Skip to main content

Asset shrinkage and the double dip

The latest stage of the Millennium depression is seeing political and financial leaders making one of the most dramatic policy mistakes yet.


The Banking system is being forced to boost its capital ratios by a combination of international (Basel III) and individual government legislation. Nothing wrong with that, you may think: the crisis has already proven that bank capital was too small to fund the holes that resulted from the collapse of the property bubble.


The problem is that global liquidity is already exceptionally tight: governments are seeking to tap the markets in order- among other things- to fund the banks that they have nationalized or to fund the European bail out fund, the EFSF. Of course those in the capital market that have liquidity are now exceptionally loath to invest it, unless in some haven deemed extra safe.


Banks cannot be considered particularly safe in the light of the crisis. As a result, even the strongest banks are not getting the amounts that they seek or, if they are, the terms are radically different- and far more onerous. 


The question has already arisen: what happens if banks can not get capital in the way they need? The answer is simple and brutal:if the banks can not improve their capital: balance sheet ratio by increasing capital, they must improve it by shrinking their balance sheets. In other words, banks are about to shut down lending again: a second credit crunch which may not be as severe as the first, but will be far more drawn out..


This is where the Millennium depression is about to get interesting. We have heard a great deal about the idea of a double dip recession based on a lack of liquidity: this is why central banks have been pouring liquidity into their currencies. However there is no escape from a double dip based on solvency. By adjusting the bank capital ratios at this critical point, the politicians and regulators have essentially guaranteed that the global economy will slow once more, and given the adjustments that banks are compelled to make, the second "dip"  will be much longer and more prolonged that the first.


We have already seen increasing political protest. I think that another three years of gathering austerity will cause some major political breakdowns. The UK already looks like a very fragile political construct, as does Russia, and political pressure on China, though hidden is still significant.... but all of that is a subject for another day.

Comments

Popular posts from this blog

Concert and Blues

Tallinn is full tonight... Big concerts on at the Song field The Weeknd and Bonnie Tyler (!). The place is buzzing and some sixty thousand concert goers have booked every bed for thirty miles around Tallinn. It should be a busy high summer, but it isn´t. Tourism is down sharply overall. Only 70 cruise ships calling this season, versus over 300 before Ukraine. Since no one goes to St Pete, demand has fallen, and of course people think that Estonia is not safe. We are tired. The economy is still under big pressure, and the fall of tourism is a significant part of that. The credit rating for Estonia has been downgraded as the government struggles with spending. The summer has been a little gloomy, and soon the long and slow autumn will drift into the dark of the year. Yesterday I met with more refugees: the usual horrible stories, the usual tears. I try to make myself immune, but I can´t. These people are wounded in spirit, carrying their grief in a terrible cradling. I try to project hop

Media misdirection

In the small print of the UK budget we find that the Chancellor of the Exchequer (the British Finance Minister) has allocated a further 15 billion Pounds to the funding for the UK track and trace system. This means that the cost of the UK´s track and trace system is now 37 billion Pounds.  That is approximately €43 billion or US$51 billion, which is to say that it is amount of money greater than the national GDP of over 110 countries, or if you prefer, it is roughly the same number as the combined GDP of the 34 smallest economies of the planet.  As at December 2020, 70% of the contracts for the track and trace system were awarded by the Conservative government without a competitive tender being made . The program is overseen by Dido Harding , who is not only a Conservative Life Peer, but the wife of a Conservative MP, John Penrose, and a contemporary of David Cameron and Boris Johnson at Oxford. Many of these untendered contracts have been given to companies that seem to have no notewo

KamiKwasi brings an end to the illusion of Tory economic competence

After a long time, Politics seems to be getting interesting again, so I thought it might be time to restart my blog. With regard to this weeks mini budget, as with all budgets, there are two aspects: the economic and the political. The economic rationale for this package is questionable at best. The problems of the UK economy are structural. Productivity and investment are weak, infrastructure is under-invested and decaying. Small businesses are going to the wall and despite entrepreneurship being relatively strong in Britain, self-employment is increasingly unattractive. Red tape since Brexit has led to a significant fall in exports and the damage has been disproportionately on small businesses. Literally none of these problems are being addressed by this package. Even if the package were to stimulate some kind of short term consumption-led growth boom, this is unlikely to be sustainable, not least because what is being added on the fiscal side will be need to be offset, to a great de