The news last week of the ongoing meltdown at the toxic fuel-rod infested Fukushima complex in Japan shook world markets to their core, and G7 leaders raced to fight off Yen surge as currency jitters hit the banking system like a ton of dynamite.
And now, as the Fukushima situation seems to have gone into an eerie sort of nuclear coma, where nobody really knows what is going on, but we hear that traces of radiation now contaminate Tokyo water supply, that Spinach from 100km away from the plant was also affected, and that life in Tokyo, home to 35 million, is expected to be crippled by massive blackouts any day now; we hear that "Operation Odyssey Dawn" is underway in Libya to help the people fight off Qaddafi's crazed onslaught.
If either of these little issues gets resolved; (and I'll come back to why they probably will not in another post) we have a host of other crisis that brew in the background, playing a sneaky sort of waiting game until space in the news to start covering them again, and until the politicians and the movers and shakers and spivs and bankers and fund managers in the financial centers of the world start to get bored again.
To quickly reel them off; there is the European debt crisis- the fact that Greece and Portugal's debt has been downgraded again and Greece now pays just as much for its debt as it did when it was bailed out last year. Then there is an oil crunch, which could happen any week, any month now. The rising oil price posed a threat to the global economy, much like 2008, and that was before the trouble in the Middle East kicked off. Any further disruptions, or any intensification of Saudi unrest could unleash the price volcano needed to cripple economies left, right and center.
And then there is America. The ever obstructive Republicans are pushing the economy to the brink of disaster by refusing to approve more borrowing until April 15th, right when the Treasury is going to run out of money. Timothy Geithner, the Treasury Secretary has warned John Boehner, Republican House Leader, that the US would default if more debt is not quickly approved by congress. In the long term, the US debt needs to be brought down to prevent interest costs swelling to overwhelm the Federal budget- but there is no need to play cards with the economy like the GOP are doing right now. The "red threat" from the Republican's also manifests itself in a nasty piece of legislative work sponsored by presidential hopeful Newt Gingrich, that would allow states to go bankrupt. It is predicted by many, if not the majority, of financial analysts, that within days of this bill passing (and it could well pass) we would see a wave of individual states declaring bankruptcy, immediately wiping out millions of jobs, pensions, and welfare funds. The dramatic scenes in Wisconsin's state capital, where even the Police force joined in "on the side" of the protesters, could repeat themselves in a host of other states within the coming weeks and months.
But right now, there are more pressing concerns. Firstly, the finer details of the situation in Japan are at least hazy, but we can be absolutely certain of a few things; that the rebuilding efforts will require hundreds of billions if not trillions of foreign assets that Japanese insurers are required to hold abroad to be liquidated (sold to raise cash). It is no longer cheap to rebuild entire countries, an Japan's extra demand for oil which stems from it's nuclear crisis will only worsen the cost of rebuilding. Repairing Japan to it's former glory, will if it ever happens, require an enormous amount of money. If Japan is not fixed up quickly, and global supply chains continue to feel the loss of Japan's big industries, then the Japan situation could wipe out investments in the West. On the other hand, if Japan repatriates its foreign investments too quickly, this will also wipe out investments in the West. The threat to bank equity resulting from Japan's 9.0 earthquake could not have come at a worse time. Indeed, the FSA (Financial Services Authority) in the UK last week announced a series of "stress tests" to investigate whether banks would be able to withstand a further collapse in property values resulting from a double dip recession. My research suggests that banks will both fail this stress test, and that the Japan situation could quickly drain nearly all of their equity (the differences between assets and liabilities that allows banks to survive). The equity of Britain's greatest banks such as Lloyds TSB, Barclays, and RBS, is wafer thin.
In their latest annual report; RBS, the bank that told Chancellor Alistair Darling in 2008 that they were within hours of running out of cash, which could have brought the entire world to its knees, published it's annual report at the end of December last year. Their equity is just under 5.3% (the gap between assets and liabilities), meaning that any fall in the value of their assets, or increase in the value of their liabilities, or a combination, of this magnitude, would force them to shut both their doors and their cash-points. Also, the ratio between their cash reserves and the money value of customer accounts is about 1:9. A run on the banks is unlikely, but as George Osborne's fiscal axe sharpens by the day, this ratio could be pushed to breaking point, as public sector workers are laid off in the hundreds of thousands, many with little more than a months salary in savings, who would be forced to go to the bank to get by. If this ratio got much worse, it is highly likely that RBS, and other banks in a similar situation, would have to rapidly tighten lending, leading to a downward spiral the likes of which we saw in 2008.
In this case, the Bank of England could not, and would not, simply print the money to bail them out. "Quantitative easing", as it is called, has not resulted in skyrocketing inflation up to now, because it has mostly involved the flooding of new money "non liquid" assets such as property, meaning that the money only permeates through to consumer spending very slowly. The true scale of all of these problems will only become clearer in the current weeks and months, because the world leaders have run out of schemes to prop up the global house of cards. The game is pretty much up; we are truly out of time.
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