If you thought it couldn’t happen again, get ready: A new global financial freeze-up could be straight ahead.
It’s too bad that economics, trade, finance, etc., are such boring topics to most people. Well, they actually are boring because they are hard to understand, fraught with erroneous data, and difficult to relate to personal circumstances.
By necessity, most Americans are concerned with their own critical problems, like paying the mortgage, keeping their job and holding their families together. That’s understandable. In spite of the rosy spin on economic data, the middle class continues to get squashed.
In January 2013, 23,087,866 households received food stamps. That’s 889,154 more households than January 2012. Given that there are some 115,310,000 households in the U.S., it means that a full 20 percent of America cannot adequately feed itself.
The above chart shows the Labor Force Participation Rate (LFPR) since 2000, when the baby-boomer demographic dynamic kicked in. The red line is simply the demographic element, while the blue line is the actual participation rate. Since 2000, the actual rate has declined from 67.3 percent to 63.3 and since the recession, has significantly plunged below the “norm.” The LFTR has fallen back to a level not seen since 1980.
Whatever the reason might be for someone who leaves the workforce (retirement, gave up looking, disability) the fact is that since the recession, there has been no real employment recovery, and things continue to get worse, not better.
Not unexpectedly, the increase in food stamp recipients just about matches employment dropouts. If this is the case, then there are a multitude of other statistics that would follow along: Medical payments, unemployment, welfare payments, etc.
Whatever fragile uptick in economic activity that might have occurred in the last 24 months, it hasn’t been been enough to reverse the deterioration of the middle class and the swelling of those on poverty roles.
America is not isolated in this experience. Europe, China, Australia, India, Brazil, Japan, etc., are generally worse off than we are. Ambrose Evans-Pritchard writes in The Telegraph (UK):
The closely-watched ISM index of US factories tumbled through the “boom-bust line” of 50 to 49, far below expectations. It is the lowest since the depths of the crisis in mid-2009 and a clear sign that US budget cuts are starting to squeeze the economy. New orders plunged 3.5 to 48.8 on weak foreign demand and reduced federal contracts.
The news came hours after HSBC said its index for China also fell below 50, a major inflexion point for the world’s industrial workshop.
“This is not a good moment for the world economy,” said David Bloom, currency chief at HSBC. “The manufacturing indices came in weaker than expected in China, Korea, India and Russia, and then we got America’s ISM.
“We thought we had a clear picture that the US was recovering, Japan was printing money and were we’re back to happy days, and now suddenly a huge spanner [wrench] has been thrown in the works.”
On June 2, Bloomberg reported that “Global Interbank Lending Falls to Record Low, BIS Reports.” The fraternal global banking community is harboring a mutual distrust as they wonder who will implode and leave them with huge losses. It’s getting progressively worse as currency and interest rate wars heat up. The liquidity crisis of 2007 – 2008 was caused by the same type of distrust, when banks refused to lend to each other.
Liquidity in the global financial system is like oil to a car engine: If it drains out, the engine will freeze up and burn. With economic malaise infecting the entire global economy, the entire engine of the global economy is at risk of seizing up, which could push the entire system into deep recession or even depression.
Adding to the strain is the sharp rise in interest rates on a global basis, and especially in the U.S. The Fed’s policy of lower interest rates is being torpedoed by market forces, putting it at risk for huge portfolio losses. Why? because all of its Quantitative Easing program involves purchasing and holding Treasury bonds, bills, notes and mortgage-backed securities, in return for which the Treasury received cash. When rates go up, the value of bonds declines. As of June 5, 2013, the Fed’s combined balance sheet was valued at $3.43 trillion.
Here’s the dilemma: The Fed is trapped. If it were to stop purchasing additional Treasury obligations, then QE would be officially over and the markets would crash. If it continues its purchasing program and swells its balance sheet, it is guaranteeing itself even more future losses. If it were to sell any portion of its portfolio, it would suck liquidity (cash) out of the banking system and cause the markets to crash even harder.
The global banks are in a similar dilemma since they are also hold huge amounts of government debt that will decline in value as rates rise. Banks have ignored this risk since the last financial crisis of 2007 – 2008, but it will bite them hard this time around. If major banks start dumping their bonds into the open market, it will risk causing a panic sell-off with other bond owners.
Those policy-makers who think that we will “grow our way out” of this will soon come face to face with the hard data of recession – there isn’t going to be any growth! To the contrary, the global economy is contracting. Any further decrease in liquidity, for whatever reason, may well cause another “Lehman Brothers moment” where the whole financial system simply freezes up.
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