"Whatever the Central bank does, getting credit is very hard": the title of an excellent article in the Tijd yesterday, proving exactly my repeating point that we are in a deflationary market. Bloomberg also writesthat Money Market is `Plagued' by Libor that the Fed can't reduce, The Wall Street Journal writes that the European banks are tightening lending Standards; just read theJuly 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices and make your own conclusions on the size of the deflationary hurricanes coming your way.
Worse even, the Financial Times wrote that corporate debt default could hit 10%, more defaltion anybody? It's clear the next move of the US Fed will be... down ! Which is crazy of course; savers can then take their money and use it to buy another currency and take advantage of realistic interest rates (like on the Brazilian R$). Aw, that will be prevented by a global plan to prevent ANYONE from saving money. This takes us back to gold. As soon as commodity inflation is gone, then buying gold will be the only way to preserve funds.
Once again, this crisis is not just a cyclical crisis. We had a system for the last sixty years which precipitated the greates debt cycle in history. And now the Americanfed will address the greates deflationary cycle (wake up if you still have the inflation titles on your cornea) with the same remidy which started this crisis in the first place: cheap loans.
With the macro data of the last weeks, it's clear now that the G7 countries (the group of the major advanced economies including US, UK, Japan, Germany, France, Italy and Canada) are already in a recession or close to tipping into one. Other advanced economies or emerging markets (the rest of the Eurozone including Spain. Ireland the the other Euro members; New Zealand, Iceland, Estonia, Latvia and some other South-East Europe economies) are also very close to entering recession.
Yes, that includes Australia, the Australia Reserve Bank just announced it is "shocked" by the severity of the Australian economy slowdown. I previously wrote on Australia, but who would listen then? Associate Professor Steve Keen from the University of Western Sydney wrote last week "Brace youyrselves for recession" and that's exactly what I would recommend you to do.
And yes, meanwhile consumer spending in China and Brasil are still rising; even if inflation remains under control at around 6% in both countries. Yet, both China and Brazil need this growth. For example, a country like China - that even with a growth rate of 10% plus has officially thousands of riots and protests a year - needs to move 15 million poor rural farmers to the modern urban industrial sector with higher wages every year just to maintain the legitimacy of its regime; so for China a growth rate of 6% would be equivalent to a recessionary hard landing. This is why the IMF defines a global recession as a global growth rate below 2.5% as emerging market economies usually grow much faster (6%) than advanced economies where growth averages about 2%.
It now looks like that, by the end of this year or early 2009, the global economy will enter a recession.
And you wonder why the Euro is doomed to keep falling? Simple: Whenever global liquidity tightens relatively speaking, it is very US$ supportive, just watch this interview with Marc Faber.
No, there's no easy solution to this crisis. We will need to understand again to stop believing the fairy tale of debt-leverage into unproductive investments and this will require a massive change of political structures, financial intermediation channels, savings and consumption habits, and economic incentives which challenge virtually every assumption made by at least two generations. Our kids will never forgive us for our naive debt-leveraged way of doing business.