Global credit ocean dries up

[Warpy]

The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard

One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

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Most of the world is now tightening, with no sign of a fresh credit window opening to keep the game going. This is new. Japan has had the tap on continuously as the trade exploded over the past five years, while America itself became the source of funds after it slashed rates to 1pc at the end of the dotcom bubble, and held them there until June 2004.

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There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

http://portal.telegraph.co.uk/money/main.jhtml?xml=/money/2006/02/24/cccredit24.xml&menuId=242&sSheet=/money/2006/02/24/ixcoms.html

[xchrom]

1. more bubbles?

that's not good.

[Warpy]

2. More bubbles about to pop

and that's worse.

[NMDemDist2]

3. i'm not real sure what all that means, but it doesn't sound good..... n/t

[Warpy]

5. It means central banks all over the world are tightening the money

supply, which in turn means the US is going to have a whole lot of trouble finding anyone to back the massive debt, which means interest rates will have to rise quite steeply to make it more attractive, which also means taxes will likely be hiked (and you know who they'll hike them on) to decrease the rate of debt growth, which means the economy will come to a screeching halt as people can't afford the interest on home loans and that bubble bursts which means we're basically fucked six ways from Sunday.

I hope this is an alarmist article, but everything else I've been reading suggests that it isn't. The days of the US financing global adventurism on a sea of funny money are over. The days of the US financing anything without taxing the sainted rich and the corporations are also over, but don't look to the men in power to twig to that one until we're in a full blown depression.

May the Force be with us because nothing else will be.

[fedsron2us]

4. It is only a matter of time before fear wins out over greed

When everyone heads for the exit at once there is going to be a crash in asset prices such as real estate where valuations have been underpinned by the ready availability of cheap credit provided by the carry trade. The smarter dealers are already trying to unwind their positions without spooking the markets. As reality bites the currency markets are likely to become increasingly volatile over the next 12 months . Already the Icelandic krona has suffered a mini crisis that caused it devalue by 9% within little over a day and a half last week. At one stage the panic looked as though it might spread to other currencies such as those of Brazil and Indonesia. The New Zealand and Australian Dollars which were also other favoured destinations for carry trade speculators have also declined sharply recently. The meltdown when it comes will probably start with a crisis of confidence in one of the secondary currencies where the market is more illiquid. Sooner or later a major hedge fund or other financial institution is going to get caught in a speculative position from which it can not escape. This could raise the risk of cascading debt defaults across the whole financial system. How bad it is likely to get will really depend on how well the dollar is able to stand up to the storm. If it crumbles then things could get completely out of control. At least this time no one can claim that they were not warned about what was coming.

http://news.ft.com/cms/s/f20bcff0-a88a-11da-aeeb-0000779e2340.html

[fasttense]

6. Amen to that.

"At least this time no one can claim that they were not warned about what was coming."

So many economists have been warning us about uncontrolled debt and the eventual consequences that anyone who is caught unaware just hasn't been paying attention.

[ramapo]

7. Empire of Debt

Basically our day of reckoning will come, perhaps sooner maybe later. There is a basic law of economics, an entity (person, business, country) cannot spend more than it earns or buy more than it produces indefinitely. The Republicans, with plenty of help from a delusional public and spineless, go-along Democrats, have transformed America into a country totally dependant on our electronic printing presses to create money, and the goodwill of the godless, communist Chinese, among others, to buy up our debt.

The solution to our debt crisis, the elephant sitting on our shoulders, will not be pleasant.

[many a good man]

8. Where's Alan Greenspan when you need him?

:puffpiece:

[ramapo]

9. So he can create more money?

What a spineless loser...