This is an extremely serious economic condition, which on top of
rising interest rates will almost certainly destabilize the whole of
the Eurozone banking system.
The effect of a dollar will be to drive it down in the foreign
exchanges, certainly against Commodities, which is the important
thing.
Rather.
I mean, you know, we can guess what's going to happen against other
currencies.
I mean that's, you know, they're all in a
Same boat, basically.
But what I would see is is a weakening dollar against commodity is.
Now, what that means is that the idea that you know, inflation is
getting Community, prices are going to return to 2% or something like
that.
That's just for the you know that's for the birds it really is you're
going to see persistent price inflation at all levels from Commodities
through wholesale prices through to Consumer prices irrespective of
Of whether the US economy, our economy, the Eurozone economy is in
recession or not.
And what this means is that that's can't hire counterparty risk for
the banking system.
It means that the customers to whom they have lent money, you know, in
the physical economy, the, you know, Main Street, if you like a lot of
that is going to turn into bad debts.
It means
That bond yields will rise, which undermines the value of the
collateral banks, have on their balance sheets.
So that's something they're going to want to get rid of.
And the only way you get rid of collateral basically is by foreclosing
on loans.
So you can see that the situation is beginning to work, rather against
the Western Financial system.
And I would make a further point
And that is that virtually all transactions in measured by GDP are
settled in bank credit.
There's only a very small minority, which is settled in non Bank,
credit non-commercial Bank credits and that's cash probably less than
5%.
I think easy less than 5%.
So what really matters is what happens to that bank credit and if you
get a contraction of bank credit,
Then you're going to go get a Contracting GDP.
And what do we call?
Contracting nominal GDP, we call it a recession, it's not necessarily
a reception, it's a contraction in the amount of credit in the economy
and so on that basis.
Yeah.
They're going to be screaming recession, of course they will.
But really, what's happening is you got bad credit Contracting and
it's good because that credit generally has expanded so much since the
Lehman crisis that
Action is not going to be trivial, it really is not.
So I'm afraid that the outlook for Western Financial centres
Commercial Banking is one of increasing risks.
I think credit Suite is the first rescue.
I think there will be more.
There are certainly other Banks which are at least as highly balance
sheet, leverage to if not more so particularly in the Eurozone and
also in Japan and a lot of those banks have
Price to Book values, very substantial discounts, very substantial.
And when I say discounts, I mean like Credit Suisse on the share price
for we have seen today which is taken it into new low ground.
I'm guessing slightly, but I think the price to Discount the discount
to book value is about 80% now, 80% now that's just option money on
the survival of the of the bank.
The rights issue is not guarant guarantee, its future.
It really is not.
And as far as other banks are concerned.
We've got on the banks, which are similarly afflicted by Massive
discounts to book value, which is the markets way of telling us that
the market reckons that these banks are all.
But just so, you know, I think Contracting Bank credit Will expose
that position to us and you're going to have to have Central
It's working very, very hard to catch a failing banking system.
Commercial banking system to ensure that depositors are protected so
that's roughly where we are and I think that there's Credit Suisse
news is I'm afraid the first of several that were likely to see in the
ensuing months.
Yeah well and the Euro has been very weak, it ran down, I think to
something like you know, sort of under
A dollar ninety, eight cents.
I think for a Euro it's now bounced back up a bit.
As buddy of 105, something like that.
We've got a general rally in these currencies which as much as
anything is due to two factors.
Firstly, the immediate pressure from rising bond yields seems to have
lessened.
And secondly we have that reaction in the dollar which is just making
any other currencies suddenly look a bit better.
Except the problem with the euro is that it's a manufactured currency.
It's not like the dollar, it's not like Sterling.
I mean, those currencies, you know, have a history behind them going
way back.
They were substitutes for gold.
I mean, you know you could get take your dollar along and change it
for gold.
I mean, literally we could do that with Sterling now somewhere in the
very, very far distant memory that is
the linkage that we still have today, even though,
The dollar has lost 98% of its value measured in Gold since 1971.
But you know, that sort of Link still persists.
The Euro Euro does not have that link.
So it's got a fundamental problem when trouble arises as to what's
likely to happen.
I think the political scene in Europe as always is
Only difficult.
And here again, I think what we've got to do is to try and think it
through, in this new environment of rising interest rates, the Euro
has held together over a period of falling interest rates.
Even to the point where negative interest rates - deposit rates have
been imposed by the ECB, so that period is now end.
We ended.
We now have Rising interest rates and we've got to think in terms of
the effect on the target to imbalances.
Between the national central banks.
And we've also got to think about the effect on the repo Market, which
in pure real Euros is around about 6, trillion of about nine trillion
Euro repos Brotherhood of Europe.
Now, Six Trillion Euros of repo is a not inconsiderable sum
The banks have been using this as cheap as to get cheap liquidity in
effect on their balance.
Sheets as the cost of repose rise.
This is going to undermine the liquidity situation in general terms.
The other problem we have and this is also been an already admitted by
the Dutch national bank and that is that they are already running into
negative equity because of the
Has of easing bombs, which are on their balance, sheets, you know,
the, the bond yields have risen and the value of those bombs had
fallen and it's wiped out the equity in virtually all the national
central banks.
Now, obviously that situation has, you know, lessened with the fall in
bond yields recently, but nonetheless, this is still a problem.
What the Nash Dutch national bank said is that well we don't actually
have too much of a problem.
As because we can always revalue a lot gold Reserve jobs, which is an
interesting statement because it really means that there is if you
like a balance sheet use without disposing of their gold reserves,
even maybe they should increase their gold reserves, their gold
reserves are probably the best asset they've got on their balance
sheets and by God they better hold on to them.
I think that's the message that we're getting if you like through that
simple statement.
But it does confirm that these
These Banks really do have a problem and they are beginning to think
about it.
I'm talking about the central bank's in this case.
And the reason this really matters is in the Eurozone is that we
expect somewhat dysfunctional Euro system to backstop an extremely
highly leveraged, our Commercial Banking Network.
And this is it something which you know particularly with the winter
coming on and higher energy prices in particular, higher food, prices
hitting Europe.
I mean these are going to hit
Europe a lot more than America I can, but I can assure you.
This really does mean that we're going to be moving into a deepening
crisis in the winter months.
Now how the bank's going to survive this?
How are the central bank to going to could survive?
It can the central bank's just Bluff their way through it?
Well that's a very risky bet.
I would suggest.
So what we're looking at I think is a situation coming back to the
political angle.
Which has moved from, you know, we can we can disagree and I can shout
about you and you can shout about me and all the rest of it but don't
worry interest rates falling and will get cheap money.
So, you know, we're put off our problems that's changed because the
cheap money isn't there anymore.
How is that going to affect the politics?
Between, say, Italy and Germany, France, and Germany.
Germany is I mean it's companies in free fall.
Absolutely free fall.
And that's it's been brought about by the politicians.
The politicians are saying we're not going to do business with Russia.
No, I mean Russia.
It was a major major market for Germany and where they're supplying
other Goods into the Eurozone.
Their customers.
I mean, we're talking about the Mythic stunt, I mean companies like,
you know, sort of Automotive component,
Hers, like, Bosch, for example, you know, their customers are
businesses all around Europe and they attend turn are affected by by
this ridiculous situation of trying to sanction.
Russia, this is an extremely serious economic condition which on top
of rising interest rates will almost certainly destabilize the whole
of the Eurozone banking system and threatened to blow apart the Euro
itself.
If because it does not have that reference back to having been a
currency with a long history going all the way back to some set in the
past where you could exchange it for gold.
So it is an inherently unstable situation with a currency which is
unlikely to survive or certainly less likely to survive than its
peers.