Friday 1 October 2010

Are we going to make it through 2010 without a Financial Crisis?

1st October today, right in the middle of the 'storm' months in the Financial Markets. Two years ago exactly Lehman had gone under and the UK Banks were about to go down, either to bankruptcy or just in a massive share price collapse. Of course, Black Monday and the Wall Street Crash were also October events.

There are some pretty bad macro-issues around at the moment, with a global currency war and the sovereign debt issues of the outer Euro states.

But so far, so good, the markets are a little up in September having recovered their losses of the summer. Gold keeps rising suggesting some stress, but the pace of the rise is a little lower.

Things as always are on a knife edge...can we escape 2010 without a Financial Crisis?

Views of the Wise Crowd welcome...


Steven_L said...

Not sure why a rising gold price suggests 'stress'? Surely lack of confidence in US fiscal/monetary policy is a long running theme and this is just a classic bull market now.

There could be a stock market dip at any point, we saw that with 'flash crash'. Good, a have some cash sitting in my ISA that needs a long term hope, so a nice dip to buy on would be welcomed here.

Just buy good quality stocks when they look cheap, remove the stoploss and sit tight is my view.

Anonymous said...

Isn't the rise in the gold price a direct result of the feds intervention in markets and the brutal devaluation of the dollar?

I speak from a position of 80% PMs (physical) 20% land and getting rid of any paper money asap into more of the same.

The markets are detached from reality with all the funny money sloshing around, the euro can't devalue without busting the banks, the yen is a good laugh. America is going insane with ben blowing for all he's worth.

Fiat money looks more precarious now than at any time in my life. I don't know how long they can keep the merry go round going but the poo is on the way to the fan. Maybe this year if not next.

Irish budget in December might be interesting. A good fart at the wrong moment could bring the whole house of cards down IMO.

Steven_L said...

Anon sums up the paradox.

Whereas bubbles are usually caused by irrational exhuberance, the PM bubble is driven to some extent by an increasingly irrational fear of paper money.

The Fed can snap them all out of it any time they want.

Anonymous said...

@Steven, 'an increasingly irrational fear of paper money'? Let's see, total UK savings are about 800 billion. last year the BoE printed 170 billion new pounds to buy government bonds, so the pound fell by 25% against the Euro, dollar, etc. It fell by more against gold, as gold is a unique currency, it can't be created by the BoE. Over the next year the BoE has already told us they plan to print another 200 billion to buy, can you guess how much the pound will fall against gold? If you guessed about 30%, you would be correct, it's just maths.
These are the countries that have printed more money to try to devalue against the dollar in the last week, Peru, Brazil, Japan. We are in the middle of a currency devaluation war, like the 1930's. if you are bullish on government paper in times like these, then you must be a government worker.

Sackerson said...

You mean we're not in a financial crisis already?

Andrew B said...

It depends what you mean by crisis.

I am sure that one will be announced on the Today program by some notable figure at some point over the next few weeks.

Of course it wont be as good as the ones we had in 2008. Perhaps we can start becoming nostalgic about real crises.

I wonder what the gold standard for a real crisis is?

To those who start to doubt the validity of fiat money well, what is the alternative?
We cannot all carry gold pieces around with us - not least because there is not enough gold.
Without any factual support, I think a lot of the demand for gold is from people who culturally value gold and who remember that their government was less than reliable with their currency.
Some may say that includes the UK when we abandoned fixed exchange rates.

This time round I still think that the major short term risk is still deflation.

To steal a paragraph from S Flander's latest post:-

But there is a larger lesson here: that the most important question mark hanging over Britain's economy is not whether we suffer a double dip. The recovery will probably bounce around a lot in the next year - but none of these economists expects it seriously to go into reverse.

In fact, they all think we're looking at a slow and painful road out of recession - because slow and painful recoveries are what countries coming out of financial crises usually get.

The difference is that the IMF thinks that's the best we can get. Whereas Adam Posen thinks we could do better - and the Bank should try. I went into his reasoning in that earlier post, but the basic idea is that by pumping more money into the economy, the Bank could not just raise demand in the economy - but also the long run supply.

Budgie said...

Andrew B said: "This time round I still think that the major short term risk is still deflation."

People have been predicting deflation for the last 3 years. It hasn't happened yet. There's a little matter of £200 billion printed out of thin air sloshing around.

Any whiff of the possibility of deflation (not the actuality) and our dear leaders will run for the printing presses again. We will continue with inflation for the short and medium term.

Let's just see who was right in a year's time, shall we?

Sackerson said...

@ Andrew B:

I remember when it was gold, silver and bronze, and worked perfectly. That was before governments of both colours encouraged monetary inflation and connived at the takeover of our institutions by a cabal of mediocre European lawyers and administrators.

I think that if fairly free international trade continues, we can only survive the long crisis we're in by reducing real wages and that entails forgiving / defaulting massive amounts of debt. At that point the ratio of notional money to the three metals may seem more reasonable.

I share your contempt for the MSM news, now I can't even listen to / watch the Dimblebore Question shows where the guests occasionally get to interrupt the chairpundit brothers. The edition of QT that put on all the NL leaders seemed terribly familial, if you know what I mean. And don't even get me started on the News Quiz and most of the Now Show. But I don't know what the lefties have to go at, it seems to me that Balloon Head and Cleggie are pod people just like the Milibands and co.

Sackerson said...

... and for a taste of what may happen in the near or intermediate future, watch China jerking our chains with the supply of rare earths.

Sackerson said...

Ominous sign for the Autumn, perhaps - Bloomberg reports that insider selling outpaces insider buying by a ratio of 1,400:1 (htp: Theo Spark)

Mark Wadsworth said...

Budgie: "There's a little matter of £200 billion printed out of thin air sloshing around."

Good grief. The whole QE thing was a completely closed and tightly sealed loop between Debt Management Office, Bank of England and Commercial Banks (whereby the first two are both sub-departments of HM Treasury).

I'll explain QE again in simple terms to illustrate its real impact (which is nil):

1. £5 notes are small, non-interest paying bearing securities issued by govt - they are no different to government bonds apart from the interest bit - they are the holder's financial ASSET and the government's financial LIABILITY.

2. Comm banks have £5 notes under mattress.

3. Bank of England then offers to buy those £5 notes back for 502 pence in coins issued by Royal Mint. Coins are even smaller non-interest bearing securities, i.e. also a form of government financial LIABILITY.

4. Comm banks say "Ta very much", hand over the £5 notes, take the 502p in coins in exchange and pop the coins back under the mattress.
Or returning to real life, the £200 billion is not SLOSHING AROUND in the economy, the £200 billion is safely on deposit with the Bank of England (or three quarters of it).

Those comm bank deposits with BoE are a financial ASSET from the point of view of the comm banks and obviously a financial LIABIILTY from the point of view of the government.

Before QE, the comm banks had financial assets and the government has liabilities. After QE, the comm banks had financial assets (plus half a per cent profit margin) and the government has liabilities.
If you really want to worry about money 'sloshin around', try worrying about the £150 annual deficits run up by the governmetn, which is now up to an impressive cumulative £1,000 billion.

That's what we should be trying to fix, but the Tories have no interest in reducing government spending because £281 billion of it goes to their mates in the 'private' sector businesses every year.

Andrew B said...
This comment has been removed by the author.
Andrew B said...

I find all the discussion on crashes fascinating.

Partly because we cannot 'see who was right' in a years time, things might have been worse if there was no QE, (or worse if there was more).

Having looked at wikipedia, it seems that the 1800s had a couple of good crashes in 1857 and 1873, that both looked to be bigger than 1929.
Perhaps they can form a gold standard for crises.
How about if the crash does not take > 20% of all listed business into bankruptcy and cause a > 10% recession, it does not count or it is a small c crash rather than a Crash.

Anonymous said...

Budgie: "It [deflation] hasn't happened yet.

Housing prices still going up are they?

Still where they were in 2007?

I select house prices because they were the symptom of the last inflationary bubble, credit. That too is now contracting all over the world: Iceland, Greece, Portugal, Spain and now our next door neighbour Ireland.

Right now the central banks of Euroland the USA and the UK are desperately plugging the leaks in the dam, but they do not have enough fingers and actually the structure of the wall that holds back the body of water is now badly compromised.

Anonymous said...


China and Rare Earths......

The IMF won't sell Gold to China.

Mauritius purchases from IMF?

The Islands are an offshore vehicle for India, ergo Island purchases are destined for India.

Trade wars in Gold tell a mighty story!
Everyone should listen!

Budgie said...

Anon said: "Housing prices still going up are they?"

No. But particular goods going up or down in price does not mean inflation or deflation anyway.

Andrew B stated the short term risk was deflation, without defining either short term or the measure of deflation. I disagree with that prediction. I defined short term as one year. My view is that CPI will not drop below 0% over the full year April 2010 to April 2011. Nor will it over the full 12 months to Sept 2011.

Budgie said...

Mark Wadsworth - you are wrong (as well as patronising).

Let me quote Liam Halligan (04-07-2009):

"At this point, people in my position are supposed to explain that QE isn't "printing money". I'm not going to do that. For the only difference between the UK's current policy and Zimbabwe-style economics is that QE involves the creation of electronic balances rather than actual notes."

"When used to re-purchase gilts, QE allows governments to carry on borrowing like crazy, rather than facing up to the reality the country must balance its books."

"When QE was announced, the emphasis was on the commercial debt purchases the authorities would make. In the event, gilts have accounted for a staggering 99pc of the total. That's why QE will inevitably lead to high inflation – whatever nonsense is spouted about "withdrawing the monetary stimulus"."

Anonymous said...


Right on.

And that's why there is bugger-all multiplier.

And that's one of the reasons folks are quitting in the US.

And it's also a reason to distrust BofE prognostications. Merv has a 94% failure rate on guessing future inflation levels and writing idiotic letters

And that's why more QE is baked in, to devalue the currency, to INFLATE away the international debts.

Why do you think they scrapped inflation adjusted instruments?

Race to the fiat bottom, everyone wants to be an exporter, theft of all savings, yada, yada, ....

Anonymous said...

Budgie: "No. But particular goods going up or down in price does not mean inflation or deflation anyway."

Agreed, it is possible even likely to see price rises during a deflationary economic environment, my feeling is such rises would be driven by shortages rather than manufacturing efficiencies.

If deflation is the contraction of money and credit in a system, then I think we are very much in a contracting credit environment.

The amount of notes and coin is about 3% of the whole money and credit in the economy.

But if the government doubled the amount of cash and notes in the economy yet the amount of credit contracted by a third, then I think that would be a deflationary environment regardless that the amount of cash in circulation has doubled.