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Saturday, January 3, 2009

World Economy: back to the roots (core business) - what is going to happen to the conomies throughout the world

© Thomas Ramseyer-Volkart

December 30, 2008
Despite huge liquidity injections the worldwide economy is to enter a period of stagnation, possibly stagflation. Faltering consumers absent from buying all sort of goods. Mainstream US, UK, Spain residents are not capable to pay down debts. Credits gradually becoming nonperforming dramatically drag down loans as well as bank ratings.
What may happen to the world wide economies and the financial system is perfectly illustraded by some meToo firm's stock price performance. After its forced sale of the asset management unit the new tune was "back to the core business; back to the roots."
Retrofitted to the boring meToo group it has ever been for more than 100 years before the daredevil excursion into the field of bancassurance took place it gradually recovered and returned to a steady growth at lower speed.
metoo group soared at highs in July 1998 at the Stock exchange. The main reason for this was the expected Return on Equity (ROE: 15% to 20%) vagualy promised by managers heavily influenced by the dotcom bubble's steeply rising quotes. Supported by creative balancesheet managers the topshots almost burst with enthusiasm. But then the imploding dotcom sector had them struggle and finally topple over. Illusions vanished into nirvana; the quotes fell by some 69% from 905 to 84 points.
Meanwhile the phantastic outlook for the banking business - mainly the investment banking - lifted this sector's prices by 40 points (146%) from lows at 23 in the early 2000s to miraculous levels of 75 points in June 2007. The driver for that was cheap money supplied by almost all the developed countries' central banks having the debt (government and private) increase to an unrealistic volume led by the long-lasting low interest rate policy of United States' Bush follower A. Greenspan.
AssumptionThe implosion of the US and other countries' real estate sector - first signs were already given by the stumbling twins Fanny and Ginny in early 2004 - was provoked by the gradually increasing federal reserve (Bernanke) interest reates. The mainstream people were not longer able to pay their interest due nor paying down any debt. People of age above 70 were reported working forced by lacking cash in Florida and elsewhere too.
Real Estate Market 2006 to 2008
The heavily indebted houseowners - with 90% to 120% mortgage credit on their homes - did not substantially lose their money, if not at all. They just depoited their housekeys on the creditsharklike greenhorny bonushot greedy banking clerk's desk. It is evident that only the citizens - by their dwindling savings as well as the badly managed assets covering their annuities and their possibly destroyed belongings insured - really lost their wealth by institutional investment experts all over the globe.
As a matter of fact the manipulated ignorant kept citizens unwittingly stroke back. By busting their mortgage credits they hit actually themselves by the means of their troubled pension funds - often only liabilities on their employers' balance sheets - as well as miserably performing insurance policies' coverage, direct investments as well as exchange traded funds (ETF) due to mismanaging finance experts.
The stalling financial system which was poorly supported in the first place - e.g. Lehman Brothers' failure - , swept along the economy and is even shaking the citizens's faith in the governments around the world.
The actual financial system seems to be more or less antiquated.
  2. Governments shall not practice demagogy; integrity is wanted
  3. Leaders of all kind be clear, honest and transparent
  4. Government shall give citizens the incentive to pay down their debts thus being less vulnerable (a lot of students start their earning lives with debts up to USD 40'000)
  5. Governements shall explain to citizens as well as to the financial community and have them clearly understand that the actual liquidity injection is like a shot suppressing the truth: the action taken is only for to postpone the financial system's fatal collapse if not corrected in due time
  6. Reasonable austerity - governments to state the different impacts on the economies - must be announced. As it is common knowledge austerity thus saving - paying down debt, less consuming, saving today and buying tomorrow - always means lower economic growth rates
  7. By the aforesaid austerity the basement of a sound long lasting growth - lower than the one of the past decade - is built
The present world peoples's descendants will be grateful for that !
The Administration starting this will be mentioned in the history books for sure; our children will remember and respect the people of change !
An enduring lower standard life will be the basement to future realistic stabilized prosperity !
© Thomas Ramseyer-Volkart