The next phase of the Credit Crisis
Posted: Wed Oct 08, 2008 12:49 am
Right, its now Wednesday and we are another day deeper into this first order disaster for global capitalism. The British have had to come out with all guns blazing to try and save their national banks, the EU has more or less agreed to allow countries to suspend the rules defining borrowing and budget deficits to enable each country to support its banking system. The Fed is now taking on supplying money directly to American business, and the Japanese Stock Market has collapsed.
So the rout of the banking system goes on, National governments are now having to back up the capital system using the resources of the state, so whats the next phase? I will tell you: the market is the mob, once they markets lose interest in the banks or have wiped them out, they will turn on national governments and currencies.
The Eurozone is going to come under intense pressure as will the Euro, but it will probably weather the storm after taking a battering, there may be significant political disruption within the Eurozone as the fallout continues and the long term future of the single currency will depend on whether the national governments will be prepared to do whatever it takes to maintain financial stability. Most of the smaller European currencies (with the exception of Sterling which is still a reasonably strong currency) outside the Euro will get decimated probably simply due to the small amount of reserves underpinning those currencies such as the Danish Kroner.
Many brits would cheer at such an outcome, however, schadenfreude should be kept on hold as despite what I said about Sterling and its current stability; the UK government are now going to seem extremely exposed being outside the single currency, (being so dependent on banking and insurance, and housing to keep the UK economy afloat) and having backed up bank deposits with the UK Treasury the way it has. The nightmare for the UK is that the global capital markets decide to test the assumption that the British Government will support the UK financial system with public money printed in Sterling at any cost; that could result in extreme selling pressure against sterling and a collapse in its value, that of course would be disasterous for the British economy as it is import dependent in many areas.
The upshot of what's happening now, is that concerted international action is now urgent to stop this, and that means the US, the EU, Japan, China, Russia and all the other major players acting more in concert to try and restore some stability to the system. In Europe in particular all the major countries, whether in the Euro or out of it need to pull together to prevent a continental economic collapse.
So the rout of the banking system goes on, National governments are now having to back up the capital system using the resources of the state, so whats the next phase? I will tell you: the market is the mob, once they markets lose interest in the banks or have wiped them out, they will turn on national governments and currencies.
The Eurozone is going to come under intense pressure as will the Euro, but it will probably weather the storm after taking a battering, there may be significant political disruption within the Eurozone as the fallout continues and the long term future of the single currency will depend on whether the national governments will be prepared to do whatever it takes to maintain financial stability. Most of the smaller European currencies (with the exception of Sterling which is still a reasonably strong currency) outside the Euro will get decimated probably simply due to the small amount of reserves underpinning those currencies such as the Danish Kroner.
Many brits would cheer at such an outcome, however, schadenfreude should be kept on hold as despite what I said about Sterling and its current stability; the UK government are now going to seem extremely exposed being outside the single currency, (being so dependent on banking and insurance, and housing to keep the UK economy afloat) and having backed up bank deposits with the UK Treasury the way it has. The nightmare for the UK is that the global capital markets decide to test the assumption that the British Government will support the UK financial system with public money printed in Sterling at any cost; that could result in extreme selling pressure against sterling and a collapse in its value, that of course would be disasterous for the British economy as it is import dependent in many areas.
The upshot of what's happening now, is that concerted international action is now urgent to stop this, and that means the US, the EU, Japan, China, Russia and all the other major players acting more in concert to try and restore some stability to the system. In Europe in particular all the major countries, whether in the Euro or out of it need to pull together to prevent a continental economic collapse.
