Interesting times, and stepping up the game

Thursday, May 6, 2010
By Paul Martin

by Christopher Laird
FinancialSense.com

Following the great banking crisis of 2007/8 the world now is realizing that the old ways are gone forever. At least the world is getting closer to that realization. What follows is described by the appropriately chosen Chinese Proverb ‘May you live in interesting times.’ to their enemies.

Right now, the US and Europe are wrapped up in trying to reflate a former economic model that raised economic expectations to unsustainable levels. The present efforts of central banks in the West are merely underwriting the massive losses across all sectors of the economy and taking that burden onto taxpayers. That effort will fail, and is failing. The failed reflation efforts are leading to strikes and social strife. Much more of this is to come, and it will sweep the world. China will have an especially dangerous manifestation of this in a year as they pop their construction and real estate bubbles. 60% of China’s GDP is construction related!

China too, ready for a crash of their own property and financial bubbles, will become wrapped up in their own efforts to hold onto the past. That was the economic build out since 1990 of an unprecedented speed and scale, bringing China into modern times and a modern although somewhat immature economy. China has let the speculator dragon out, and it’s time to try to throw a net over it. One thing I know about Asians, being from Los Angeles, California, is that Asians are the biggest gamblers on the planet. They love to save, and they love to gamble. I know because I play poker against them. They love to yell “GAMBLE!” when making a big bet. Prognosis: Bad to avoid a huge China crash of their own.

Europe experimented with the monetary union and the Euro, which is only about ten years old in its present implementation. Europe’s key problem with the Euro is that too many different countries with different economies cannot be accommodated by the Euro model. So, very simply, things will change dramatically over there.

The Euro as it stands is not going to stay the same. It is already cracking up. Typically, these crises take several years to build to a head, and every effort is made to avoid the inevitable. Even with a huge proposed 110 billion Euro bailout for Greece, the bond markets are still skeptical.

With German elections looming, Germany cannot support a massive bailout for Greece. Without that bailout being rapidly implemented, the contagion is spreading already to the Spanish and other weaker nations’ bond markets in the EU. Time is fast running out.

We have a looming war threat in the Mid East as well, which if it is not avoided could lead to World War 3. Israel stated again unofficially that the West has another two months before they act unilaterally on Iran. Obama has pretty much squelched the Israeli efforts to contain Iran, and has essentially halted US military aid purchases for Israel, and this has now been a year of that much to their chagrin. Does not mean, however, that they won’t act alone. Since they are being pushed into a corner, get ready for a real show over there.

Many looming crises right now

So, let’s see, we have a looming Mid East war right on our heels, a serious, very serious Euro crisis that is spreading and is not being contained…And a China crash of several dimensions looming in Fall 2010 (look out commodities!), and a supposedly recovering US economy, which is being torpedoed by all the negative developments, particularly in the EU at this time. The US stock market is ignoring any good economic news, which is a bad sign. Maybe sell in May and go away is the order of the day?

Who is not in fiscal disaster?

Japan is a fiscal disaster. The US is a fiscal disaster. The UK is a fiscal disaster. The EU is a fiscal disaster. All of these bond markets will be next on the firing line, after the EU mess deconstructs into chaos. We already have partial paralysis in the EU and chaos in Greece fighting the cutbacks of the public sector. The Unions are paralyzing the efforts to stem the fatal Greek fiscal situation, which is impossible to fix with cuts. The cuts needed are too large to tolerate.

The whole world that we know is turning upside down. The only thing that prevented two – yes two – world banking collapses and bank holidays was an unlimited US Fed checkbook. And the US is the last bastion of credit salvation for countries in fiscal chaos. I have no doubt the US will be central in any final bailout plans for Greece and Spain and whomever else. But the US cannot bail out every market under the sun.

The only solution anyone is willing to try is more public borrowing. That is not working and will only result in much higher taxes in two years across the world. The public will not tolerate budget cuts either in the US, in the UK, in Japan, in China, and especially in the weaker EU club med economies. Our entire world order is changing for the worse, and is again reaching a crisis stage. One or more of the above building crises will pop in 2010 and it will be ‘Oh no, here we go again!’. The others will follow in the next two years.

2010 certainly will go down as a final chapter before all hell breaks loose around the world. And, when the bond markets finally rebel on the last big borrowers who can still get money (the US and others), everything ends badly.

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