Phase IV of the systemic crisis: The sequence of global insolvency begins (LEAP/E2020)

{mosimage}  LEAP/E2020 estimates that a new sequence of the fourth phase of the unfolding global systemic crisis has began: the sequence of global insolvency

  Public announcement GEAB N°31

  Jan. 16, 2009 (LEAP/E2020) -- In 2007, LEAP/E2020 announced that U.S. banks and consumers were both insolvent. More than a year ago, our team estimated that USD 10 trillion worth in "ghost-assets" would vanish in the crisis. Both announcements came in complete opposition with the common opinion of that time; however they proved perfectly justified in the months after. In the same line, LEAP/E2020 today estimates that a new sequence of the fourth phase (so-called "decanting phase") of the unfolding global systemic crisis has began: the sequence of global insolvency.

Market capitalisation of stock markets worldwide (in trillions of US Dollars) - Source: Thomson financial Datastream, 01/2009

 

  How to make the difference between a crisis of solvency and a crisis of liquidity?

  The difference between a crisis of liquidity and a crisis of solvency can appear rather technical and in the end not very decisive concerning the evolution of the current crisis. However it is not a simple academic dispute; indeed, according to the answer to that question, the actions taken by governments and central banks will either be useful or utterly useless, if not dangerous.

  A simple example can help to understand what is at stake. If you meet a temporary problem of cash, and if your bank or your family agrees to lend you the money you need to cross over that difficult path, their effort is mutually beneficial. Indeed, you can resume your activity, you can pay your employees and yourself, your bank or your family get their money back (with an interest in the case of the bank), and the economy in general benefited from a positive contribution. But if your problem is not due to a question of cash-flow but to the fact that your activity has ceased to be profitable and will never be again because of new economic conditions, then the effort made by your bank or family becomes all the more dangerous that it was substantial. Indeed, in all likelihood, your first call for funds will soon be followed by more calls, always matched with promises (honest ones we suppose) that difficult times are about to be over. The more your bank or your family has lent you (and therefore the more it would lose if your activity is stopped) the more willing they will be to continue helping you. However if the situation worsens, and it will if it comes from a problem of profitability, there is a moment when the limits are reached: on the one hand, your bank will decide that there is more to lose in keeping supporting you than in letting you down; on the other hand, your family ends up with no money left because you have siphoned its entire savings. Then it appears clearly to everyone not only that you are insolvent or bankrupt, but that you dragged down with you your family or your bank (4). You have thus dealt a severe blow on the economy around you, including on your close relatives (5). It is important to highlight the fact that all this could take place in all sincerity because you were not aware of the impact on your activity of a sudden change in the economic context disrupting the conditions of your profitability.

US daily bankruptcy filings (01/2006 – 11/2008) - Source: CreditSlips, 01/2009

 

  According to LEAP/E2020, this simple example illustrates perfectly the situation prevailing today throughout the entire global financial system, a large part of the world economy and all the economic players (including States) who based their growth on debt in the past years. The crisis translates and magnifies a problem of global insolvency. The world is becoming aware of the fact that it is a lot poorer than it used to believe in the last decade. And 2009 is the year when all the economic players must try to assess their real level of solvency, knowing that many assets are still losing value. Moreover a growing number of investors no longer trust the traditional instruments and indicators of measurement. Quoting agencies have lost all credibility. The U.S. Dollar is just a fiction of international monetary unit and many countries are striving to get away from it as quickly as possible (6). Thus, quite rightly, the entire financial sphere is suspected of being a giant black hole. Concerning companies, no one can tell if their order books are reliable (7) because in every sector customers cancel their orders (8) or just stop buying, even when prices are discounted, as indicated by dropping retail sales in the past few weeks (9). Concerning States (and municipalities), slumping fiscal revenues are likely to result in even higher deficits and then bankruptcies. As a matter of fact, Russian billionaires (10), Gulf oil-monarchies, Chinese commercial Eldorados (11), all the "golden-egg geese" of companies and financial institutions of the planet (namely European, Japanese and North-American ones (12)) turn out to be insolvent or hardly solvent. The question of the solvency of the U.S. federal State and federated states (13) (as well as of Russia or the United-Kingdom) is beginning to be asked by some big international media; as well as the question of the solvency of large capital-based pension funds, major players in this past twenty years’ globalised economy.

  According to LEAP/E2020, the trend is clear: the sequence that has begun this year is a sequence of global insolvency.