GEAB No. 20 Breaking phase ahead for the global financial system in 2008

Posted by D.D.Grant at 3:07 AM

GEAB No. 20 is now issued. This is one of the few publications that has achieved a remarkable predictive record on the subprime crisis and the global credit crisis. Although it is a subscription item (I have no financial connection or other connection) there is an informative abstract provided on the site. The following is excerpted from this abstract:

"The rapid aggravation of the global systemic crisis as its phase of impact unfolds (1) has brought our researchers to estimate that the contemporary global financial system will reach a breaking phase in the course of 2008.

Crisis follow-up indicators now show that we should no longer only fear the failure of some large financial institution (and of many small ones) in the US first and the in the rest of the world (cf. GEAB N°19), but that the global financial system itself is structurally hit.

The network of global central banks' repeated incapacity to control the « credit crunch » when the two historical pillars of the contemporary global financial system (a US economy in recession and a US dollar in decay), reflects the growing surge of centrifugal forces within this very system.

Indeed it is no more a matter of competence or of magnitude of the corrective actions implemented by central bankers. These times are over since summer 2007 and, according to LEAP/E2020, we are now witnessing an increasing divergence in
economic interests among the different components of the global financial
system.

The expected failure of the Fed's most recent attempt to coordinate a joint action of the main central banks in order to feed the banks in US dollars (2), is particularly revealing. This action meant to restore confidence in the financial system by two means:

- reinstating the now moribund inter-banking market, by proving the existence of a « joint force de frappe (strike force) » of global central banks.

- enabling large financial institutions in distress to anonymously restock in US dollars, in exchange of their assets being accepted as discount window collateral (i.e.worth their value some months ago, when they were still worth something)(3).

Of course the first goal is predominant, as reinstating of interbanking market is the only means to bailout banks in distress in a sustainable manner. However, it is already clear that the target has failed to be reached (4). The LIBOR (London Interbank Offered Rate), a key indicator of the health of the interbank market, has not moved an inch from its highest levels ever reached (5). “Psychologically” speaking, the global stocks decline recorded after the action of the central banks was announced, proves this if any message went through, it is that the situation for large US banks is even worse than announced in the past months (6).

According to LEAP/E2020 research team, it is already a fact that after it lost control over interest rates (cf. GEAB N°16), the US Federal Reserve has now lost two more of the attributes that characterized the post-1945 global financial system: its credibility as a proactive player capable of influencing heavy market trends(8), and its capacity to organize and drive global central banks altogether along its own rhythm and goals. In doing so, it has just lost the ability to steer by itself the entire global financial system, an ability it has gained after 1945.

Even though today, financial markets are mostly receptive to the loss of the first attribute (9), our researchers estimate that it is the loss of the second attribute (and the impact on the system's leadership) which will result in the global financial system's break sometime in the course of next year, probably by summer, when the effects of the ongoing US recession will start being fully felt and when Asians and Europeans will decisively be compelled to impose their own priorities to the “Fed-pilot”.

In this 20th issue of the GlobalEurope Anticipation Bulletin (December 2007 issue), our team describes in detail the characteristics of the growing divergences between the four main central banks (US Federal Reserve, European Central Bank, Bank of England, Swiss national Bank)."

'Too Much Like 1929'

Posted by D.D.Grant at 1:17 AM

Bernard Ber, an investment representative with CIBC in Toronto, has published an article that for its superior analysis deserves attention. (This originally appeared in Guest Commentary at PrudentBear.com but at time of writing has gone missing; this may or may not have conspiratorial implications depending on your temperament; I give an alternative link below). The opinion expressed, needless to say, is hardly the official position of the Bank and one wonders to what extent it is a view shared within the corridors. This writer obviously knows all those numbers and concepts on the currency exchanges that give us all such headaches (well, me anyway).

Of great interest is the thesis that the relationship between China and the USA today is a replica of that between USA and Britain on the eve of the Great Depression.

"The two major players in the world
financial system at that time were the United States and Great Britain. The
United States was the emerging industrial power, whereas Great Britain was the
mature and stagnating industrial power. ...

Now fast forward to today, and what
you see is China as the emerging industrial power and the United States as the
mature and stagnating industrial power."

Bernard Ber Too much like 1929

GEAB N° 14 A Chronicle of America's Very Great Depression

Posted by D.D.Grant at 1:03 AM

The (free) abstract of GEAB 14 is now available online. This issue claims that the "2007 Very Great Depression has indeed begun."

Two aspects are identified:

1. A historical reversal of global financial balances:

The report chronicles the decreasing role of the US in the field of international trade and wealth production signalling an end to a century-long tendency which began during WW1. This is supported by statistics showing the current dominant place of the EU in the external trade of oil-producing countries. In addition China has now surpassed the US as premier source of EU imports. It also notes that in March 2007, the value of European financial markets surpassed those of the US. This represents "a 'seismic tremor' for the global financial markets as it shows a displacement in the centre of gravity of the global financial sphere out of the US and towards the Old Continent."

The following US trends are identified:

1. relentless and durable decline of the US currency
2. decreasing share of the US in international trade and the production of global wealth
3. geographic remoteness of the US compared to the 'Old Continent's' Eurasian economic centres
4. impoverishment of the US consumer
5. collapsing competitiveness related to collapsing quality of education

2. An implosion of the US society:

US income disparity is now comparable to what it was on the eve of the Great Depression. The ratio of incomes between the richest 0.01% and the poorest 90% hovered in the 170-180 range throughout the period 1950 to 1980. It soared to 880 in 2005, this being about the same level (891) as in 1928. It is thought that this disparity will produce severe social and political tensions, a hint of which are already present in the number of foreclosure evictions. The report maintains that the economic recession will grow deeper and that US society is being split into two groups, one poor and the other very rich, with the middle class in increasing danger of falling into the poor group.

Unlike the situation during the Great Depression when the US was in the ascent as an economic power, the current depression will take place in a period when US economic power is eroding. It is claimed that in April 2007, the tipping point of the global systemic crisis is already occuring and that trends will speed up and their impact intensify and become obvious to everyone.

The full report (subscription) describes four other trends that will dominate the coming quarter:

1. The continuing contagion of other types of home loans and other sectors of the economy by the subprime crisis.
2. The return of stagflation with US growth falling below 1% by this summer. A further sharp increase in the US deficit by mid-2007.
3. An intensification of the geopolitical oil crisis in May 2007 with Iran and Venezuela on the frontline and Oil on the rise (USD$100) and the US Dollar suffering a further dramatic fall by summer 2007.

Krassimir Petrov - Effects of inflation

Posted by D.D.Grant at 3:54 AM

An interesting list of the effects of inflation from this writer:

No positive social or economic effect
Increases the level of prices
Distorts relative prices
Creates risk and uncertainty
Income diffusion effect – early comers gain at the expense of late comers
Benefits inflators (inflators=recipients of the inflation tax)
Hurts fixed income groups
Hurts existing creditors
Hurts all holders of money [through] Inflation Tax
Increases the consumption-investment ratio
Lowers national savings
Reduces economic growth & standards of living
Creates illusion of increased business profits
Consumes capital
Imposes “menu costs”
Imposes “shoeleather costs”
Causes a bracket creep
Creates Malinvestments
Causes Business Cycles
Causes currency debasement = currency devaluation
Causes more expensive imports
Strengthens industrial cartelization (predominantly for inputs/resources)
Causes speculation and bubbles

The list appears on PrudentBear.com and there is a link to a videocast talk on the subject.

This weekend I pulled an old paperback copy of Galbraith's The Great Crash 1929 off the bookshelf and have been engrossed with it since. Galbraith's account of the Crash does not give credence to the common interpretation that it was the result of the onset of a recession that was already occurring but the inverse of this explanation. More later but I am struck by the way in which the work leads to the idea that the credit bubble in the Real Estate market is very like a situation where the stock market is running on no margin.

The book is certainly a gripping read and of course Galbraith was that exception in being an economist who could weave an entertaining story while still adhering to impeccable scientific standards. Haven't looked to see if it's still in print; it ought to be.