INDEX - ECONOMYwww.islandbreath.org ID#0806-18
SUBJECT: FINANCIAL CRISIS
SOURCE: JUAN WILSON firstname.lastname@example.org
POSTED: 28 JUNE 2008 - 9:00am EST
US financial fiasco could wreck world economy
image above: Artists conception of blackhole from http://thebigbangtheory.ning.com
by Bert Helema on 26 June 2008 in www.intelligencer.ca
Triple warnings this past week: the Royal Bank of Scotland fears a steep fall in the world stock market; the bank of all banks in the world, the BIS, Bank of International Settlements, in Switzerland, said that a worldwide depression is now a distinct possibility; Morgan Stanley, a leading American Investment firm, signaled similar pessimistic messages.
So what's happening out there? Frankly, all financial institutions are in deep trouble, and the reason is the American dollar. The situation is so dire that it's not going to make a hoot of difference who becomes the next president of the United States: it's beyond the power of the rulers of the American political and economic system to curtail severe damage to its entire economic enterprise. Neither Obama nor McCain can do anything to stem the disaster that will be fully employed by the end of this year.
Part of the cause is that the USA happens to be the most indebted nation on the planet and its people the least prepared to cope with peak oil and peak food. Even now Americans throw away up to 40 per cent of the food they buy, their high-powered and fuel-thirsty automotive park cannot be converted to more efficient vehicles for many years, while their exurban lifestyle makes car-sharing and mass transport impossible for most.
So what's so inevitable of the current monetary scene?
The world's entire Gross domestic product is some $50 trillion, of which the USA accounts for about $13 trillion. However, it owes more than $2 trillion to foreigners, of which Japan and China carry about half and Great Britain some 10 per cent with the remainder divided over many countries. Canada has less than one per cent.
The American public carries $9 trillion in credit-card debt and even more in mortgages. Its national debt is close to $10 trillion while its Social Security and Medicaid has a future liability in excess of $50 trillion, burdening the average USA household with debt totaling more than $600,000.
And then there are the outstanding derivatives! They grew from $100 trillion 5 years ago to $500 trillion in 2007. Warren Buffet -- the world's richest man after Bill Gates and a most savvy investor -- wrote in 2002: "We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly
appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
Now, when everything that can go wrong is going wrong, this financial WMD, this weapon of mass destruction, is no longer latent but out in the open ready to kill the American economy.
According to the LEAP think tank, based in Europe -- subscriptions cost 200 Euro or $300 per year -- in the next six months all factors affecting the economy will converge, and create a perfect socio-economic hurricane.
The root of the problem is always money, basically the US dollar of which there are trillions too many in circulations, so many that its value is decreasing, and the world doesn't know what to do with them. It's this flood of money that drives up the price of all commodities, including oil, of course. Nobody wants more US dollars, unless its value increases.
But that can only happen when the US pushes up interest rates, which will cause the US economy to die within a few weeks, as the real estate market falls to zero by lack of affordable credit, interest on Adjustable Rate Mortgage loans skyrockets, drastically shrinking consumption, and corporate failures multiply exponentially and stock markets collapse.
No, higher interest rates are not the solution. However, to do nothing is not an option either, because soon nobody will accept U. S. dollars anymore.
Basically the US has lost the ability to govern its own economic policy. Thanks to its trillions of debts, it is now powerless to avoid disaster. No wonder banks are getting nervous.
The immediate consequence of America's economic collapse will be the end of the war in Iraq, because, suddenly, as the greenback disappears as the world currency, the US will be forced to live within its means. Since the war is the most costly of all its undertakings, the troops will abruptly go home.
Curiously the WMDs -- the weapons of mass destruction -- were not in Iraq: they are in the heart of America, right on Wall Street. Pity the veterans and the wounded; there will be no money to look after them -- no pensions, no jobs, no medical care.
Eventually a new financial system will emerge, but only after a period of tremendous turmoil and pain.
Island Breath: The Shadow Bank System 6/20/08
Island Breath: Alternate Derivative Reality 6/5/08