World Wide Financial Crisis explained…

China as the growth engine of the world is now slowing down.  China’s own internal debt bubble is about to burst.

Europe’s deadly debt contagion is spreading from the PIIGS in Europe (PIIGS:  Portugal, Ireland, Italy, Greece, Spain.) to Germany, France and the USA.  The recent debt “hair cut” in Greece will slow but not stop this contagion without structural changes in government spending.  This bailout will only last a few months and the root of the problem will still not be resolved.

Who did the most lending to the PIIGS?  France and Germany ~ $1.6 Trillion.  Currently France’s economy is weak and Germany’s is strong because of massive exports to China but China is now in trouble. This does not bode well for Germany.   Money printing only pushes out the inevitable to the future but does not solve any underlying structural financial problems.  France and Germany do not care about saving the Euro…they only care about saving their banks.   The US Federal Reserve is propping up many of the banks in Europe with money printing. This allows European central banks to borrow money from the Fed and then give that money to private European banks.  This is done to save our own banks who have loaned money to Europe.

China has a debt crisis?  Yes.  As a percentage of GDP China has printed more money than the USA to stimulate their economy.  The crisis is coming to a head now as the borrowers cannot pay just like here in the USA with Fannie Mae and Freddie Mac.  China’s crisis has already started so now China has their own form of TARP to bail out their failing banks.

Exporting countries like Australia, Canada, Brazil, South Korea, Japan and Germany are seening their exports come to a halt as a result of China’s economic problems.

Bottom line is that many countries have become dependent on exporting to China and now that China’s economy is slowing down, they are seeing huge drops in their economy.

What this means is that the debt contagion is spreading from the weak economies to the strong economies which will eventually bring down the whole system.

BELOW:  With the exception of Germany which exports machinery to China, Green arrows represent the export of raw materials.  Canada, lumber; Brazil and Australia minerals and raw materials, etc.  These economies seem to be doing well but are dependent on China’s continued consumption.  Red arrows represent the export of credit.  The entire globe is tied together in a death spiral dependent on China which is rapidly coming unraveled.

The US could restart the World economy by consuming more but can’t because businesses are taking a defensive position caused by fear and uncertainty. Why won’t US Banks loan money to small businesses?  They too are taking a defensive posture in the face of economic uncertainty and are thus accumulating cash.  Besides the Federal Reserve has inadvertently provided another more secure source of income for the banking industry.  The Federal Reserve allows banks to borrow money from the Fed at 0.25% interest, then loan that money to the government at interest rates ranging from 2 to 3%. This represents a subsidy to banks in the form of a risk-free profit only limited by the Federal Government’s appetite for spending. How would you like to have a sweetheart deal like that? Just think of the billions in profit you could make with other people’s money with no risk. BTW, this is not capitalism.