Are we rapidly approaching a moment of reckoning for the global financial system? August is likely to be a relatively slow month as most of Europe is on vacation, but after that we will be moving into a "danger zone" where just about anything could happen.
The consensus? The world economy has entered a final countdown with three months left, and investors should pencil in a collapse in either August or September.Citing a theory he has been espousing since 2010 that predicts "a future lack of policy flexibility from the monetary and fiscal side," Jim Reid, a strategist at Deutsche Bank, wrote a note Tuesday that gloated "it feels like Europe has proved us right.""The U.S. has the ability to disprove the universal nature of our theory," Reid wrote, but "if this U.S. cycle is of completely average length as seen using the last 158 years of history (33 cycles), then the next recession should start by the end of August."
A number of very important events regarding the financial future of Europe are going to happen in the month of September. The following is from a recent Reuters article that detailed many of the key things that are currently slated to occur during that month:
In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain and Italy ~ or what do if one or both were to topple.
Reuters is reporting that Spanish Economy Minister Luis de Guindos has suggested that Spain may need a 300 billion euro bailout.
The unemployment rate in Spain is now up to 24.6 percent.
According to the Wall Street Journal, a new 30 billion euro hole has been discovered in the financial rescue plan for Greece.
Morgan Stanley is projecting that the unemployment rate in Greece will exceed 25 percent in 2013.
It is now being projected that the Greek economy will shrink by a total of 7 percent during 2012.
German Finance Minister Wolfgang Schäuble says that the rest of Europe will not be making any more concessions for Greece.
As I have written about previously, a banking crisis is more likely to happen in the fall than at any other time during the year. The global financial system will enter a "danger zone" starting in September, and none of us need to be reminded that the crashes of 1929, 1987 and 2008 all happened during the second half of the year.
"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."
Needless to say, I will be advocating 1933 monetary stimulus à l'outrance, or trillions of asset purchases through old fashioned open-market operations through the quantity of money effect (NOT INTEREST RATE 'CREDITISM') to avert deflation – and continue doing so until nominal GDP is restored to its trend line, at which point the stimulus can be withdrawn again.