Friday, December 21, 2012
Why the European situation is so important may not be obvious to those who don’t live there. However, the global economy is extremely integrated, and what happens in one location readily leads to financial contagion in other areas.
Europe is the epicenter of the next phase of the credit crunch. From here, expect waves of financial contagion for the next several years. Many member states are at or near sovereign debt default, with the potential to trigger credit events in the credit default swap market. Banks are over-leveraged, often highly disproportionate in comparison with their host economies and intertwined with the sovereign debt issue.
Many EU member states have housing bubbles far larger than America’s. Some have already burst; in others the market is becoming illiquid and prices are declining. As the value of collateral falls, and economies slide deeper into recession and high unemployment, the leveraged debt will be unsupportable. Personal debt is a problem too, even in countries that are considered wealthy and stable.
Europe’s misfortune is relevant to the future of the whole global financial system, and where Europe is leading - debt deflation, liquidity crunch, depression - many other countries will follow. We are in the process of crashing our global operating system, as we did on a smaller scale in the 1930s. The global credit bubble has peaked, and the debt created in the expansion years will not be repaid.
The gargantuan pile of interlocking promises will become nothing more than dashed expectations. The credit collapse will crash both the money supply and the velocity at which money circulates in the economy. Credit bubbles bring forward demand by artificially stimulating it, but when they burst, the demand borrowed from the future must be repaid.
Posted by Unknown at 9:23 AM