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World Crisis scenarios for the 21st century – Worldwide economic depression.(update 13)

Posted by Adrian on March 25, 2008

World Crisis scenarios for the 21st century – Worldwide economic depression. (update 13)

The US Federal Reserve current policy of buying debt, offering cheap loans (to banks and brokerage firms) and generally pushing amounts of cash into the banking system – has ensured short periods of calm , then panic sets in again. When a financial system freezes up, or is loosing money (on depreciating assets) and at the same time systemically unwinding (credit markets) in a dramatic way – this is worrying.

Are we heading for a worldwide depression? A real possibility. Can China and Asian withstand a severe global recession? From the perspective that the US has already entered a recession and will fall into a severe recession. The severe recession probability will effect Asian countries, at this point the degree of effect is speculative. But, global inflation is a concern mixed with slowing/recession economies. America and Europe may be on the verge on a harsh case of stagflation, slowing economy/rising prices. Asian could also show the hall marks of stagflation too, namely japan and Singapore.

cfn635.gif

(Above graph reflects global headline inflation.)

Oil now at trading over $100.00 a barrel, and with demand increasing namely from emerging economies, South America and Asia; oil will continue to rise well into the 100’s. Emerging economies will add to energy inflation and demand, which will effect western recessionary countries (inflation), such as Europe and the US.

So if the world is heading for a severe global recession or depression, will it be a deflationary depression or a depression with rising prices/costs? Similar to Argentina in the late 1990’s and early 2001. When the economy collapsed and the Argentina currencies (Peso) loss significant value.

A country that has received little press, as far as a depressed economy, is Italy. This was discussed late last year on morbius glass filed under The Sadness of Italy. Italy is a good indication of a country that has a collapsed industry, rising prices, inflation and a poor ‘middle class’. The example of Italy is when an inflation is allowed to grow, the currencies and purchasing power is diminished. This is now happening in the US, apart from the denial of The Fed (including the chairman) and the US administration. But the US is not alone, Europe who has an artificially high Euro, is also vulnerable to a debasing of it’s currencies.

So, when countries find it hard to finance and find financial safe havens such as Government Treasury bonds we can use Italy again as an example, according to an article on the Telegraph 19th March 2008,

“Few noticed last week that the Italian treasury auction was also a flop. The bids collapsed. For the first time since the launch of EMU, Italy failed to sell a full batch of state bonds.

The euro blasted higher anyway, driven by hot money flows. The funds are beguiled by Germany’s “Exportwunder”, for now. It cannot last. The demented level of $1.57 will not be tolerated by French, Italian and Spanish politicians. The Latin property bubbles are deflating fast.”

So with falling markets such a property, rising inflation and reserve banks either cutting rates or keep rates on hold, may be at the detriment of the currencies. Apart from debasement of currencies and their value there is also a fall in global production, according to an article in the Financial Times (19th March 2008  ) global trade is slowing significantly,

“The equivalent growth rate in the three months to October was 6.9 per cent.

“This is a substantial deceleration,” the institute said. “World trade volume growth is on a downward trend.”

Trade figures tend to be volatile but even on a longer-term smoothed basis, comparing the three-month average with the same period a year earlier, the growth in goods trade is at its lowest since 2003.

The data appear to provide further evidence that global economic activity is slowing, as growth in emerging markets has failed to compensate for weaker demand in the US.

The last time annual growth in trade went negative was in 2001, when the shallow US recession that followed the bursting of the technology bubble and the shock of the September 11 attacks caused global commerce to contract.

Trade growth is consistently higher on average than overall economic growth but it also tends to be more variable, dropping sharply during recessions.”

Also, the Baltic Dry Index that tracks dry bulk shipping has declined

refer to graph

chart1.gif

With inflation now completely out of control, a global recession on the horizon and the real possibility that a depression could occur globally, dragging in emerging economies. Again the question has to be asked, what kind of depression will it be? A deflation or stagflation based depression?

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3 Responses to “World Crisis scenarios for the 21st century – Worldwide economic depression.(update 13)”

  1. […] Posted by Adrian on April 8, 2008 The Australian terms of trade reported a massive trade deficit of $3.29 billion from $2.54 billion in January 2008; this would indicate a few things. Weather and infrastructure problems and the main issue is global trade slowing rapidly as reported in World Crisis scenarios for the 21st century – World economic depression (update 13). […]

  2. The style of writing is very familiar . Did you write guest posts for other blogs?

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