Thursday, 14 July 2011

A Crisis of Confidence

In the Euro zone Italy is the latest country to come under pressure from the debt rating agencies and if both Spain and Italy need bailing out there is not enough money or political will in Europe to do it. It is inevitable that a breakup of the Euro would follow, allowing weaker economies to revalue their currencies and start to rebuild their economies.

If that was all we had to worry about it’s possible that a core group of Euro zone countries could weather the storm and carry on, but there’s a worse crisis on the way. The looming denouement of the USA’s debt crisis is only three weeks away. If Republican groups in Congress will not agree to extending the ceiling on US government borrowing limits the US will be in default of its contracts. This would trigger a world crisis of proportions that have never been seen before.  Everyone, not just Americans will be worse off, stock markets will crash, banks collapse, and unemployment will go through the roof everywhere because trade will slow down due to a lack of liquidity. The stronger economies like Germany and China will not be immune and we can expect civil unrest to boil up in the developed countries. The solution of increasing the money supply, which was adopted in the banking crisis of 2008, is no longer possible. The action taken then is, to a large extent, the reason why we are here now, in a situation in which governments are struggling to finance their borrowings.

Even if the US negotiations go down to the wire, but finally an agreement is reached, the effects will be felt in terms of financial uncertainty and market volatility. But, assuming that the Tea Party Republicans are not inclined to be suicidal, and don't decide to take themselves down with Obama, there remains the problem of reducing US debt.  I doubt that it is politically possible to effect cutbacks in a US election year, but if it was, a recession or slowdown in the US will affect other economies worldwide.  It's most likely that nothing will be done until the election is over and then it will depend on who wins and what support they have in Congress.

I see no way out of this crisis without a lot of people, sooner or later, being much worse off than they are now.  The easy answer for the politician's is always to "let the good times roll" using borrowed money but one day it's payback time!

Against the financial crises in Europe and the USA, News International’s ever expanding phone hacking scandal, however serious, is a mere detail of UK politics. This article by Michael White of the Guardian expresses similar sentiments.  I have written another blog piece about US government debt here.

Writing about this from an international perspective has made me think about my personal situation. I have decided that I am going ensure that my bank accounts are protected by UK Banking Codes of Practice.  Then I am going to consider selling my modest investments in unit trusts and ISA's and moving them into cash until the next crash, when I might buy again.

1 comment:

  1. "I'd do as the French do and make better use of the Matrass Banque. Although when push comes to shove all cash will be useless and as the Germans of the Weimar Republic found, wheelbarrows are too small to carry the coin needed for a loaf of bread.
    We are, as Moriarty noted, doooomed, a good enough reason to support String-up-a-Banker Day. "