International instability

As bad as the US is, there are worse problems elsewhere. This is why I think this credit crisis will not play out like any previously and why I think there's a better than even chance of a systemic banking crisis.

In times past when a country experienced a bubble or a banking crisis, there was always a country next door that hadn't where the savvy could hide out. Where does one hide out today?

Europe on the brink of currency crisis meltdown

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis,” this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Those figures in the bottom two paragraphs are quite the eye-openers. Somehow Austria's bank system loaned out 85% of Austria's GDP to emerging markets that are even now resorting to emergency measures to stem the erosion of the their currencies against the dollar. The problem, apparently, is that these countries were loaned vast amounts of money denominated in dollars. The faster their currencies fall, the more it costs them to pay back their loans. Some of these currencies have fallen by 40% in a matter of weeks.

So we're going to have to watch this very carefully. The reason this could lead to a systemic banking crisis is that some countries are going to have to resort to currency controls and outright defaults. Not just one at a time, like the Russian and Argentinian defaults of 1998 and 2001, respectively, but potentially a dozen or more. But the world's banks are all now interlinked to a degree that prevents easily walling off a country. Hence, the chance of a systemic breakdown increases.

And if you wanted to find a more severe crash in any market in the world, it would be hard to beat what's happened to the rates for global shipping. The measure of global shipping rates is known as the "Baltic Dry Index," and it has collapsed in a most dramatic manner.

For companies that are in the business of shipping, this represents a 90% cut in their pay:

The biggest bubble of them all; globalization

Oct. 24 (Bloomberg) -- The 90 percent tumble in the global benchmark for commodity shipping costs since May exceeded the Dow Jones Industrial Average's plunge during the Great Depression, signaling globalization is "the biggest bubble of them all,'' Bespoke Investment Group LLC said.

The Baltic Dry Index's drop from its peak just five months ago surpassed all of those, along with the Dow's 89 percent retreat from 1929 to 1932, according to Bespoke.

"The Baltic Dry Index had a meteoric run since the start of the decade, as it became one of the key symbols of the 'globalization' trade,'' Paul Hickey, co-founder of the Harrison, New York-based research and money management firm, wrote in a report yesterday. "It now appears that like any 'new thing,' the globalization trade went too far.''

The Baltic Dry Index fell yesterday for a 14th straight session as the freeze in money markets curbed traders' ability to buy cargo on credit.

This means that global trade is rapidly slowing to a crawl, with unknown impacts. The rates are plummeting, as fewer international loads are competed for by a vast fleet of cargo ships whose carrying costs demand that they be used.

Certainly, for the nearly record number of cargo ships that are being constructed, somebody is going to take a huge hit. Many will never be completed. Dockyards and shipping companies alike will go under.

Before too long, we might expect shortages of some products to begin showing up here and there.

For those more visually oriented, here's the chart of the shipping rates. Ouch. Imagine trying to run a shipping business. How would you set a budget and plan for this? Clearly the monetary system is broken and dysfunctional. The sooner we can all admit that, the better.


This is a companion discussion topic for the original entry at

"The US figure is just 4pc. America is the staid old lady in this drama.

Come on. 4% of cooked Enron books translates to a lot more. Do other countries use Enron math when calculating GDP.

When it comes to finances Lady of the Night comes to my mind.

Article in NY Times re: currency crisis, Japanese Yen, etc.:


Wonder how the average "Joe the Plumber" in the streets is going to react when he starts reading the words "Currency Crisis" in his local newspaper?!?

Every country uses inflated GDP numbers which means Europe’s problems are a lot worse then they are stating. Even if you believe the US is the only one fudging numbers, there is a big difference between 4% and 50%. If you say the US is overestimating the GDP by 1/3, then that is still only 6% - chump change.
Regardless of what you think about our long term prospects, America is the tallest midget in the room right now. As bad as the meltdown has been, the deleveraging has been calm compared to the emerging markets. And we’ve only just begun…


Thanks, I always wondered about the other countries. I don’t have a calculator handy, but here is the math I did in my mind. US GDP is about 13.8 trillion and 4% of that would be about (well if 1.4 was 10% half would be 770 billion or about 4%.)

Hmm, so the author Chris quotes is using a deflated number because as Chris pointed out the bailout is about 2 trillion which is what I have read on other sites, save for the pom pom cheerleader sites.

Okay, so Chris said GDP was in 2003 cooked by 40%, assuming the BLS didn’t get less or more Enron creative then our GDP is likely around 8 trillion.

2 trillion is 25% of 8 trillion.

So, bottom line I would not call us a tall midget.

That’s my dollar, which is probably worth about .02 cents.

You may be right, we may fair better - but I don’t see how any country who uses Enron math can skate fast enough to keep from sinking after the ice melted.


My read on the numbers was that 4% was the exposure to Eastern Europe.  The total bill for this will be far higher than any cheerleaders expect, and I include all major US media in that.

All the best.

Can someone explain the graph? I’m rather confused. Does the x-axis go back five years? Any particular reason that January 3rd is used at one point? What exactly does qc_xaverage(20)_C mean?

Hello Reuben:

Agh, that makes more sense, thank you!

The average plubmer would not know waht it means. I didn’t understand currency and money only I found this website. I am an average person really scare because I do not understand economy like you guys but even worse I know that my poiliticians know less than me

Gr8ful, thanks for the link to the NYT article.

emdiaz, you aren’t alone. I’m scared too. I’m sure a lot of the folks on this site are!

About the best suggestion I can give you is to turn your fear into constructive action. Figure out what you need to do to position yourself and your family as best you can for what the future may bring. Listen to Chris’s Crash Course, and follow his advice for assessing your situation and figuring out what actions to take in chapter 20. And if you have questions, ask them on this blog! We’re all struggling with the same thing, and are happy to help with advice where we can, and happy to learn from the questions others ask, and the discussions they initiate.

I know I feel like a deer looking into the headlights sometimes, frozen into inaction, but that isn’t productive. So we need to shake that off, and get moving in a constructive direction.

Best of luck!


I think even my eight year old can figure out how this one is going to end…

Dollar strength may be temporary

A Reuters article published last week in Beijing highlighted the growing discontent of China with the dollar in global commerce.

“The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.”

Or both? This sure sounds a lot like our future, don’t it:

Oct. 28 (Bloomberg) – Iceland’s central bank unexpectedly
raised the benchmark interest rate to 18 percent, the highest in
at least seven years, after the island reached an aid agreement
with the International Monetary Fund.

Policy makers raised the key rate by 6 percentage points, the
Reykjavik-based bank said in a statement on its Web site today,
taking the rate to the highest since the bank began targeting
inflation in 2001. It will publish the reasons for today’s move at
11 a.m. local time.

The central bank is raising rates as Iceland, the first
western nation to seek aid from the IMF since the U.K. in 1976,
faces a prolonged contraction, coupled with possible
hyperinflation and rising joblessness. The economy will shrink as
much as 10 percent next year, the IMF forecasts. Iceland will
receive about $2.1 billion in aid from the Washington-based fund,
according to a deal struck on Oct. 24.

This is ``a first step toward opening their currency market
and is probably one of the conditions attached to the agreement
struck with the IMF,‘’ said Bjarke Roed-Frederiksen, a Copenhagen-
based economist at Nordea Bank AB, the biggest Nordic lender.

Today’s increase in the key rate comes after the central bank
on Oct. 15 cut it by 3.5 percentage points from 15.5 percent. That
move indicated policy makers were focusing on growth and
abandoning their target of stabilizing inflation, which may soar
as high as 75 percent in coming months, according to Lars
, chief analyst at Danske Bank A/S in Copenhagen.

Yep, the old IMF "tough love" program. Crank those rates to pay the usurers, and we’ll send you a food ration. And let you open your currency market.

Much like borrowing from Vinnie the loan shark, it’s only a short-term fix. And if you can’t pay, you might get kneecapped.

MAN – who knew that "free money" was gonna be this expensive? Money mouth


Chris, you should also look at the Yen carry trade as the source of many of today’s problems. You may find some of Elaine Supkis’ insights into this as useful


 I would say that the line you are refering to is a 20 day moving average.  The 200 line would be a 200 day moving average.  It does appear to be a 5 year chart.  I do not know why the Jan 3 is used or why one year would be scrunched up shorter on the X axis either.

Hope this helps.

All the best.

that’s not a hockey stick it is a wall

I don’t know guys/gals… I know there’s a lot of negativity around the USD and I agree with the fact that they have been abusing the privilege of being the global currency but let’s look at the alternatives… hmmm, there isn’t actually any. Going back to a gold standard would create havoc and would only happen if there were multiple sovereign defaults and a massive infrastructure/constitutional change would be required. I think the most likely outcome is a collapse of the Euro and the general dismantling of it. Poland and other countries who were supposed to migrate into the Euro are already questioning this move and will likely opt out. My bet is that all of the EC countries are drawing contingency plans on dismantling the Euro.

But what would this all do for the USD? Well, it would make it even stronger… or at least more stable. The world is just not ready for a huge shift in establishing a new leader in the global currency market. I think in a few years if things stabalize, people will remember what has happened and will look to augment the system so that it is not so dependent on one global currency leader but I have no idea on how they would do that. Just keep in mind that currencies are a relative value game. If you rank the US on factors like

  1. Debt/GDP 2. Relative size of money supply 3. diversity of economy 4. ability to use monetary/fiscal policy to affect change and 5. level of foreign investment

relative to other countries, the US actually doesnt look too bad. 5 years from now it may be a different story but in my opinion, no one has the authority to say with any conviction what will happen 5 years from now which is why even Chris reserves the right to change his opinion as data points change.

thanks rajiv

great site


Kind of like picking the best of the worst?

lol, never looked at it quite like that but ya, that’s a pretty good summary.