Front PageEconomy Global systemic crisis / June-November 2006 - The 4 structural stages of the speeding up
Global systemic crisis / June-November 2006 - The 4 structural stages of the speeding up
Written by LEAP/E2020
Friday, 16 June 2006
On the 15th of May 2006, in GEAB N°5, LEAP /E2020 announced that phase II of the global systemic crisis – the so called « acceleration phase »[1] - would start in June 2006 and that it would be characterised by a general awareness of the existence of such a global systemic crisis.
The strong and ongoing fall of all stock exchange indicators all over the planet in the past weeks clearly shows the start of this acceleration phase of the crisis[2], which has now become obvious to all economical and financial players. These players are now seeing their past reference points fading and their certitudes being smashed to pieces. However, for the LEAP/E2020 team, seeing the actual starting process of phase II of the global systemic crisis[3] explains its development. LEAP/E2020 has defined 4 structured stages within this phase II. These four stages could overlap and will spread out all along phase II for a 3 to 6 months period starting from June 2006. The way they will link with each other will determine the nature of Phase III, the so called “impact phase”. LEAP/E2020 has decided to present two of the four stages in this public release, these will be analysed in detail and strategic and operational recommendations will be provided in our GlobalEurope Anticipation Bulletin N°6 to be released on June 15, 2006[4]:
Stage 1 – Fall of world stock exchanges and temporary liquidation of dollars Stage 2 – Awareness of the deadlock of US rates policy: towards stagflation or hyper-inflation Stage 3 – Accelerated flight away from the dollar and the end of its monopoly on energy Stage 4 – Emerging of consequences in the field of growth and employment
The entry process into phase II is thus constituted of a brutal and long-term fall of the world stock exchange indicators, which, as stressed already by LEAP/E2020, had started as soon as March 2006 with the crash of the Arab Gulf stock exchanges. It is important to keep in mind that a systemic crisis affecting such a complex and vast system as the global society at the beginning of 21st century proceeds in “waves”, in a nonlinear way. Thus it affects certain parts of the system before others, while suddenly appearing to reverse its impact on other components whereas they are simply transitions, during which the system reaches a new threshold of imbalance, preambling a new impact even more brutal.
Stage 1 - Fall of the world stock exchanges and provisional liquidation in Dollars
Stage 1 illustrates perfectly this phenomenon. The combined movements of the Dollar and of inflation during the last months have finally changed the attitudes of the financial market players, while dispelling two illusions which underlined market increases over the past few years: the solidity of the US Dollar and the strength of the American economy (or more exactly, the negligible character of its imbalances: uncontrolled deficits, consumption based on credit, the real estate bubble,…). The disappearance of these two illusions has thrust the stock exchange operators into an increasingly opaque and unknown environment, where only the developments in interest rates remain understandable and anticipable[5]. They thus now focus on this indicator and, in uncertainty, liquidate all assets whose relationship with this indicator might seem to be problematic or negative. This decision, cumulated with the consequences of the heavy losses undergone by the speculators in the emergent markets (stock exchange and monetary)[6], led to a sudden increased demand for US Dollars, the currency in which the large majority of the positions were expressed: either to fill the losses, or to escape from positions now considered dangerous. We are now witnessing a “technical” increase of the Dollar which does not result from a choice by investors, but which is an obligatory “transition stage” within the framework of a “risk-avoidance” process, which paradoxically the Dollar forms part of, and which can be seen in the long term decisions of the central banks of China, Sweden, the Gulf States or even Russia[7] to modify their reserves to the detriment of the Dollar and for the benefit of the Euro.
Stage 2 - Awareness of the deadlock in US rates policy: towards stagflation or hyper-inflation
The financial and stock exchange players are now focusing on a single indicator, the evolution of the interest rates fixed by the central banks, and in particular that of the American Federal Reserve. Indeed, because of the United States central role in the world financial system, they play the part of the catalyst of hopes and fears; and their financial authorities will, during this phase II, accelerate the crisis. The US government and Federal Reserve have indeed led their economy and the whole of the financial markets towards a total dead end. The return of inflation has led to an increase in interest rates everywhere in the world, and the loss of confidence in the real American economy (with the background, the general loss of confidence in the United States) imposes a dramatic choice between two solutions with painful consequences:
. Solution 1 - towards stagflation: to raise of the US interest rate to fight against inflation and to preserve the credibility of the Dollar (since it is only the differential in the interest rate with the EU and Japan that now maintains its relative value), but to accelerate the collapse of the growth of the United States economy, by making the real estate bubble (which is already deflating quickly) explode, and by disrupting up household consumption (on which the essence of the US growth has rested for 5 years). Inflation, high interest rates and growth at half-mast, even recession, this is a well-known situation which prevailed during the Seventies: stagflation[8].
. Solution 2 - towards hyperinflation: stability of the US interest rates (and thus a drop of their relative value compared to the EU and Japan) to try (without guarantee, given the current state of the US economy[9]) to maintain the American internal growth and cause a collapse of the Dollar whose value “only just holds” on this differential, leading to the brutal interruption of the financing by the rest of the world of the American deficit (commercial and public) and thus a total financial crisis. This decision of course leaves the space open to inflation by trying to privilege growth, but it opens a period of generalized loss of confidence which reinforces, with the collapse of the Dollar, a very strong inflationary pressure in the United States which could lead to hyperinflation[10].
LEAP/E2020 believes that the US Reserve Federal, whose shareholders are large banks[11], will choose Solution 1 because in the second case the Federal Reserve is itself marginalized and loses the possibility of using one of its main instruments of action (interest rates). In addition, the current president of the Federal Reserve is convinced that parallel to a rise of the interest rates, an additional contribution of liquidity[12] to the economy will make it possible for the latter to set out again on the path towards growth[13].
For the team of LEAP/E2020, neither of the two solutions open to the American authorities can cure the total systemic crisis, their choice will be in fact primordial in determining the form and the extent of phase III of the total systemic crisis, the phase known as “impact phase”. The rest of the world will indeed not be affected the same way if the American authorities choose solution 1 or solution 2.
[1] Anticipated to last 3 to 6 months starting June 2006 - cf Leap/E2020
[2] Foreseeable and anticipated for the readers of the GEAB (cf N°2 to N°5)
[3] The generalized fall of the world stock exchange
[4] In French version, and other languages on June 17
[5] Stage 3 will illustrate the illusion also at play with this conviction.
[6] Compared with the beginning of May 2006, the stock exchange’s losses go from 15% to 30% depending on the zones. In most emerging markets currencies, the loss reaches 10% to 20%, and in some of them (Turkey, Korea,…) has already lead to brutal rises of the interest rates.
[9] The American government and the Federal Reserve can even decide, in electoral year, a fall in absolute value of the US rates in order to restart the economic machine already on the way to a recession.
[10] Hyperinflation definition: Wikipedia source [11] The structure of the Unites States Federal Reserve is indeed rather antiquated. It resembles that of the European central banks before the 30’s. It was created in 1913 and is a de facto bank whose shareholders are private banks. The future American Finance Minister, Henry Paulson, is the former president of the Goldman Sachs bank which is itself an important shareholder of the Federal Reserve of the United States. [12] Source: Reserve Federal - November 2002 - Speech of Ben Bernanke: [13] Stopping the publication of the M3 indicator (see GEAB February 2006 issue) allows for the two operations to be done simultaneously without the second, the currency making, being easily detectable.
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