Monday, June 29, 2015

Is a financial crisis about to erupt worldwide?


I've said before that the next major financial crisis may arise when any one of a number of factors - or a combination of them - suddenly erupts.  Right now there are several such factors that are poised on a knife-edge.  If two or more of them blow up . . . I think the next worldwide financial crisis will be upon us.

Greece is poised to default on its debts and (probably) exit the Eurozone.  This crisis has been brewing for years, but is now near boiling point.  It's fundamentally about much more than just Greece.  As the Telegraph comments:

As an institution, the EU promises security, stability and prosperity to member states in exchange for pooling their sovereignty. Yet for Greece, it has provided the opposite. Everyone knows the country should never have joined the eurozone in the first place and having done so, should not have compounded that mistake by going on a borrowing binge.

But the humiliation now being heaped upon a proud and ancient country is a salutary lesson to all member states – that without the power to make their own decisions they are always at the mercy of the unelected bureaucrats and financiers who run the institutions.

The democracy that was born in Greece more than two millennia ago no longer applies when control over the currency and economic policy is handed to a supranational body. The question of whether the price is any longer worth paying is not one for the Greeks alone to answer.

There's more at the link.

Nor is Greece the only European nation in danger of default (although it's certainly the most at risk right now).  "Altogether there are six European nations whose debts are larger than their economic output, and 16 that have debts larger than the 60%-of-GDP limit set out in the Maastricht Treaty."




If Greece defaults and gets away with repudiating its debts, at least in the short term, I fully expect one or more of the other most-debt-burdened nations in the EU to follow suit.  After all, if creditors have to deal with more than one massive default, their options become more and more limited.  As J. Paul Getty famously said, "If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

Central banks and major commercial lenders in other parts of the world are waking up to that reality as well.  China's premier stock exchange is crashing, and Morgan Stanley warns that no improvement is in sight - rather the opposite.

China's stock market got wrecked on Friday with the Shanghai Composite index crashing by 7.4%.

The red-hot market is now down 19% from its high, which it set on June 12.

Some folks may see this as a buying opportunity, but not the analysts at Morgan Stanley.

. . .

Garner warns that the Shanghai Composite, which closed at on Friday, could have much farther to fall.

"We set a new 12-month Target Price range for Shanghai Composite of 3,250-4,600," he said. "This range is ~30% to -2% below the current level of the index."

Garner's not kidding when he warns of the 30% downside. While a crashing stock market could be bad enough to trigger some social instability, it's not without precedent to see regulators allow the market to just collapse.

Again, more at the link.

The USA is at serious risk of further Detroit-style defaults, not just at city level but involving states too.  Consider:


Put all these current and near-current events together, and you have a very dangerous picture indeed.  I can only compare it to the well-known simulation of a nuclear reaction using mousetraps and ping-pong balls.





All it takes to start the reaction is one ball . . . or, in terms of a financial crisis, one major collapse or other economic event.  There are so many of them out there that contagion is inevitable.  If any one of the world's current fiscal crises goes out of control, the odds of another crisis doing the same increase exponentially.

I think we're living in very dangerous times, economically speaking.  The Bank for International Settlements (an association of central banks) has warned that "The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises".

I'm currently making sure I have two months' expenditure available in cash, tucked away in a safe location.  If we're forced to endure a compulsory 'bank holiday' as Greece is now enduring, I want to make sure I can buy what I need.  Other than that, there's not much I can do.  I'm not wealthy enough to have high-value assets like gold or silver in quantities sufficient to preserve wealth in times of crisis.  Like almost all of us, I'll just have to ride it out as best I can.

Peter

4 comments:

Rolf said...

We've been on "borrowed time" for a long time, and that which cannot continue will not. There is no way out other than wholesale debt write-downs; most nations in the world have simply borrowed too much attempting to live beyond their means for a generation or more.

Chickens, roost, some disassembly required.

Anonymous said...

Given we have had time to store funds outside the bank, perhaps a safety factor of food - medicine funds is in order. Remember the experiences of hurricane shortages where vital supplies and materials skyrocketed. Hotel room cost doubled - tripled overnight, gasoline cost was crazy, that sort of thing.

It isn't like the interest rate being paid by banks is substantial after all.

Thank you for the post.

NornIron Lad said...

Interesting, those high tax, high welfare Scandinavian have really healthy balance books whilst our dear old austerity, tax and benefit cutting UK is..... well, f**ked, really.

Hmmm I am sure the Chancellor said austerity and tax cuts for the the wealthy was the answer. Honest.....

I would make more of a joke of it were they not still in government promising even lower taxes and even more austerity. And we don't even have the world class infrastructure the French got out of their overspending.

Coconut said...

It'd be ironic if all the nineteenth-century dreams of german hegemony came true not because of glorious wars of conquest but because their creditors finally had no choices but to pay their debts- which, eh, lel -or swear eternal fealty to the kaiserin.