Chronicles Of Depression 2.0: #252: No Escape

This is Ambrose Evans-Pritchard, the sharpest mind covering this mess. For the longest time, he didn't believe things would come to this point. So for him to write this ...

US Economy: Even Hank Paulson's bail-out plan cannot detox global banking

Even if Congress backs the Paulson bail-out, the $700 billion blast cannot save the US, Britain or the world from the deepest economic slump since the Thirties. If Congress balks, God help us. The credit system is suffering a heart attack. Inter-bank lending is paralysed. Funds are accepting zero interest on US Treasury notes for the first time since Pearl Harbour, because no bank account is safe.

Wherever you look – dollar, euro, sterling Libor (the rate at which banks lend to each other), or spreads on credit derivatives – the stress has reached breaking point. If borrowers cannot roll over the three-month loans that are the lifeblood of business, they will default en masse.

“Money markets are imploding. If no action is taken very soon, there is a significant risk that the global economy will collapse,” says BNP Paribas. Almost every trader says much the same thing. So does US treasury secretary Hank Paulson, who as Toby Harnden reports, literally dropped on bended knee to beg help from Democrats on Capitol Hill.

Emphasis added by me.

Nine-plus months I have been warning of this reckoning. Is it sinking in yet?

Credit is the lubricant of a modern economy. A seizure now would probably lead to the bankruptcy of General Motors and Ford in short order, but it would not stop with the US car industry. Waves of job losses would set off a self-feeding spiral. Yet more people would default on their mortgages (and car loans), driving house prices down even further. That, in turn, would threaten the solvency of the best banks. That is the way to Armaggedon.

Emphasis added by me.

Hopes that the world can cruise happily on as the US buckles have been dashed by the violent downturn across Europe and Asia over the summer. The Baltic Dry Index measuring freight rates for ships has plummeted by two thirds since May. Japan’s economy is already contracting. China’s may be close behind: a third of all textile factories in Guangdong have closed this year. House prices are tumbling in Shenzen, Beijing, Shanghai.

Albert Edwards, global strategist at Société Général, says Asia built its boom on shipping goods to the US: “The emerging market boom is going to collapse and this will shake investors to the core. The great unwinding has only just begun.”

All Europe and Asia will do is witness American Gotterdammerung and they will move far faster than our Congress has been doing with the bailout -- to decouple themselves from America and reconfigure the web of finance. They will Ask The Question. It is inevitable.

More:

America’s serial bail-outs – nearing $1.6 trillion, or 12 per cent of GDP – are playing havoc with the US budget. The deficit is above 6.7 per cent, near a 60-year peak. But claims that the US is going bust are frivolous. The US Treasury is not taking on permanent debt: it is behaving like a giant wealth fund, hoovering up mortgage securities selling far below their real value for reasons of panic. Famed investor Warren Buffett expects it to make “a considerable amount of money”.

The system will recover, but it may take a slow purge for a decade or more to rid us of the debt toxins. There will be no quick rebound this time.

Emphasis added by me.

See, this is where I still disagree with him. A collapse will lead to rampages. We will have the Los Angeles post-Rodney King riots happening every night. (And no, I do not mean this in a racial sense. I reference that as the most-recent nationally-televised example of how things can turn bad. In fact, they will be worse.)