Meanwhile, the costs to the United States of the Iraq and Afghan wars are becoming a little clearer. The latest estimate is that by the time the hapless George Bush leaves office, in January 2009, the direct costs alone will have exceeded $ 1 trillion. The indirect costs remain opaque.
After the pasting in the credit market, American house prices have fallen dramatically. The emerging housing recession is only just beginning to have an impact on the US Consumer. Although the FOMC seems likely to call for a further rate cut, they now have to tread a fine line in order to avoid a complete collapse in confidence in the US Dollar- with a concomitant fall in global confidence. The short-run outlook for US Equities seems pretty bearish, and with a simultaneous crisis in credit and housing, the outlook is increasingly pointing to a full blown US recession.
Europe can not take much satisfaction from this, as it loses its US export markets and finds American goods globally more competitive. The strong links between the American and British financial markets are already showing up in lay-offs in the City of London. With continued losses emerging across the global financial system, London seems set to be hit hard. The consequences for the already overstretched UK housing market hardly need to be spelled out. At an historic average house price to average earnings ratio of above five, it seems clear that at least some of the US problems will come to the UK, despite the structural shortage of supply in the south east, which is the result of the nationalised planning regime.
Those that hope for China to take on the role of the United States as the locomotive for global growth do not take into account the export stance of the country, nor the extremely inefficient nature of the Chinese credit market. Chinese state banks, in particular, are thought to sitting on substantial bad loans in the local market, in addition to whatever exposure that they may have to the US sub-prime losses. Although the Chinese economy has continued to grow at a spectacular pace- now closing in on Germany as the worlds third largest economy, inflation is also growing, and the signs of overheating, as the result of a too lax monetary policy, are now increasingly plain. Meanwhile, despite the dramatic flight of the rural population to the cities, the demographics of the country will begin to tighten within the next five years, as the population actually starts to fall from its current peak of 1.3 billion people.
The emerging crisis in the United States is creating pressures across the global financial system, it is increasingly unlikely that an orderly handover of the growth baton can in fact take place. In other words we are coming to a major inflexion point in the global markets.
Over the past 15 years policy makers thought that they had ended the cycle: "an end to boom and bust" was the confident slogan of the Labour party. In fact we have just had an exceptionally long boom, fueled in part by excess liquidity in the US as the result of loose money and the resultant consumer boom (mitigated by the periodic collapse of speculative assets: Emerging Markets in 1997-1998, Tech stocks in 2001 and now housing).
We have unstable and tight markets in energy, especially oil. We have historic peaks in commodity prices, as we enter the peak of the cycle. We have an increasingly tight market for food, as nearly 30% of US corn production goes to ethanol and not to food.
However, after the long fat years, the cycle is inevitably reaching a peak and the increasing inefficiencies across the global market point to a substantial period of adjustment, while these distortions work their way out of the system.
In short we can expect an equity crash and a prolonged slow down in global economic growth.
Hold on to your hat- it is going to be an exceptionally volatile ride- the slightest event, such as the overdue Kanto earthquake in Japan could trigger major global market instability. As a board member of a mojor investment house said last week: its dangerous out there, I am seriously thinking that canned food and shotguns might be good invesments.
The political impact of the crisis is totally unpredictable, but I think we should certainly pay a special tribute to the 43rd President, George W. Bush: the man who seems certainly to have taken the title of the "worst President in American history" from the hapless President Harding.