|The New Citizen Extra
World Teeters on Brink of Financial Crash
March 18—A panic is setting in among key financial circles—a panic that we are fast approaching the final disintegration of the financial casino known as the global monetary system. Reflecting this panic, as well as intensifying it, a series of shocks hit world markets in February and the first half of March:
- A financial crash in the tiny nation of Iceland on February 21 set off shock waves in the currency and bond markets in Australia, New Zealand, Brazil, Mexico, Indonesia, Turkey, South Africa and Eastern Europe. Iceland’s currency, the krona, fell 9.2% against the U.S. dollar; its stock exchange collapsed by 5.2%; the nation’s interest rates shot up to 10.75%; and its largest bank had to issue a statement claiming that it was solvent —a sure sign that it isn’t.
- A second round of panic broke out on March 7, when stock markets in Russia, Turkey and all over Latin America plunged by 3-6%, causing risk premiums on those nations’ bonds to shoot up, and some of their currencies to plunge, as in Brazil, Turkey and South Africa, in particular. Commodity markets also saw panic selling, particularly in such base metals as copper, zinc and aluminium.
- A week later, a new round of panic swept world markets, in particular in the Middle East, where the stock market of Dubai plunged by 12% on March 14 alone; Egypt’s collapsed by 11% in one day until the government intervened to prop it up; and Kuwait and Saudi Arabia’s markets continued to collapse, the former losing 17% since February 7, and the latter an astounding 28% since February 25.
- The U.S. on March 16 announced a staggering US$800 billion annual current account deficit—a clearly unsustainable sum which portends a crash in the dollar.
The Yen Carry Trade
As dramatic as some of these events are, “you ain’t seen nothin’ yet”. At the end of February, the Bank of Japan announced that it intended to end one of the chief props of the global financial bubble over the last decade, the “yen carry trade”. London’s Daily Telegraph of February 25 explained how the yen carry trade works: “The ‘carry trade’—as it is known—is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1% in Switzerland, to re-lend anywhere in the world that offers higher yields...” And, the paper continued, “The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads; everything is poisoned. It’s going to come to an end later this year and it’s going to be ugly...”
When Japan raises its rates, borrowers in yen will have to “unwind” their positions in commodities, stocks and bonds, real estate, and other speculation, which will become unprofitable using borrowed yen at higher interest rates. This will set off a global wave of selling as everyone stampedes for the doors, so as not to be left holding the bag as asset prices plummet. Under enormous pressure from many central banks, the Bank of Japan has temporarily put off raising its rates, but over the next few months will do what amounts to the same thing: it announced on March 9 that it will cut back by 80% the amount of funds it lends for free, down from approximately US$300 billion to only $50 billion.
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