Global Financial Crisis 2.0 - 2023 Edition

[noobcarbuyer]

https://www.abc.net.au/news/2022-10-01/david-taylor-global-financial-crisis-2/101492384

The world is flirting with another global financial crisis, and the next few weeks are key

It's hard to overstate the magnitude of the financial trouble Britain and, because of its financial heft, the world found itself in this week.

We came within inches of "global financial crisis mark 2". That's not hyperbole.

Towards the end of 2008, it was clear many Wall Street investment banks were on the brink of collapse.

They were sitting on tens of billions of dollars' worth of rubbish assets – mortgage-backed securities attached to properties plummeting in value.

A credit crunch was sparked when the US government allowed Lehman Brothers to collapse. It was sitting on a lot of these worthless assets.

Suddenly, it was unclear who could afford to repay loans and who couldn't.

We've just flirted with a scenario of similar magnitude.

The problem now is, well, the flirtation is not over.

Comedy of errors

Liz Truss – Boris Johnson's replacement as British prime minister – inherited an economy at risk of entering a protracted and deep recession.

Truss delivered a "mini-budget" last week which offered up lots more government spending and the biggest package of tax cuts in 50 years to help stimulate the economy.

Great, right? Well, not so much. Financial markets asked an obvious question in response: "how are you going to pay for this?", when the UK's budget deficit (or net borrowing) is already in the hundreds of billions of pounds.

The BBC reported conservative MPs walking the corridors "in shock" after the mini-budget was handed down.

The ultimate response from the money markets was a vote of no confidence in the fiscal package. The bond market "sold off". Bond prices in the fixed income market plummeted.

As bond prices fall, yields rise. It's really not necessary to understand the bond market machinations here, but it is important to understand the next point.

That is, for Britain's pension scheme to work, or continue as a going concern, interest rates can't rise too high too quickly — which is what happened.

The funds found themselves unable to pay pensions because they were losing too much money on their investments.

To stop this, the Bank of England came in to buy up bonds on an enormous scale to increase the price of bonds and lower the interest rates on those bonds.

"To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from September 28. The purpose of these purchases will be to restore orderly market conditions,"  the Bank of England said.

"The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury."

But here's the killer line.

"Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability."

What the Bank of England was suggesting, according to former London City trader Henry Jennings, is that when the bond market moved violently against these pension funds, they were at risk of being placed into margin calls.

That is, many funds had borrowed money to make more money. They were heavily in debt to enhance their returns.

They were about to be asked to "pay up".

If they were asked to pay up, they would have been forced into liquidating their assets, which he says would have led to a financial markets "death spiral".

The sheer weight of global assets being sold off would have, in Jennings' opinion, led to a global "confidence crisis".

Problem not going away

The Bank of England bailout of Britain's pension schemes is limited.

"These [bond] purchases will be strictly time limited," the BofE said. "They are intended to tackle a specific problem in the long-dated government bond market. Auctions will take place from today until 14 October."

So, what happens when they stop buying gilts, or British bonds?

The chief economist of the National Australia Bank says the forces that led to Britain's financial system edging to towards the brink remain firmly in place.

"Markets are getting a bit worried," Alan Oster says.

He says interest rates in Britain will keep climbing, and may do so quite aggressively in the coming months.

"[Markets] are talking – well, it's frightening, they're starting off from a cash rate of 2-ish per cent and they're talking about a 1.25 per cent or 1.5 per cent interest rate increase [at the next Bank of England meeting]".

"It's extraordinary and of course the pound is being absolutely killed."

In other words, the problem facing the pension fund scheme is set to return.

It's heavy stuff

So, let's just do a quick stop-and-check at this point, because it's heavy stuff.

The UK is still at risk from a financial crisis because a major investment scheme remains vulnerable to a bond market that's still at risk of plummeting due to the UK's economic woes (in part created by a dire mini-budget).

This is all being reflected in a recent collapse of the pound.

A financial crisis in the UK would, analysts say, lead to a global economic rout.

Is Australia immune?

The short answer is no.

The Australian dollar is hovering around two-year lows against the greenback, and the stock market is down 15 per cent from peak to trough.

We're inching towards a share "bear market".

This has obvious implication for those in and approaching retirement.

A destabilisation of the global financial system, more broadly though, would produce the same shock waves as 2008 and 2009.

It leads to higher unemployment and a recession.

The problem this time around is that the Australian government, and indeed the Reserve Bank, are in no position to engage in extraordinary economic stimulus measures.

But … so far so good

However, it seems the majority of Australians, right now, have the financial capacity to continue on in a relatively normal fashion.

Australian retail turnover rose 0.6 per cent in August, according to Retail Trade figures released by the Australian Bureau of Statistics earlier this week.

The August increase was the eighth consecutive rise and follows a 1.3 per cent rise in July and a 0.2 per cent rise in June.

"This month's rise was driven by the combined increase in food related industries, with cafes, restaurants and takeaway food services up 1.3 per cent and food retailing up 1.1 per cent," Ben Dorber, head of retail statistics at the ABS, said.

The dark cost-of-living clouds hanging over millions of Australians is "being balanced by people saying, 'well, I'm not going to lose my job' ", NAB chief economist Alan Oster says.

"The economy is doing really well."

But, and that's a big but, he says ominously, the "next four weeks will be interesting".

That's a reference to the fact that the bulk of already-announced Reserve Bank interest rates hikes will hit bank accounts over the next couple of months.

It's unclear to most observers how, exactly, this would damage the Australian economy.

Work is already underway though to put policy makers in a better position to make the right calls when it come to pulling the levers.

The ABS, for example, is now delivering monthly inflation or cost of living data.

The first monthly Consumer Price Index (CPI) indicator rose 7.0 per cent in the year to July and 6.8 per cent to August.

The largest contributors, in the 12 months to August, were new dwelling construction, up 20.7 per cent, and automotive fuel, up 15.0 per cent.

Now the Reserve Bank is in a better, or timelier, position to see how its policy tightening is influencing prices in the economy.

This, in practice, is meant to avoid hiking interest rates too far.

The RBA meets on Tuesday.

At the moment it's a coin toss as to whether the bank raises its cash rate target by 0.25 or 0.5 percentage points.

How serious is all this?

Naturally, with any major financial event, the question is: do I need to worry about this?

The answer is that you need to keep watching this story unfold.

AMP's chief economist, Shane Oliver, suggests while the Bank of England's short-term effort to bring back the UK financial system from the brink has worked, the country's financial system is set to go right back there again soon.

"The Bank of England's intervention to calm the gilt market (which was threatening financial problems for UK pension funds) by buying bonds (ie restarting QE) has helped calm things – directly in the UK and indirectly elsewhere by showing that authorities will still intervene in a crisis," Dr Oliver said.

"Unfortunately, the return to QE [bond buying] may just add to inflationary pressures if it has to be sustained for long, which may necessitate an even higher interest rate hike when the BoE next meets in early November with many talking about a 1.25 per cent hike, which leaves the BoE in the silly position of easing and tightening at the same time."

So, the options are that the Bank of England keeps coming to the rescue of the UK financial system with the risk of exacerbating inflation which will lead to much higher interest rates, or allow the market to take over, and risk a full-blown financial crisis when the bond market collapses again.

Australia seems to be in a reasonable position now to manage a financial shock, but it's unclear whether that will still be the case in just a few weeks' time.

Huge risks remain.

Printing trillions of dollars of money, globally, during the pandemic to support the global economy was always fraught with risk.

As it stands we are unable to remove that economic support without the whole system collapsing, but we need to remove it before we create even bigger economic problems.

It's an extremely uncomfortable position to be in.

[inlinesix]

No news on ST.

Must be fake news 😜

[noobcarbuyer]

[noobcarbuyer]

[Stary]

Most people are oblivious to this news in UK.  All they know is that the pound is low now and so it is time to go travel to UK.

 

[Watwheels]

Europe is facing an energy crisis coming winter. It either money spent on food or heat(not both) for most families. Germany wants to build a pipe to Spain as an alternative to get natural gas but it will at least take a year for the project to complete. Energy crisis plus economic crisis some brought forth from the sanctions they put on Russia. What irony. Of course ppl will blame Putin.

We need help. The effect will be global.

COE will crash or not, I dunno.

[kobayashiGT]

USD : GBP is like 1 : 1.03 now. Scary. 

 

[Mkl22]

10 minutes ago, kobayashiGT said:

USD : GBP is like 1 : 1.03 now. Scary. 

 

no la. XE says its 1GBP to 1.14USD.

[Jamesc]

If people are talking about it.

It won't happen.

Who predicted asian financial crisis?

Who predicted Leeman and his brother?

Who predicted Covid crash?

Trust me if there is a financial crisis the financial experts and writers will be the last people to know.

:D

[noobcarbuyer]

33 minutes ago, Jamesc said:

If people are talking about it.

It won't happen.

Who predicted asian financial crisis?

Who predicted Leeman and his brother?

Who predicted Covid crash?

Trust me if there is a financial crisis the financial experts and writers will be the last people to know.

LOL. 

Hope you are right and  property & stocks huat to the moon. 🚀🚀🚀

[noobcarbuyer]

24 minutes ago, yishunite said:

COE up or down ah

Up lah. 

Chiong until $200K.

[Beregond]

1 hour ago, Watwheels said:

Europe is facing an energy crisis coming winter. It either money spent on food or heat(not both) for most families. Germany wants to build a pipe to Spain as an alternative to get natural gas but it will at least take a year for the project to complete. Energy crisis plus economic crisis some brought forth from the sanctions they put on Russia. What irony. Of course ppl will blame Putin.

We need help. The effect will be global.

COE will crash or not, I dunno.

They are snapping up china heater/ mattress x10 times for this winter 😂

[Spidey10]

15 minutes ago, noobcarbuyer said:

Up lah. 

Chiong until $200K.

buy, buy, buy!!......then byeeee...

aiyahhh...best is be prudent, spend within yr means.....

[Jamesc]

24 minutes ago, noobcarbuyer said:

LOL. 

Hope you are right and  property & stocks huat to the moon. 🚀🚀🚀

Unfortunately the prosperity will not be evenly spread.

In any market whether stocks go up or down the rich will get richer and the poor will get poorer.

Its simply because rich people have money and influence and they use their money and influence to get more money.

[Jamesc]

Why Europeans have to choose between staying warm and having a meal to eat?

Someone made a hole in the Russian gas pipeline.

What an idiot!

They should have made a hole and attach a pipe to tap the gas!

Its leaking and its free.

That's a lot of free heating leaking out free.

Edited October 5, 2022 by Jamesc

[Jamesc]

Why is all this gas wasted?

Its all warm homes for people and hot food and hot showers wasting away.

[kobayashiGT]

1 hour ago, Mkl22 said:

no la. XE says its 1GBP to 1.14USD.

I saw some youtube ystd

 

[Mkl22]

2 minutes ago, kobayashiGT said:

I saw some youtube ystd

 

Old news. It did drop till 1.05, now recover Liao. Let’s see if gbp will drop again.