DEAR TGC’ers - News Bulettin 13-10-08
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WE STAND ON THE VERY BRINK OF COMPLETE GLOBAL FINANCIAL COLLAPSE!
WHAT WE ARE ABOUT TO EXPERIENCE HAS NO PRECEDENT.
THE WORLD’S BANKING SYSTEM IS BEING NATIONALISED AS WE SPEAK.
WE DO NOT KNOW WHAT THE COMING WEEKS WILL BRING…

From www.FT.com:

No G7 official was sure the plan would work, so deep is the financial crisis. If it does not, the next steps would be one of two nuclear options: to guarantee all liabilities of banks, in effect nationalising the financial system, or for governments to seek to bypass financial institutions by lending directly to companies and households.

From the New Statesman:

We are witnessing the collapse of the world financial system. To have said that even a month ago would have been to invite ridicule, but now it seems only a statement of the obvious as banks implode, governments panic and investors run. The initial liquidity crisis that broke in August 2007 and drove Northern Rock to the wall has evolved into a crisis of insolvency and finally into a crisis of confidence in the entire financial system.

From the IMF:

The global financial system is on the brink of a meltdown and additional steps must be taken immediately by the richest nations to calm jittery bankers and investors, the International Monetary Fund warned Saturday.

"Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown," said Dominique Strauss-Kahn, IMF managing director.

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US heading for bankruptcy! - 13-10-08

At the moment the US dollar has rallied because the companies in the US are liquidating their overseas assets to shore up there domestic obligations (ie, they sell AUD assets and others and convert to USD).

The trouble is they are still running out of US dollars because the value of the US dollar assets (ie. home loans, businesses) have fallen below the value of the debts. This means that the US citizens and companies are essentially bankrupt with 0 USD in equity. So the US government has to decide

1. Inflate out of bankruptcy (print money to reduce the value of debt and increase the value of assets through inflation)

2. Borrow more money and curb spending on all government expenditure.

China, Japan, Korea and other account surplus countries will not be happy with Option 1 as they are holders of a lot of US government debt. However, the US government will likely choose option 1.

End result will be high interest rates for US debt and low asset values which will be scooped up by foreign countries with real equity left on their balance sheets. Sad story for the US but that's what happens when you consume more than you produce and fund the difference with increasing debt levels.

Story By Glen