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Global financial system implosion begins

I was reading in the Daily Mail yesterday that they've had to install armed guards at AIG. The people I feel sorry for are all the low paid workers like receptionists, operators etc on the front line of all this flak.
 
slaar said:
DD - If the Treasury bubble bursts then we really are all f*cked.
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Very true, if by that you mean if people lose confidence and dumping treasuries.

While I guess most people would be deeply sceptical as to why people want US treasuries, dollars and UK gilts for that matter.... the thinking is that it is a safe investment for the very reasons you've said. If treasuries are unsellable then the whole damned shooting match is over, they are almost the last line to fall (other than precious metals I'd guess). Many companies and especialy banks need to hold assets in some kind of "safe*" asset class. So long as people beleive there treasury 10 year note will get repayed, even if they lose out on inflation, then by holding it they are holding a good class asset to put on the books and something they can trade for cash in a pinch. That seems to be why people are holding on too them.

I guess it will take a couple of months for all this money being pumped into the economies to work themselves through. The thinking seems to be that that will start to get things moving again. The big one will be stock levels needing replenished. One of the reasons manufacturing and import has took such a huge hit around the world is that retailers seem to have allowed there stock levels to run low or not had the credit to keep buying new stocks in. Some people think that these will need to be replaced and that some more credit will be available. This may give everyone a bit of a lift if figures for march or something show bit of a bump manufacturing or so on as retailers restock.

I am not saying that the whole crisis is over but we do seem to be in a phase of holding.... not falling further for the moment.

But there are still alot of potential disasters out there.


goebfwai said:
I suppose with the all the economic numbers falling so far and so fast, we can only cross fingers and hope 'the only way is up'...?
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It seems that many people have reached a stage of 'capitulation' where they have accepted how bad things are. Now news that is less than disasterous but still bad can be psychologicaly reassuring.

For now.


*Yeah I know.
 
U.N. panel says world should ditch dollar

Link to reuters


LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

...
"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

.....

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.
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Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years.
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I wonder if the Saudis, Japanese and Chinese are quite ready to have there vast stores of dollars liquidated in value?

Hmmm not too sure about this. We shall see what the experts say.... but it sounds like a multipolar Bretton Woods. One of the reasons Bretton Woods worked was that the US had the strength in depth to make it work, until it started becoming a creditor nation and the system could not keep up with the rise of Europe (GDR specificaly) and Japan. A new Bretton Woods might not be flexible enough to work with a dynamic world of rising and falling nations. See the fate of the pound and the ERM as an example.

Anyone else have thoughts or disagree?
 
"I wonder if the Saudis, Japanese and Chinese are quite ready to have there vast stores of dollars liquidated in value?"

Not sure. I am less than an amateur in trying to understand all this high finance stuff, but maybe thats what that new global reserve currency suggestion is planned to forestall?

If Bretton Woods worked because of US strength, maybe the only way a new Bretton Woods would work is if China was at the heart of all, given all the wealth is over there now. Maybe, in private, that was what the Clinton visit was all about, greasing the wheels of it all? Time will tell. Something dramatic is clearly needed, as all the bubbles deflate and de-leveraging and economic contraction rolls on.

Economic Forecaster Predicts "Greatest Depression"
http://www.abc6.com/news/41131932.html

Jim Rogers Says U.S. Bailouts Add to Risk of Depression
http://www.bloomberg.com/avp/avp.ht...//media2.bloomberg.com/cache/vQzOcJXbzz.A.asf
 
Nah, China is nowhere near the size, relative to the world economy, that the US was at the time of the first Bretton Woods.
 
slaar said:
Nah, China is nowhere near the size, relative to the world economy, that the US was at the time of the first Bretton Woods.
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The US had about 50% of the worlds total manufacturing capacity just after WWII. It was also by a huge margin the worlds largest creditor nation and had a very mature legal and economic system. The only other time in history when another nation was in this position was the UK around about the 1850s when its lead over the world sort of peaked.

RBS traders hid toxic debt

If this is true then RBS shareholders may well be entitled to legal action against "Fred the Shred". I dont really know enough about that sort of law though.
 
david dissadent said:
Link to reuters

Hmmm not too sure about this. We shall see what the experts say.... but it sounds like a multipolar Bretton Woods. One of the reasons Bretton Woods worked was that the US had the strength in depth to make it work, until it started becoming a creditor nation and the system could not keep up with the rise of Europe (GDR specificaly) and Japan. A new Bretton Woods might not be flexible enough to work with a dynamic world of rising and falling nations. See the fate of the pound and the ERM as an example.

Anyone else have thoughts or disagree?
Click to expand...

I don't think it's like Bretton Woods, because it's not an attempt to peg currencies. It's a good idea because the hoarding of any one country's currency basically allows that country to follow excessively loose monetary policy without attracting sufficient punishment. It's a major reason why they can still sell T-bills with interest yields significantly lower than comparable industrialised countries.

It also promotes financial instability. I think we'd be in a very different situation if the Chinese had invested in a basket of different currencies instead of US bonds over the last 10 years.

I would be hugely surprised if the US did not try to veto this in some shape or form, though. They have done incredibly well out of their status as the world's reserve currency.
 
I don't have it to hand, but there is a report in today's Telegraph re BNP Paribas predictions of deflation running to 2010/11 if I remember correctly. This is more pessimistic than the other report mentioned in the Times. This quantitative easing thing that seems to becoming fashionable around the world is all beginning to make sense now. Presumably they are hoping that the mildly inflationary potential of QE will help stem a deflationary spiral and get things back into low inflation target of 1-2%...?
 
goebfwai said:
Presumably they are hoping that the mildly inflationary potential of QE will help stem a deflationary spiral and get things back into low inflation target of 1-2%...?
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I heard that there arent many policies to deal with deflation, so they are more comfortable fighting inflation, and that would certainly make QE appealing.
 
david dissadent said:
I wonder if the Saudis, Japanese and Chinese are quite ready to have there vast stores of dollars liquidated in value?
Click to expand...

There was something interesting in the FT today about that:

http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html?nclick_check=1

China calls for new reserve currency to replace dollar
By Jamil Anderlini in Beijing
Published: March 23 2009 12:16 | Last updated: March 23 2009 14:22
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

The goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies,” Zhou Xiaochuan, governor of the People’s Bank of China, said in an essay posted in Chinese and English on the central bank’s website.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

Analysts said the proposal was a clear indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

For now, China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of Special Drawing Rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that system collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – US$, Yen, Euro and Pound Sterling – and they are used largely as a unit of account by the IMF and some other international organizations.

“The US dollar is still the most important currency for settling international trade, pricing and payment in the current international monetary system,” Hu Xiaolian, director of the State Administration of Foreign Exchange, which manages the country’s foreign exchange reserves, said at a press conference earlier in the day. “Investing in US Treasury bonds is an important element in China's forex reserve investment and we will continue this practice.”

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be widely used in international trade and financial transactions.

Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.

Mr Zhou said the proposal would require “extraordinary political vision and courage” and explicitly acknowledged a debt to the theories of John Maynard Keynes, who made a similar suggestion in the 1940s.

More recently, US economist and Nobel prize winner Joseph Stiglitz, who is visiting China this week, has suggested expanding the role of SDRs to lay the foundation for the creation of a world currency.

In the short term, China expects the IMF to “at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings,” Mr Zhou’s essay said.
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Well that would be a pretty monumental shift if it happens, I guess they'd have to do it rather slowly.
 
It's an extraordinary development indeed. The fear of inflation eroding the value of
US Treasury bills a few years down the line must be a major worry for the Chinese.

Prof Willem Buiter of the LSE writing in the FT describes double digit inflation on a 5 year horizon
in the US as a "distinct possibility". Thinks QE can be reversed in time down the line to curtail higher inflation in the UK:

It is surprising that even at a horizon of 5 years or more, the markets are not yet pricing in a distinct possibility of double-digit inflation in the US. The announcement of QE in the US did weaken the external value of the US dollar, but long-term sovereign interest rates fell for the maturities targeted by the Fed (two to 10 years) and did not rise materially for longer maturities. At some point, probably not too far into the future, the future inflation expectations effects of QE that is unlikely to be reversed when required to maintain price stability, should overcome the immediate demand effect of the Fed’s QE on the prices of longer-term nominally denominated US sovereign debt instruments.

The UK is somewhere between the Eurozone and the US as regards central bank independence and as regards the likelihood that current QE will be reversed in time to prevent inflation and inflationary expectations from escalating. The UK Treasury can take back the power to make monetary policy using the Reserve Powers granted in the Bank of England Act 1998. This only requires retroactive approval by Parliament. However, the degree of polarisation of the UK polity and of UK society in general is probably rather less than that of the US. In addition, because the UK political regime is an elected dictatorship, the UK Executive is subject to minimal checks and balances and may well be able to impose the future tax increases (I am less sure about future spending cuts) required to maintain government solvency without the need to inflate away much of the real burden of the public debt.
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http://blogs.ft.com/maverecon/2009/...ystem-and-the-fiscal-abuse-by-and-of-the-fed/
 
A good read.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.
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http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print
 
Barking_Mad said:
Failure to save East Europe will lead to worldwide meltdown
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This has been on the cards for some months now. This is the scariest thing of the crisis so far. Its nearly beyond the EU to solve the problem. I have a feeling that one of them, very likely the Ukraine will default.

Who knows what happens then, it could take out some of the banks in Austria and Italy. They might have no other choice but let them fail because the alternative is beyond the ability of the governments wealth, perhaps even the EU's combined wealth.

Might shake the foundations of the Euro.
 
elbows said:
There was something interesting in the FT today about that:

http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html?nclick_check=1



Well that would be a pretty monumental shift if it happens, I guess they'd have to do it rather slowly.
Click to expand...

The rightdowns on those moneys not transferred incentivize revolution not evolution. Still reckon on the (G)OPEC; the institutional entrenchment with in the IMF and the nuances of face within this mess are just going to lead to bog down and frustration.

Good article on AIG Barking Mad
 
Sunray said:
This has been on the cards for some months now. This is the scariest thing of the crisis so far. Its nearly beyond the EU to solve the problem. I have a feeling that one of them, very likely the Ukraine will default.

Who knows what happens then, it could take out some of the banks in Austria and Italy. They might have no other choice but let them fail because the alternative is beyond the ability of the governments wealth, perhaps even the EU's combined wealth.

Might shake the foundations of the Euro.
Click to expand...

Germany leaves the EU. or NATO declares war on Switzerland. This a proper hurricane with an eye and everything.


:hmm:No exit mechanism or lender of last resort for the EUro who'd of thunk it:rolleyes:
 
jayeola said:
So are we supposed to be in deflation or inflation? I understand the latter. Can some one explain the former?
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It's the opposite.

Things are complicated though, obviously it's only the average change in prices that counts as inflation or deflation, and this varies depending on what you consume (the aggregate inflation measures use an average shopping basket). So some people are really suffering right now, because import prices went up rapidly as the pound depreciated (food etc), whilst those on variable tracker rates who took on huge debt are laughing (this won't last long).

So we've got mortgage and housing costs tanking, and food and other commodities going up, with savings rates wiped out.
 
Food and other costs are set to go down due to the oil price going down. The price of oil going up took considerable time before it was reflected in higher prices. The same is going to be true but to a lesser extent initially because farming will be enjoying the higher prices.

I watched that article on Newsnight saying the the Ukraine is on the edge of bankruptcy already. Many of their banks have shut and people can't get their money out. The government is refusing the conditions of the IMF so its in stalemate but will probably come around, though I don't blame them. IMF conditions are often onerous.
 
whispers in the conspiracy world reckon that they'll shut down the banks by the end of this year, bringing in some sort of "token" system. (estimated time frame for this is August/September)

If it happens, they woz right, if it doesn't, they woz wrong. Now we play the waiting game.
 
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