Is A Global Financial Meltdown Imminent?
May be I’ve been posting too much doom and gloom in the recent past. Do I really think we’re on the cusp of a global financial meltdown? No, I do not. But Telegraph does. Here’s an excerpt from an article which says the meltdown has already started:
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.
Austria’s finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria’s GDP.
“A failure rate of 10pc would lead to the collapse of the Austrian financial sector,” reported Der Standard in Vienna. Unfortunately, that is about to happen.
Europeon banks may face write-downs of $25 Trillion dollars! In compaison, Nouriel Roubini’s estimate of $1.8 Trillion in write-downs for US banks seems like chump change.
Whether it takes months, or just weeks, the world is going to discover that Europe’s financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
Under a “Taylor Rule” analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.
But I digress. It is East Europe that is blowing up right now.
The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
This doesn’t sound very encouraging. If there was ever a time to start investing in gold coins, it’s now! If you can’t afford gold, you might want to consider silver coins. Silver prices have been on a tear over the past 3 months. The graph’s been up linearly over 40%!
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February 20th, 2009 at 2:43 am
The IMF has already announced plans that they intend to print money. It seems like all governments and the like think the solution is to print more and more money out of thin air. So I agree, it’s definitely time to invest in precious metals.
Gold and silver have broken out of their price bases, which means now is a great time to start looking to buy on pullbacks. There is a lot of room for this bull to run and it looks like it might be warming up again.
Happy investing.
February 20th, 2009 at 12:20 pm
Correction Nirav, If ever there was a time to invest in gold, it was 2001 when gold was at $250 an ounce. Now, the gold run is somewhat long in the tooth. It has become the trendy trade. It is never good to follow the crowd in investing. Yes, gold could spike up to $5000 an ounce based on fear and panic. But it would be just that, a spike. Most will get caught in gold as it collapses, as it has every single time before for the past several hundred years.
This financial crisis is somewhat a recurring event. If you follow Elliott Wave Theory, you know that there is a long wave that repeats on an 80 year cycle. The reason for the length of the cycle is probably that it is the length of average human life (everyone gets to experience one of these once in their lives).
Check out my blog for a post on the dangers of gold as the fear peaks: http://www.wealth-ed.com
February 20th, 2009 at 2:03 pm
You don’t seem to be too concerned about the derivatives-market?? 700 trillion is alot of money… I got two posts on my blog explaining it fairly concisely.
February 21st, 2009 at 6:58 am
The net value of the derivatives market is unknown. I have seen reports about hundreds of trillions, but the derivatives are on both sides of the equation (as in options which have puts and calls that offset). You cannot add together both sides to determine the true exposure. It is so large, obscure and complex, I don’t know that anyone really knows the true amount (much of which has been unwound the past 18 months).
But the derivatives exposure is the entire case for gold right now. The uncertainty around the global financial crisis is why gold makes a good SHORT TERM bet. Once that uncertainty is resolved the panic value of gold will disappear and the price will crater since it is a very crowded trade and will become more so.
If the central banks are successful in reflating depressed economies, and so far their efforts to print money to offset debt unwinding has not been adequate, at that point we can worry about inflation. But inflation is no sure bet. They tried mightily in the 1930s to create inflation and were unsuccessful. It is the very least of worries right now. It is very difficult to print enough money, and get people to use it, during a major debt unwind like we are going through. To put a point on it: Money Velocity is near zero right now.
February 24th, 2009 at 11:42 am
Well, talk about the Great Depression and a bigger collapse have only increased in the last two-three trading days… another good opinion to take a look at is Harvard’s economist Niall Ferguson. Interesting views on “Chimerica” and how the rest of the world is going to get hit harder than the US, ironically, and very sadly. Canada’s going to hang in there with the US since it’s its largest single trading partner. But Ferguson predicts more political unrest. There’s a link to his article (an interview in the Globe and Mail) on my twitter feed.
I’m starting to change some of my own investment strategies to take more into consideration the possibility of a greater downturn. We can’t just act like nothing has changed, because I think something has.
March 6th, 2009 at 6:55 pm
“But Ferguson predicts more political unrest.” – No shit Ferguson. Going out on a limb there. By the way, I’m not making fun of the poster. The prediction by that economist just seemed rather unnecessary.