Thursday, March 28, 2013

Buckle Seat Belts! World Economy Going Off Cliff!

The world economy is about to fall off a cliff.

We've known that will happen ever since the 2008 failure of Lehman Brothers, but after massive interventions by Western central bankers saved the world economy from collapse then, there has been a desperate hope that happy times would return if everyone just believed in financial fairies. It is now clear that this will not work. 

All that governments have done since 2008 is kick the can down the road, and now they have run out of road. When banks in Cyprus open later today – if they open today – there will be a run and unavoidable contagion.

Whether or not that will send the world economy into a free fall will depend on how successfully European governments contain the situation. All over Europe there are contingency plans to deal with riot and disorder. In Washington, a delegation from London is reported to be in tense meetings with Pentagon brass who are tight-lipped about the agenda.

There are two reasons why tiny Cyprus will have a global impact. One is visible: the “deal” imposed on it by the European Union (read Germany), requiring a heavy 40% “tax” on bank deposits has demolished the foundation of trust necessary for the functioning of a modern banking sector, and it cannot be restored in the short term.

The second reason is that the crisis will hit one of the nodal points of the British-run global money-laundering system. What we are seeing is not an ordinary sovereign debt crisis but a power struggle pitting Germany and the United States against Britain’s criminal empire.

The global impact will come from the sudden collapse of confidence in Britain's capacity to manage the world's enormous stock of black money. That confidence has been dipping ever since the United States charged HSBC last year with money laundering and imposed a fine of nearly $2 billion on Britain's largest bank; the developments in Cypress will push it over a cliff.

Those who hold large undeclared funds in tax havens like Cyprus do so without benefit of official rules and guarantees. They have no legal way of getting their money back if those holding it throw up their hands and plead force majeure. Their only redress is violence. The Russian mafia, which is estimated to have some $19 billion in Cyprus, is probably behind the sudden "suicide" in London of former Russian oligarch Boris Berezovsky. We should expect an increasing number of sudden deaths among money-men around the world. 

There will also be a range of other humungous developments as some $30 trillion in black assets freezes over. The huge Hedge funds that have kept commodity markets soaring through three years of recession in all developed countries will probably be less energetic. Prices of real estate, gold and oil will collapse. So will a great deal of luxury consumption. As recent surges in stock markets indicate, the in-crowd has realized that equities will be the safest haven; valuations can be expected to soar.

The Indian economy is among the best for investors to be in right now for it is driven mainly by domestic demand. This explains David Cameron’s two visits to India in the past year, Finance Minister Chidambaram’s stop-over in London as he returned from Davos, and the strange proposals he included in the 2013 budget.

The fall in commodity prices, especially energy, will be a boon for India, but the sailing will not be easy by any means. There will be an enormous amount of economic volatility -- perhaps hyper-inflation -- as black money seeks every which way to enter the legitimate economy. Without careful handling incoming financial flows could send the value of the Rupee skyrocketing. The Reserve Bank better have contingency plans in place to prevent successive waves of deflation and hyper-inflation from roiling our lives too violently. (This would be the right time for the government to float a new family of infrastructure bonds and turn a blind eye to the source of funds.)

There is also the chance that the British elite, in an apre moi le deluge mood, will use their Taliban/ISI proxies to set off a major crisis. A nuclear attack on India will bring down the whole global order and give the vampires a new lease of life.

If something cataclysmic like that does not happen, we can expect that when the dust settles there will be a new world economic order. The Euro probably will not be around. A handful of national currencies, especially those of the United States, Germany and India, might be the foundations of a new (fixed-rate?) international financial system. Britain, China and Japan could also be players if their heavily internationally dependent economies have not taken too severe a beating.

But before we get to that point it’s going to be a wild ride. Buckle your seat belts!

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