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The Parallel With 1931 Looks Unbearably Close + Return Of The Credit Crunch

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I'm of the opinion that comparisons with the 30s are spurious given the changes to our economies and relationships between them over the last 80 years. Some things will always remain the same, but other stuff (like many of Keynes' assumptions) just don't hold anymore, eg flexible workforces, trade volumes, specialisation etc.

On the other hand interdependence makes bad news spread.

BWTFDIK I'm more suited to micro than macro.

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I'm of the opinion that comparisons with the 30s are spurious given the changes to our economies and relationships between them over the last 80 years. Some things will always remain the same, but other stuff (like many of Keynes' assumptions) just don't hold anymore, eg flexible workforces, trade volumes, specialisation etc.

On the other hand interdependence makes bad news spread.

BWTFDIK I'm more suited to micro than macro.

It's different this time... right?

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Is there anything left for governments to pull out of their hats or from up their sleeves, or will nature finally take its course?

Yes, there's some ammo in the form of real QE by the ECB. See the other article in the FT - http://www.ft.com/cms/s/0/540cfd22-fcb0-11df-bfdd-00144feab49a.html

Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.”

I think that this is where we will end up. ECB printing which will lift the PIGS off the rocks. It's the easiest solution politically.

Edited by newbie

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I'm of the opinion that comparisons with the 30s are spurious given the changes to our economies and relationships between them over the last 80 years. Some things will always remain the same, but other stuff (like many of Keynes' assumptions) just don't hold anymore, eg flexible workforces, trade volumes, specialisation etc.

On the other hand interdependence makes bad news spread.

BWTFDIK I'm more suited to micro than macro.

debt, and the inability to pay back LEVERAGED debt was very different in those days, indeed, Maths was different then....

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(I can't find an online link to it, sorry.)

Is this it?

http://www.ft.com/cms/s/0/50de8e2c-fcab-11df-bfdd-00144feab49a.html

Just google "The parallel with 1931 looks unbearably close" to find it otherwise.

Europe’s debt yields show investors are unconvinced

By John Plender

Published: November 30 2010 18:26

Last updated: November 30 2010 18:26

Bond market contagion has now spread from its initial source in Greece all the way to Italy and Belgium via Ireland, Portugal and Spain, raising government borrowing costs on the way. This week the infection has spilt over into the corporate bond market. The parallel with 1931 looks unbearably close.

Then the rot started with Austria after the collapse of the Creditanstalt bank. The country’s creditors pulled out, triggering similar runs on other countries including Hungary, Czechoslovakia, Poland, Romania and Germany. Bail-outs were as politically contentious and difficult to implement then as they are today and deflationary remedies were likewise in vogue.

One lesson is that when markets are minded to behave this way, it becomes singularly difficult to draw a line, which is a current issue in relation to Portugal and Spain. Small wonder that European politicians are expressing exasperation and want to assert some control over market movements. Are they right in thinking that investors are behaving irrationally?

In financial crises markets can become pathological, ceasing to distinguish between types of debt, maturity profiles and institutional structures in a panic. In extremis, their prophecies become self-fulfilling if interest rates rise to the point at which the fiscal position of a heavily indebted country tilts over and becomes unsustainable. Yet in the present case the markets are not being notably irrational. Part of the trouble lies in the fraught interaction between politicians and capital flows and the differing speeds at which they operate. But the markets are also sending signals that politicians would be ill-advised to ignore.

In effect, the rise in bond yields in southern Europe reflects a justified belief that this sovereign debt crisis is more serious than the politicians have, until recently, been prepared to acknowledge. As I argued here in May, the European financial stability facility, prompted by Greece’s problems, essentially provided a liquidity solution to a solvency problem. That becomes more worrying as the crisis escalates and people note that the EFSF does not have sufficient funds to deal with Spain, if a bail-out becomes necessary. And if a bail-out is ultimately needed, it will impose a serious burden on Italy’s public finances when it has to make its contribution to the EFSF. So crisis management in May now contributes to further contagion.

Markets are also worried that the deflationary policies imposed on debtor countries will worsen ratios of debt to gross domestic product by shrinking their economies. They do not believe the cheery official forecasts for Ireland’s growth, to take an obvious case in point, and regard the state of the Irish banking system as proof of the laughable nature of the recent stress tests for European banks. A further concern relates to the newly announced European Stability Mechanism, where there is uncertainty about how decisions will be made about the solvency of debtor countries.

The halting path towards “fiscal Europe”, which is essential if the monetary union is to have any chance of survival, is strewn with obstacles. Meantime there are plenty of more specific political issues to give bond investors pause. The governments of Italy and Belgium, which have very high gross public sector debt levels of 116 per cent and 97 per cent of GDP respectively, are in disarray. A huge question mark hangs over the ability of politicians to maintain consensus in heavily-indebted countries for fiscal retrenchment. That the Greek government has so far survived, despite inflicting considerable pain on the electorate, is a near miracle. How the Irish take their deflationary medicine remains to be seen.

Underlying all this is the fact that the public finances of most advanced countries are in a greater mess than at any point in peacetime history. There used to be a tradition in public finance that debts were racked up during wars, national emergencies and other upheavals. They were then paid down in peacetime. Since the second world war, the growth of the welfare state has caused budget deficits and public debt to rise inexorably. Inflation has played an increasingly important part in reducing the real value of debt.

Today, in a more deflationary world marked by a global savings glut and by independent central banking, it is beginning to look as though defaults, whether in the form of stretching maturities, restructuring or other means, will stage a comeback in advanced countries. This means that burden sharing will be more explicit than with default by inflation and thus more politically fraught.

Yet as the independence of central banks is eroded as a result of the financial crisis, the risk increases that inflation will return in due course. It is a safe bet that the bond markets will be a pretty nervous place for a while yet.

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debt, and the inability to pay back LEVERAGED debt was very different in those days, indeed, Maths was different then....

I didn't mean maths was different...

There is plenty of stuff that wasn't the same, but see your point

Personally I don't care as I'm generally better off in this recession than in the boom years.

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Yes, there's some ammo in the form of real QE by the ECB. See the other article in the FT - http://www.ft.com/cms/s/0/540cfd22-fcb0-11df-bfdd-00144feab49a.html

I think that this is where we will end up. ECB printing which will lift the PIGS off the rocks. It's the easiest solution politically.

The wave of money may lift the PIGS off the rocks, but will only dash them on the next rock with greater force.

Money printing will only work if the problem countries immediately move to balance their budgets. The trouble is, the force of moral hazard brought about by direct bond purchases encourages the opposite behaviour.

I would guess that if Euro's are printed in this fashion, the German populace might simply refuse to accept them. They are aware that this would rob them, and it is no wonder we keep hearing stories of German safe deposit boxes full of gold coins.

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I am getting miffed reading about bond holders demanding and getting higher IR returns to lend money to banks, to states but that us savers are still be screwed.

I suspect that now they have got away with giving ultra low IRs to savers that they will continue this for decades to come.

I read all this stuff about bonds and it might creating another crisis - ala 1930 - but they have been saying this for several months if not years now.

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I didn't mean maths was different...

There is plenty of stuff that wasn't the same, but see your point

Personally I don't care as I'm generally better off in this recession than in the boom years.

nah, to say things are different is a false flag.

Of course they are different, we have TV, internet, the world is in colour.

but, money is no different, in spite of what the geneii in the Financial World tell us. a £ is still a £ ( although a pale version of its former self), and lending is still lending.

In the late 1920's there was an asset boom...later fueled by bankers lending on the basis of asset values...then in order to get rich quicker, they lent, no money down to buy your assets....

then the loans stopped being able to be repaid, bankers called in the margins, course, there was no money to pay it back as all the new "wealth" was credit...and credit settles no debts whatsoever.

Its the same this time, the same £'s buying ever rising assets, "clever" ways to make the debt fountain forever grow...didnt work when the first defaults came in big numbers.

printing and failure to clear the debt has changed nothing...like the 1930s, they prolong and worsen the inevitable bust...that ended in war and destruction of continents.

I can see a time, not too far away, where this buck passing of debts between nations become a war issue....the first noises are from Greece and now Ireland...WHY SHOULD WE PAY THEIR BANKERS DEBTS? is the cry...all it needs is a radical politician to run with this.

sounds familiar?

Good luck with your doing better...it aint gonna last unless you are "in the club".

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Is this it?

http://www.ft.com/cms/s/0/50de8e2c-fcab-11df-bfdd-00144feab49a.html

Just google "The parallel with 1931 looks unbearably close" to find it otherwise.

Thanks... I was amused that google brings up this thread first though.

I particularly like this line.

As I argued here in May, the European financial stability facility, prompted by Greece’s problems, essentially provided a liquidity solution to a solvency problem.

This pretty much states the major financial problem of our times... solving solvency problems with liquidity solutions both on a personal and national level.

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Good luck with your doing better...it aint gonna last unless you are "in the club".

I don't mean to sound smug. I'm by no means rich, but feel well-positioned to ride out the storm, as should all of us here who are generally realistic about the economy. Nothing should surprise anyone.

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I don't mean to sound smug. I'm by no means rich, but feel well-positioned to ride out the storm, as should all of us here who are generally realistic about the economy. Nothing should surprise anyone.

im stocking up on tins and credit card debt.

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I am getting miffed reading about bond holders demanding and getting higher IR returns to lend money to banks, to states but that us savers are still be screwed.

I suspect that now they have got away with giving ultra low IRs to savers that they will continue this for decades to come.

I read all this stuff about bonds and it might creating another crisis - ala 1930 - but they have been saying this for several months if not years now.

If the risk doesn't reflect the reward, I suggest you remove your money from the bank. That's all the bond market is doing.

Better still, it may be better to get out of cash altogether, considering they will may just print up deposits when demanded (as the banks get bailed).

Holding cash doesn't automatically entitle you to earn yet more cash from it. There has to be a demand to borrow it and an ability to pay it back, in order for cash to yield interest.

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If the risk doesn't reflect the reward, I suggest you remove your money from the bank. That's all the bond market is doing.

Better still, it may be better to get out of cash altogether, considering they will may just print up deposits when demanded (as the banks get bailed).

Holding cash doesn't automatically entitle you to earn yet more cash from it. There has to be a demand to borrow it and an ability to pay it back, in order for cash to yield interest.

There must be the biggest ever demand to borrow cash right now. It used to be done by people and now it is done by countries.

The UK lending Ireland cash at 5.83% or 7.25% while NS&I and our state backed banks pay pathetic interest rates to UK savers.

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There must be the biggest ever demand to borrow cash right now. It used to be done by people and now it is done by countries.

The UK lending Ireland cash at 5.83% or 7.25% while NS&I and our state backed banks pay pathetic interest rates to UK savers.

If you dont like UK rates, you can always buy Irish bonds and take the currency risk.

Lots of choice out there, no need to whinge.

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There must be the biggest ever demand to borrow cash right now. It used to be done by people and now it is done by countries.

The UK lending Ireland cash at 5.83% or 7.25% while NS&I and our state backed banks pay pathetic interest rates to UK savers.

But do they have the ability to repay it?

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If you dont like UK rates, you can always buy Irish bonds and take the currency risk.

Lots of choice out there, no need to whinge.

Risk?! I thought people just wanted 'risk free' returns on their money? ;)

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But do they have the ability to repay it?

of course they do...thats why we LENT them a load more. silly boy.

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John Plender's column in the FT this morning begins:

(I can't find an online link to it, sorry.) Then on the opposite page, by way of other articles such as "Banks come under heavy selling" and "No relief in sight for beleaguered Euro", we come to:

Eurozone banks hit by return of the credit crunch

Is there anything left for governments to pull out of their hats or from up their sleeves, or will nature finally take its course?

Do you happen to have Bloomberg links to these government bonds so I can see the current trading graphs? Have tried to find these myself to no avail. Cheers,

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:lol:

And when they are unable to repay, we just lend them even more right? ;)

good Lord, I think you may be onto something... call wikileaks immediately

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I hate to post and run, but I have to head out into the snow now, and might be gone some time. :D

I think the answer to the possible "next trick" might even have been on the FT's front page headline:

Trichet hints at bond purchase rethink

The ECB toying with QE and joint bond issuance. I wonder what German tax payers think about that?

Another (German unpalatable) alternative is full fiscal union. I've said before, but I think this is 'make or break'. If the EU was less sclerotic and paralyzed I'd expect to see all sorts of bold, wild, brave moves. Maybe fear will even break their decision deadlock.

The reason it's paralyzed is the same reason the Euro was always going to fail.

And it's the comparisons with the later 1930's that worry me more.

Why can't the countries in Europe just mind their own businesses and be good neighbours to each other?

Why do they constantly have to try and impose a Europe wide dictatorship on each other?

Can anyone answer this question?

:blink:

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+ 1

Good post BL

Most people will probably think you are mental linking the current financial crisis to potential civil unrest / war as happened in the 1930's but there will be a tipping point; it's not difficult to see that civil unrest is starting.

nah, to say things are different is a false flag.

Of course they are different, we have TV, internet, the world is in colour.

but, money is no different, in spite of what the geneii in the Financial World tell us. a £ is still a £ ( although a pale version of its former self), and lending is still lending.

In the late 1920's there was an asset boom...later fueled by bankers lending on the basis of asset values...then in order to get rich quicker, they lent, no money down to buy your assets....

then the loans stopped being able to be repaid, bankers called in the margins, course, there was no money to pay it back as all the new "wealth" was credit...and credit settles no debts whatsoever.

Its the same this time, the same £'s buying ever rising assets, "clever" ways to make the debt fountain forever grow...didnt work when the first defaults came in big numbers.

printing and failure to clear the debt has changed nothing...like the 1930s, they prolong and worsen the inevitable bust...that ended in war and destruction of continents.

I can see a time, not too far away, where this buck passing of debts between nations become a war issue....the first noises are from Greece and now Ireland...WHY SHOULD WE PAY THEIR BANKERS DEBTS? is the cry...all it needs is a radical politician to run with this.

sounds familiar?

Good luck with your doing better...it aint gonna last unless you are "in the club".

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      • down 5% +
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