Wednesday, 19 March 2008

no problem

It looks as if the black holes in the global economies are starting to form now. I wondered some months ago what would happen to all the missing money and where it would finally come to rest.

Bush, Brown and a few other politicians have attempted to influence outcomes by lobbing extra reserves into the system in an attempt to stave off the problems. For Bush it was relevant to the US election year and better for him to hold problems until the other side of his term. Brown had already been given a hospital pass when he took the premiership with the interesting twist that he'd somehow thrown the ball to himself.

So now we can hear the gentle popping of major corporations. The Northern Rock was the highest visibility UK one, with around £50billion of missing money so far and climbing. Bear Stearns was the fifth largest investment house in the USA until a few days ago and the value at buyout of some $236m compares with $18bn around a year ago - or some 0.14% of the prior value.

In a few days, around 3-4% has been wiped from stock exchanges around the world, notably except the Dow, where the amount of intervention has kept it around neutral. The Fed dropping $30bn into help JP Morgan Chase absorb Bear Stearns may have just tipped the Dow positive. Somehow things seem to be on a very delicate edge at the moment with what seem to be huge quantities of reserve funding being used to plug the various gaps.

All of that overlooks the money pit of the Iraq war. Some would (perhaps cynically) say that Bush's original involvement with Iraq was partly done for economic reasons. Beyond all of the Weapons of Mass Destruction and Resolution 1441 ambiguities that led to the war, there was also a view in some areas that the short term boost that followed the intense part of the war was a way to bolster the dot bombed US economy. Not to mention keeping a hold on middle eastern oil.

Experts such as the Centre for Economic and Policy Research tend to disagree that the 'stoke an economy through war' has anything beyond a short term effect and that by year six a war would have major negative economic consequences for the United States - we are currently at year five.

The spending on Iraq totals somewhere north of $400bn from the US so far and a current run rate of around $8bn per month, according to the CSIS Iraq Study Group.

Just starting to add together some of the numbers listed here illustrates the amount of money flow that drifts towards a hole of some sort. Whilst they were disaggregated it was difficult to see the scale of the challenges. Now there's the visible accumulation of loss and the knock on effect of this into the next layer of organizations.

As an example, another UK organisazation, HBOS, lost 12.5% after Bear Stearns, because of its rumoured links to US sub-prime. Other UK financials like Barclays dropped 9% and RBS by 8% and in the USA Merrill Lynch dropped 5%, Morgan Stanley 8% and CitiGroup 6%. More scarily, intra day, Lehman Brothers dropped 46% but corrected after the chief exec issued a statement.

The problem now seems to be that most of the conventional corrective tactics have been played. The last few Bank rate reductions haven't worked. Last week's $200bn injection by the Fed didn't work. The UK and US Government are now both bailing out a significant financial services institution. And still somewhere there's 'missing money' which has been driven by corporate commission-driven sales tactics and efforts to boost global economics on the back of warfare.

I'm sure the politicians will want to make the best they can of a lumpy carpet, but the dirt is really beginning to pile up. The only vacuum in town seems to be the one created by this ever expanding global deficit.

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