House Of Straw

'Significant chance' of second financial crisis, warns World Economic Forum

There is now more than a one-in-five chance of another asset price bubble implosion costing the world more than £1 trillion, and similar odds of a full-scale sovereign fiscal crisis, a key report warned.

By Edmund Conway, Economics Editor
Published: 7:24PM GMT 14 Jan 2010

Investors must steel themselves for the possibility of a second leg to the financial crisis, and should be equally prepared for a fiscal crisis, in which a major economy faces either default or a "sudden stop" in financing themselves on capital markets, according to the World Economic Forum.

Its closely watched Global Risks Report also warned of the possibility of China's economy overheating and, instead of helping support global economic growth, preventing a fully-fledged recovery from developing.

The report, which comes a fortnight ahead of the WEF's annual summit in Davos, which will be attended this year by many of the world's leading businessmen and politicians, including Jamie Dimon of JP Morgan, Bill Gates, Bill Clinton and Nicolas Sarkozy. The report, produced in conjunction with Citigroup, Marsh & McLennan, Swiss Re, the Wharton School Risk Center and Zurich Financial Services, warns that the crisis has left leading economies acutely vulnerable to further problems.

The report, which in previous years had been among the first to cite the prospect of a financial crisis, the oil crisis that preceded it and the ongoing food crisis, included a list of growing risks threatening leading economies. Among the most likely, and potentially most costly, is a sovereign debt crisis, as some countries struggle to afford the unprecedented costs of the crisis clean-up, the report said, specifically naming the UK and the US.

Robert Greenhill, chief business officer of WEF, said: "The US and UK will have among the highest debt burdens; the danger may not be of a default, but it will certainly dampen economic activity."

The report also highlights the risk of a further asset price collapse, which could derail the nascent economic recovery across the world, with particular concern surrounding China, which some fear may follow the footsteps Japan trod in the 1990s.

Another worry is that Britain and fellow nations may be sleepwalking towards a potential energy crisis by failing to invest enough in the infrastructure that keeps the country powered. John Drzik, chief executive of management consultancy Oliver Wyman, said that countries were failing to invest sufficient amounts in both transport and energy infrastructure.

As we examined in Strategy #5, many people are in denial of the reality we face including politicians and policy makers. There are inherent problems with our banking system, our monetary system, and expectations by voters in western democracies.

In fact, the expectations of voters (which have been influenced by politicians) may end up threatening democracy itself.  The two edged sword of leverage is currently swinging back as defaults of individuals graduate to corporate defaults, then municipal & state defaults, and finally sovereign defaults.

The core of the issue is that of the integrity of our political leaders and voters themselves.   We have come to believe the socialist lies that:

a) everyone has the "right" to "free or subsidized" __________________ (insert wish in the blank)

b) someone else will pay for whatever we wish.  Perhaps a new tax on the rich, or a tariff on imported goods, or stealth taxation through inflation?

c) we can't possibly cut spending because ____________ (insert group name) will be offended and not vote for us next election.

Between fiat currencies and the mentality of entitlement in western democracies we have created a house of straw.  While the first major financial storm damaged our big government, socialist economies, the second storm may send our financial house crashing on top of us like some kind of Greek tragedy.

Reflection for the day:
"Without fuel, they were nothing. They built a house of straw. The thundering machines sputtered and stopped."
Mad Max 2 aka The Road Warrior 1981


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