Economic Collapse Round 2 – Getting Started

| March 10, 2009

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It is forgivable, really. The economic shock during October and November pushed the global economy into a significant recession. Then America elected their “Hope and Change” ticket, with fantasies of a quick fix to what was a deep rooted systemic fault in the financial systems of the modern world.

By throwing vast sums of money into the maelstrom, the central banks and big money players were able to hold the crisis back, for a time. It came at a very dear price – an amount of money that we cannot likely duplicate. As the Christian world focused on the Christmas holiday, a time of family and good cheer, it almost seemed that maybe through massive action we had dodged a lethal, credit crunch fueled collapse.

As we wrote then, this unprecedented squandering of future earnings could not possibly stop what nature and the laws of math said must take place.

Rather than defeating the credit crisis, it gave the collapse a ready source of capital that it had to burn through before it could return to wrecking the real economy.

Now we have early reports of a re-tightening of the credit markets. For those of you who wonder why this matters, over the past 30 years the major economies of the world have replaced capital as a working fuel with access to credit. No longer does a company need to raise money to expand or pay executives huge bonuses, they can simply issue debt to cover the short fall. In the prior financial structure (pre mid 2007) this was easily done, and all the players simply assumed that the future was bright enough that repayment would not be an problem. As the credit binge wound towards it’s end, the economy burned through increasingly lower grade debt fuel, in many ways similar to the dying cycles of a star as it burns any elements it has left to stay alight.

With credit tightening once more, the levels of stress on the weakest points of the financial system will once again climb. This time, these weak points; AIG, Citibank, Bank of America, HSBC, are on life support.

From Yahoo News:

Fresh pessimism sweeps over credit sector

Credit market indicators – barometers of stress since the financial crisis began 18 months ago – are once more flashing red.
Heightened concern over the fate of US carmakers and worries about escalating losses at banks and financial institutions and at General Electric, the largest debt issuer in capital markets, are creating a grim mood. “There has been a strong repricing of credit risk as there is a panic almost about the financial sector,” Brian Yelvington, strategist at Creditsights, says.

Not even investment grade is escaping the selling pressure. The US CDX index – which tracks 125 investment grade credits – is trading at a risk premium of 250 basis points over US Treasuries, its widest level since last December.This comes at a time when some investors have shunned equities and plumped for high grade credit exposure. The moves in credit come, however, as equity values continue to tumble. The inability of the Fed’s term asset-backed securities loan facility to boost confidence in banks and for asset-backed securities is adding to pressure on financials and credit markets.

Let me translate. As stocks tanked, money poured into bonds, as a “safe haven”. Bonds are now under pressure.

Also this report from the Wall Street Journal

New Fears as Credit Markets Tighten Up

The credit markets are seizing up again amid new anxieties about the global financial system.

The fear and uncertainty that sent stocks to 12-year lows is now roiling the market for corporate bonds and loans, which have given back much of the gains they chalked up earlier in the year.

Short-term credit markets are still performing better than they did last year thanks to government programs to buy commercial paper and guarantee short-term debt. But Libor, the London interbank offered rate, a common benchmark interest rate, has crept up over the past weeks, from 1.1% in mid-January to 1.3% on Friday, reflecting banks’ concerns about being paid back for even short-term loans. It is still well below its peak of 4.8% last October.

This time around, the economy is slipping deeper into a recession, and bond investors worry the government’s repeated modifications to its financial-rescue packages are undermining the very foundations of bond investing: the right of creditors to claim their assets first if a borrower defaults. Without this assurance, bonds of even the most stalwart institutions are much riskier to own.

With any luck, someone very smart will figure out a way to defuse this one again without spending the entire gross production of planet earth for the next 100 years. Keep a close eye on those countries already on the edge, such as Ireland, Ukraine, Kazakhstan, Hungary, Latvia, Estonia or even Russia itself. These countries are in fragile shape, and the collapse of one or several of them could be the trigger of the full break out of the second round of the collapse.

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Category: Credit Backlash, Economics, Geopolitics, Main, Obama Administration

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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