Financial meltdown: What next?
Financial markets melted down this week, with the banks posting some huge losses that are far from being over, with Lehman Bros and AIG going down this week after Fannie Mae and Freddy Mac crashed last week. The US gov't is forced to take over almost every failing bank (they didn't with Lehman and the threat to the US/World economy worsened considerably). This is a disastrous situation for the banks, and is wiping out huge chunks of wealth in the US economy.
While inflation was a real threat with soaring commodity values and a declining dollar, now the possibility of a collapse in the US economy is at stake. The huge amount of wealth lost by banks (very publicly) might be paled in comparison by the amount of wealth lost by US homeowners (especially those not foreclosed upon). At some point, this is going to slow consumer spending as the 'wealth effect' takes over. The 'wealth effect' is the slowing in consumer spending caused by consumers knowing they don't have any wealth left, and thus dropping their spending as a conservative response.
The largest danger to the US economy is a loss of confidence in consumer's future - that could kill consumer spending and everyone knows that the US economy (and thus the world economy) is driven by US consumer spending.
The rush to quality wealth preservation is on as the world pulls money out of the US economy and puts it into precious metals, as gold has soared $100/ounce in the past 30 hours to this writing and silver has soared almost 10%. What else can store value today? Many commodities like grains, livestock, and energy are driven by a strong world economy and heavy US consumer spending (even China and India depend on US consumers to spend money on their Walmart goods). So if the US economy crumbles and the world economy follows, what has value? Banks used to be considered a safe haven investment, but no more!
The uncertainty facing the US economy, and thus the world economy, is causing some very wild trade in commodities as well as equities. With every hiccup by the US gov't in their response to bank failures (especially when they don't back one like Lehman), the world economy and stocks are rocked! Pro Ag sees the US gov't as having no choice but to bail out every failure in the next few weeks, or the confidence in the US financial system will fail. This unprecedented move by the US Bush administration (a conservative group indeed) indicates to Pro Ag that there isn't a bank in the world who wants a shot at ownership. This could be the story of 2008, as US banks are virtually make into public entities owned almost entirely by the US gov't. Its uncertain where this ends, but so far it looks like most major banks will fail in 2008, an almost unimaginable results just 10 months ago! And if the banks fail, imagine how much wealth was lost by the US homeowners, who bore the first loss in most cases before the bank lost dollar 1.