Echoes of 2008 become deafening as credit crunch bites
Posted on 08 January 2012 with 4 comments from readers
History never exactly repeats itself but things are seldom much different this time.
As we start 2012 there is a strange sense of deja-vu as we relive the events that pulled the world into the recession of 2008 albeit with a eurozone rather than US focus.
US immunity?
That makes it tempting for US investors to stick their heads in the sand and pretend nothing is happening. But that would be just as foolish as it was for Europeans to think they had nothing to worry about in 2008.
Really the first warnings of the coming heart attack came in the summer of 2007 with the Northern Rock bank failure in the UK and Bear Stearns debacle stateside. The credit mechanism of the great housing bubble was blowing up.
Today we have the credit mechanism of the great eurozone sovereign debt bubble imploding. European banks will not lend to each other, and only bank with the ECB. Only an emergency flooding of the market with liquidity kept it from imploding in December but the strains continue to mount.
There is the end of the endless Greek debt crisis coming in March, the inevitable default. There is a painful recession in progress in the eurozone peripery that is now reaching the core. Financial markets are struggling again.
Italy is paying above seven per cent for its debt, the level that triggered a rush for emergency funding in Greece, Ireland and Portugal. But the funds needed to rescue Italy are just not on the table.
Eventually the printing of money will not work any longer. Bonds that are being issued are increasingly bought by the issuing authority.
Italian paradigm
We see in Italy how a central bank cannot keep interest rates low in the long-run. The market drives up the cost of borrowing because of the risk of never being repaid. It’s also contagious leaping across national borders as capital seeks a higher reward.
However, what is worrying from the countless historic examples of debt mountains toppling over is that all can appear very calm and untroubling until it suddenly is not. You live on the volcano quite happily until it erupts.
Welcome to 2012 where we seem very close to a repeat of the fall of 2008.
4 Comments posted by readers:
Cheer up! …it could be worse.
A repeat of the fall of 2008 – what is that? A 50% or so fall in the value of the DOW?
Someone on the TV said that the Europeans could muddle through for an entire year with stop gap measures. I tend to agree. As things get more dangerous, the Europeans will do their own version of what the US did in 2008. Unlimited debt guarantee by the ECB. If not, I see a Dow going down to around 8,000. The Fed will print money like crazy to limit the crash.
That volcano photo reminded me of an article that I read in Scientific American decades ago about what would happen if the super volcano under Yellowstone National Park blew up. It is quite surprising how recent the understanding of the enormous destructive potential of an eruption of one of the 5, or so, giant volcanoes that are known to exist is. Although everything within a couple of hundred kilometers would be blasted flat by the collapse of billions of tons of hot rock and ash that would roar at supersonic speed out of a hole maybe 10 kilometers across, the greatest danger is not heat and blast.
The amount of material ejected from a super volcano is hard to imagine. Yellowstone would bury much of the USA under a meter of ash. Nothing would move and nothing would work. All buildings except high rises with concrete roofs, in roughly half of the USA would be crushed by the weight of the ash. Everyone within the area of significant ash fall would die from lack of water because the electric system of all of North America would fail. All the rivers would be blocked by ash so any heavy rain would flow all over the countryside. Nobody could move because even helicopters couldn’t fly, since their engines would ingest too much ash. And the ash would be so thick, you couldn’t see where you were going. In much of North America it would be pitch black for weeks.
People living in the Middle East might think that they would be safe, NOT. The glass expelled by a volcano is an ultra fine dust. The edges are razor sharp. A super volcano will blast it into space. It can’t go into orbit because it won’t be going anywhere near fast enough to reach orbital velocity, but it will be grabbed by the jet streams that circle our only home. At first, you will see very pretty sunsets. But then you will notice a distinct darkening of the sky during the daytime. You will notice it getting colder each day. Each night will get colder and colder until it never gets above freezing anytime. The Persian Gulf will soon develop a layer of ice. You will be able to avoid freezing because of the amount of gas and oil available to burn. Unfortunately, you can’t eat it. You would soon discover how much food it keeps to keep you alive in extreme cold – a lot.
Some people may survive. It has happened thousands of years ago when one blew up in the Indian Ocean region. Two scientists proved it by studying human DNA. They were able to show that the human population of Earth went from several million down to as few as about 70,000. One of the DNA specialists happened to read an article about super volcanoes and realized that was what had caused the population hour glass he had observed in the DNA analysis.
So if you hear about hundreds of earthquakes happening in Northwest Wyoming, max out your credit cards. But put it way down on your worry list because recent work indicates that the magma chamber under Yellowstone is not yet nearly full. Or so they think.
@ Bill.
So, erm, you’re saying short the DOW or go long warm jacket producers?
Lighten up mate…..January isnt even over and i can already see you roasting marshmellows with some mayans in yellowstone…!