27 January 2009

Predictions for 2009

It’s a little bit late for New Year predictions, but here are mine and very pessimistic they are, too. I have bottled it on the big one (No.6), but—really—I don’t feel brave enough to predict the end of the world as we know it—at least not yet. Anyway, working on this list has made things a lot clearer for me. Here goes.

1. Debt is going to get more expensive and harder to come by.

In other words, interest rates are going to go up. Most of what follows, are corollaries of this single prediction.

1. Government bonds are yet another bubble.

If yields are going up then prices are coming down. Ergo, it is going to get harder for governments to raise funds in the market. In other words, the apparent fear of deflation is overdone and the cost of debt financing is going to go up.

2. International long-term lending is going to slow to a trickle

This is already happening, so I am not sure if this counts as a prediction, but what I mean is that it is going to get worse. This is exactly what happened in the early stages of the Great Depression and banks and hedge funds everywhere are winding down their international loan books, where possible. Fear, uncertainty and doubt along with the disappearance of several trillion dollars from the world’s stock of apparent wealth means that we cannot expect long-term lending to return any time soon once it packs up and goes home.

3. There will also be a significant reduction in international short-term lending

This is more scary, but, again, it happened in the 1930s and it seems pretty plausible that it will happen again. The sovereign wealth funds are not going to be particularly flush; creditor nations are going to need resources for sorting out their own problems; the debtor nations are going to look like an increasingly unprofitable prospect; cross-border banking activity is already slowing to a trickle; the crazy lend-long-borrow-short hedge fund world is coming to an end. The scariest bit of this scenario is that there is an awful lot of cross-border long-term debt being funded by short-term paper. The UK banks, for example, hold about $4.4 trillion of foreign liabilities. And, remember, it is the short-term money market that did for Northern Rock. This one is a bit worrying, but possibly unavoidable. See also prediction 6, below. 1

4. The UK retail price inflation will head up before the end of 2009.

Not a very adventurous guess this. And I am really not at all sure about the timing, but it follows from the likely collapse in international lending that our government will be left with little choice but to run the printing presses day and night.

5. The UK banks are too big for the UK government to bailout alone

Financial institutions based in the UK have generated a colossal volume of foreign liabilities and they are going to have difficulty refinancing them this year. The UK government can cope with their sterling liabilities, but not those denominated in dollars, euros and yen. If they don’t get help, UK banks will bring the global banking system down.

6. The chances of systemic failure will remain high

By far the biggest threat comes from exposure to currency risk. Anyone (and primarily, it’s the banks) who has been borrowing short and lending long in a currency that is not their own is going to present a serious risk to themselves and others this year. If this risk cannot be contained, we are going to have a pretty horrible time of it. However it is possible that at some point this year, as shorter-term loans mature and cannot be refinanced in the market, governments will either refuse or be unable to act as international lenders of last resort and the failure of some large financial institution somewhere is going to cause the whole house of cards to come tumbling down.

6. Gold is a bubble, but it won’t pop in 2009.

Gold is a safe haven in troubled times. And the times are going to remain troubled for a little while longer yet.

7. Oil prices will continue to be subject to extreme volatility, but an upward trend may be discernible again by the end of the year

Failure to invest in distribution infrastructure will contribute to volatility, while failure to invest in new production capacity will underpin the upward price trend. continuing falls in demand may well mask this trend for much of the year, but possibly not for all of it—unless of course we do get systemic failure, in which case the failures of investment will be even greater, and the updward movement will be delayed, but probably more pronounced when it eventually comes.


1 Added January 30. Actually, short-term lending has already come to a halt. Central bank currency swap agreements are keeping the global economy afloat. See Soros on the crisis.

d. sofer