Posts Tagged ‘credit crunch’

UK Economic and Debt Crisis Approaches Dangerous Tipping Point

March 14th, 2010 Comments off

Amid the clamour over the Greek debt crisis, a far more perilous threat to the global economy is becoming increasingly apparent. The global economic and financial crisis has wrecked havoc on the United Kingdom’s public finances, with no clear path to salvation.

Consider the following statistics. Greece has a GDP of approximately $350 billion, compared with $2.2 trillion for the UK. In other words, the Greek economy is only 16% the aggregate size of Great Britain’s. The proportion of Greece’s annual deficit to GDP is 12.5%, a figure that has triggered the current Greek sovereign debt crisis and panic search for a bailout formula within the Eurozone. Yet, in the much larger UK economy, the deficit to GDP ratio has reached 13%, an even higher level than for Greece, which has aroused so much fear among global investors and policymakers. Furthermore, while the UK’s official public national debt comprises 68% of GDP, a figure lower than America’s and much lower than with Greece, that level of indebtedness is accelerating at a rapid rate. It must be recalled that only three years ago the UK national debt to GDP ratio was only 38%, and with double digit deficits now an inescapable fiscal reality in the United Kingdom, it seems almost certain that the nation’s public debt will exceed 100% of GDP within the next three years. Furthermore, it is widely believed by analysts and investors that off balance sheet public debts (as was similarly revealed in relation to Greece’s current debt crisis) and unfunded contingent liabilities significantly add to the official figures.

What do these dismal statistics tell us about the future trajectory of the UK’s profound sovereign debt and economic crisis? Consider what Kornelius Purps, fixed income director at UniCredit, Europe’s 2nd largest bank, told the British newspaper,The Daily Telegraph; “Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13% of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that.”

In effect, the UK economy is at a dangerous tipping point. Massive public indebtedness occurred as a result of the government’s bailout of its banks, yet businesses remain afflicted by a severe credit crunch. Massive stimulus spending has added enormously to the deficit, but the only result has been suspect figures that, if interpreted most optimistically, show that the UK’s economy has essentially flatlined after incurring a sharp contraction in economic output during the height of the global financial crisis.

The predictable outcome, as alluded to by Kornelius Purps, is that in the future the UK’s treasury gilts will be unable to finance the nation’s prodigious borrowing needs with historically low interest rates. At some point, perhaps sooner than many realize, interest rates on the UK’s debt instruments will rise precipitously. This will occur while GDP growth is at best sluggish. Sharp reductions in public spending will almost certainly tip the economy back into deep recession, further constricting revenue  and maintaining London’s fiscal imbalance. However, the alternative is even more unpalatable. The sovereign bond market will demand increasingly higher yields, leading to a fiscal reality that is unsustainable. Ultimately, the United Kingdom will face the real prospect of national insolvency, with all the predictable dire consequences.

This grim trajectory has an even darker meaning for the United States. As bad as the UK’s fiscal situation is, America’s is far worse. Its annual deficit to GDP ratio is only marginally lower than Great Britain’s. Furthermore, its national debt to GDP correlation is significantly higher. More importantly, the average period of turnover on the United Kingdom’s debt is 14 years, compared with a mere four years on U.S. Treasuries. Once bond yields start to rise, the short term structure of America’s national debt will incur a vast increase in annual interest payments.

It seems to this  observer  that it is only a matter of time before the UK sinks into an irreversible sovereign debt cataclysm, with the United States not far behind. Anyone who believes that the same political establishment and financial elites that have led both nations to this hellish fiscal precipice can now lead us to a sustainable solution is, in all probability, being excessively hopeful.

Global Financial Crisis Agonistes

February 15th, 2009 Comments off
At the G7 meeting of finance ministers in Rome, representing most of the world’s major economies (but excluding China), there was an outpouring of Keynesian conformity. Already engaging in fiscal policies in most G7 countries that represent major structural deficits, the finance ministers in unison pledged even more massive deficit spending as a panacea for demand destruction and rising unemployment. However, even if massive stimulus spending were the correct policy response in a normal recession, in this economic crisis such a course is doomed to failure. The current Global Economic Crisis began with a global financial crisis that is still very much with us. The banking and financial system in the major economies is struck with paralysis, resulting in a credit crunch that has debilitated a growing proportion of the world’s primary economic activities. Without a solution to the global banking and credit crisis, all the debt spending in the world will accomplish nothing save international insolvency.

Right now, frightening proportions of the banks of the major economies are either insolvent, close to insolvent or in otherwise poor condition. Though the major economies have already poured trillions of dollars of largely borrowed money into shoring up the balance sheets of failing banks, it has been a case of good money after bad. There may simply not be enough money available in the world to “fix” all the banks, which are rotting with the disease of toxic assets. Yet, without some form of effective, coordinated policy response on a strategic level to the financial component of this global crisis, all the other conversations ongoing in Rome with these illustrious finance ministers represents nothing more than side-talk on the decks of the Titanic.

U.S. Treasury Secretary Timothy Geithner and his G7 colleagues are pontificating about their robust stimulus deficit spending and pledges to avoid protectionism, while paying lip service to the catastrophic disintegration of much of the global financial architecture. As outlined on this blog in prior posts, almost the entire United States banking sector is insolvent; ditto for the United Kingdom. I have also drawn reference in another post to a leaked secret document from the European Commission, which seems to suggest that a large proportion of the Eurozone Banks are also infected with toxic assets to such a degree, they are also threatened with insolvency.

The financial cancer is spreading through the enfeebled limbs and arteries of the global credit and banking system. Time is running out for an effective and comprehensive solution. Yet, in imitation of Emperor Nero, the G7 finance ministers prefer to exercise their fiddles, accompanied by the lyrical singing of meaningless rhetoric, as the financial and economic world around them burns with agonizing ferocity.


Global Economic Crisis Brings World To The Eve Of Demand Destruction

February 1st, 2009 Comments off
A new center of gravity is driving the vortex of global economic destruction that is ravaging the planet. It was the financial sector that originated this cosmic disaster, leading to the earlier definition of what was unfolding as the Global Financial Crisis. The systemic failures in the global financial system will not only continue to inflict fiscal carnage; their impact will worsen as the realization grows that the banking systems in many of the world’s economies, in particular the United States and the U.K., are effectively insolvent. However, out of the inferno of a worldwide credit crunch and systemic banking failure has emerged an even more potent instrument of economic disintegration, the phenomenon referred to by economists as “demand destruction.”
While the banking and credit systems of national economies represent the bloodstream of commerce, it is the production of goods and services that define sustained economic activity. The totality of human life is captured in the statistics that gauge an economy’s productivity, in areas as diverse as agriculture, manufacturing, transportation and services in a vast multitude of human endeavors. Over a given span of time, it is anticipated that economic activities will peak and flow through businesses cycles. A recession brings a diminution in the output of goods and services for a limited period of time, followed by recovery and the restoration of growth. An economic depression, however, manifests a far different and much more radical character with respect to quantitative measurements of production and distribution of goods and services. The numbers increasingly evident from emerging macroeconomic data makes clear that what we are now witnessing is not the typical short-term recession in economic output but rather the far more dangerous and virulent evidence of global demand destruction.

The Global Economic Crisis is fully revealed by a combination of a systemic financial meltdown contributing to uncontrolled demand destruction in a continual negative feedback loop. This is not just demand destruction, but a global economic death spiral.

To take the example of the 4th quarter GDP figures released by the U.S. Commerce Department, they reflect a consumer base that has been stripped of its financial capacity to consume, thus displacing demand by staggering levels of contraction. In just one quarter we are seeing the American consumer, who represents 72% of the totality of all American economic activity, curtailing purchases in major categories at double-digit rates. The cutbacks by individual consumers are being replicated by the means of production, reflected by businesses in the manufacturing and distribution arenas. These enterprises are cutting back sharply on orders for durable goods, other products and services, be it machine tools, imported fabric, transportation services or inventory for supply to retailers. As Q4 GDP statistics from the U.S. indicate that the business sector is only in the initial phases of correlating its output with consumer demand contraction, these numbers will get much worse in the first and second quarters of 2009.

The American consumer, over-leveraged with debt but always beckoned to purchase more by easy access to credit, has now been denied his fiscal narcotics and is experiencing the writhing pain of withdrawal symptoms. Upon such a slender reed was the global economy constructed. With the collapse of consumer demand in the United States, factories in vast numbers throughout China, Japan, Taiwan and Southeast Asia are shuttering their doors, throwing multitudes of employees out of work. This in turn is collapsing internal consumer demand in those countries, further exacerbating the virulence of the Global Economic Crisis. The Asian contraction in comsumption is leading to global demand destruction in commodities, facilitating the deadly virus of global deflation.

It is now chillingly clear that this global economic disaster can no longer be contained. The cancer stimulated by banking and credit systems contaminated by toxic assets based on subprime mortgages in the United States, has now metastasized into the mainstream world economy and no variation of radical surgery or fiscal chemotherapy can bring this man-made catastrophe into remission.

Policy makers throughout the world are reacting in panic. Their prescriptions are the usual doses of debt-funded stimulus spending, while borrowing even more money to throw into the black hole created by the Wall Street magicians and banking sector. However, it is now the rampaging demand destruction throughout the world that is cementing the insolvency of the credit system. No amount of money that can conceivably be borrowed, begged or conjured out of thin air by central bankers and hysterical politicians has even a snowball’s chance in Dante’s inferno of reversing the tsunami of demand destruction that has now been unleashed by the Global Economic Crisis.



Credit Crunch Nightmare: Report Claims British Banks Are Technically Insolvent!

January 18th, 2009 Comments off
British banks were not far behind their American cousins in being hammered by the onset of the global financial crisis, inflicting a cruel credit crunch on businesses and consumers in the United Kingdom. The unpopular British Prime Minister, Gordon Brown, initiated his own version of borrowing staggering amounts of money to prop of the tottering British banks, as fabled names like Northern Rock and HBOS became symbols of chronic institutional failure.
Early in his deficit spending spree, Gordon Brown boasted to Parliament, in a fiscal version of the Freudian slip, that he had “saved” the world. Well, it appears that boast from the right honorable gentleman was a tad premature. A report just released by financial analysts at the Royal Bank of Scotland will make limp the stiffest of British upper lips.

Entitled appropriately “Living on a Prayer,” the report concludes that UK banks are “technically insolvent.” The Brown government’s expenditure of nearly $400 billion to prop up British banks impacted by the Global Economic Crisis has almost entirely failed to curtail the affects of the credit crunch.

In a stealthy meeting at 10 Downing Street involving Prime Minister Brown, Financial Services Authority chairman Lord Turner and Bank of England governor Mervyn King, the implications of the “Living on a Prayer” report were digested. The purpose of this panicky pow-wow was apparently to conjure up some desperate last-ditch solution. According to media reports in the UK, Brown will probably throw another $150 billion in taxpayers money at the UK’s insolvent banks, desperately hoping that more deficit spending and mortgaging of the future will somehow repair the mistakes made by the “masters of the universe” whose casino capitalism is responsible for  incinerating the balance sheets of British banks.

The problem with Gordon Brown’s characteristic response, as with the TARP and Fed money gusher in the United States, is that we are dealing with a Global Economic Crisis, which means that there is not enough real money on the planet to plug up the collective insolvency of all the world’s major banks and credit institutions. Living on a prayer, indeed!




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U.S. Budget Deficit Will Likely Exceed 2 Trillion Dollars

January 15th, 2009 Comments off
The U.S. congressional budget office has recently forecast that the current federal budget deficit will exceed $ 1.2 trillion dollars, more than double the previous year’s near-record government overdraft. However, the CBO estimate does not even include the Obama stimulus package in its estimates, likely to be in the range of a trillion dollars over two years. Perhaps most problematic, the estimates conveniently set aside the catastrophic diminution in tax receipts that are inevitable, as the impact of the Global Economic Crisis on the American economy contracts payrolls and bankrupts businesses large and small. Just as dead men tell no tales, dead companies and unemployed workers pay no taxes. projects that for 2009, the U.S. government will have a deficit in excess of two trillion dollars and possibly even in excess of $2.5 trillion. However, government taxing and spending does not only occur at the federal level. All over America during the course of 2009, state, municipal and county governments will be drowning in red ink, and beg the federal government to bail them out. That is the logic of borrowing from Peter to pay Paul. There is a limit to how much money even the United States Treasury can borrow. However, an even greater danger lurks in both the short and long term.
The massive deficit spending that Washington initiated as the global financial and economic crisis accelerated was supposed to free up the credit markets and allow normal flows of business lending to proceed. In a fiscal paradox, the very solution implemented by the U.S. Treasury and Congress, massive debt spending by government, will inevitably suck up credit from the private sector like a vacuum cleaner, diverting this economic necessity into the public deficit purse, further aggravating the credit crunch.
The out-of-control multi-trillion dollar deficits being offered by Washington politicians and their coteries of corporate socialists desperate for a government bailout will bankrupt both the public and private sector, and ensure that the Global Economic Crisis brings about a worldwide depression of catastrophic proportions.

Global Financial Crisis Claims 535,000 Jobs In U.S.

December 7th, 2008 Comments off

The November unemployment numbers released by the U.S. Labor Department show a record 535,000 jobs were lost during the month. This is the worst monthly total of lost jobs ever tabulated, and shows that the full wrath of the global economic crisis is wreaking havoc on the United States economy. With only weeks left in the lifespan of the Bush administration, America appears rudderless at a time when its economy is in dangerous free-fall.

Many economists believe the worst is yet to come. The official unemployment rate, which excludes long-term jobless, now stands at 6.7%. Some experts are forecasting that the number will rise to 8 or 9 percent, or even higher. With fear rife among families about losing their livelihoods, consumer spending in the U.S. will continue to erode, leading to further demand destruction. This is likely to continue the trend of house price deflation, the facilitator of the current credit crisis. A vicious circle of economic implosion is now fully underway, with policy makers in the United States and throughout the world desperately throwing money in vast sums at the problem, hoping something will work. So far, however, nothing seems to be impacting the acceleration of the global economic crisis. It is likely that vast numbers of workers across the globe will be joining the ranks of the unemployed, leading to further recessionary pressures on the global economy and dangerous levels of deflation.