The Economic Collapse
July 12, 2011
Have you noticed that a really bad mood seems to have descended on world financial markets? Fear and pessimism are everywhere. The global economy never truly recovered from the financial crisis of 2008, and right now everyone is keeping their eyes open for the next “Lehman Brothers moment” that will send world financial markets into another tailspin. Investors have been very nervous for quite some time now, but this week things seem to be going to a whole new level. Fears about the spread of the debt crisis in Europe and about the failure of debt ceiling talks in the United States have really hammered global financial markets. On Monday, the Dow Jones Industrial Average dropped 151 points. Italian stocks fared even worse. The stock market in Italy fell more than 3 percent on Monday. The stock markets in Germany and France fell more than 2 percent each. On top of everything else, the fact that protesters have stormed the U.S. embassy in Syria is causing tensions to rise significantly in the Middle East. Everywhere you turn there seems to be more bad news and large numbers of investors are getting closer to hitting the panic button. Hopefully things will cool down soon, because if not we could soon have another full-blown financial crisis on our hands.
Even many of those that have always tried to reassure us suddenly seem to be in a really bad mood.
For example, U.S. Treasury Secretary Timothy Geithner admitted to “Meet the Press” that the U.S. economy is really struggling and that for many Americans “it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for a long time to come.”
Does Geithner know something that we don’t?
To say that what Americans are facing will be “harder than anything they’ve experienced in their lifetime now, for a long time to come” is very, very strong language.
It almost sounds like Timothy Geithner could be writing for The Economic Collapse blog.
It certainly is not helping things that the Democrats and the Republicans still have not agreed on a deal to raise the debt ceiling. It is mid-July and Barack Obama and John Boehner continue to point fingers at each other.
Of course if they do reach a “deal” it will likely be a complete and total joke just like their last “deal” was.
But for now they are playing politics and trying to position themselves well for the 2012 election season.
Meanwhile, world financial markets are starting to get a little nervous about this situation. The newly elected head of the IMF, Christine Lagarde, has stated that she “can’t imagine for a second” that we are going to see the U.S. default on any debt. Most investors seem to agree with Lagarde for now, but if we get to August 2nd without a deal being reached things could change very quickly.
But it isn’t just the debt ceiling crisis that is causing apprehension in the United States. The truth is that there are a host of indications that the U.S. economy is continuing to struggle.
Even big Wall Street banks are laying people off. A recent Reuters articledescribed the bad mood that has descended on Wall Street right now….
Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and some other large U.S. investment banks are not just laying off weak performers and back-office employees. They are also cutting the pay of those they are keeping, scrutinizing expense reports and expecting even the most profitable workers to bring in more business for the same amount of compensation.
That is not a good sign for the U.S. economy.
If the corrupt Wall Street banks are even struggling, what does that mean for the rest of us?
But the big trouble recently has been in Europe. The sovereign debt crisiscontinues to get worse and worse.
As I wrote about yesterday, the emerging financial crisis in Italy has EU officials in a bit of a tizzy. If Italy requires a bailout it is going to be an unmitigated disaster.
One of the most respected financial journalists in Europe, Ambrose Evans Pritchard, says that financial tensions in the EU are rising to dangerous levels….
If the ECB’s Jean-Claude Trichet is right in claiming that Europe was on the brink of a 1930s financial cataclysm a year ago – and I think he is – it is hard see how the threat is any less serious right now.
Fall-out from Greece flattened Portugal and Ireland last week. It is engulfing Spain and Italy, countries with €6.3 trillion of public and private debt between them.
Last year it was just small countries like Greece and Ireland that were causing all the trouble.
Now Italy (the fourth largest economy in the EU) and Spain (the fifth largest economy in the EU) are making headlines.
Up to this point, the EU has had all kinds of nightmares just trying to bail countries like Greece out.
What is going to happen if Italy or Spain goes under?
At this point things with Greece have gone so badly that some EU officials are actually suggesting that Greece should just default on some of the debt.
Yes, you read the correctly.
There are news reports coming out of Europe that say that EU leaders are actually considering allowing the Greek government to default on some of their bonds. According to The Telegraph, “the move would be part of a new bail-out plan for Greece that would put the country’s overall debt levels on a sustainable footing.”
All of this chaos is causing bond yields in Europe to go soaring.
Earlier today, The Calculated Risk blog detailed some of the stunning bond yields that we are now seeing in Europe….
The Greek 2 year yield is up to a record 31.1%.
The Portuguese 2 year yield is up to a record 18.3%.
The Irish 2 year yield is up to a record 18.1%.
And the big jump … the Italian 2 year yield is up to a record 4.1%. Still much lower than Greece, Portugal and Ireland, but rising.
Could you imagine paying 31.1% interest on your credit cards?
Well, imagine what officials in the Greek government must be feeling right about now.
If these bond yields do not go down, we are going to have a full-blown financial crisis on our hands in Europe. If these bond yields keep rising, we are going to have a complete and total financial nightmare in Europe.
The only way that any of these nations that are drowning in debt can keep going is if they can borrow more money at low interest rates. There are very few nations on earth that would be able to survive very high interest rates on government debt for an extended period of time.
Pay attention to what is happening in Europe, because it will eventually happen in the United States. Right now we are only paying a little more than $400 billion in interest on the national debt each year because of the super low interest rates we are able to get.
When that changes, our interest costs are going to absolutely skyrocket.
Not that the United States needs any more economic problems.
Right now Americans are more pessimistic about the economy than they have been in ages.
In a recent article entitled “16 Reasons To Feel Really Depressed About The Direction That The Economy Is Headed” I noted a number of the recent surveys that seem to indicate that the American people are in a real bad mood about the economy right now….
*One of the key measures of consumer confidence in the United States has hit a seven-month low.
*According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.
*According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.
*Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.
The American people are in a really bad mood and investors around the world are in a really bad mood. More bad financial news seems to come out every single day now. Everyone seems to be waiting for that one “moment” that is going to set off another financial panic.
Hopefully we can get through the rest of this summer without world financial markets falling apart. But the truth is that the global economy is even more vulnerable today than it was back in 2008. None of the things that caused the financial crash of 2008 have been fixed.
We will eventually have a repeat of 2008. In fact, next time things could be even worse.
The entire world financial system is a house of cards sitting on a foundation of sand. Eventually another storm is going to come and the crash is going to be great.
This article was posted: Tuesday, July 12, 2011 at 4:35 am