Great Depression Mark II

From the UK Telegraph:

Leading City experts have started raising the prospect of "Great Depression II" amid worries that the European economic crisis could trigger a deeper bout of chaos.

By Edmund Conway, Economics Editor
Published: 7:03AM BST 20 May 2010

Markets on both sides of the Atlantic dipped to fresh lows as fears surrounding the fate of the euro project transmuted into worries about the wider global economic system.

Bill Gross of bond fund Pimco said that hedge funds were starting to liquidate their positions in a bid to preserve their capital – a worrying "mini relapse" towards 2008 territory.

Andrew Roberts, head of European rates strategy at RBS, said "Great Depression II" could now be approaching, adding: "It now has potential to speed toward its conclusion; a European $1trn package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation."

The FTSE 100 flirted briefly with the 5,000 point mark, eventually finishing the day down 84.95, or 1.7pc, at 5073.13, while the French CAC 40 index was 2.3pc lower and Germany's Dax dropped 2pc. The S&P 500 and the Dow Jones index both suffered their sharpest one-day falls in more than a year. The S&P fell 3.9pc to 1071.59, while the Dow closed 3.6pc lower at 10,068.01.

Fears that Europe's debt crisis could hurt a global recovery pushed Asian shares down for a third day. Japan's Nikkei 225 plunged 2.5pc to 9,782.02. Markets in Australia, Taiwan, mainland China, and Singapore also retreated. Hong Kong amd South Korean bourses were closed for public holidays.

The falls in share prices coincided with increases in the price of government bonds in Germany, the US and much of the developed world as investors sought a safe haven. German 10-year bund yields consequently hit a record low, while in the UK gilt yields dropped to the lowest level since early last December.

Although the rush to safety stems originally from the euro's difficulties this week and German efforts to ban short-selling on its banks, fears that the episode may evolve into a deeper economic crisis were bolstered by fresh data. The European Commission produced "flash" data showing consumer confidence falling from a 23-month high of -15 in April to a seven-month low of -17.5 in May. Howard Archer, of INS Global Insight, said: "This is clear evidence that the deepening and spreading eurozone debt crisis... is now weighing down appreciably on consumer confidence. This is a very worrying – if hardly surprising – development."

In the US there was a surprise 25,000 increase in jobless claims to 471,000 in the week ending May 15. The deterioration in the employment picture, coming hard on the heels of Wednesday's drop in inflation, underlined worries that the US is exposed to a possible global double-dip recession.

Mr Gross said investors were now being frightened off by worldwide "fiscal tightening momentum", adding that markets were facing "a mini-relapse of a flight to liquidity as hedge funds and other leveraged positions are liquidated to preserve capital".

One worry is that European leaders are not sufficiently behind the $1 trillion bail-out fund they announced, in collaboration with the International Monetary Fund, last week. A second fear is that other indebted countries could soon be exposed.

One rumour abounding on Thursday was that a major rating agency will soon have to downgrade Japan's credit score, potentially bringing the world's second-biggest economy into the spotlight.

The euro jumped to a one-week high against the dollar of $126 on speculation that European Union officials meeting today will discuss some measures to counter the region's spreading debt crisis.

Earlier in the week the single currency has tumbled to a fresh four-year low around $1.21 after Germany's unilateral imposition of ban on shorting of government debt and the shares of ten major financial institutions.
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As of 0245 edt on 21 May, Asian markets are mostly down significantly.

And remember -- desperate governments do desperate things.

Alea iacta est.