Infinite Unknown

The International Monetary Fund has slashed its forecast for the world economy next year, predicting outright contraction for the rich economies of North America, Europe, and Japan for the first time since the Second World War.

Taxi driving through Tokyo at night. Photo: GETTY

“Prospects for global growth have deteriorated over the past month. The financial crisis remains virulent. Markets have entered a vicious cycle of asset deleveraging,” said the fund yesterday.

Britain’s economy will suffer and will see the steepest decline in G7 club of leading powers, shrinking 1.3pc as the crunch in the City of London leads to more job losses. Germany will decline by 0.8pc, The US and Spain by 0.7pc.

Sending shivers through stockmarkets everwhere, the Fund cut its world outlook next year to just 2.2pc, down from 3pc just a month ago. This is a global recession under the IMF’s 3pc rule-of-thumb.

“Financial stress is likely to be deeper and more protracted than envisaged in October. Markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans,” it said.

“Activity is increasingly being held back by slumping confidence. As the financial crisis has become more entrenched, households and firms are increasingly anticipating a prolonged period of poor prospects for jobs and profits. As a result, they are cutting back.”

Olivier Blanchard, the IMF’s chief economist, called on authorities around the world to respond rapidly with combined monetary and fiscal stimulus, saying risk on an inflationary surge had subsided as commodities prices slump.

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Tags: Economy, EU, financial crisis, G7, Germany, IMF, Japan, Politics, Recession, Spain, U.K., U.S.

Christine Lagarde, the French finance minister, warned her US counterpart Hank Paulson that he had to bail out US investment bank Lehman Brothers or face global financial collapse, but her advice went unheeded.

Christine Lagarde, the French finance minister, warned her US counterpart Hank Paulson that he must bail out US investment bank Lehman Brothers or face global financial collapse, but her advice went unheeded. Photo: Reuters

Sources close to Mrs Lagarde said that she had called the US Treasury Secretary - a close personal friend - well before the ailing bank’s collapse imploring him to act, but he chose not to.

Lehman Brothers’ demise sparked the biggest shake-up on Wall Street in decades and sent shock waves around the world that triggered a massive bailout plan in Britain and Europe.

Mrs Lagarde - attributed with playing a key role in brokering a bailout deal among G7 finance ministers in Washington last weekend - dubbed Mr Paulson’s decision to let the bank go under “horrendous” as it triggered panic in markets and banks to the brink of a 1929-style financial meltdown.

In an interview with the Daily Telegraph, she warned that the world’s hedge funds could be the next institutions to be hit by the financial turmoil.

Mrs Lagarde, a perfect English speaker, said that governments must be “vigilant” over the health of hedge funds. “Initially everybody thought the hedge fund sector would be the first one to actually cause the collapse. They are vastly unregulated, they have been operating at the fringes, at the margin, and we need to be careful that there is no contamination effect,” she said.

Related articles:
- Hedge funds shake in the teeth of financial storm
- US hedge funds suffer heavy withdrawals

Her warning will send a shiver through the $2 trillion (£1.15billion) hedge fund industry, which has doubled in size in the last three years and proved to be one of the most powerful forces in the global financial system.

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Tags: bailout, Credit Crisis, credit crunch, Economy, EU, financial crisis, France, G7, Government, hedge funds, Henry Paulson, Jean-Claude Juncker, Lehman Brothers, Meltdown, Nicolas Sarkozy, Politics, Stock Market, Treasury, Trichet, U.K., U.S., Wall Street

Why is gold dropping right now when anyone in their sane mind would expect it to rise? The simple answer to this question is, “because Comex-gold isn’t gold” - and because it deceptively pretends to be ‘the’ price-setter for real gold.

Gold is gold, paper is paper, and “Comex gold” is nothing but paper masquerading as gold while simultaneously pretending to be the price-setting medium for actual gold in the world. Now, finally, Comex-gold is in the process of being unmasked.

The real supply and demand determinants for Comex gold are not actual gold investors but fund managers. Fund managers are inextricably intertwined with the world of contract-based credit instruments. They use bet on Comex gold contracts to hedge their other (currently horrendously losing) bets with something they all, in their in-bred belief in paper markets, believe will ‘go up’ in value while everything else is going down.

However, these very same fund managers and their paper-bound investment psychology are the exclusive reason why Comex gold is dropping in these times when everyone (including fund managers) expects gold to rise. As already stated, though, and as they now finally realize to their own dismay, Comex-gold just isn’t gold - and that causes even further selling.

Two Losing Bets, Compounded

Fund managers’ other bets are losing money fast, now, so they need to raise cash to keep up the overall value of their respective funds, so they can earn their management bonuses and avoid getting booted for lack of relative performance. Guess what they cash in on? The very same Comex paper-gold they mistakenly bought as a ‘hedge’, of course.

Meanwhile, real investors in real gold are enjoying their shopping spree - except that the spree turned into a treasure hunt as the shelves and display cases of gold dealers look more and more like the supermarket shelves in the old Soviet Union - bare.

This is the only ‘bare-market’ in real gold the world will see for a long, long time to come.

With this split, this disconnect, between Comex illusion and gold reality, one thing or the other will have to give, and it won’t be physical gold that gives.

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Tags: bailout, COMEX, Constitution, Economy, G7, Gold, hedge funds, Stock Market, Wall Street

Government set to become biggest shareholder in top banks as Japanese weigh bid for Morgan Stanley

THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call.

Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion.

Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger, wants £7 billion, while Barclays needs £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would give time for the market to digest the impact of the moves.

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Tags: AIG, Bank of England, Barclays, Citigroup, Credit Crisis, credit crunch, Deutsche Bank, Economy, G7, Goldman Sachs, Government, HBoS, HSBC, JPMorgan, Lehman Brothers, Lloyds TSB, Morgan Stanley, mortgage crisis, Mortgages, Politics, RBS, Stock Market, U.K.

Strauss-Kahn said rich nations had so far failed to restore confidence

The world financial system is teetering on the “brink of systemic meltdown”, the head of the International Monetary Fund (IMF) has warned in Washington.

Dominique Strauss-Kahn said rich nations had so far failed to restore confidence, but he endorsed a new action plan by the G7 group.

He also said the IMF was ready to lend to countries in dire need of capital.

The 15 eurozone leaders will meet in Paris later to try to establish a common approach to the markets crisis.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they would present a number of proposals at the summit to ease the credit freeze that has caused the collapse of several leading international banks.

But after meeting in Paris on Saturday, the two leaders said the summit would not result in a joint financial rescue fund for Europe, in the model of a $700bn rescue by the US government.

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Tags: Angela Merkel, Banks, Economy, financial crisis, G7, George Bush, Gordon Brown, Government, IMF, Meltdown, Nicolas Sarkozy, Politics, Stock Market, U.K., U.S.

A security officer stands outside of the Federal Reserve building in Washington on Sept. 16, 2008. Photographer: Jay Mallin/Bloomberg News

Oct. 8 (Bloomberg) — The Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the worst financial crisis since the Great Depression.

The Fed, ECB, Bank of England, Bank of Canada and Sweden’s Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn’t participate in the move, said it supported the action. Switzerland also took part. Separately, China’s central bank lowered its key one-year lending rate by 0.27 percentage point.

Today’s decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937; Japan’s benchmark today had the worst drop in two decades. Policy makers are also aiming to unfreeze credit markets after the premium on the three-month London interbank offered rate over the Fed’s main rate doubled in two weeks to a record. Continue reading »

Tags: Bank of Canada, Bank of England, Banks, Ben Bernanke, ECB, Economy, Fed, Federal Reserve, G7, Great Depression, IMF, Lehman Brothers, Meltdown, Politics, Recession, Stock Market, Sweden, U.S., Wall Street

Russian soldiers adjust a Russian flag in the South Ossetian city of Tskhinvali (AFP)

The Kremlin moved swiftly to tighten its grip on Georgia’s breakaway regions yesterday as South Ossetia announced that it would soon become part of Russia, which will open military bases in the province under an agreement to be signed on Tuesday.

Tarzan Kokoity, the province’s Deputy Speaker of parliament, announced that South Ossetia would be absorbed into Russia soon so that its people could live in “one united Russian state” with their ethnic kin in North Ossetia.

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Tags: Abkhazia, CSTO, Dmitry Medvedev, EU, G7, Georgia, Government, Military, NATO, Russia, South Ossetia, U.S.

Russia has criticised the US for using naval ships to deliver aid to Georgia

A new Cold War between Russia and the West grew steadily closer yesterday after the Kremlin gave a warning about “direct confrontation” between American and Russian warships in the Black Sea.

Dmitri Peskov, a spokesman for Vladimir Putin, the Prime Minister, declared that Russia was taking “measures of precaution” against American and Nato naval ships. “Let’s hope we do not see any direct confrontation in that,” he said.

Any attempt by countries in the West to isolate Russia would “definitely harm the economic interests of those states”, he said.

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Tags: Abkhazia, Canada, Cold War, Dick Cheney, Dmitry Medvedev, France, G7, Georgia, Germany, Government, Japan, Military, NATO, Politics, Russia, South Ossetia, U.S., Vladimir Putin

Jean-Claude Juncker, the EU’s ‘Mr Euro’, has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.

Jean-Claude Juncker, who is calling for Washington to
take steps to halt the slide of the dollar

Momentum traders have blithely ignored last week’s accord by the G7 powers, which described “sharp fluctuations in major currencies” as a threat to economic and financial stability. The euro has surged to fresh records this week, touching $1.5982 against the dollar and £0.8098 against sterling yesterday.

“I don’t have the impression that financial markets and other actors have correctly and entirely understood the message of the G7 meeting,” he said.

Mr Juncker, who doubles as Luxembourg premier and chair of eurozone financiers, told the Luxembourg press that he had been invited to the White House last week just before the G7 at the urgent request of President George Bush. The two leaders discussed the dangers of rising “protectionism” in Europe. Mr Juncker warned that matters could get out of hand unless America took steps to halt the slide in the dollar. Continue reading »

Tags: Airbus, Barclays Capital, central bank, China, collapse, Commodities, crisis, Dollar, EADS, ECB, EU, euro, European Central Bank, FDI, Federal Reserve, France, Futures, G7, GDP, George Soros, Germany, Gold, hedge funds, Holland, Ireland, Italy, Jean-Claude Juncker, Luxembourg, Nicolas Sarkozy, Oil, Saudi Arabia, Silver, Silvio Berlusconi, slide, Spain, stability, traders, world authorities

A foreclosure sign in Florida. Photograph: Joe Raedle/Getty Images

America’s mortgage crisis has spiralled into “the largest financial shock since the Great Depression” and there is now a one-in-four chance of a full-blown global recession over the next 12 months, the International Monetary Fund warned today. Continue reading »

Tags: Bank of England, Bear Stearns, crisis, Federal Reserve, finance ministers, financial crisis, G7, GDP, George Bush, global, Great Depression, IMF, Recession, shock, U.S.