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Bailouts are over: debtors will fail, banks go bust and economies contract, then what?

Posted on 25 November 2011 with 6 comments from readers

Try to standback and take the position of the guys emerging from the isolation of the Mars 500 Project. Instead of looking at day-to-day market fluctuations look at the bigger picture. It takes a while to focus but actually you can then see where we have come from since the 2007 crisis and where we are most likely going.

The global response to the 2007 and much more severe 2008-9 crises was to bail everybody out. The banks were too big to fail and so every debtor deserved support. It’s madness really and some home-owners have never been better off with interest rates so low and enterprises with very poor internal economics have staggered on regardless.

The Endgame

All that is about to end as global interest rates rise in a bond market crash. That is what the gradual blowing up of interest rates in Europe and the contagion that has now reached Germany tells you.

Those who have relied upon low interest rates to stay afloat with big debts are therefore about to get their comeuppance. On the otherside of this trade if you are a creditor with a weak balance sheet then you will be dragged under too by these debts going bad.

Banks in the eurozone look particularly vulnerable but as the contagion spreads around the world this will be true for banks all over the globe. It is a global banking trauma of a kind we have not seen before, or at least not since the 1930s when something very similar did happen.

Credit will freeze up for two reasons: the banks capital will be under severe pressure and interest rates will be much higher. Without credit the flow of trade and business will decline and economies will contract. How bad will it get?

One thing is for sure, there will be an end to the crisis. The Great Depression of the 1930s eventually corrected and then came the Second World War. This is a downward spiral and there will not be an equal sharing of the burden this time.

Winner takes all

The spoils will go to the cash-rich and credit-worthy who will buy up the cheap assets from the bankrupt, and that will restart the economic cycle, although it may take some time to get moving again. Eventually interest rates will fall back as the demand for money will be low.

Hopefully the authorities will at this point put measures in place to ensure that borrowing can never again be allowed to spiral so out-of-control. Most likely every central banker in the world will have lost his job by then.

Then the bounce back will actually be stronger and faster than most people think possible now and a new age of peace and prosperity should dawn. Well why should there be another major war when there are no obvious opponents or at least none that are remotely equally matched?

Posted on 25 November 2011 Categories: Banking & Finance, Bond Markets, Global Economics

6 Comments posted by readers:

Comment by John Mark - 25 November 2011

Some have said that the Great Depression ended after the Second World War. In other words, that war was part of the Great Depression, but instrumental in bringing it to an end.

If this is true, then it is possible to argue that the Great Depression ended as a result, partly or otherwise, of depopulation, which was massive if one includes the untold Russian dead and those who died in Hiroshima and Nagasaki.

I agree with the Editor that a “new age of peace and properity should dawn”, indeed “will dawn”. The problem is that we don’t know how we will get there and whether we will actually like the form of peace and prosperity of that new age.

As for getting to that new age, the question is posed for us: “Why should there be another major war when there are no obvious opponents or at least none that are equally matched?”

Unfortunately, nuclear and viral technology does not require opponents to be equally matched. Even after one of the two opponents has been decisively beaten, the depopulation amongst the victor nations could be too high to re-establish the old, pre-war society because of nuclear irradiation and man-made pathogenic viral release by suicide warriors in our malls and streets.

The new society could then be “peace and prosperity” but based on an autocracy disliked by many of the world’s survivors.

I am speculating, I know, but so is the concept of “a new age of peace and prosperity”.

Comment by Bill of Slidell - 25 November 2011

Germany will NEVER let the euro collapse. They will lie to foolish investors to the last second, but before the collapse, they will get the ECB to print as much money as needed to save the euro currency. Europeans will NEVER accept PERMANENT subservience to USA’s global dominance, which would follow if the euro breaks into different currencies. That would let the USA call the global shots until China takes over after they build the largest navy, best air force, and gain access to a global network of military bases, like the USA has. That could take a LONG time. The European elite ask themselves every day why they have to cooperate with the USA, and why is the US dollar the reserve currency, when they have twice the population of the USA, and greater economic output. They resent that the USA is the global top dog. They know that without a single currency, they will NEVER achieve the political unification that will let them eventually dictate policy to the USA, instead of the other away around. Don’t be fooled by Merkel. She gets her orders from the super rich who you don’t see on TV. They meet once or twice a year on some island, or heavily guarded retreat. They run the world, not us with our little illusion of democracy. They just removed the elected heads of 2 countries. What more proof does anyone need that they run things?

Comment by Adam - 26 November 2011

I want to reopen the paper gold discussion, Gerald Celente has lost money on so-called secured gold bullion he owned (on paper). Please watch the video.
http://www.youtube.com/watch?v=W02n-wjPqNE

Conclusion: paper gold is going to fail sooner or later, only physical gold will prove to be the real gold.

Comment by Andy in the UK - 26 November 2011

I dont share your optimism – at least not for those living in Europe and North America.

We will soon see bank runs of epic proportions followed by ‘bank holidays’ (which will include the switching off of ATM’s and the ending of electronic transfers).

Savers will be wiped out as will investors in anything ‘paper’ – take MF Global as the ‘warm up act’ before the concert and you will get some idea!

After the banks shut and the welfare cheques stop coming the social unrest phase will ensue (if you thought Egypt was bad wait until you see millions of heavily armed Americans take to the streets when they cant buy fuel with thier cards or food for that matter). Marshall law for Europe? Could happen.

Thats the optimistic bit! – if the US, who have just sent a carrier group to Syria start yet another war, whats left of business in the middle east will be in tatters too (the Russians have positioned a nuclear armed missile cruiser between the US Carrier and Syria to further raise the stakes).

Of course the Israelis could attack Irans nuclear reactor too…….

Comment by Airborne 71 - 26 November 2011

Bill of sidell : Than please explain why the Germans have been printing new DEUTSCH MARKS for months now ? They are going to drop the euro like a hot potato , Bet the farm on it . Remember the Golden rule : He who has the gold makes the rules !!!

Comment by Best Mate - 28 November 2011

Bill of Slidell mentions this international conspiracy theory again but can offer no more facts to support its existence than anyone else. It is what it is – just a theory, a figment of imagination.

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