The World Zombie Economy

Isaac Hayes - 16-Oct-2009

The cause of the current deleveraging crisis was because of the sudden reduction in leverage in the financial sector in 2008. As assets fell in value, the most highly leveraged firms, or lenders who raised money by selling debt went out of business.

These events caused a chain reaction in which other market players were forced to sell assets and preserve capital. The Banks simply stopped lending to preserve capital, thus causing various businesses to deleverage or collapse. From there the deleveraging crisis jumped straight to households who cut back spending.

As households stop spending like they use too, corporate and bank profits decline, thus the banks faced more credit write downs from households getting behind in bills and loans, and the entire cycle accelerates.

What do the Global monetary authorities do? .......They simply increase asset prices to stabilize bank balance sheets and prevent the spread of the credit crisis, and they do that by the suspension of mark-to-market accounting rules, and the maintenance of low interest rates especially in the USA, yet in other places like Australia interest rates are being currently jacked up, because simply the Australian households are still spending far too much, instead of servicing there large debts and saving.

House asset prices still have not been allowed to fall in Australia like they have in the USA and the UK because of the vested interest between banks and developers.

Australia is a interesting case, as the government seems to be doing everything there to support the nation's four biggest banks at the expense of Australia's small mortgage lenders.

The Australian government there seems to be purchasing more residential mortgage backed securities which further distorts the entire housing market.

`Kim Cannon, managing director of FirstMac, a Brisbane-based lender to homebuyers which relies on mortgage-bond sales for funding. The top banks have ''too much power'' over the housing market because they can raise money from other sources such as deposits, he said.'

Meanwhile Australia's big four banks increased their combined portion of new owner- occupier mortgages to 81 per cent in July from 60 per cent as of mid-2007, the Reserve Bank of Australia said September 24.

Also the Australian banks have been allowed to used zombie magic to create quarter earnings growth which gives the appearance of stability, when in reality the toxic sludge still needs to be written down as the bank's assets are still highly contaminated, and to make matters worse those contaminated assets were purchased with borrowed money.

When things crumble in Australia the borrowers with the smallest margin for error are going to be hurt the most and it looks like the Australian retail sector will soon be hit hard.

Clearly no "mark to market" in any asset class in sight, not in Australia, USA or anywhere else, just a Zombie Economy with seemingly no clear direction, except massive behavioral change in how we spend money, if you have any left that is.