Fiddling Money and Burning Markets

Posted January 21, 2009

The US has a new President as of yesterday and the stock markets tumbled on fears the banks still need additional capitalization to survive. These same fears are plaguing the global banking systems dragging down equity and currency markets.


There were two big events yesterday that led to a big drop in the US stock markets and further declines in the UK pound against the yen, euro and dollar.   The first news was the US did celebrate until the wee hours of the morning after the inauguration of President Barack Obama.  The second bit of news was a set of messages from financial sector analysts making it clear many banks will require more capitalization to survive.

The US stock market traditionally drops on the day a new president is inaugurated, but not by 332 points.  Yesterday the Dow Jones Industrial Average dropped below 8,000 again to close at 7,979.09.  The 3 digit swing reflects a lot of investor fear about the stability of the entire banking system.  Despite billions of dollars pumped into the economy, the banking balance sheets need shoring up with additional bailout money.

This is not limited to the US either.  The UK pound has continued to weaken in response to Governor Mervyn King of the Bank of England saying in a speech it may be necessary for the bank to begin buying toxic assets in the private sector.  This was a signal the UK banks are still in trouble and the economy is not going to recover on its own.

The UK pound weakened against the yen, the euro and the US dollar.  In fact, the pound has fallen to a rate not seen since 2001 against the yen at 122.99 yen per pound.  The pound also weakened to $1.3761 against the US dollar and 93.81 pence per euro.  The streak of currency price declines in the pound when paired with other major currencies is expected to continue also.

It is anticipated the Bank of England will lower its benchmark interest rate again in the first week of February.  The expectation is the rate, which was just lowered two weeks ago, will be reduced again by .5% to 1%.   The UK government is lagging behind the US in economic responses, but will be catching up as the money printing equipment is turned to high speed.

In other currency news, the Australian and New Zealand dollars weakened against the US dollar.  Both countries are dealing with rising trade deficits as commodity exports and prices continue to drop.  The Aussie fell to $.6527 against the US dollar.  The kiwi weakened to $.5266 in US dollars.  Commodity price recovery is expected in 2009 but right now there are concerns over how the countries will fund their deficit spending.

Of course, this is also a growing concern in the US.  It is a play now-pay later problem which is growing rapidly as new bailout programs are introduced.  Both developed and emerging market countries have trillions of dollars of debt which will have to be funded in 2009.  The analysts keep pointing this fact out to investors because it sometimes seems as if no one wants to talk about it in depth. 

There is an expression about Nero fiddling while Rome burned.  In the financial markets the money printing presses are fiddling while the global economies continue to burn.  The global recession is continuing to deepen every day.

A lot of hope has been placed in the new US president.  But the problems in the financial markets cannot be fixed quickly.  The credit markets have been disrupted to the point where they are not functioning normally, and as long as credit remains locked up there will be no economic recovery.