Coming credit crunch with higher interest rates?
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From Bank of Engand statement...
"Barclays PLC, Hsbc Holdings PLC, Lloyds Banking Group PLC and the Royal Bank Of Scotland PLC have exposure to the five most vulnerable euro-zone states to the tune of GBP191.8 billion, or 83% of their core tier-one capital--the most easily accessed capital buffer.
Including France, Germany, the Netherlands and Belgium, their exposure rises to 268.2%."
Isn't a large part of this debt down to UK banks being forced to bailout (sorry, lend to) banks/countries in Europe?
It is a crazy setup in my view. Bank A borrows from Bank B in another country who then borrows from Bank C in yet another country and so on until banks in every country owe and are owed money from the banks of every other country.
Many many years ago my dad told me then that if all the world debt was recalled then there would not be enough money in the world to cover those debts.
I think the present setup is a smokescreen to hide that fact and unless there is a universal printing of money (quantitave easing) to cover those debts then the banking system will collapse. So it seems to me that we are going to see high inflation and possibly much higher interest rates in the coming years.
Oh woe.
Responses (4)
You are right about the coming credit crunch. It is here upon us and most to worry about within the whispers of The City district is tha there is one European bank (not confirmed which one) that is already bust and has become the Lehmans of 2011/2012.
Your dad was right - it's the fractional asset system.
Let's say it's set at 10% so banks need to have just 10% of funds in their coffers. Now, Fred deposits £100 in Bank A which can lend £90 to Stan who uses it as a deposit on a house so it ends up in John's account in Bank B. Bank B can now lend £81 of that to Joe so he can buy a kindle. His money ends up in Amazon's account at Bank C. So, from that initial £100 of Stan's, Amazon also has £81 and John has £90 while Stan still has his original £100 (i.e. it's become £271 so far).
This is called the "Bank Multiplier Effect" and means there's not enough money in the world to pay everyone what's in their accounts.
I wouldn't bank on interest rates going up either. If that happens, debt will compound and increase rather than reducing. However, inflation will continue climbing as the BoE prints money so that sterling denominated UK debt effectively deflates (if someone has £100 of bonds that the UK has to repay, it can print new money to pay the bill). The problem is, the more pounds are in circulation the less value each one has so anything imported (denominated in a currency other than sterling) inflates in price!
Crikey, think I just compressed a couple of chapters of an Economics text into a couple of paragraphs.
Go me!
You certainly put it succinctly.
I believe that interest rates are being held artificially low to encourage growth after the 2008/9 meltdown. Since this does not seem to be effective, if it comes to banks protecting themselves against inflation and risk to survive then I think interest rates on the high street will rise unless QE continues indefinitely.
I agree Sealate... Scarily though, I think QE might indeed continue indefinitely(!)
There's talk of the EU entering QE which will probably spark more QE in the UK and USA. Considering China's suffering from reduced exports and so a slowdown in manufacturing, I think they may devalue their currency in some way too, which would again spark more QE from the USA and UK to help boost exports :(
Yep! Go G-Man.
The current Government decided that all quantitave easing should go through the banks. Yes the same banks that got us into this almighty mess. They decided that those billions should not go to infrastructure opportunities, creating new jobs, investing in growth companies, but to the banks. This Government have shown their cloven heels - they are wedded to the rich - their natural consistuency. The rich have taken no hits in this meltdown. Our cabinet of multi millionaire ex public schoolboys will make hundreds of thousands redundant, maintain tax relief for rich buy to let "investors", make middle class ppl pay the same university fees as the super rich, and council tax as well. The cabinet of multi millionaires are protecting their core market from any pain, and looking after their own. The poor pay for the rich mistakes - positively 18th century.
Oh woe indeed Sealate. I was listening to Mervyn King this morning. Tis grim times ahead for sure.
http://www.guardian.co.uk/business/2011/dec/01/mervyn-king-bank-reserves-eurozone-crisis
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