Prepare For Global Geopolitical Dislocation

The last few weeks we have been hearing a lot about stimulus packages and historic decisions but what might have many people puzzled is that these bold pronouncements don’t seem to be cheering the markets very much, in fact they have been heading south faster than ever. So why are the markets not responding to the stimulus now and are they going to in the near future? Well this very issue was picked-up by European think-tank leap2020 last week and their prognosis does not look good.

Beginning of Phase 5 of the global systemic crisis: phase of global geopolitical dislocation.

Due to the global leaders’ incapacity to fully realise the scope of the ongoing crisis (made obvious by their determination to cure the consequences rather than the causes of this crisis), the global systemic crisis will enter a fifth phase in the fourth quarter of 2009, a phase of global geopolitical dislocation.
 
A. Two major processes:
1. Disappearance of the financial base (Dollar & Debt) all over the world
2. Fragmentation of the interests of the global system’s big players and blocks
 
B. Two parallel sequences:
1. Quick disintegration of the current international system altogether
2. Strategic dislocation of big global players.
 
…
 
In the United States, as in Europe, China and Japan, leaders persist in reacting as if the global system has only fallen victim to some temporary breakdown, merely requiring loads of fuel (liquidities) and other ingredients (rate drops, repurchase of toxic assets, bailouts of semi-bankrupt industries,…) to reboot it.
 
…
 
There is only one very small launch window left to prevent this scenario from shaping up: the next four months, before summer 2009. Practically speaking, the April 2009 G20 Summit is probably the last chance to put on the right tracks the forces at play, i.e. before the sequence of UK and then US defaults begin (2). Failing which, they will lose their capacity to control events (3), including those in their own countries for many of them; and the world will enter this phase of geopolitical dislocation like a “drunken boat”. At the end of this phase of geopolitical dislocation, the world will look more like Europe in 1913 rather than our world in 2007.

So what is it that the policy makers and central banks have failed to grasp about the crisis exactly one may ask? Well the current disturbance in the credit markets which we hear so much about, in which banks will not lend to one another except at punitive interest rates in spite of almost zero base rates (credit spreads) is not caused by a lack of available money to lend but in a lack of faith in the ability of counterparties to repay. The Federal Reserve and the Bank of England has gone about solving this problem as if it were a liquidity issue when the basic problem is that there is considerable uncertainty in the credibility of balance sheets.

Even though credit markets have been flooded with cash spreads have not shifted because nobody knows who is solvent and who isn’t.

Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing.
 
Why? Because the underlying problem isn’t a liquidity problem. As I’ve noted elsewhere, the problem is that lenders and investors don’t trust they’ll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.
 
Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks’ capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.
 
     US Former Secretary of Labour Robert Reich

Uncertainty about the impact of financial distress of one entity [from derivatives] on all other market participants causes trading in the inter-bank market to freeze up further increasing volatility and potentially risk of failure of weaker firms.

Its not a liquidity problem, it is an insolvency problem. Or more accurately, a lack of trust that the other party is not going to go belly up because of derivative liabilities.

Is someone going to explain this to the politicians?

Worse still, George Soros agrees but thinks its already too late.

See also :

Moody’s predicts default rate will exceed peaks hit in Great Depression.