Saturday, 6 September 2008

Credit Crunch Part II and Beyond

"At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

“When written in Chinese, the word "crisis" is composed of two characters-one represents danger, and the other represents opportunity.”
John Fitzgerald Kennedy, 35th US President

When the credit crunch began last year a lot of people didn't seem to realise the severity of what was happening. People saw stock markets fall and massive liquidity injections, and thought it wouldn't effect them. As soon as I heard the news and saw the footage, I knew this was the beginning of something, a once in a life time experience. The financial institutions realised the music had stopped and now came the consequences of decades of monetary expansion. The Credit Crunch is just the beginning of the start of something much worse. To use an analogy of a car crash, the credit crunch was just the person seeing what was coming and putting the brakes on. The real pain is yet to come.

We are entering the next stage of the crises, Credit Crunch Part II. Central banks have been busily infusing huge amounts of money into the private banks, through the swapping of Treasuries for the banks alphabet soup of deadly cocktails of debt. At what point will Central Banks stop? There has to be a limit, I mean they are effectively taking over the market, a market which is massive. This is the juncture we are at, where the Central Banks will soon begin to slow the liquidity they provide and start getting a lot more selective. British banks have been issued huge amounts of money, and not just from the Bank of England, but from the FED and the ECB due the global connectivity of banks. British Banks are in fact in a terrible state, which doesn't surprise me as I warned the economy was too reliant on finance. This is the part in the chapter where lending begins to get a whole lot tighter.

The media continually report that all these liquidity schemes will soon have banks lending back to the recent decade of reckless standards, however this will not be the case for decades. Libor is still showing great signs of stress, and will continue to do so. We are entering the phase where job losses will really start picking up, losses will keep increasing on debt, governments deficits and debt will keep going up. Worldwide currencies are fluctuating everywhere, the price of gold will begin to rise over the coming years. Incomes are being squeezed. Credit Crunch Part II will be much worse than last year and I can see major problems in the system in October, and definitely once the next president is in office at which point the recent rally in the dollar should resume its decline. Its the beginning of the impact in the car crash analogy, a realisation of the trauma and pain to come.

Looking beyond Credit Crunch part II the next decade will be completely different to now. Prices of stocks and property won't reach their 2007 highs until at the earliest around 2022 (unless hyperinflation occurs at which point you won't care what those are worth). This is a huge leveraged boom and the fallout will be very severe, for the world. Old powers will slowly collapse from within, and new powers will rise and replace those who have lost principles of thrift. Currencies will collapse and be replaced by new ones or nations will converge into single currencies. Present future liabilities will be realised as those future debts will now become a reality, staring my generation in the face. Industry will change, to quote,

"During the great bear market in commodities that began in the 1980s and carried into this decade, very few college entrants dreamed of becoming engineers and geologists to work in the commodity sector, but instead poured into finance and technology related degrees. This has created a vacuum in available talent that will only get worse with the retirement of many existing engineers and geologists that received their degrees in the last commodity bull market of the 1970s."

My father is included in the above description, and as global energy and commodities demand increases in the future he may even come out of his coming retirement to take part in the greatest boom since he started in the industry.

It will be an interesting time to live in and I personally can't know for certain the outcome. All I do know is that at this present time, with the facts as they stand, a similar future as described above seems very likely.

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