Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

At this point, I doubt there are many that would downplay the integral role speculation plays in our dangerously unstable global markets....
The interplay between central bankers and the leveraged speculators (hedge funds, proprietary trading desks, etc) has been instrumental to the expansive global Credit Bubble. For the first time, global finance operates with no limits to either the quantity or quality of new credit creation. There is no gold standard; no Bretton Woods currency management regime; nor even an ad hoc dollar-reserve system to anchor Credit expansion....
Unconstrained finance is nirvana for speculation. Importantly, boundless Credit completely abrogates a system's capacity to self-adjust. I thought one positive outcome from the crisis would be a much smaller and less destabilizing speculating community. It was not to be. In less than two years, hedge fund assets surpassed a record $2.0 Trillion....Amazingly, global markets became more speculative and dysfunctional than ever....

Hedge fund de-leveraging was surely a primary factor behind last week's market tailspin. The community is again on the wrong side of rapidly moving markets, and they're being forced...to liquidate positions and rein in risk....
And now that de-risking and de-leveraging have begun in earnest - and with losses accumulating rapidly - the fear will be of de-leveraging begetting liquidity issues and only more de-leveraging....And there will be the issue of hedge fund redemptions, with the distinct possibility that industry fundamentals have recently taken a dramatic turn for the worse.

Asian equity markets continued their downward path from last week....

To summarize, as of late mid-afternoon Friday local time in Tokyo, the MSCI Asia Pacific Index had lost 3.2% on the week to 122.03 for a full loss of 10.8% over the last fortnight. Short-term indicators are steadily poor and not quite technically overbought. The analogous euro-denominated FTSE index shows similar technical features, including slightly improving if still thoroughly discouraging momentum.

...on August 11, the Swiss announced that they were discarding their monetary constitution that has prevented inflation in Switzerland and that has made their currency a safe haven for people everywhere who desired to protect their wealth, both small and large, from the predatory inflation practices of their own governments? Or is the Swiss announcement a result of America's financial irresponsibility, the behavior of a parasite?

The Swiss said that they are forced to violate their monetary constitution, because the irresponsible practices of the United States and European Union monetary authorities are driving so many dollars and euros into Swiss francs that the franc has appreciated to astronomical heights and is threatening Switzerland with the collapse of their export markets and Gross Domestic Product.

Obviously, Washington is threatening the world not merely with war but also with inflation.

A slowing global economy on the back of debt woes in the United States and Europe will hurt China's exports in the long run - but not just yet, analysts and industry players say.

Evidence of robust growth in foreign demand for China's goods came on August 10...giving China its biggest trade surplus for two-and-a-half years, reaching US$31.5 billion in July from $22.27 billion in June....
"To ease the negative impact of the downgrading of the United States' credit rating, such as the constant rise of yuan, China should plan to diversify China's huge foreign-exchange reserves, a majority of which are invested in US assets and prepare more flexible macro policies."
The most pressing task for Chinese exporters is to open more markets in emerging countries....

Astonishingly, U.S. economic experts often respond to the question of how the world’s largest economy will find its way out of its debt trap with, “Muddling through.” With that, they do not mean relevant management theory (don’t laugh, it really exists), but rather a true muddling through. Have fun with that....
The United States has a debt ratio of around 100 percent of the GDP. Above all though: Only roughly 56 percent of government expenditures are currently covered by tax income....
Sorry: An economic austerity program that merely proposes debt reduction will unfortunately be too small. To get to a tolerable 60 percent of the GDP (that would be the famous Maastricht criterion), the U.S. would need to reach primary budget surpluses of 10 percent of the GDP until 2020. That means income would have to exceed expenditures (minus interest payments) by roughly $1.4 trillion. Every year. Does anyone believe that? Above all, does anyone believe this will succeed with muddling through?
The U.S. is rapidly approaching the path where many euro countries already stand: behind the debt limit with no return....That’s not how one heals patients. At the beginning there is normally a proper diagnosis without self-deception. And it is: We are watching the “growth through low interest rates and high government debt” economic model fail. The debt is climbing higher and higher and growth is becoming slower and slower. The recognition that economic stimulus no longer functions above a certain debt level is, of course (at least officially), not yet political mainstream....
Without a restart, it will work neither in the U.S. nor in Europe. The question is who will push the button for the debt restart. And what this looks like. Several possibilities are open: simple cancellation of debt (improbable because of the potential for political conflict), currency reform (likewise improbable) and “inflationing” away government debt (very probable), to name only the most important.

The last might be the most charming for those in power; that is, if hyperinflation doesn’t get out of control, those asked to the cash register...will not truly realize their dispossession.

Since 1929, when Wall Street plunged, the president of the United States can only say one thing: "The fundamentals of the American economy are good." This sentence, with a few close variants, has been systematically used by all political leaders and central banks when markets tumble....
Today in Europe, as in the United States, the fundamentals are not good. Markets are not wrong. They are right.

The United States is short of ammunition to revive demand. Companies do not need cheaper credit, they need customers. Citizens do not need cheaper credit or lower taxes. They need jobs and higher wages.

We can no longer pretend to believe that American and European fundamentals are good. Thus, investors, anxious to preserve the value of their holdings, sell their shares and buy gold. They also buy Treasury bonds. But for how long?

Gold is useless. Gold does not produce anything. But the precious metal is seen as the best way of retaining the value of financial assets. And if inflation is the final solution, gold is the last defense.

Germany's inability to repay war reparations led to the breakdown of the multilateral system of free trade. The United States introduced tariff restrictions in the Hawley-Smoot Act, which further deteriorated the situation around the world....

The Germans blamed the banks....After the Nazis came to power, they used the foreign assets locked in Germany to induce Switzerland and Britain to adopt less hostile policies toward the new German government. Frozen debt (call it blackmail) turned out to be an effective tool in preventing the West from getting its act together....

...17th-century Spain offers another good example....By 1598, the King of Spain gave the church's hierarchy the role to renegotiate the debt. The king thought that only they could rationalize default by using theological arguments, making a financial issue sound like a moral one, which the lenders could not oppose.

By now, morality, ethics, or any notion of honor has lost their association with religion, race, or patriotism. Policies became rationalized by armies of subsidized academics and think tanks. Subsidies to universities and "academic" publications have turned the resulting output into what I often call "the sciences of political lies".,,,

What the US has to do is simple in principle -- which does not imply that it is easy to execute. It must create massive equity bottom up....

It seems clear that Germany has reached the limit of its patience with its feckless southern neighbors, who have taken the attitude that they might as well be hanged for a sheep as for a lamb, and seem unwilling to adopt the drastic austerity measures needed to stabilize their positions.

If Greece (and perhaps Italy and others) are allowed to go bankrupt, as I expect, and forced out of European monetary union, the result is deflationary. That seems to explain why gold is falling.