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Global Financial Collapse as $50 trillion of Asset Values Wiped Out

Stock-Markets / Financial Crash Mar 09, 2009 - 12:36 AM GMT

By: Nadeem_Walayat

Stock-Markets Best Financial Markets Analysis ArticleThe Asian Development Bank estimates that the global financial crisis has seen a loss of asset values of more than $50 trillion, with the loss to asian emerging markets estimated at near $10 trillion. The ADB president Haruhiko Kuroda puts the destruction of asset values on par with that of the Great Depression"This is by far the most serious crisis to hit the world economy since the Great Depression"


The ADB study does not see an asian emerging markets recovery starting until late 2009 and possibly early 2010. Haruhiko Kuroda stated. "I am afraid things may get worse before they get better. However, I remain confident that Asia will be one of the first regions to emerge from it, and it will emerge stronger than ever before."

The estimate of $50 trillion is set against my earlier estimate of global asset value destruction of at least $38 trillion. The impact of which is highly deflationary and hence resulting in many of the economies experiencing true deflation in terms of negative consumer prices going into mid 2009.

Governments across the world are increasingly adopting "Quantative Easing" aka "Printing Money" to fight against Deflation that is threatening to push global economies into a downward deflationary spiral towards a prolonged period of economic depression. The question is will printing money coupled with ZERO interest rates work ?

Money printing in the first instance takes the form of governments instructing their respective central banks to buy government bonds in an effort to artificially drive longer term interest rates lower and thereby stimulate economic activity. Therefore the governments are trying to play at catching the falling knife which is represented by economic contraction, which means as the level of contraction intensifies then so will the degree of measures adopted to fight DEFLATION.

However there should be no illusion in that these are panic measures, and in that the greater the level of panic, the greater will be the price paid, far in excess of the value of the ongoing economic contraction, perhaps in the order of ten times the cost as evidenced in Britain's case where measures to date have FAILED so far to halt economic meltdown but the price paid so far is in the 30% additional loss of value of assets due to sterling's crash. However. this is at the same time as all currencies through their respective governments panic measures are engaged in competitive devaluations where all currencies are on a race towards ZERO in an attempt to boost their own economies by attempting to boost foreign demand for their goods and services and impact on importers. The only problem is that no one is buying anymore as evidenced by the collapse in auto sales across the globe which have crashed by 60% on a year earlier.

Whilst competitive currency devaluation normally should be highly inflationary, however the effect of collective devaluation actually reinforces DEFLATION as it leads to the destruction of asset values as demand further contracts as we are witnessing with the collapse in housing, stocks and commodities as many of the western economies are now at serious risk of facing a 10 year Japan style deflationary depression .

To learn how to survive the ongoing deflationary crash , Robert Prechter the world's foremost expert on and proponent of the deflationary scenario has made available his NEW Deflation Survival eBook , a FREE 60-page compilation of Prechter's most important teachings and warnings about deflation Download now , from which the following article has been adapted.

Nouriel Roubini writes in Forbes, arguing in favour of a protracted deflationary L shaped depression as global trade collapses and as a consquence of the massive destruction of household net wealth.

For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.

There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

Nouriel continues in that he expects U.S. and global equity markets to continue their bear markets for the duration of 2009 and well into 2010, which may be punctuated by what he considers as a bear market sucker rally during the 3rd or 4th quarter of 2009.

In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).

Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.

For more on the deflationary depression do take the time to read the free 60 page ebook The Deflation Survival Guide by world's foremost expert on and proponent of the deflationary scenario.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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