Global systemic crisis - Mortgage crisis spreads

September 23, 2008

The current global systemic crisis was caused by, and is still held hostage to, the mortgage crisis which started last year. However, it is indicative of a very permanent shift in the entire global economy. Although no one knows exactly how deep it will cut, and what exactly needs to be done to mitigate it, the global economic landscape will look very different when we emerge next year.

The crisis was caused by a perfect storm that was driven by greed:

1. Mortgage-backed securities (MBS) that were sold on the secondary market, allowing banks to no longer worry about default.
2. Unregulated mortgage brokers selling to subprime borrowers.
3. Financial derivative products that took the MBS and repackaged them, using computer programs to make them so complicated that no one really knew their value.
4. The U.S. driving up its debt to an unsustainable level, leaving no room for fiscal policy alternatives.
5. Unregulated hedge funds and investment banks that took on too much leverage.
6. U.S. consumers who took on too much debt.
7. A global financial market that is completely integrated, instantaneous and round-the-clock.

As a result, money has become unhinged to any underlying, tangible value, whether it is homes, oil, gold or companies. This is similar to what happened in the 2000 tech boom, and the result is the same, although on a much wider and broader scale...a panic-driven, global deflation.

What the global systemic crisis means:

This is the same boom-and-bust, greed-and-fear driven cycle that has plagued man throughout history. The difference is that is it much larger, much more complicated and reactions move much faster than even seven years ago. Although it was started in the U.S., as the financial innovation capital of the world, the U.S. alone is probably not big enough to contain it. Either global intervention is needed, or it will run its course, as all busts do.

The crisis has exacerbated the following global trends:

• The economic decline of the U.S. The most recent bailout plan will raise the U.S. debt level to $11 billion, which will continue to lower the value of the dollar and increase inflation in the U.S.
• Oil prices will remain around $100 a barrel, slowing global growth until new sources of energy are found.
• Development of alternative fuels, energy-efficient design, and sustainable living will accelerate.
• The U.S. will lose it status as the only world superpower.
• Europe, Asia and even Latin America will continue to ascend in economic power.

Action Steps:
The correction in the global stock markets and credit markets may seriously escalate into something worse before it gets better. Hopefully, you have already moved any money you need in the short-term to a money market account, as I suggested last year.

The best way to withstand market volatility is with a well-diversified portfolio. Find out how to protect yourself with my home study course, “Retirement Planning 101.”

For more on the the Global Systemic Crisis, see the WorldMoneyWatch Top Ten Trend: Financial Innovation.

Like this article? Sign up for your free email newsletter.