Category Archives: Financial Crisis

Ray Dalio Fed tightening is like 1937 – Business Insider

In a note last week, Dalio wrote that the economy is eerily similar to that of 1937. The Fed raised rates eight years after the 1929 financial crisis, following accommodative monetary policy to boost the economy, and it still ended up being too soon. The Dow lost half of its value between 1937 and 1938.

Dalio wrote:

If one agrees that either a) we are near the end of the developed country central bankers’ ability to be effective in stimulating money and credit growth or b) the dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening.

He lists six market conditions around the 1929 financial crisis that mirror the most recent one (the follow is quoted directly from Dalio):

  1. Debt limits reached at Bubble Top, causing the economy and markets to peak (1929 & 2007).

Ray Dalio Fed tightening is like 1937 – Business Insider

Is China’s 1929 moment coming? – The Washington Post

It’s weird to worry about China when it’s still growing more than 7 percent a year, but it’s a little less so when you consider how mammoth its credit bubble has gotten.

The numbers are historic. China’s total debt has sprouted from 153 percent of gross domestic product in 2008 to 282 percent today. That, according to Goldman Sachs, makes China’s borrowing binge bigger than 96 percent of all others on record. The problem is that, despite all this debt, growth is slowing and profits are falling, which makes it harder for companies to pay back what they owe. So does the fact that inflation is down to just 0.8 percent. It’s no surprise, then, that China’s central bank just eased policy for the third time in as many months, cutting its benchmark rates by a quarter of a percentage point, to try to avoid the kind of low growth, low inflation trap that the rest of the world has fallen into.

But it might be too late for that.

Is China’s 1929 moment coming? – The Washington Post

This is what happens to countries that heavily focus on economic stability. Instead of little crashes they get big ones.

Time Bomb: China’s Debt Is Out of Control | The National Interest Blog

China’s national balance sheet is starting to look ragged. Goldman Sachs thinks China’s industrial debt is, at 240 percent of GDP, approaching American levels, but at a much lower development stage. McKinsey reckons China has piled on 83 percent debt/GDP in 2007-14. In this period, total debt has quadrupled, certainly the world’s largest ever credit buildup but also one of the fastest. This latter point is significant. By Goldman’s count, China is coming off a “97th-percentile” episode of credit accumulation. Historically about half of such events have culminated in a banking bust. Since China “doesn’t do crises,” it must eventually correct through rebalancing.

… The days of 7-point-something growth may be over soon.

Time Bomb: China’s Debt Is Out of Control | The National Interest Blog

For the third time in a century, America will have to ride to Europe’s rescue – Telegraph

It would be the third time in a century. Will America once more end up having to save the fratricidal Europeans from themselves? In Washington, there is a sense of events spiralling out of control, and of again getting drawn into Europe’s centuries old propensity to self destructive madness.

The EU’s evident inability to contain the geo-political ambitions of Vladimir Putin may be the most visible of America’s latest concerns, but the more immediate danger centres on the stand-off with Greece, which grows uglier by the day. Greece’s latest overtures to the Russians make the situation seem more alarming still.

Tuesday’s apparent olive branch from Greece’s celebrity finance minister, Yanis Varoufakis, is in truth no compromise at all, despite the evident relief it brought to financial markets; it was merely the same demands dressed up in more acceptable language. Speculation of a six month programme extension was also fast slapped down by the German finance ministry.

For the third time in a century, America will have to ride to Europe’s rescue – Telegraph

The global financial system stands on the brink of second credit crisis – Telegraph

The world economy stands on the brink of a second credit crisis as the vital transmission systems for lending between banks begin to seize up and the debt markets fall over. The latest round of quantitative easing from the European Central Bank will buy some time but it looks like too little too late.

It was the collapse of US house prices back in 2007 that resulted in the seizure of the credit markets and banking crisis of 2008. And it would be easy to lay the blame for the 2008 financial crisis at the doorstep of American home owners, easy but wrong. The collapse of the US housing market was not the cause of the crisis, it was merely a symptom of the more insidious ills of cheap credit, low risk and the promise of another bailout round the corner.

The Keynesian pump priming that has taken place on a colossal scale across the world is failing. The Chinese economy was growing at 12pc in 2010, but that slowed to 7.7pc in 2013 and 7.4pc last year — its weakest in 24 years. Economists expect Chinese growth to slow to 7pc this year. It is the once booming property sector that has turned into a bust, and is now dragging down the wider economy as the bubble deflates.

The global financial system stands on the brink of second credit crisis – Telegraph

Osborne Sees Rising Danger of Bad Outcome in Greek Crisis – Bloomberg Business

U.K. Chancellor of the Exchequer said the danger of a miscalculation leading to a “very bad outcome” between Greece and the euro area is increasing, and the Group of 20 finance ministers are urging a solution.

“It’s clear that the risks to the world economy, the risk to the British economy of this standoff between the euro zone and Greece, is growing each day,” Osborne said in an interview with Bloomberg Television in Istanbul late on Monday. “The risks of a miscalculation or a misstep leading to a very bad outcome are growing as well.”

That outcome could be a “potentially chaotic and disorderly exit,” Osborne said, adding “there’s no doubt that the U.K. economy would be affected by a crisis in the euro zone.”

Osborne Sees Rising Danger of Bad Outcome in Greek Crisis – Bloomberg Business

The 7-year slump: Why the global economy can’t seem to get started – The Globe and Mail

Bill Hammond has navigated a globally focused business through 37 years and a half-dozen economic cycles. But he’s never seen anything quite like the long, slow, on-again-off-again recovery that the world economy remains stuck in, years after things should have returned to normal. Frankly, he’s worried.

“It has become clear that we are really dealing with a different kind of economic recovery than anyone has experienced since World War II,” says Mr. Hammond, chief executive officer of Hammond Power Solutions Inc., a Guelph, Ont. company that makes electrical transformers for industrial clients around the world.

“This is far different from any recession I have seen.”

“I have never seen as much global instability,” says Betty Lou Pacey, who runs a Vancouver-based specialty lighting company with international suppliers and clients. She just returned from seeing a client in Argentina, where inflation is running at about 40 per cent. Even in her primary market of the United States, where so much of the world’s recovery hopes are now pinned, she senses the tremors from the nagging global woes and the lingering hangover from the recession: Big U.S. restaurant chain clients are no longer investing in renovations.

“I mean, we’ve got the euro, which has got troubles. We’ve got political issues all over the world. Where this is going, I don’t know.”

The 7-year slump: Why the global economy can’t seem to get started – The Globe and Mail

The global economy is different than it used to be. What happened?

In short, stability is what happened. During the stable times problems slowly build up. Eventually they overwhelm the everything. The only real solution is a full depression lasting at least a decade. Short of that there will be no solution.

Here’s a little background information:

A System Collapse Framework for Societies | 1913 Intel

How to Build a Better Economic Model | 1913 Intel

Analysts fear China financial crisis [in 2015] | Business | The Guardian

A credit crunch in China is “highly probable” this year as slowing economic growthprompts a surge in bad debts, Bank of America Merrill Lynch predicts.

Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion – and rebalance the economy from overly relying on exports and investment to consumer spending.

Bank of America Merrill Lynch strategists David Cui, Tracy Tian and Katherine Tai argue: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”

The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money.

They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government with the People’s Bank of China playing a central role.”

The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s.

Analysts fear China financial crisis | Business | The Guardian

Greek expulsion from the euro would demolish EMU’s contagion firewall – Telegraph

Should EMU leaders choose to cut off liquidity support for the Greek banking system – forcing a return to the drachma – they might find that their contagion defences are a fiction.

Everybody is tired of Greece’s endless agony. It is precisely when you are most tired that your judgment fails you.

Greek expulsion from the euro would demolish EMU’s contagion firewall – Telegraph

Could a Greek Christmas Crisis Threaten the Euro? | Morningstar

From a Greek perspective, now would actually be a very good time to default on past debt. After years of savage austerity, the Greek budget is now just in surplus before accounting for debt interest or the repayment of debt. This means that Greece no longer needs to borrow money from anyone to fund itself, and so its level of debt is near a peak. Defaulting now has lots of upside and limited downside from this perspective.

The German word for debt is has very close links with the word for guilt, and Germans would regard a Eurozone country defaulting on its debt as profoundly wrong, threatening the very sanctity of the single currency. There would be a strong move to have Greece ejected from the euro, though there is no legal process for any country to leave the euro.

While the world enjoys its Christmas and New Year holidays, Greek MPs will be determining whether we return to our desks to find a new crisis threatening the Euro.

Could a Greek Christmas Crisis Threaten the Euro? | Morningstar

Russia Faces First Recession Since 2009 as Banks Add to Oil Pain – Bloomberg

Russia is entering its first recession since 2009 as sanctions over the Ukraine conflict combine with plunging oil prices and the weakening ruble to hammer the economy and force the government to prop up banks.

The economy is succumbing to penalties imposed over Ukraine as the plummeting ruble stokes inflation and a 30 percent drop in oil prices erodes export revenue. As economic ties with the EU deteriorate, President Vladimir Putin yesterday said Russia scrapped a proposed $45 billion Black Sea pipeline to carry gas to Europe by bypassing Ukraine.

Russia Faces First Recession Since 2009 as Banks Add to Oil Pain – Bloomberg