Red Alert: The Second Wave of The Financial Tsunami

The Wave Is gathering force & could hit between the first & second quarter of 2010

Linked on our blogs with Matthias Chang – Malaysia. – Published on Global Research.ca, by Matthias Chang, Bovember 22, 2009, and linked on this blog with Red Alert: The Second Wave of The Financial Tsunami (to compare and think about mutual influence).

The Irreconcilable Differences:

Some two decades ago, it was decided by the global financial elites that the framework for the global economy shall consist of:

  • 1) A global derivative-based financial system, controlled by the US Federal Reserve Bank and its associate global banks in the developed countries.
  • 2) The re-location from the West to the East in the production of goods, principally to China and India to “feed” the developed economies. 

The entire system was built on a simple principle, that of a FED-controlled global reserve currency which will be the engine for growth for the global economy. It is essentially an imperialist economic principle.

Once we grasp this fundamental truth, Bernanke’s boast that the “US can produce as many US dollars as it wishes at no cost” takes on a different dimension …

… The Prelude to the End Game:

The US economy will be spiraling out of control in the coming months and will reach critical point by the end of the 1st quarter 2010 and implode by the 2nd quarter.

The massive US$ trillions of dollars stimulus has failed to turn the economy around. The massive blood transfusion may have kept the patient alive, but there are numerous signs of multi-organ failure.

There will be another wave of foreclosures of residential and more importantly commercial properties by end December and early 2010. And the foreclosed properties in 2009 will lead to depressed prices once they come through the pipeline. Home and commercial property values will plunge. Banks’ balance sheets will turn ugly and whatever “record profits” in the last two quarters of 2009 will not cover the additional red ink.

Given the above situation, will the Fed continue to buy mortgage-backed securities to prop up the markets? The Fed has already spent trillions buying Fannie Mae and Freddie Mac mortgages with no potential substitute buyer in sight. Therefore, the Fed’s balance sheet is as toxic as the too big to fail banks that it rescued.

In the circumstances, it makes no sense for anyone to assert that the worst is over and that the global economy is on the road to recovery.

And the surest sign that all is not well with the big banks is the recent speech by the President of the Federal Reserve Bank of New York, William Dudley at Princeton, New Jersey when he said that the Fed would curtail the risk of future liquidity crisis by providing a “backstop” to solvent firms with sufficient collateral.

This warning and assurance deserves further consideration. Firstly, it is a contradiction to state that a solvent firm with sufficient collateral would in fact encounter a liquidity crisis to warrant the need for a fall back on the Fed. It is in fact an admission that banks are not sufficiently capitalized and when the second wave of the tsunami hits them again, confidence will be sorely lacking.

Dudley actually said that, “the central bank could commit to being the lender of last resort… [and this would reduce] the risk of panics sparked by uncertainty among lenders about what other creditors think”.

To put it bluntly what he is saying is that the Fed will endeavour to avoid the repeat of the collapse of Bear Stearns, Lehman Bros and AIG. It is also an indication that the remaining big banks are in trouble.

It is interesting to note that a Bloomberg report in early November revealed that Citigroup Inc and JP Morgan Chase have been hoarding cash. The former has almost doubled its cash holdings to US$244.2 billion. In the case of the latter, the cash hoard amounted to US$453.6 billion. Yet, given this hoarding by the leading banks, the New York Federal Reserve Bank had to reassure the financial community that it is ready to inject massive liquidity to prop up the system.

It should come as no surprise that the value of the dollar is heading south.

When currencies are being debased, volatility in the stock market increases. But the gains are not worth the risks and if anyone is still in the market, they will be wiped out by the 1st quarter of 2010. The S&P may have shot up since the beginning of the year by over 25 per cent but it has been out-performed by gold. The gains have also lagged behind the official US inflation rate. It has in fact delivered a total return after inflation of approximately minus 25 per cent. When Meredith Whitney remarked that, “I don’t know what’s going on in the market right now, because it makes no sense to me”, it is time to get out of the market fast.

In a report to its clients, Société Générale warned that public debt would be massive in the next two years – 105 per cent of GDP in the UK, 125 per cent in the US and in Europe and 270 per cent in Japan. Global debt would reach US$45 trillion.

At some point in time, all these debts must be repaid. How will these debts be repaid?

If we go by what Bernanke has been preaching and practising, it means more toilet paper currency will be created to repay the debts.

As a result, debasement of currencies will continue and this will further aggravate existing tensions between the competing economies. And when creditors have enough of this toilet paper scam, expect violent reactions! (full long text).

(Matthias Chang is a frequent contributor to Global Research. Global Research Articles by Matthias Chang).

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