Saturday, 14 September 2013

Lehman's Plus Five - Part 1

“... events last night on the markets lead me to believe that a very serious situation might have arisen. If I am right, and it plays out then we are talking a complete financial meltdown, a catastrophe of Biblical proportions, "rivers of blood, cats and dogs living together etc.".

That was what I wrote five years ago - Severe Financial Warning – accurately predicting the financial meltdown that followed in the next few weeks.

Lehman's collapse was, on the one hand, the start of that particular series of events that led to the financial meltdown, and the recession in the North Atlantic countries. On the other hand, it was the result of the developing credit crunch that began in 2007, and was manifest in Britain in the collapse of Northern Rock. But, the credit crunch itself was the result of the massive build up of debt that had been created over the previous 40 years. Many of the analyses of the situation, five years on from Lehman, have asked the question, what has changed since then? Well, considering the causes of the financial meltdown, the following changes are important.

  • The level of debt today is far greater than it was when Lehman's collapsed.

  • The quantity of money printing that facilitated this massive level of debt is far greater today than it was when Lehman's collapsed.

  • The asset price bubbles in stock markets, bonds, and property that the money printing and the debt inflated are even bigger today than when Lehman's collapsed.

  • The banks that in 2008 were considered “too big to fail”, and which, therefore, had to be bailed out by taxpayers, are even bigger today than when Lehman's failed. 

  • In 2008, the global economy was growing strongly. Since 2008, growth in the North Atlantic area has been sluggish, at best, and although growth in the rest of the global economy is strong, it has been pulled down, by the North Atlantic recession. We now face the prospect of a bust without a boom

  • In 2008, the conditions in the global economy that led to 30 years of falling global interest rates, and which were also the reason for all the money printing during that period – see The Rates Of Profit, Interest and Inflation - were in place. Today, the rate of profit is set to fall, and global interest rates are moving higher in a new secular upward trend.

In short, all of the conditions that led to the financial meltdown of 2008 have deteriorated. If the financial system – and I continue to distinguish here between the financial system and the economic system – were a patient, its condition would simply have gone from critical to chronic. An immediate crisis was dealt with, but without curing the underlying illness, which then continues to deteriorate before it breaks out in an even more violent crisis.

The question is not if a new financial meltdown will occur, but only when, and how much of the global financial system will it destroy. I will examine that in the following parts of this series.

Forward To Part 2

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