keeled over at your desk, someone else would be there before your body was cold.

I would not bet the house on a recovery happening any time soon. Oooops we already did and therein lies the problem of the greenback.

Not sure I would bet the US economy on the COME line but that is exactly what our leaders have done. Now the question is how long before it's "7 out, line in..."

Crazy-making and all so crazy....

(From tbd.com)