The economic tsunami on the horizon
It’s happening now in America and is due here in the UK and Europe by summer, if the usual time lags apply.
The recession / depression / crash is on its way like an unstoppable tsunami.
A tsunami is not a “tidal wave”. Waves break and retreat when they hit shallow waters or the shore. A tsunami trundles on for miles inshore powered by tremendous forces out in the deep ocean. No power on earth can stop it until its energy is spent.
Those who think we can stop a deep recession from happening by fiddling with interest rates or printing liquidity are looking at wave science not tsunamis. Now we can only watch and hope.
The signs of families cutting back their spending are everywhere here in Britain. Apart from the super-rich, ordinary folk are drawing in their horns as if they never existed. This mass retreat from the markets is beginning to have a cumulative effect which can only build to an inevitable crescendo.
The banks are barely functioning, except as deposit-takers. When they get our money they hoard it like the early Ebenezer Scrooge — the kind of man who creates depressions or shows us how to avoid them, depending on your point of view.
America is in deep trouble now, deserted even by the Sovereign Wealth Funds of the Orient, who just a few weeks ago seemed like saviours. Now they are pulling their cash out and retreating to the new economies of the East.
The “carry trade” to smaller Western economies, like Turkey, Iceland, Latvia, Estonia and others is falling apart, as will these countries in the coming months. Iceland may well be the first to crack, like some monstrous symptom of global warming tearing apart the ice sheets.
Those that are in the eurozone are being held together only by the common currency, the euro. But the fault-lines are beginning to show and it seems only a matter of time before the whole system snaps in a great twanging of over-stretched elastic. Beethoven would not recognize the new European Symphony about to be played. An Ode to Joy it isn’t.
If we look at all this from a Scroogian perspective though, it’s a kind of deep-cleanse that the world’s febrile financial sectors need — and this is certainly a problem of their making. This tsunami began in the boardrooms of banks and retail lenders, not in the real economy where most of us work — although our greed doubtless helped.
As America contracts, like a crab sensing danger, we can only await the storms to come. And they are the least of it. The unstoppable tsunami is the real enemy.
John, I fear you may be correct — I hope not!!
In America, the media constantly launders the news - for every article about the credit crisis, we are treated to other articles about “good news” — maybe it’s American optimism, maybe it’s just a desire to sell media - people like to read comforting stuff.
For that reason, I’ve been reading the UK papers - especially the Financial Times, because I find them more hard edged in their reporting. And, yes, they are saying some very scary stuff.
By Alicia on March 30th, 2008 at 9:29 pm
Hi Alicia.
It’s undoubtedly getting bad, if not quite falling off a cliff just yet. Over here we’re usually around 9 months behind the U.S. cycle, so the worst for us is yet to start.
However, our press has been writing about it as a crisis since last summer, especially Ambrose Evans-Pritchard in the Telegraph, who really stuck his neck out for a slump. Looks like he may be right.
Other economists have gone different ways : Anatole Kaletsky in The Times has suddenly become an optimist by seeing it purely in liquidity terms, while Irwin Steltzer (an American who writes over here) has steadily got darker in his assessment.
I must say, looking at it as a deep structural problem in America, which has spread around the whole of the world’s banking and financial system, makes it appear more like a tsunami than a few tidal waves.
The U.S. is nothing if not buoyant, even in the worst of situations, so will probably bounce back against trend. Quite what poor old Britain will do, after 11 years of Labour government overspending on non-productive “investments” is another. I fear we may ultimately be in a worse case than you in the States.
Continental Europe seems doomed to lose some structure, possibly the euro currency in some member states.
By John Evans on March 31st, 2008 at 10:41 am
I saw news today about the falling pound vis-a-vis the euro and thought of you, John.
I don’t understand why some countries want to opt out of the Euro - some people say it will be the reserve currency in 10-15 years. Wouldn’t this be a good thing?
Why do some members dislike it?
I am asking because, here in the States, some people are opening Euro accounts. And, I wondering if it’s maybe a bad idea, because I have heard from many euros (people - that’s american slang for continental Europeans, not Brits), just hate the Euro and want to go back to their own currencies.
By Alicia on April 1st, 2008 at 2:49 am
The pound is falling against the euro for a number of reasons and that may get us off the hook. Exports are rising rapidly into the eurozone putting us in a good position, although it mean import prices will raise inflation.
The eurozone is a common currency zone without a political centre. It’s a ragbag of countries with little convergence and is doomed to fail in the medium term. The current crisis may well fragment it.
The problem for us is that the Brits don’t like being bossed about by Brussels, which is a bureaucratic (non-democratic) form of administration. It’s also immensely corrupt.
By John Evans on April 1st, 2008 at 8:01 am
Right about our news. It’s all useless rhetoric, devoid of content and meant to manipulate psychology. Fewer and fewer are falling for it anymore. We do like a happy ending, but it is hard to envision one here. The world is changing in every way imaginable and nobody can explain how this all goes away. Truth is, US has not paid down the debt of the S&L crisis. The public debt has grown steadily since then. 9.4 trillion, although a trillion dollars doesn’t buy what it used to…
By Alan in RTP on April 5th, 2008 at 11:13 pm
Alan, some people are using the S&L model as an example for getting out of the present crisis, i.e. massive public injections of funds. That will only put off the evil day, I think. Those who made bad calls should not have to be subsidized by those who didn’t. However, moral hazard melts away when the whole economy is at stake.
By John Evans on April 6th, 2008 at 9:31 am