Three facets of the new financial crisis
Posted on 04. juil, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
The issues in financial markets are multidimensional, which makes the crisis more and more severe.
G10 sovereign solvency
The G10 sovereign solvency problem takes its roots into the 2007/2008 financial crisis. Indeed, the banking system failures required Governments bailouts and massive fiscal stimulus to foster growth. Governments have substituted public debt for private debt. As a result, G10 governments, already structurally indebted, have entered unsustainable debt paths, as illustrated by the chart below:
These paths have no chance to reverse in the medium term as the nominal growth in G10 will be far below budget deficits in the next 3 years. This sovereign debt crisis has degenerated into a banking crisis in the Eurozone for at least three reasons we have mentioned here. So far, a global liquidity crisis has been averted thanks to the unlimited liquidity injected by the ECB. But the sources of uncertainty are now social and political: will the European peoples accept the austerity cures imposed to them? Will Germany accept a devaluation of its currency, long-term inflation threats and the provision of unlimited guarantees to the insolvent states of the Eurozone?
The possible Chinese hard landing in real estate
The risk of US double dip
Our advanced indicator of the business cycle (composed of e.g. base metals, emerging currencies and depletable commodities) has stopped its rally a few months ago and has begun a sharp drop since then, which we have interpreted as a negative signal for the industrial activity… The industrial activity eventually slowed down sharply, in accordance with our forecast:
Our guess is that the slowdown will go on as cyclical markets are still undergoing a massive deleveraging.
These three rogue waves are intertwined: as G10 indebtedness reduces Governments’ action margins and in turn increases the likelihood of a double dip while China is clearly vulnerable to a slowdown in Europe, Japan and the US, which still account for 60% of global GDP.
The reflexivity theory advocated by Georges Soros has never been more valid than today. Financial markets shape the economic fundamentals they are supposed to reflect. Former Federal Reserve Chairman Greenspan himself acknowledged this reality several days ago:
“While ordinarily we’re seeing the stock market driven by economic events, I think it’s more the reverse,” Greenspan said in an interview on CNBC. “What we do know is stock prices are a leading indicator.”
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