The First Storm Front
The first storm front hit early in 2007 when homebuyers in the US started missing their mortgage repayments. The first to suffer were those lenders that had specialised in the riskiest, “subprime” loans, such as the so-called NINJA loans – a slang term for a loan extended to a borrower with “No Income, No Job and No Assets”.
The global financial crisis, which quickly became an economic crisis, began with the failure of several US subprime mortgage lenders including, New Century Financial, DR Horton, Countrywide Financial and Fannie Mae and Freddie Mac.
The losses incurred by these mortgage lenders then began appearing on the balance sheets of banks such as HSBC, BNP Paribas, Bear Stearns and Lehman Brothers, which had to write off huge losses. As a result the cost of borrowing rocketed and lending became scarce.
The US subprime fiasco became the trigger that burst the global credit bubble, ending 25 years of economic boom predicated on cheap debt and easy money.
The Eye Of The Storm
Right now we are in the eye of the global financial & economic storm. The relative calm that we are experiencing today, the so-called “economic recovery”, is merely temporary and has come at great cost.
In order to stave off the economic depression that would have resulted from the 07/08 global financial crisis, the world’s top eight central banks increased their balance sheets by $10 trillion, that’s around $2 trillion per year.
The fact is however, all of this money printing has only masked the problems and hasn’t fixed anything, in fact, underneath the surface the problems continue to worsen.
Even if unemployment in the US were to continue to fall, and the Eurozone and Britain were to avoid recession, we cannot avoid the second storm front, all we can do is postpone the day of reckoning.
The Second Storm Front
The natural corrective process cannot be forestalled forever. Sooner or later these huge unsustainable debts have to be repaid and the imbalances in the global financial system have to be corrected. We simply cannot begin a new cycle of sustainable prosperity until the malinvestment and bad debts have been cleansed, and assets prices are fairly valued.
Far from addressing the underlying structural issues facing the economy, the act of continuously adding to the burden of debt in order to keep the global economy bumbling along, actually increases the threat posed by the second storm.