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Can Central Bankers Prevent the Great Depression?Gary Dorsch Amid the worst financial crisis and market meltdowns since the 1930's, the world's top-20 central bankers and finance ministers are busy at work, inflating the world's money supply, slashing lending rates, and crafting stimulus packages, in order to prevent a "credit crunch" recession from morphing into a Great Depression. The ECB has cut interest rates by 100-basis points to 3.25% since early October, and is telegraphing another 50 basis point cut at the next policy meeting in December. On Nov 6th the Bank of England slashed its base rate a whopping 150-basis points to 3%, its lowest in 53-years, and signaling more easing ahead. With new construction in China collapsing to its worst level in a decade, Beijing pledged to spend $600-billion over the next two-years,for new housing, road and rail infrastructure, agricultural subsidies, health care and social welfare. The stimulus package equals 16% of China's total economic output. But the dreaded "D" words - "Deflation and Depression," are whispered quietly by the "Group of 20" central bankers, behind closed doors. Traditional monetary tools such as lowering interest rates are not working, because banks are hoarding cash and not passing along the lower costs. There is no light at the end of the tunnel until home prices finally stop falling, and banks can stop writing-off big losses. "What this crisis reveals is a broken financial system like no other in my lifetime," said former Fed chief Paul Volcker on Nov 17th. "Normal monetary policy is not able to get money flowing. The trouble is that, even with all this government protection, the market is not moving again. I don't think anybody thinks we're going to get through this recession in a hurry," he warned. The sub-prime crisis has morphed into a diabolical monster, spreading its tentacles across the globe. Bank credit remains tight in the United States and Europe, even for top-notch investment-grade companies, who are confronted with borrowing costs that are indicative of junk bonds. And the unregulated $55 trillion credit default swap market is a nuclear time-bomb, which can explode at a moment's notice.  In the lead-up to the G-20 central banker summit, the World Bank warned the global economy had suddenly stopped growing,and now predicts a meager growth rate of +1% for 2009, after expanding +5% or more from 2003-07. Global exports are seen tumbling -2.5% in the year ahead, a precipitous fall from growth rates of +5.8% in 2008, and +10% just two-years ago. In today's highly synchronized global economy, no nation has been left unscathed, not even Iceland. The Baltic Dry Index (BDI), a composite of shipping prices for various dry bulk products such as iron ore, grain, coal, bauxite, and alumina, has plunged 11-fold from a record high of 11,800-points in May, to 840-points in mid-November, signaling a global depression. The largest cargo ships are unable to charge more than their daily operating costs, and must cut ship speeds in order to economize on fuel costs. China accounts for 40% of the movement in commoditiesbeing shipped around the world, on the 22,000 ships that sail the world's shipping routes. China's steel makers have cut production due to lower profit margins, and weaker demand at home and abroad. China produced 35.9-million tons of crude steel in October, down -23% from a record high of 47.1-tons in June. Some 90-million tons of iron ore are now stockpiled in Chinese ports, two months worth of imports, due to a sudden collapse in demand by steel mills. Chinese orders for copper, nickel and a range of other base metals have also plummeted. India's industrial production was only +1.3% higher in August, than a year earlier, a 10-year low. Indian exports fell -15% in October compared to a year earlier, the first such fall in five-years.Japan entered its first recession since 2001 and Germany contracted for the first time in five-years, after its industrial output plunged -3.6% in September, the largest monthly loss in 14-years.The jobless rate in the UK, has reached its highest since 1997 andits economy is expected to shrink -1.7% next year, its worst performance since the 1991 recession.  South Korea is a key bellwether of the global economy, with 52% of its GDP derived from exports. Korea's shipments to China, its biggest customer, have plunged over the past six-months, and were -3% lower in October than a year earlier.Korean factory output fell for a third straight month, the longest run of declines in eight-years, adding to fear the Asian tiger is headed for its first recession in a decade. Emerging Asian economies account for one-fifth of world growth, but are being dragged down as their biggest customers in the US, Japan and Europe are sliding into recession. Posco, PKX.n, Asia's biggest maker of stainless steel, said it will slash output by about a third this quarter to cope with a slowdown in demand. The Bank of Korea slashed its overnight loan rate a record 100-basis points in October, after the Kospi stock index suffered its worst loss in two-decades. Federal Reserve Shifts towards "Quantitative Easing" The United States is the world's largest economy, and buys roughly 20% of the world's exports. But after a decade of living on easy credit, US consumers are now saturated with debt, (300% of GDP), and forced to de-leverage, leaving Asian exporter nations in a terrible bind. US retail sales plunged -2.8% in October, the fourth straight monthly decline, impacting across virtually all sectors of the retail economy. According to official figures, 10-million American workers are out of work and cannot find jobs, and over 85,000 US-homes were foreclosed in October. US consumer spending can collapse if the job-cutting continues and US households are deprived of credit, as home values fall and banks tighten access to mortgages, auto loans, and credit cards. Amid fears the US-economy is sliding towards a Great Depression, the 1-month US T-bill rate fell to 4-basis points, and the 3-month T-bill rate ended at 12-basis points. That leaves T-bill rates far-below their lowest levels in 2003-04, the last time the Fed pegged the fed funds rate at 1-percent.  With T-bill rates approaching zero-percent, the Fed has clandestinely adopted a radical monetary policy known as "Quantitative Easing," (QE) pioneered by the Bank of Japan (BoJ) earlier this decade, in a desperate gambit to prevent a Great Depression. With falling retail sales, rising unemployment, collapsing commodity prices, and an international credit crunch in motion, the Fed is printing vast quantities of US-dollars, in order to buy government agency debt, commercial paper, and toxic mortgages, and other paper, from the financial industry. "At the beginning of this year, the assets on the books of the Fed totaled $960 billion," said Dallas Fed chief Richard Fischer on Nov 4th. "Today, our assets exceed $1.9 trillion. I would not be surprised to see them reach $3-trillion, roughly 20% of GDP, by the time we ring in the New Year. The composition of our holdings has shifted considerably. Previously, almost 100% of our holdings were in the form of US Treasuries, today, it's less than a third. The remainder consists of claims deriving from our new facilities," Fischer revealed. To read the rest of this article, please click on the link below: http://www.sirchartsalot.com/article.php?id=98 Nov 17, 2008 321gold Ltd |
