Monday, January 21, 2008

A Global Crash Coming

The credit storm that began in the United States with subprime mortgages has spread to markets across the globe.

CNN reports this morning that "Todays' [plunge of world markets] renews speculation that the crisis in the U.S. housing market may trigger a global recession."

According to the UN's World Economic Situation and Prospects 2008: "The major uncertainty for 2008 now emanates from the US economy. The domino effect of a US recession would be to knock down export growth from China, Europe and Japan, in turn reducing their demand for exports from developing countries," it said.

According to the Wall Street Journal: "Chinese authorities have slammed the brakes on bank lending, in their latest attempt to curb the runaway investment threatening to overheat what is soon to be the world's third-largest economy. In recent weeks, regulators have quietly ordered China's commercial banks to freeze lending through the end of the year, according to bankers in several cities. The bankers say that to comply, they are canceling loans and credit lines with businesses and individuals."

China is awash in US Dollars and that surplus is causing a steady rise in food and energy costs. This could be mitigated by allowing their currency to "float" freely. But a sudden, steep increase in the Chinese yuan's value could also send the world headlong into a global recession. For now, the lending freeze and price fixing appear to be the way out.

The dollar continues to take a pasting. Gold and oil has shot up to record levels.

Jon Basile, economist at Credit Suisse, summed it up like this: "There's a heck of a lot of bad news out there." Indeed.

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