Thursday, October 9, 2008

When the crisis will end?

I have been seeing the markets crumble around us, and I am of course concerned like everyone else. The central banks around the world have been trying to stave off the abyss, and have thrown everything at the markets. Nothing has worked. There are several problems in the markets these days.

There is over $360 trillion (yes, trillion with a T) in financial contracts in the marketplace that is subject to LIBOR (the London interbank offered rate - the rate that banks lend to each other). According to, that's over $53,500 per person on earth. When you look at it, ultimately debts are held by people, even if it is artificially held in corporations. This debt becomes the debt for the world, and each and everyone of us is burdened by this. As the amounts are absolutely unsustainable, these financial contracts must be reduced. The market cannot afford this. These debt amounts are absolutely unsustainable. It was absolutely necessary for the banks to deleverage. It just happened that the financial industries appetite for risk (hedge funds, derivatives and mortgage-backed securities) had to doom us. Even though the government has been pumping trillions of dollars into the marketplace, this will not result in reduction of the credit rates. We have seen cuts to bank rates, it has not resulted in lower LIBOR. LIBOR must, must, must decline to more manageable levels before we can return to financial normalcy. Therefore, even if the governments around the world continue to pump money into the markets, we will see the money supply continue to decline as that $53,500/person drops to more normal levels, and LIBOR finally drops to levels closer to the US Fed funds rate.

I will add one thing: I personally feel that we will need Keynesian economics to recover from the long-term problems that we will see from this crisis. Without concerted and worldwide coordinated government projects, the world industrial output will come to a standstill.

Tuesday, October 7, 2008

Europe vs. the World - Can the E.U. survive this debacle?

As we have been facing this complete freefall in the market (can someone say capitulation?), I think we need to evaluate where to put our hard-earned dollars when it comes to the equities market. As I've stated before, I believe that we are facing deflation, in spite of all the unsuccessful US actions to increase the money supply, and try and shore up the lending system. With lending at a standstill, and deleveraging already underway with the banks, I often wonder where to put my money. But a more pressing issue to the world should be, how will the E.U. deal with this?

The reason why this question is so pertinent is that the European Union has one central bank for those countries that use the Euro (so U.K. is excluded among a group of the E.U. countries). That assists the Euro-zone in creating a central interest rate, and a central monetary policy. The big problem within the E.U. is that each country has its own Treasury function, and each country still has its own government with its own budgetary system. Because of this, countries in the Eurozone will decide to take different actions to shore their economies, thereby affecting all countries in Europe. This can create a worse problem than in the rest of the countries around the world. When a country doesn't control its own monetary policy, but controls the treasury function, it can only hinder coordinated attempts to stabilize an economy. I will be interested to see how Europe copes with the current meltdown, and I even feel there is a remote possiblity that the Euro could be rejected in some countries and even the total rejection of the European Economic Community by others.