Wednesday, November 07, 2007

A Third Mellenium Great Depression ?

Last night I attended a seminar over dinner with a group of Traders and Hedge Fund Managers.

Over the course of the evening, various theories were discussed as to "what is happening in the global economy".

The answers put forward were complicated but more or less uniformly bleak. The overnight gyrations of the dollar and the price of oil as the result of the Chinese openly talking about "diversifying" their currency holdings seems to reinforce the sense that we are not looking a a simple turn in the cycle.

Put simply, the scale of the credit losses is now so large that the United States can not avoid a prolonged period of painful adjustment. As Hans-Redeker, currency chief at BNP Paribas, puts it "Our view is that these losses are so substantial that it puts current business models at risk."

The US is now caught is a deadly trap. The price of oil and other commodities is in Dollars, so the effect of the dramatic appreciation of the Oil price is felt directly in the US, with no mitigation from currency effects. Meanwhile, the credit meltdown is sending the economy deep into recession. The Fed keeps trying to cut rates, but each time it does so, the Dollar falls further- the oil price rises and American inflation grows. The ability of the Fed to cut rates further is extremely limited, but the necessity of doing so grows more urgent with each foreclosure. Meanwhile the forecasts now suggest that if anything, the first half of next year will be even worse as "teaser mortgages" roll over to commercial rates.

The single bright spot is that the US external imbalances are correcting more rapidly than expected- but this is a painful adjustment too- since it at least partly reflects the drastically weakening purchasing power of the US currency.

However the consensus of our discussion was sobering: the current crisis only looks like the first stage of a gigantic change that will leave few areas in the world unaffected. Despite this, the view around the table was that the markets will eventually correct many of the problems on their own- or at least they would, were it not for the biggest risk of all: bad decisions by political figures who chose to intervene too directly.

Political risk is seen as the element that could turn the current crisis into something far more prolonged. Yet, we face the current crisis bereft of political figures with any real understanding of the workings of the global economy. Even major policy formers in central banks have had to have the workings of the CDO market explained to them, and when looking at the prospective Presidents of the United States, ones heart begins to sink.

Meanwhile, the incumbent, by sabre rattling on Iran, could drive the price of oil far higher: with consequences that could simply destroy the US Dollar as a reserve currency.

As the US faces a credit crunch and property crash unprecedented since the Great Depression, too many Americans remain complacent.

Too many British fail to understand: the risks in the UK are now also approaching critical levels. A major Bank failure is still a real risk, and the bickering between the Finance Minister, Alistair Darling, and the Central bank chief, Mervyn King, over Northern Rock, do not bode well if and when that perfect storm hits the UK.


Tristan said...

It doesn't look good.
And I have a horrible feeling that the politicians will manage to mess things up again...

This will then be blamed on 'capitalism' and 'liberalism' and we'll be set for more protectionism and really bad economics if we're not careful.

If I allow myself to be really paranoid I can imagine some politicians rubbing their hands with glee at the prospect of having another excuse to restrict our liberty...

Anonymous said...

Yesterday Police used rubber bullets to break up mass demonstrations, and riot police stormed an opposition TV station to take it off the air. So have you rushed to condemn it Consul. Nope. Of course you can't do everything but we all know had yesterday's events been in Russia not Georgia you couldn't stopped yourself lambasting the Russians fast enough. Perhaps even you might think your view a little one eyed to Russia and her neighbours now


Cicero said...

Lepidus- I respond above- and you should stop talking out of ignorance. The fact that the Tories ally with Putin in PACE is a disgrace, but the money you get from them should not stop you opening YOUR eyes to where the right lies in this.

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