This time it's serious

If you thought round one of the financial crisis was pretty rough three years ago, that was just a dress rehearsal for the main act. And the performance has just begun.
For the past 10 days, the markets have been doing the dance of the uncertain. Serious falls but nothing to get too alarmed about. On Wednesday things began to get ugly. Then came last night, when it finally dawned on traders in Europe and North America that there is almost no way to avoid an economic calamity.
The problem is compounded by the fact that it is so alarmingly huge and that it is replicated throughout the developed world. Massive deficits, enormous debts, and no obvious way to pay for it all.

Advertisement: Story continues below

Downward trend? Markets tremble as world lurches toward GFC MK II.

Global markets now have given up on the pretence that it all will somehow work out. They've given up on the soothing statements from politicians. Even those eternal optimists, stockbrokers, no longer believe their own rhetoric about "green shoots" and "return to a bull market".
And once greed turns to fear, as has been occurring for the past week and a half, it's everyone for himself.
In round one, governments bailed out the private sector. The financiers who engineered the problem got away scot-free. But who will bail out the governments?
The word around Wall Street last night was that the economy needed another round of stimulus, even more money printing, to stave off an imminent recession.
The second round of stimulus, the much vaunted QE2, wound up only a couple of weeks ago. It did nothing except add more debt to the national accounts. Employment has stagnated, economic growth has flatlined, consumer spending is down.
Western consumers seem to have picked up what the financiers and governments don't seem to understand; that there is too much debt and that it is time to pay it down.
This isn't the first time the world has seen sovereign debt crises. But it is the first time it has been of this magnitude and the first time it has infected First World economies on such a scale. The last major outbreak, in Latin America several decades ago, was before the forces of globalisation connected the entire world to everyone else's opportunities and misfortunes.
The Asian crisis of 1997 was largely confined to the region and, to their credit, those nations took their medicine, attempted to rectify the problems and resumed their normal activities.
The developed world has not been prepared to do the same this time. Debt problems have been given a temporary balm by the addition of greater debt.
And for all those who talk about a soft landing for Australia? We are one of the most exposed nations on earth, a small economy that relies extensively on exports and trade. As for all those who reckon we have "decoupled" from America and that our relationship with China will save us, you are partly correct. But China is tied to the US, courtesy of its huge exposure to American debt. That's only one degree of separation.
Let's hope governments can come to some meaningful way to resolve the problems confronting global finance. After the farce in Washington during the past month, that seems highly unlikely.
iverrender@smh.com.au


Read more: http://www.theage.com.au/business/this-time-its-serious-20110805-1ie4t.html#ixzz1U7zwUzoV