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World Crisis scenarios for the 21st century – Worldwide economic depression. (update 8)

Posted by Adrian on November 22, 2007

World Crisis scenarios for the 21st century – Worldwide economic depression (update 8 )

Is there a perfect storm brewing in the financial markets? America’s subprime and general mortgage market is continuing to collapse in a severe and widespread manner. In fact, the housing collapse in the US has been called the worst since the Great Depression. The liquidity and credit crunch is sending precursor shock waves thought out the markets, effecting currency exchange rates, stocks and testing the reliability of the major banking institutions in disclosing their exposure of major losses and write downs. The Dow Jones continues to edge lower as it appears the bull market is over. What ever slight jolts of upward euphoria occur, they are going to be less and less. Refer to Dow Jones graph (6 months, including the 211 point drop Nov 21st 2007):

interact-chartimg.gif

But this will not just be a contained single country financial problem, with global and interconnected money markets, this is going to be a ““generalized systemic financial meltdown.” as Professor Nouriel Roubini has indicated.

All countries will be effected by financial shudders in the global credit markets, with most industrialized countries and their citizens carrying huge personal debts, inflated housing markets and rising inflation on food and oil – general living costs. From Europe through to Asia. Most notable countries (in the EU) that appear vulnerable to credit crunches are Spain and Ireland. Regarding the Irish property markets, from moneyweek.com

The trouble is, just as Ireland’s consumers are stuffed full of debt and vulnerable to any waver in interest rates, Germany is recovering. And now the ECB is raising rates – which suits the consumer in Berlin, but is an utter nightmare for Dublin’s amateur property moguls.”

And, as a small open economy especially vulnerable to external developments, everything from a weakening dollar to higher interest rates – both of which seems very likely indeed – could act as a trigger for a drop, says Dr. Alan Ahearne, an economist at the National University of Galway.

“If we get a 25% drop in house prices over two to three years and a big contraction in [construction] at the same time… there’s no doubt that that would put the Irish economy into recession. And if our export sector is hit at the same time by a falling dollar then you’re getting a perfect storm of negative shocks, and then there could be quite serious trouble.”

So with the US federal Reserve paranoid of a recession, which would appear now is inevitable. The rate cutting policy will stay in place, only to signify the destruction of the US dollar, which in turn will cause major instability in all the currency markets – as globally the value of currencies, even the high yield currencies such as the EUR and CAD, NZD and AUD have shown volatility and risk from the problematic credit markets. Currently there is no real ‘flight to quality’ in currency markets as far as yields. As ‘carry traders’ have shunned risk in even the higher yield currencies. So all currencies are looking unstable.

The other major worry is the rising oil price, with Oil about to reach $100.00 this could be the final blow to the already vulnerable financial global markets. A high oil price will hamper and effect economic growth expansion and productivity, even if consumers adjust to higher oil costs, business won’t, they will pass on costs and decrease expansion (staff).

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3 Responses to “World Crisis scenarios for the 21st century – Worldwide economic depression. (update 8)”

  1. […] Posted by zekukith on December 18, 2007 When I compiled the World Crisis scenarios for the 21st century. It was done with with gathering evidence for potential risks that the human race face in the 21 st century. The recognized risks are Global Warming, Bird Flu, Nuclear War/conflict or tensions, economic problems globally. In late 2006 the first morbius glass forecast was posted filed under Forecasts for 2007, the main aspect for that forecast was the economic news from the US at the time. Which was the falling housing market (subprime mortgages), I called the recession in the US mid 2007, it could be argued that the US went into a growth recession mid 2007, as growth was negligible or even at times negative to GDP in the last quarters of 2007. Suffice to say what was not anticipated was the severity of the wide spread global credit crunch and a far reaching and alarming liquidity crisis between financial institutions which has the potential for a complete freeze of liquid money markets. However I did follow the credit/liquidity and US housing crisis though out 2007, filed under Finance and Economics/ Strategy and Society. I overestimated Europe and assumed that their policy of monetary tighten would slow down inflationary pressures, in which both the European Central Bank and Bank of England has allowed inflation to become a runaway train. With massively overinflated housing markets in Spain and Ireland the indicators are pointing to an economically dangerous tipping point for the Euro zone economy. With the UK now in a housing based recessionary down slide, not unlike the US. So for 2008 morbius glass forecasts they will all be predominantly economic based, I personally believe we are entering into a serious and problematic year economically for the world. This will also be followed in the Crisis Scenarios for the 21st century – updates. […]

  2. […] 3, 2008 I mentioned the problems with higher yield currencies going into 2008 in 2007 under the World Crisis Scenarios for the 21st centuray – Worldwide economic depression update 8, […]

  3. contemporary home…

    […]World Crisis scenarios for the 21st century – Worldwide economic depression. (update 8) « morbius glass[…]…

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