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World Crisis scenarios for the 21st century – Worldwide economic depression.(update 7)

Posted by Adrian on October 18, 2007

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(photo from ABC article, 16 Septemeber 2007)

World crisis scenarios for the 21st century – Worldwide economic depression (update 7)

Over the last few months, going back to when the liquidity and credit crisis revealed itself and the banks seized up with interbank lending. Panic ensured, Northern Rock an English bank had to be bailed out by the Bank of England due to a withdraw panic from their customers. A somewhat calm fell over the banking sector after the US Federal Reserve cut interest rates by 0.50% bringing the Fed Fund rate to 4.75%. More importantly the Fed cut the discount interest rate, which is the rate the banks borrow from 0.50% to 5.25%. These were big cuts, unexpected by the majority of the market that factored in a 0.25% cut and with a massive 0.50% the markets rallied, namely the stock markets around the world. As it was thought the ‘credit crisis’ had been contained.

But, the US Dollar nosedived against all major currencies, the Yen carry traders overinflated high yield currencies such as the EUR (Euro), CAD (Canadian Dollar), AUD (Australian Dollar) and the NZD (New Zealand Dollar) – pushing all those currencies into record highs against the US dollar. With the US dollar losing favour as a global base currency, rumors spread that middle eastern currencies, such as the Saudi Arabian Riyal would unpeg it’s currency from the USD. If this was to happen a massive sell off of the USD would occur, which would push up further high yielding currency’s causing a global currency crisis. As the Chinese Yuan remains artificially low and the EUR soaring, most global markets are being potentially effected by high inflation.

Also the credit crisis has reemerged, with major banks such as Citigroup and Swiss world bank UBS reporting significantly high losses in the 3rd quarter, which are related to the mortgage meltdown in America, namely the Subprime. In the case of Citigroup bank, they reported 57% losses from their third quarter profit. From Times Online:

Citigroup said yesterday that America’s housing crisis could drag it down even further in the fourth quarter, as the world’s largest financial services group announced that the mortgage meltdown had chopped 57 per cent from its third-quarter profit.

The bank reported net income of $2.38 billion, its biggest profit decline in three years, as the housing slowdown fed through into $6.5 billion of writedowns, $600 million more than previously estimated.

Other banks that have reported large financial losses connected with the mortgage market are JPMorgan Chase and Bank of America. So, again we are going to see volatility in the credit markets as major world banks may freeze interbank lending again.

Despite a wider credit/liquidity and currency crisis emerging worldwide, combined with inflationary problems in Europe and their own debt/mortgage bubbles. The US housing market is still declining, in fact the mortgage/housing market may prompt the Federal Reserve to cut interest rates again , from Bloomberg:

“Oct. 17 (Bloomberg) — Treasuries rose the most in five weeks on concern that the U.S. housing slump is getting worse, pushing the odds of an interest rate cut this month by the Federal Reserve back above 50 percent.

The rally pushed two-year note yields down for a third straight day as a government report showed builders started construction of new homes at the lowest rate in 14 years last month.”

The looming recession about to hit America may be a severe one, whether a recession turns into a full blown depression is disputable. Nevertheless with a connected global economy, a global panic from investors, traders through to banks can cause markets to crash very quickly.

Links:

Financial times ‘ JPMorgan, BofA poised for $3bn writedown’

Bloomberg ‘Treasures Rally Most in five weeks on Housing, Credit weakness

Times Online ‘Citigroup says mortgage hit knocks 57% from bank’s profit figures’

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4 Responses to “World Crisis scenarios for the 21st century – Worldwide economic depression.(update 7)”

  1. […] credit crunch has emerged again in the UK, where in August 2007 and September 2007 one bank Northern Rock needed emergency funding from the Bank of England, which sparked massive over the counter […]

  2. […] mortgage defaults? The smaller regional banks may suffer, the UK in particular has shown this with Northern Rock bank nearly going under, only to be lifted out by the Band of England. At this point no information as […]

  3. […] is under strain by the credit, and liquidity crisis stemmed from the US sub prime market collapse. Northern Rock was prime example to the seriousness of a financial sector unable to finance it’s self, hence […]

  4. Chris said

    Nice article!
    Liked reading it.
    Thanx for posting.

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