Reality dawns

I take no satisfaction whatsoever in being proved right - although I'd much rather have been proved wrong a few weeks ago, when I warned, "I fear that the economic crisis has deteriorated to such an extent that recovery is no longer possible without some sort of major disruption".

I received a few e-mails after I wrote that article.  The authors told me I was crazy, accused me of being a prophet of doom, and generally insulted my economic intelligence.  I wonder how the writers are feeling in the wake of the most recent warning from the President of the World Bank, Robert Zoellick?

The head of the World Bank yesterday warned that financial markets face a rerun of the Great Panic of 2008.

On the bleakest day for the global economy this year,  Robert Zoellick said crisis-torn Europe was heading for the ‘danger zone’.

Mr Zoellick ... said it was ‘far from clear that eurozone leaders have steeled themselves’ for the looming catastrophe amid fears of a Greek exit from the single currency and meltdown in Spain.

The flow of money into so-called ‘safe havens’ such as UK, German and US government debt turned into a stampede yesterday.

In Berlin the two-year government bond yield fell below zero for the first time, with the bizarre result that jittery international investors are now  paying – rather than being paid – for lending to Germany.

There was a raft of dismal economic news from around the world, with manufacturing output falling in Britain and Europe, unemployment jumping in the eurozone and America, and fast-emerging economies such as Brazil and China showing signs of running out of steam.

. . .

The Dow Jones Industrial Average shed more than 200 points in New York, wiping out all its gains this year.

. . .

Fears are mounting that Spain will be crippled by its banking sector and will be the next domino to fall.

Mr Zoellick said: ‘Eurozone leaders need to be prepared to recapitalise banks. In the eurozone, the guarantees of some national sovereigns are unlikely to be sufficient and only that of the “euro-sovereign” will suffice.

‘It is far from clear that eurozone leaders have steeled themselves for this step. Eurozone leaders need to be ready.

'There will not be time for meetings of finance ministers to discuss the outlook and debate the politics.

'In panicked markets, investors flee to safe assets, sparking other flames.’

Yesterday investors scrambling for lifelines piled into German, US and UK government debt.

Not only did the German two-year bond yield fall below zero for the first time, but also the yield on ten-year UK gilts – the benchmark borrowing cost for the British Government – hit a record low of 1.44 per cent.

The yield on the equivalent US treasuries fell to 1.46 per cent – the lowest in over 200 years of records.

‘People’s objective is the return of their capital, not the return they get on their capital,’ said Sam Hill, a strategist at Royal Bank of Canada.

There's more at the link.  Italics in the last paragraph are my emphasis (and bear out what I said about those zero-interest German bonds a few days ago).

Folks, that warning I gave back on May 11th?  It's no longer a warning.  It's already become reality.  You're watching the world's economy unravel, day by day, hour by hour, minute by minute.  The large-scale soup kitchens and breadlines of the Great Depression have already reappeared in Greece, and are developing in some parts of Spain and other tottering Eurozone nations.

Soup kitchen, Chicago, USA, February 1931 (image courtesy of Wikipedia)

Soup kitchen, Athens, Greece, February 2012 (image courtesy of the Guardian)

Welcome to the madhouse.

Peter