Articles tagged with: world economic crisis
In the book “The Snowball” – a wonderful biography of Warren Buffett’s life and absolutely worth reading in my opinion – Warren Buffett summed up the actual situation of the world’s economy in the last chapter “Coupons” using the words: “It’s a hard time. This is now another world, and nobody knows what will happen to the world.”
But let’s take a look on what happened in the last months. After the fall of Lehman a big shock wave spread over the financial markets inexorably. In the course of that shock wave, the Dow Jones fell from its all-time high of 14,000 Points to 8,000 Points and bank titles such as Bank of America or Citygroup have lost 85% of their former market capitalisation. The former chairman of the NASDAQ Bernard Madoff was able to dupe his investors to the tune of $50,000,000,000. Several personalities of the financial world have committed suicide, including the German investor and multibillionaire Adolf Merckle.
What will happen now? Will we really face a crisis just like the crisis in 1929? First of all, I want to say that nobody can predict the future but the similarities to the year 1929 are really frightening. The crash of 1929 for example had it’s roots in much too high stock values caused by the wide range of credit offers banks offered the people in order to achieve larger profits. Four years after the crash the U.S. government passed a sequence of central economic planning programmes called “New Deal” in order to stabilize the economy and above all regulate the completely runaway stock market. The deal worked and as banks weren’t allowed to spread credits to everyone in order to fund huge financial bubbles, governments did’t have to deal with the consequences of such enormous financial bubbles for more than 75 years – until now. But in the year 2000 bankers had a new exciting idea on how to offer credits to the masses. Instead of giving direct credits to the people like in 1929 they now gave mortgages to nearly everybody. This had the effect of raising housing prices and when the price of your home is very high you are also more creditworthy. But of course this bubble also had to burst and now we are facing a huge credit-funded pile of fragments again. The story of Bernard Madoff has also already existed, albeit in a slightly weakened form: Richard Whitney, who was the chairman of the N.Y. stock exchange in 1929 was sentenced to 5 years prison in 1938 for embezzling millions of dollars from his clients between 1929-1930.
But let’s sum up the facts: The advantage this time around is that our governments know how to deal with recession much better than they did in 1929. Sir John Maynard Keynes developed his theories on fiscal policy and instead of making things more worse our governments know that they have to invest in order to get the economy going again. The disadvantage of this policy is that national debts have to be paid back one day, or governments have to abandon their currency. But the economical supremacy of the U.S.A. can’t be defeated when the government will start to pay back their 14 trillion dollar debt. On the other hand, the disadvantage is that this crisis is a different type of crisis: This crisis has hit the economy at its weakest spot: its banks. The cash flow between banks and companies has been nearly zero for a long time. Many banks have securities which nobody knows how much they are worth – or better said if they are worth anything. Now the U.S. government finally created a “Badbank” worth $2,000,000,000,000 which should release the credit markets from their state of shock. Nevertheless it has to be said that the consequences of this “Badbank” on the international bank sector can’t be predicted yet. Another problem is that people often forget the past in times of crises. The “Buy American clause” for example would in my opinion be the first step into a catastrophe. Because when the first country starts to protect their markets, others will follow and that would have unpredictable consequences in our fully globalized world.
In conclusion it can be said that we are definitely facing a deep deep recession which will either hit quick and painful or slow and painful. Unemployment rates will be very high for a long time and the average rate of return for securities won’t be over 4% for many years. But if the crisis really turns into a depression like in the years 1929-1935 can’t be said, yet. In my opinion that depends on our governments now.
In 2006 the German economist Max Otte published a book with the title “The crash comes“, in which he pointed up the risks of the present housing bubble in the U.S. and the fact that most of these houses were sold on credit to people who actually couldn´t afford such high debits. He also predicted an enormous fall in the value of the dollar and a new world economic crisis in which all finally ended. When I read his book one year ago I thought either this guy is a bit crazy or this book is one of the most ingenious ones I ever read, nowadays I´m more given to the latter case.
Only now many people understand how serious the crisis is and the wishful thinking that governments could´t rescue every bank like they did in the case of Bear Stearns, Fanny Mae or Freddie Mac slowly disappears. But what are the consequences when the once fourth biggest investment bank of the U.S. files under chapter 11? First of all the stock quotation falls and many bank employees who believed their company are loosing everything their savings and later their jobs. That sounds bad but the real problem is another one, for example Lehman Brothers has a value of nearly 700 billion Dollars on the passive side securities, bonds, mortgages all these things are on the active side of other bank, funds or insurance companies. So if one bank falls under chapter 11 it´s logical that others will follow, but others could also be insurance companies like AIG although I´m not sure at this moment if the FED really has the nerve to let the biggest insurance company of the U.S crash. Sure this goes on so long till the market has adjusted all overratings and bad credits. That´s also why the governments won´t help the banks anymore, because they wouldn´t solve the problem and unless they help the faster the “crisis” or adjustment will be over, so we could say the crisis has just begun.
However let´s get back to the world economic crisis because a world financial crisis doesn´t absolutely have to be a world economic one, it´s just an actuator. The problem is that the people have forgotten that the international money supply has achieved absurd high worth, during the world industrial production stayed relative constant. So what did we do with all that money hadn´t that inevitably lead into an super inflation ? The answer is no because we always found ways to invest our money and funny bubbles like the Asia, DotCom or commodity-bubble arise which always burst again. By the way one reason for the incredible high money supply is also the fact that the issue banks always pumped more money into the system when a bubble burst so that the investors aren´t so gloomy. However these bubbles weren´t a big problem but the people have disregarded that since more than 10 years there accrued a new bubble, a super bubble, the housing bubble, founded on weak mortgages worth 9000 trillion U.S. dollar. This bubble burst now and what we are facing is the situation that the people have to find a new thing to invest in, before they realise that there is actually too much money in the system and this brings us to a very big danger because in my opinion the new investment target will be gold. But when the gold price will achieves to 2000-3000$ per unce the issue banks won´t be able anymore to cover the banknotes they printed. Finally the people will loose their trust in money and a super inflation coupled with a deep recession would lead into a financial failure.