Global financial meltdown - written by David Newman

This is a note from David Newman, a nice looking + thinking friend, member of ISWA Board. He kindly permited me to publish his thoughts regarding global financial meltdown. I found theme very interesting and I am sure that all readers will do the same. Thanks a lot David and I hope that this will be just your first contribution...

"The impact in the real economy of this year's financial meltdown will now start to make itself felt. And we are all about to be hit by an economic tsunami.

The banks can no longer finance themselves through inter bank relations. This means they are without liquidity. They will not therefore be financing companies at risk, even for solid companies ordinary day to day financing is at risk.

Vulnerable companies in all sectors are now going bust; this will escalate rapidly in the next weeks. By the year end this will have caused a significant increase in unemployment worldwide. Solid companies have frozen new investments, either for lack of bank financing or due to adverse risk factors. Export led economies are equally vulnerable as their major markets shrink. We will see unemployment rise here too leading to widespread social unrest.

Those economies that have benefited from high prices of raw materials will be particularly hit as the investments made on the assumption of increasing prices became unsustainable.

The western economies have a varied capacity to react because some of them are overleveraged already and have no further lending capacity. Others are reasonably immune because they have small domestic economies based on services. Among the first are GB, Italy, among the second Ireland, Greece, Belgium.

Our individual investments will be worth much less, or even nothing, in the short term as housing and stock markets collapse and banks fail. Many of us will lose our jobs as companies fail, governments slash spending, consumers spend less.

The power of the western economies will be significantly reduced relative to the east and middle east, awash with years of accumulated export and mineral wealth. But the key will be to what point the western economies will be able to sustain their unemployed masses before social breakdown occurs.

The measure to protect savings accounts are necessarily limited; taxpayers payments to governments being used to guarantee taxpayers savings- the mathematics doesn't work if that guarantee needs to be given over a long term.

So what to do ?

A first reaction is to go out and celebrate ! What the hell. But after the hangover we've all got some very serious thinking to do, and our collective reactions will determine for how long the depression will last.

For those of us with debts, by dramatically cutting our spending we will contribute to an economic depression; by not doing so we are ignoring the reality of our individual vulnerability and will shorten the time in which our banks close the credit lines. For those of us with savings in the banks, it's a frightening period- are they safe ? Are they hell ! But what do you do with these savings ?

Interest rates will now fall dramatically and leaving money in the bank will mean seeing its real value decline. And it is this group which will inevitably lead us slowly out of the mess as they withdraw their savings and take advantage of cheap markets to buy- property and shares mainly.

It takes a brave man to invest today but the profits from doing so in the medium term will be extraordinary. Companies have stock values so low they are give aways; fire sales of houses make some properties incredible bargains. They will reach the point of the early 1990s when to buy a house cost less than to build a new one- then is the time to buy and the whole economy will start to move again. It's two years before this happens.

Two years in which we've all got to face insecurity, fall in spending power, actual or relative poverty. A dramatic response to a decade of over spending fuelled by cheap money and sheer greed.

One bright note: economic decline will mean the use of less resources and may actually benefit the environment. Take some comfort from that if you can !

David
October 6th, 2008"