A friend of mine who lives in the USA has asked for my thoughts about the short term future of the US / world economies – so I started, well here it is.
There however could be repercussions in Australia as companies in Australia and overseas which have been invested it by our large financial entities including Superannuation companies are effected by the flow on effect. For instance it may effect the a large bank, the NAB and ANZ come to mind as they seem to be the most exposed to the overseas markets – it could effect their assets, their income (the weakness of the US Dollar won’t help here) and could result in write downs. This will lead into a general loss of confidence in the financial sector – which may the lead to interest rate rises again outside of the Reserve Bank guidelines – which will tighten up money supply. Although in the short term this will not be a pleasant experience – it may mean that (1) No more or perhaps less increases in interest rate from the RBA (2) That the flow on effect will allow for the RBA to reduce interest rate – great – but probably not until 2009 at the very earliest.
What does it all mean? I frankly don’t know all the answers – but what I think it means is that life as we know it is over – the greed of those capitalists who thought up and marketed the worthless junk bonds based on the sub-prime market has done incalculable damage to the US economy which will probably be revealed in full over the coming years – probably 100 or more banks will go belly up – and with the losses that those people who have more than $100,000 in cash in FIDC or more than $250,000 in a retirement funds are going to be horrendous on people, people who overall cannot afford another disaster. But as is evident the damage that is being done to the US economy is being mirrored to a lesser extent in Australia and the rest of the world – but we don’t have any FIDC to fall back on – although I don’t think it will come to this in Australia.
The damage to the perception and hence the stock price of Fannie Mae and Freddie Mac in the USA, also the IndyMac Bank where the fallout has prompted investors to dump the stocks of many mortgage lenders, precipitating the steepest one-day decline in banking shares since the late 1980’s, these are just symptoms of the bad paper, and a total lack of confidence. Fannie Mae and Freddie Mac have to wear the huge losses brought about by the failures brought about by the sub-prime. The US federal government has to bail them out – if they went down the losses would be in effect a six time multiplier of the Australian GDP – no small amount. Fannie Mae and Freddie Mac, which own or guarantee about half the $US12 trillion in home loans in the USA, but is this bail out the only one for these companies and others – how about the rest of the Finance and Banking sector. What happened for instance if these 2 critical organisations, Fannie Mae and Freddie Mac were nationalised? If this situation continues they will have to be - as although they the US Federal Government will have to have some control over the companies, as well such a move, which has not happened since the depression would be the first constructive move telling the world that the US Government guarantees and has faith in the future of the US economy - they will have no choice. So long as these two enterprises continue to bleed money at this rate. Such a move would have flow on effects into the Stock Exchanges as well as the strength of the US dollar.
The financial markets including a section of the financial market – the bond insurers the ratings agencies – such as Standard and Poor’s etc will also be affected – they are in an invidious position, there income comes from the people they are rating – I just wonder how the industry as a whole rated the sub-prime paper ?
The stock market is all about perception and confidence - the bull market is over for the foreseeable future – there will now be a huge correction – financial and associated companies will feel it markedly in the short term, especially banks – and then the inevitable flow onto industry and so I think the whole world economy is in for a shake up to a varying degree, laws governing finance companies and financial instruments will be tightened up as a knee jerk reaction probably in the extreme – which will also have the unfortunate effect of tightening monetary supply and hence flow and will in effect put a brake on the economies, when they don’t need it – to quash the enterprising spirit – mind you to a point the enterprising spirit along with greed, expedience and lack of oversight is what landed us in this mess in the first place.
Long term if the US economy actually goes into a full blown depression – then as the saying goes if the US sneezes then the world world gets a cold – as the USA is the largest consumer market in the world – it is a huge market – and have you thought for one moment as you look around your house as I did mine what items were made in China – if the US economy stagnates or even contracts – demand will slacken – orders on China will decrease which will mean that the demand for raw materials will decrease and this in the mid to long term affect the Australian economy – there are a zillion different scenarios, most of them bad – this is what happens in a Global inter Dependant economy. Of course the war in Iraq is a definite killer of the U.S. economy – it look like what the twin towers didn’t kill, the war against terror will - this perverted policy is all about ego and oil – I only hope with a new President things will get better – but for things to get better – you need time – it could be at least a term before things even start to – after all it took Bush two terms to put you in this mess. One thing the likely hood of America becoming isolationist is now not as likely as in the past.
I am optimistic at this stage – as I hope the USA – with a new President in the White House will start the process to a positive growing economy – as the people of America certainly have the will and the energy to be the big driving force back to a positive and growing world economy – but currently and with the new President as yet an unknown they have currently been badly let down by their leadership – correction the people in control and the bureaucracy - which the dictionary defines bureaucracy as an “organisation typified by formal processes, standardisation, hierarchic procedures, and written communication” – hence by its very nature an inability to act in a decisive and prompt manner – just look at Katrina and New Orleans. So if the USA learnt anything from history such as from Vietnam – remember - "Those who do not remember history are condemned to repeat it" - an apt quote which seems to fit very well today, especially the Iraq war - by George Santayana here
I haven’t even developed the thought of how the Central Banks of the world will stuff the future up – but see the above concerning bureaucracy and you might get the idea. I believe I am right here – but gosh I hope I am wrong.
On top of all this the Oil price will further tend to slow down the economy – making raw materials, food and basically anything transported at a premium price – it's not going to get any easier – and then of course we have carbon trading which is again going to increase the costs of every product of service that has a polluting content and is not exempt from the Carbon trading guidelines. Everything that is made using oil or its products as a constituent , transport and the flow on from this will necessarily be a drag on the growth of the markets and the world economies. The world is going to have to consider the reality of the Global economy which for products relies on transport and their emissions. Mind you the whole idea in the world economies where one import items such as food and other essential products and services is a very poor strategic plan – one is giving your own sovereignty under threat. But trade is an essential part of the world economy – an essential part of peace for the world – now if there was a actual working world government – that had some teeth ?
One more thing – the idea of making Bio-Fuels from human foods such as corn is another one of these decisions made on the basis – that we come to the realisation that we have a problem – let not think about it – lets not actually plan a Strategy - let’s just throw money at it – and then fix up the mess with more money later. We should be sending those monies into developing new and proven technologies to the mass market. There will be long term sources of energy not even thought of yet – that are still in the realms of science fiction or in the minds of those unborn or unrecognised as yet – so we need to live with the technology we can work on now, such as the development of Base load alternatives – such as Solar furnaces with molten overnight energy (or underground pressurisation) – wave / wind power (where applicable), nuclear power (if it was safe – perhaps), Geothermal, Hydro-electric (not much of an idea in Australia)+ as well peak load supplies – solar power, wind power, Gas Turbines, +++ - A cheap way of extracting hydrogen for fuel cells, Cold fusion may even resurrect itself from obscurity – see here and save mankind – perhaps I should write another movie script.
Of course the other issue the world may have to content with is that the Chinese economy itself which my feeling is will only grow to a point – where it may start to stagnate or in fact contract - this social experiment where people in the city are wealthy and people in the country are basically forgotten and dirt poor – this was so accentuated by the recent earthquake and the time it took to get things moving – (reminded me again of Katrina) - it’s a long term scenario for a revolution - sounds a bit like Russia before 1917.. Perhaps the people of the USA might be on the way to deposing the Washington Bureaucracy – and create a Government for the people by the people.... ring a bell??
Mind you – democracy probably is a misleading term for our governments – the only good thing about it is that we can vote another ego driven, agenda bearing political party into power to stuff up the economy – as by the very nature of the animal there can be no long term plan – I regard a country as the same as a company with the citizens being the countries shareholders – that’s why we throw them out the management from time to time – as the question arises are all people treated equally? No – No arguments there. But why don’t things improve – perhaps it comes back to our Governments bureaucracies – something that we can’t throw out – now there is a thought. But the trouble is that these bureaucracies are us.
I know it is not as simple as I say here – some things I know I have overlooked and glossed over – there are other macro and micro economic issues and aspects as well as the big unknown, will and inertia – politics and the political will which I haven’t even touched on here – but I am not writing a book.
Stumble It!
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