Monday, June 27, 2011

Prediction of credit cascade into worldwide depression

World War III ended with the collapse of the Berlin Wall; World War IV proceeds apace
If you win, you're a freedom fighter; if you lose, you're a terrorist, and your cash is trash

Vienna - Most Americans were too poor to pay attention when Oesterreichische Credit-Anstalt, the largest bank in eastern Europe before World War II, failed in 1931.

A Rothschild bank, the failure of Credit-Anstalt kicked off the Great Depression and caused Austria to abandon the gold standard. After Germany followed suit, and then Great Britain, America confiscated private holdings of gold and adopted paper money in 1933.

Founded in 1855, the bank's name translated as Imperial Royal Privileged Austrian Credit-Institute for Commerce and Industry. Its failure is universally attributed to the United States' punitively protectionist Smoot-Hawley Tariff Act of 1930, an act which crippled Germany's economy and led French investors to redeem all the capital they had lent to the bank.

According to the U.S. Department of State, though the tariff first proposed by presidential candidate Herbert Hoover to protect American agricultural products did not necessarily cause the Great Depression, it was more of a consequence of the onset of the depression; it didn't do anything to stave it off.

Protection for the industrial sector was added to the bill, and soon the tariff rates for the United States were among the most protectionist in the world.

Imports from Europe declined from a high of $1,334 million in 1929 to only $390 million in 1932. At the same time, U.S. Exports to European shores fell from $2,341 million in 1929 to $784 million in 1932.

According to government calculations, world trade declined by some 66% between 1929 and 1934. "Thereafter, beginning with the 1934 Reciprocal Trade Agreements Act, American commercial policy generally emphasized trade liberalization over protectionism. The United States generally assumed the mantle of champion of freer international trade, as evidenced by its support for the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), and the World Trade Organization (WTO)," according to a historical report from the U.S. Department of State.

Credit-Anstalt has long ago been reincarnated in Italy as UniCredit. Its shares are down by 21% in the last several weeks, and the trend is considered irreversible, according to financial analysts.

Should there be a run on UniCredit, some feel that the losses will be too large for Italy, which already owes 120% of of its GDP, to manage without a huge international bailout.

UniCredit has already borrowed $300 billion from other European banks. Austerity measures imposed in Greece, Ireland, and Spain not having been all that successful, the smart money predicts that the European Union's currency, the euro, will simply cease to exist in the near future, the banking crisis will cascade, and credit markets worldwide, which are already shutting down, will continue this disastrous trend.

The outlook for the U.S. Treasury?

The U.S. Federal Reserve, which holds a staggering $5.31 trillion in U.S. debt, and is the nation's largest creditor, is committed to stop buying $85 billion per month of U.S. Treasury debt, 61% of the federal debt will mature within four years.

About $10 trillion in U.S. Treasury bonds will have to be sold – plus a predicted $6 trillion deficit that will be amassed over the next 4 years.

The financial outlook for Chinese banks is no better.

With a phenomenal rate of fixed-asset investment greater than 50% of its GDP for the 12th year in a row - that nation increased the figure by 25.8% during the first 5 months of the year, according to the China's National Bureau of Statistics, by $1.39 trillion.

At the same time, the Chinese nation is hoarding commodities as a hedge against a time when nothing will be available. China is purchasing massive quantities of raw materials. While its share of the world's economy is only 9.4%, China is consuming 53% of the world's cement, 47% of the world's iron ore, and 46.9% of its coal.

In 2010, Chinese banks loaned $55 billion – up 95% from the year before. This year, regulators have reined the banks in, demanding increased reserves. In May 2011, lending was down 25% versus the same period of 2010.

The signs all point to the same thing, and it's shaky as cafeteria jello.

Analysts are saying that, though it's impossible to predict exactly when the cascade will start, the world is looking at a credit crunch much more severe than that of 2008. Volatility will increase to white hot proportions, increasing interest rate spreads will tighten money supplies to a rigidly clamped condition, and and stock and bond prices will follow suit by crashing down, down and further down.

If the world's governments try to handle the crisis by printing more money, the resulting inflation will lead to inevitable disaster.

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