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World Bank's crisis warning

Peter Martin
January 18, 2012 - 1:55PM

The World Bank says the global economy is on the edge of a new financial crisis, deeper and more damaging than the one that followed the collapse of Lehman Brothers in 2008.

Its latest six-monthly assessment of global economic prospects halves its forecast for growth among high-income countries, and pushes its forecast for countries using the euro into negative territory.

It has slashed its global growth forecast for 2012 from 3.6 per cent to 2.5 per cent. High-income nations are forecast to grow at 1.4 per cent rather than 2.7 per cent. The euro area's economy will shrink 0.3 per cent.

However, the bank warns "even achieving these much weaker outcomes is very uncertain".

Read more: http://www.smh.com.au/business/world-business/world-banks-crisis-warning-20120118-1q5n7.html#ixzz1jmGemuV1

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In the event of such a crisis, "activity is unlikely to bounce back as quickly as it did in 2008/09, in part because high-income countries will not have the fiscal resources to launch as strong a countercyclical policy response or to offer the same level of support to troubled financial institutions".

Read more: http://www.smh.com.au/business/world-business/world-banks-crisis-warning-20120118-1q5n7.html#ixzz1jn4eoeYE

NotFooled

18 Jan 2012, 06:10 PM

Maybe people are being overly pessimistic and things will putter along for a while before recovering.

But if we do have a GFC2, I fear it could be far worse than GFC1 in 2008. Anyone want to intelligently speculate on the impact of a mega GFC2 on Australia's property market, on the price of gold and on the value of the Australian dollar?

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Forecasts not all bad news at home

January 19, 2012

IT IS NOT clear yet what the World Bank's new growth forecasts will mean for Australia, not least because the bank's economists didn't think to mention Australia once in the report. The bank's central forecast is for the world economy to grow 2.5 per cent this year. That would be marginally down from the 2.7 per cent growth achieved last year and is much lower than the 3.6 per cent growth the bank was tipping six months ago.

It's important to remember these are the forecasts of just one group of economists. Cuts could indicate a more pessimistic route for the global economy, or simply that their previous forecasts were too optimistic. For Australia, what matters most is where the growth slowdown comes from and here the news is much as expected.

Weakness in Europe is the main reason cited by the bank for the downgrade to forecasts. This should come as no surprise - multiple European countries are already in recession and many more are on the brink. What matters for Australia is China. As a major exporter to Europe, China's growth forecast has indeed taken a haircut, but to a lesser extent. The Chinese economy is still expected to grow 8.4 per cent this year.

Read more: http://www.smh.com.au/opinion/forecasts-not-all-bad-news-at-home-20120118-1q6l5.html#ixzz1jrP1QwMA

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Financial crisis: get ready for next wave

Peter Martin, Jessica Wright
January 19, 2012

AUSTRALIA should brace for a return to the ''ugliest'' of times if the latest World Bank warning of a new financial crisis proves correct, a leading economist says. The World Bank yesterday signalled a downturn so severe it would eclipse the chaos that followed the collapse of Lehman Brothers in 2008. Deloitte Access Economics director, Chris Richardson, said if there was not a sharp turnaround overseas, Australians were in for a rocky ride through a ''GFC Mark II''.

''If we get a re-run of last time, you get higher unemployment, sharp hits to company profits and a slowdown in the Australian economy without a technical recession, largely due to the momentum in the big mining construction projects,'' he said.

Read more: http://www.smh.com.au/business/financial-crisis-get-ready-for-next-wave-20120118-1q6n3.html#ixzz1jrUHMVjG

NotFooled

18 Jan 2012, 06:10 PM

Maybe people are being overly pessimistic and things will putter along for a while before recovering.

But if we do have a GFC2, I fear it could be far worse than GFC1 in 2008. Anyone want to intelligently speculate on the impact of a mega GFC2 on Australia's property market, on the price of gold and on the value of the Australian dollar?

raveswei

21 Jan 2012, 10:58 AM

there are no GFC1 and GFC2

Both events are part of Great Depression 2

Something like Great Depression: depression started in 1929 and people called it recession, but the worst year was 1932 when GDP fell more than 10% and unemployment increased to almost 25%,

audas

19 Jan 2012, 12:44 PM

I do - It has been my assertion since day one that there will be a GFC2 - and it is occurring exactly as predicted and when.

There are two basic fundamentals as to why the world can NEVER recover to where it was - the first and most obvious is the price of oil. Having gone from $40-$50 a barrel pre Iraq war, it leaped up to $147 several months before the GFC which precipitated the first GFC. The housing market in the US was a ponzi scheme, but it worked, the oil spike created a massive global economic correction - it was the first time peak oil impacted. Since then peak oil has remained in place and will always remain as a buffer to economic prosperity as seen in the boom years till 2007. Oil sits at roughly $80-$100 a barrel, even during one of the most depressed period in economic history. This represents a 50% tax on the global economy - no ifs, no buts, no maybes, thats a flat out 50% increase in the cost of doing business. As soon as there is any upturn global activity oil immediately responds and places a bufffer on that growth - recently as activity picked up oil went straight to $100 a barrel. The simple fact that the exploration has moved off shore in Saudi, moved to Tar sands in Canada and moved to the 6 kilometer depths of the artic means extraction is starting tocost significantly more than simply sucking it from the ground. Hence Libya, Iraq and Iran - its not a coincidence.

The second basic fundamental is the effect of globalisation on the western workforce. We are basically seeing a destruction of the consumer class and the creation of a global working force which are unable to consume due to wage destruction. Business is destroying itself. Fords greatest insight was that in order to sell his cars he needed consumers - and so increased his wage to a level where all his workers could afford to purchase his products - genius. The greatest driver of the world economy in all of history has been to create the consumer class - the greatest destroyer is obviously the destruction of that class.

So as there is a race to the floor in wages, while corporations race to the floor and drive down wages so too is global consumption. While there has been some delay as corporate wages and profits increase due to cost minimisation, the inevitable destruction of consumption will reap its toll. There is no avoiding the inevitable. There is a global consolidation of fundamental, inelastic, essential commodities like food, health, energy etc - all of which through monopolisation are acting to further impact consumer behaviour through skyrocketing living expenses - housing being a clear example.

The efforts in the GFC 1 were clearly a response in line with government priorities - corporations and businesses must come first, an absolute devotion to the notion of trickle down economics. All boats in the harbor will rise, but even more telling, is that this is no longer an option, choice or economic theory but absolute fact - governments are for the businesses and by the businesses. So the response has been almost entirely privatised - deliver opportunity via cash injection and reduced interest rates to business and all will be well. The simple reality that consumers, the people, have been utterly destroyed by corporations and abandoned by governments can only be highlighted through the massively ironic methodology of many nations in subseequently placing the burden of these responses on the very people they claim to be helping - Private Profit - Public Risk. Australians simply do not get this at all - America, Europe and Asia are absolutely on board with the difficulty of income destruction. Australian laborers earning $150k pushing a brrom around wanthagi are testament to the insane inbalance in our economy relative to global norms. We simply have no idea on what is happening globally to consumers.

The only possible response to a massive global downturn in consumption is to reduce living costs for consumers and increase their income and subsequently increase their disposable income. Instead the exact opposite is happening on a global scale, without even the slightest mention that this may be doing harm.

The responses of most nations was to create vast stimulus and bailouts. As always noted by most all this ever does is kick the can down the road for systemic issues and at the same time create what is known as moral hazards; businesses become risk immune due to government backing. Compounding this is the obvious inflationary pressure which will rear its head any time an inkling of recovery appears - while also masking the dire reality of the situation by creating an apparant recovery in financial markets augmented with speculation - which has clearly been happening with commodities. There has been absolutely no global recovery or growth in any real area outside of the global financial markets which were simply responding to unprecendented low interest rates while flushed with public injections of sovereign wealth.

To compound this FURTHER are of course the CDS derrivative markets which are of course the greatest ponzi schemes ever created. Credit defaults are a game of hot potato played with dynamite and a long fuse, a fuse which is almost finished. These will never be paid out, they simply can not - the payout to AIG at taxpayers expense was probably one of the greatest thefts of all time - TIMMY !! There will, of course, be considerable fall out from them, but the real damage they cause is due to the inability for markets to correct. There is a reliance on CDS's which reinforces the moral hazzard created by nationalizing risk. The credit crisis refers exaclty to this issue - no one knows who owes what, and it is exaclty this that brought down Lehman.

However the most obvious, and frequently discussed problem is the smashed piggy bank. Massive stimilus has already been applied, so there are now two problems - applying it again means reinforcing the government business dichotomy over government as representatives of the peoples interests (this failure being the initial and ongoing cause of the problems), reinforcing the moral hazard, increasing the debt burden of sovereign nations and subsequently removing the only current life line to consumption in welfare via more draconious austerity measures, the simple fact it has FAILED already, and the simple fac that many countries are already out of money and are now competing with private capital markets for what ever funds remain - and the enormous nest egg of inflation being built. So quite simply when GFC 2 hits - if there is a QE3 globally then it will be petrol on a fire.

As many people very clearly stated at the outset of of the GFC1, not allowing the market to correct itself, banks to fail, markets to collapse and reap the pain and swallow our medicine we have created the perfect storm for GFC2 - it was absolutely innevitable.

So what does it mean ?

Markets are going to pretty quickly realise that this is innevitable and there will be capital flights not to what is safe, but to whatever is going to lose the LEAST, nothing is safe. And my money is on war - maybe not in 2012, but sometime between 2012 and 2015 its going to happen, the clashes occuring now between China, Russia and the US are just too obvious and unstopable. Every indicator on the International Relations band wagon says - war, most likely with Iran. Putins seizing power, China and US build up in the south east asia, Clintons assertion of US superiority in trading routes, oil supply to China, Libya, everything is lined up like ducks on the wall.

The reason I mention war is because it highlights the current political environment in Australia as we back the US to the hilt over China, while the US installs vast northern bases and utilizes our current facilities (the initial announcment of a US base was far too premature and back burned, will happen though as US carriers are vulnerable to Chinese anti-carrier missiles which can't reach Australi due to distance and resource reliance), all points to what you should be doing with your Aus dollars, and where most global capital will fly too - US dollasrs / bonds.

Even without any confrontation the Australian dollar has absolutely nothing going for it, its real value without China is probably somewhere around 60-75 cents, has been below 50 cents before. The initial drop will be an overreaction and may send it below 50. Along with the destruction in value will come the obvious destruction in employment, foreign investment pipeline, government borrowing costs for stimulus etc. We will be the new Argentina. Even England went to the IMF in the 70's for bailout - denial is where Egyptian fish live.


China is never going to return to its pre-Tianamin Square days - however as seen in the recent collapse in the Baltic Dry index, the huge overhang of overvalued realestate, the global destruction of consumer demand, and little chance of an internal demand driven recovery in the short term (will be the long term solution to everything however), China is in for a trip down the slippery slope of correction, the angle is all we are debating now.

Australia of course has major consumers in India, Japan, Taiwan, Europe etc and not just China, but there is no escaping the very simple fact of the matter that we are in for a 20-30% decline in demand no matter what, and potentially a 50% decline as we seek the reality check and systemic reconfiguration the world markets have to have.

The decline in Australian finance jobs, mining, associated industries through to retail and hospitality is going to hit incredibly hard - mainly because we didn't have a correction last time, so Australia may well feel GFC1 and GFC2 in one combined hit. So while Europe may see unemployment spikes of 8% taking it to 18-20% Australia may see 15% spikes taking it to similar territory (Spain, Italy, Portugal, Greece and many others already have youth unemployment well above 20% - and its in this group you find revolution). But what is worse is we have decimated all our local industries in favour of the short mining fix, while even the UK kept SOME of its local industries during its financial binge. Hence why we maybe crying like Argentina.


Housing in Australia's real estate industry is going to be one of the greatest stories of all time, an historical warning to the ages, the Tulip story of our time. There is little doubt that the reality cheque coming our way is going to have some bloody nasty figures attached to it. Everything currently inflating our real estate from stimulus, China to laborers inflated wages is going to get absolutely smashed. I don't think the figures being bandied about regarding a 40% decline are anywhere near harsh enough. It will be much, much worse - carnage.

Victoria will be the hardest hit - there is simply nothing in the state - crap beaches, no industry, horrendous urban planning and an entire economy based almost exclusively on housing, footy and cafe lattes. As a Victorian I am deeply ashamed of the arrogant, smug, self assured, cockiness of my peers, and myself - honest, down to earth, fairdinukum hard working, true blue Australia vacated this state a long, long time ago - we are far far worse than Sydney ever was.

I simply can not see any possible alternative - there is nothing which can prevent the inevitable tsunami coming, except of course, as mentioned war.

The upside to all of this will be a massive correction - a realignment of priorties and markets returning to normal economic cycles of wealth creation driven economic growth as opposed to pure speculation, credit/debt and stimulus driven growth.