The Climax Of The Fall Is Now In View

[housesforcourses]

http://cynicuseconomicus.blogspot.com/2009...ow-in-view.html

I am writing this post with a profound sense of unreality nagging at me. When I first wrote about the UK economy (you may want to read here for a summary of where I started), I was profoundly worried, and could see that we were heading towards a massive economic shock. A little while later the realisation that the UK was effectively bankrupt struck me, followed by the realisation that the US was in the same position.

-- snip --

Whatever the final push, I now believe that we are on the edge and, as such, I will brave a timescale. I would now say with considerable confidence that we are within three months of the plunge. By plunge, I mean the serious collapse in either the $US or the £GB, either of which will shortly after precipitate the collapse of the other. I am not tempted to say how far they will fall, but it will be a dramatic fall over a period of about two weeks, sufficient that we will all look on in complete shock. I am not talking about 10% but tens of percent. Once the sell-off starts, I am not sure where it will stop.

I have always been a 'doomster', and taken a negative view on the prospects for anything but deep, deep crisis. To date, the events that have occurred have largely agreed with such a pessimistic outlook. In this case I sincerely hope that I am wrong, and that I will be eating these words in three months time. My worry is that this will not be the case.....

Worth reading the full article and the site to understand his reasoning.

[ralphmalph]

How can the USD and the GBP crash at the same time?

[Ted]

How can the USD and the GBP crash at the same time?

Against other currencies?

Or even massive inflation within the respective countries.

[housesforcourses]

How can the USD and the GBP crash at the same time?

I don't think he says that, I think he is suggesting one has an impact on the other.

[InternationalRockSuperstar]

How can the USD and the GBP crash at the same time?

inflation.

[blankster]

Could we see a global economic and currency collapse, even, with no significant 'winners'? After all, this is largely about evaporation of value into thin air, not transfer of value.

[ralphmalph]

This is a very illogical article. He states the GBP and USD will crash. Then states that Ireland the Sothern european countries will default on there debt.

So the Major currencies in the world are the USD, Euro, Yen and GBP. You could include the Chinese currency but that is pegged to the dollar.

So he states USD is going to crash, GBP to crash and Euro countries default which by deault means a crash in the euro. So the only currency these three can crash against is the YEN. Which means that the Euro, GBP and USD all stay at roughly the same levels with each other.

Well I suggest that he look at the currency crosses v the yen and he might just realise that this has happenned over the past 6 months. If a crash is defined as 20% the moves against the YEN are far more. 45% in the case of sterling is I remember correctly.

[interestrateripoff]

Could we see a global economic and currency collapse, even, with no significant 'winners'? After all, this is largely about evaporation of value into thin air, not transfer of value.

For me I think there is a strong possibility of this happening. However it's up in the air about what actually will happen but I fear it won't be one of the more positive outcomes.

[copydude]

Does the 'too big to fail' argument apply to the UK? (And to all those holding Sterling.)

I think that 'too big for the IMF to save' has already been discussed.

Would other members of the EU step in? Would Brussels administer an austerity package before we see the worst of worst scenarios?

[Prescience]

I am not bullish about the UK economy: far from it!

However, there is currently a temptation for all the "Teenage Scribblers" to promote a sort of John Laurie style message: "We all doomed! Doomed, I tell ye!"

At present, it is simply a matter of re-ordering Britain's economy: and fiscal strategy.

Recovery of sterling will naturally folow that process of re-ordering.

To suggest that Britain is "Bankrupt" flies in the face of the underlying realities: which must be considered in any cogent and holistic analysis.

Britain has vast foreign holdings: in US government paper; companies; property; land and etc.

Most major Central Banks and overseas investors have massive holdings in sterling denominated securities etc.

Then there is Britain's physical fabric and infrastructure.

What we have presently, is a clueless apology for Government, acting in panic mode in order to create some continuum of a wholly dysfunctional economy and fiscal state.

Early in February G7 meet and top of their agenda is urgent considerations of the sterling crisis.

Additionally, when the IMF are finally called in (To me it is as inevitable as it was in 1977), their inspectors will demand massive and swingeing cust in government spending: no further recruitment of middle-echelon managers are inflated salaries; which has still beein going on despite this current crises.

It is also on the cards that civil service salaries will be significantly cut. As is already happening in industry and commerce: want to keep your job? Fine 30% pay cut; or walk! Simple as that!

The IMF will also demand an immediate rise in base rates: which ought to have happened months ago, rather than the synthetic drops Godron believed would "Stimulate the economy" They haven't and they won't.

Trouble is rises in base rates and thus lending rates will push hundreds of thousand of over-extended households over the edge.

Good: and tough!

Once PSBR and GDP are getting back towards a sane relationship ratio then both sterling and the underlying economy will recover: slowly.

Personally, I believe the banks ought to have been allowed to go Bristols Up in the majority and instead of the unconditional bail out, Government should have elected to save a carefully selected few; converted them into nationalised banks, which didn't become embroiled in wheeling and dealing in esoteric derivs (which they failed to properly understand and risk-analyse prior to diving in!), but acted as Joint Stock Banks were intended to, before all this imported insanity: taking people's deposits and savings and turning them for SME loans and personal finance.

The few remaining building societies should also be massively funded and beefed up to take in far greater levels of the little guy's savings; and lend out on sane house mortgages: once the housing market has properly imploded and sensible value linked to current wages/salaries is restored.

Etc.

[housesforcourses]

This is a very illogical article. He states the GBP and USD will crash. Then states that Ireland the Sothern european countries will default on there debt.

So the Major currencies in the world are the USD, Euro, Yen and GBP. You could include the Chinese currency but that is pegged to the dollar.

So he states USD is going to crash, GBP to crash and Euro countries default which by deault means a crash in the euro. So the only currency these three can crash against is the YEN. Which means that the Euro, GBP and USD all stay at roughly the same levels with each other.

Well I suggest that he look at the currency crosses v the yen and he might just realise that this has happenned over the past 6 months. If a crash is defined as 20% the moves against the YEN are far more. 45% in the case of sterling is I remember correctly.

So you are saying its illogical but it has already happened?? Isnt that a contradiction?

[@contradevian]

Could we see a global economic and currency collapse, even, with no significant 'winners'? After all, this is largely about evaporation of value into thin air, not transfer of value.

I would like to know that, considering the comments on here about the dollar/sterling being "toast." You have to be invested in something.

[Errol]

Britain has vast foreign holdings: in US government paper;

Well, that will certainly come in handy when the bog roll runs out.

[housesforcourses]

I am not bullish about the UK economy: far from it!

However, there is currently a temptation for all the "Teenage Scribblers" to promote a sort of John Laurie style message: "We all doomed! Doomed, I tell ye!"

At present, it is simply a matter of re-ordering Britain's economy: and fiscal strategy.

Recovery of sterling will naturally folow that process of re-ordering.

To suggest that Britain is "Bankrupt" flies in the face of the underlying realities: which must be considered in any cogent and holistic analysis.

Britain has vast foreign holdings: in US government paper; companies; property; land and etc.

Most major Central Banks and overseas investors have massive holdings in sterling denominated securities etc.

Then there is Britain's physical fabric and infrastructure.

What we have presently, is a clueless apology for Government, acting in panic mode in order to create some continuum of a wholly dysfunctional economy and fiscal state.

Early in February G7 meet and top of their agenda is urgent considerations of the sterling crisis.

Additionally, when the IMF are finally called in (To me it is as inevitable as it was in 1977), their inspectors will demand massive and swingeing cust in government spending: no further recruitment of middle-echelon managers are inflated salaries; which has still beein going on despite this current crises.

It is also on the cards that civil service salaries will be significantly cut. As is already happening in industry and commerce: want to keep your job? Fine 30% pay cut; or walk! Simple as that!

The IMF will also demand an immediate rise in base rates: which ought to have happened months ago, rather than the synthetic drops Godron believed would "Stimulate the economy" They haven't and they won't.

Trouble is rises in base rates and thus lending rates will push hundreds of thousand of over-extended households over the edge.

Good: and tough!

Once PSBR and GDP are getting back towards a sane relationship ratio then both sterling and the underlying economy will recover: slowly.

Personally, I believe the banks ought to have been allowed to go Bristols Up in the majority and instead of the unconditional bail out, Government should have elected to save a carefully selected few; converted them into nationalised banks, which didn't become embroiled in wheeling and dealing in esoteric derivs (which they failed to properly understand and risk-analyse prior to diving in!), but acted as Joint Stock Banks were intended to, before all this imported insanity: taking people's deposits and savings and turning them for SME loans and personal finance.

The few remaining building societies should also be massively funded and beefed up to take in far greater levels of the little guy's savings; and lend out on sane house mortgages: once the housing market has properly imploded and sensible value linked to current wages/salaries is restored.

Etc.

You make some really good points. One question, doesnt it depend when the IMF is called in as to whether they can in fact bail us out?

[Prescience]

I believe part of the G7 discussion will be to agree greater funding for IMF.

Those nation states with massive foreign currency reserves have much self-interest in agreeing to do this.

[housesforcourses]

I believe part of the G7 discussion will be to agree greater funding for IMF.

Those nation states with massive foreign currency reserves have much self-interest in agreeing to do this.

Funnily enugh looking at cynicus he says something similar to what you have said:

http://cynicuseconomicus.blogspot.com/2008...wing-uk-is.html

Time has run out on the UK economy. It is bankrupt. It will need to rely on the charity of the IMF. The IMF will demand that the UK government cuts expenditure. A wind of terrible change will have to blow through the UK economy.

Our analogous household will have to cut back, move into a poor neighbourhood, into a tiny run down house, and stop the spending on luxuries. The only spending the lenders will allow will be the necessities of life. It will be very tough. That is the price of reckless borrowing - having charitable lending bail you out, and biting the bullet of living within your means while you try to repay the debt. It is tragic.

[InternationalRockSuperstar]

This is a very illogical article. He states the GBP and USD will crash. Then states that Ireland the Sothern european countries will default on there debt.

So the Major currencies in the world are the USD, Euro, Yen and GBP. You could include the Chinese currency but that is pegged to the dollar.

So he states USD is going to crash, GBP to crash and Euro countries default which by deault means a crash in the euro. So the only currency these three can crash against is the YEN. Which means that the Euro, GBP and USD all stay at roughly the same levels with each other.

I dont't think you quite understand:

ALL currencies will crash against tangibles, which is what really counts.

[Errol]

ALL currencies will crash against tangibles, which is what really counts.

Indeed.

[conflict]

The way the situation with just the banks, never mind all the other issues, will play out is in one of 4 ways -

1. 1) UK Government Nationalises the in trouble UK banks (Lloyd's, Barclay's, RBS) and takes on there liabilities. The UK will not be able to meet those liabilities as the UK Government can print GBP but there is bound to be $100's of Billions and other currencies which the UK government cant print. UK Government is not just bankrupt, but can not be saved by any other country, other than by the respective currency holders printing and giving the cash to the UK - which wont happen. UK Goes under and brings the rest of the world with it most likely as the debt collapse would trigger banking collapses world wide.
   
2. 2) UK Government supports the banks either via nationalisation or funding, but doesn't take on the liabilities. One major bank somewhere in the world fails - this triggers a wave due to related liabilities and one after one all the major banks collapse. Financial system collapses.
   
3. 3) UK Government sets up a bad bank, ALL UK banks transfer ALL loss making, and probable loss making debts and assets into the bad bank. All other major banking Governments also do likewise - essential for this to work. The good banks go back to normal, while the bad banks try and liquidate there positions. Odds are given the severity recession in the world wide the bad banks wont survive long even with government funding and will be declared bankrupt themselves. This will result in other banks world wide being affected by having further bad debts and we have banking crisis mark 3, which will result in another round of bad banks, and rinse repeat. Basically the bad bank idea wont fix the problem but it wont kill the financial system, and we will keep having banking crisis's until the economic situation normalises.
   
4. 4) All Governments create a new GOOD bank each, and let the existing banks fail, or with the bad bank method help to support them ticking over. The Good bank offers support and stability as it has no links to the old bad debt, and can only take on new debt that has very low risk. The use of Good banks will mean the Financial system will not be destroyed if all the existing banks collapse.
   

Really the Good bank is the only thing that will stop the financial system from imploding. Northern Rock appears to may be being lined up to fill the roll in the UK, Citi has been mentioned as doing it in the US. The problem with these is they still have old liabilities, unless they transfer all existing assets to the bad banks and start afresh it will impact there ability to work as the Good banks.

[housesforcourses]

Every section of the UK economy has been running large deficits. As for government borrowing, one of the oft cited examples is the state of the Japanese governments debt, but the people who cite this forget that much of that debt is funded from within Japan. The problem in the case of the UK is that large tracts of the debt is funded externally, including government borrowing.

snip

What they are all missing is that these economies may suffer now, but they have the means to repay their debts when the global economy starts to recover. As I have been saying for a long time, the UK does not produce enough of value to ever repay the debts that it has rapidly accumulated, let alone the debts that it is adding.

snip

However, I do not think that that people are quite foolish enough to believe that printing money can be a solution to the underlying problems of the UK. This is why I believe that the £GB will collapse sooner rather than later. I do not believe that holders of the £GB will hold on to the currency, as they will start to price in the effects of both the underlying weakness of the £GB and the impact of money printing. At that point, there will be inflationary surges due to substantial increases in the costs of imports.

This brings me to another point. In my original post I pointed out that a collapse in the currency would result in hyper-inflation. I should clarify this, as I have noted comments (not made on this blog) which have imagined that the moment the currency collapses is the moment at which hyper-inflation appears. This was not my intended meaning. There will be a time lag, as existing contracts are fulfilled and so forth. Some products will see price inflation very quickly, such as imported foodstuffs, whilst other products may take a while for prices to inflate. However, the process will still be surprisingly rapid, just not immediate.

http://cynicuseconomicus.blogspot.com/

[southcoaster]

talk of uk bankruptcy slipped out on radio 5 last night, the presenters were gobsmacked with what the bank trader in us was saying, presenter went on about us being the 5th richest country in the world not some iceland very fuuny on iplayer now

1h50min in

http://www.bbc.co.uk/iplayer/episode/b00gr...ive_23_01_2009/

sorry if already posted

mark

[housesforcourses]

The way the situation with just the banks, never mind all the other issues, will play out is in one of 4 ways -

1. 1) UK Government Nationalises the in trouble UK banks (Lloyd's, Barclay's, RBS) and takes on there liabilities. The UK will not be able to meet those liabilities as the UK Government can print GBP but there is bound to be $100's of Billions and other currencies which the UK government cant print. UK Government is not just bankrupt, but can not be saved by any other country, other than by the respective currency holders printing and giving the cash to the UK - which wont happen. UK Goes under and brings the rest of the world with it most likely as the debt collapse would trigger banking collapses world wide.

2. 2) UK Government supports the banks either via nationalisation or funding, but doesn't take on the liabilities. One major bank somewhere in the world fails - this triggers a wave due to related liabilities and one after one all the major banks collapse. Financial system collapses.

3. 3) UK Government sets up a bad bank, ALL UK banks transfer ALL loss making, and probable loss making debts and assets into the bad bank. All other major banking Governments also do likewise - essential for this to work. The good banks go back to normal, while the bad banks try and liquidate there positions. Odds are given the severity recession in the world wide the bad banks wont survive long even with government funding and will be declared bankrupt themselves. This will result in other banks world wide being affected by having further bad debts and we have banking crisis mark 3, which will result in another round of bad banks, and rinse repeat. Basically the bad bank idea wont fix the problem but it wont kill the financial system, and we will keep having banking crisis's until the economic situation normalises.

4. 4) All Governments create a new GOOD bank each, and let the existing banks fail, or with the bad bank method help to support them ticking over. The Good bank offers support and stability as it has no links to the old bad debt, and can only take on new debt that has very low risk. The use of Good banks will mean the Financial system will not be destroyed if all the existing banks collapse.

Really the Good bank is the only thing that will stop the financial system from imploding. Northern Rock appears to may be being lined up to fill the roll in the UK, Citi has been mentioned as doing it in the US. The problem with these is they still have old liabilities, unless they transfer all existing assets to the bad banks and start afresh it will impact there ability to work as the Good banks.

interesting, option 4 sounds like the nuclear option, but do you think it would really solve the problem. Surely there could be cascading defaults as a result, and wouldnt the governement have to backstop the good bank with a huge amount of money?

[Guest sillybear2]

How can the USD and the GBP crash at the same time?

In terms of purchasing power, very easily. If two sky divers jump out of a plane and one falls faster than the other that simply illustrates relative differences, it doesn't change the fact both will eventually hit the Earth, soft-landing or otherwise.

Edited January 24, 2009 by sillybear2

[huw]

interesting, option 4 sounds like the nuclear option, but do you think it would really solve the problem. Surely there could be cascading defaults as a result, and wouldnt the governement have to backstop the good bank with a huge amount of money?

It wouldn't be necessary, the good bank(s) would have none of the old, bad liabilities.

Those with equity stakes in, or owed money by, the bad banks would lose out when they were liquidated, but in reality their money is already lost. There would be nasty knock-on effects in sovereign wealth funds, pension funds, and so on being forced to acknowledge their true position. But business and trade would be able to continue via the medium of the good banks.

[the-sign-jacker]

Could we see a global economic and currency collapse, even, with no significant 'winners'? After all, this is largely about evaporation of value into thin air, not transfer of value.

its all about what your currency is backed up with.

if i produce wheat in a country not the uk and the uk want it, i set a price for my work.

if the uk then simply print ink on a piece of paper and want more wheat i want more £s per kilo.

and so on.

thats inflation.

this crash will affect only the countries that have gone overboard with borrowing based on no production export or resources.

you can pump oil out of the ground and sell it, but you cant cut down a tree, chop it up and print £10 onn it and expect it be the same value as oil. a tree is a tree and oil is oil.

one is more expensive than the other.