Tuesday, November 9, 2010

What will cause the next crisis? By Shan Saeed

Get ready before the hard times hit you badly......By Shan Saeed

It's not going to be another Lehman that happened on 15th September, 2008

A failure of a bank or major corporation won't cut it anymore. Governments globally have shown they're willing to step in and bail out private enterprise to any tune.

Last year, it looked like another crisis might arise with the failure of a government. But the Greek crisis back in May 2010 showed that governments are also willing to step in and bail out other governments. PIGS is still a threat to the economic and financial stability of euro...

So what should we be looking for as a potential trigger to another financial crisis?

It's going to be something at the government level. Something that makes governments unable to intervene and create new money in order to bail out trouble spots in the private sector.

There's a few ways this could happen.

Bond markets. If investors stop buying a nation's sovereign debt, it could impede the ability of that government to create new money. But so far this isn't happening. Investors bought $2.4 trillion in American bonds this past fiscal year, more than paying the U.S. deficit.

It could be public outcry. If the people rally hard enough against profligate government spending, they might be able to handcuff their leaders. The US Tea Party movement is one sign of this happening, although it's unclear yet whether this group will have any material effects on government spending.

Maybe currencies will be the brake. Theoretically, the more a nation prints cash, the more the value of its money will fall. The loss of spending power should eventually force an end to money creation. Advance economies will keep weak currencies to boost exports...

Except that the world's largest economies are printing and devaluing in tandem – meaning that major currencies are staying roughly equal, relative to each other. Dollar, Pound, Yen and Euro

But here's a new one that just emerged yesterday: perhaps monetary tampering or monetary dumping would be halted by international peer pressure.

Such a move was suggested by World Bank president Robert Zoellick in a Financial Times article on 5th Nov. Among other things, Zoellick wrote that the global economy should move back to a gold standard. And that major nations should "agree to forego currency intervention, except in rare circumstances agreed to by others."

A gold standard would hamstring governments in printing new money. So would a system where monetary interventions need to be approved by a world vote. Bu the point is , do we have enough Gold supplies to meet the demand globally? Supplies are flat. Such a system would open the door for insolvent banks and corporations to once again fail in the good, old-fashioned way.

Could such a system come to pass? Currencies and global trade are already becoming a heated issue in many parts of the world. Just look at the renewed pressure on China to re-value the renminbi.

If things get rough enough, world leaders might be forced to sit down and negotiate something like Zoellick suggests. If you're wondering what's ahead for global finance, this is an area to keep watching for signs. Protectionism and structure devaluation of currencies would be the strategic interest of many advanced economies...


  1. Good points Shan. Do you think that a country like Brazil is less exposed to these risks?
    Hildete Vodopives

  2. Brazil is basically rich in natural resources..The recent spate of currency talks with china [ under-valued yuan] would not help both countries...But I am bullish on Brazil.....