The Economic Straw on the Camel Back

Posted February 18, 2009

The global recession entered a new phase with the rapid deterioration of Japan's economy, the Eastern European debt crisis, and the report the US GDP is falling even as government support rises. The euro continues to weaken against the US dollar as Euro-Zone banking institutions continue to slide into deeper crisis.


The financial and economic news around the world is not good anywhere you look.  North American, European countries and even oil rich Middle Eastern countries battle valiantly against the continuing recession in an attempt to prevent a collapse of the banking system and a slide into a depression.  It has to be assumed there have not been more recriminations against the United States for selling such risky securities to foreign banks only because everyone's attention is focused on dealing with the crisis.  It can be assumed though that when economic indicators begin to turn around, the finger pointing will begin in earnest. 

Turn around…? It's had to imagine right now as the economic news gets worse by the day.  The looming problem with debt repayments by Eastern European countries is dragging down the euro and has the potential to cause bank failures in unprecedented numbers.  Since all banks right now are still carrying toxic assets on their balance sheets, and housing foreclosures and commercial insolvencies are rising, the inability to collect foreign debt payments could be the proverbial straw on the camel's back. 

This is not intended to be a doom and gloom assessment of the situation.  It is the reality unfortunately.  That is why the world is pressuring the United States to develop a plan for pricing the toxic assets and getting them off the bank balance sheets so credit can flow again.  No specific pricing plan has emerged yet and the stock market has sent a strong message it is not happy.  The US DJIA plunged 297.81 points yesterday even as President Obama signed a $787 billion stimulus bill. 

The downward pressure on the euro led to a weakening when paired with the US dollar.  The euro fell to US$1.2583, and it also fell to 115.99 yen per euro and 88.38 UK pence per euro.  

The dollar fell against the Japan yen to 92.18 yen per US dollar as investors sought risk aversion.  But Japan has entered a new stage of economic decline that has taken some people by surprise.  It was considered the strongest economy in the world but declining exports are taking a severe toll.  The GDP contraction of 12.7% reported for the 4th quarter of 2008 let the financial world know that Japan is struggling also. 

The US credit crisis has impacted the Japanese economy in several ways.  One is the reduction in exports to the US from Japan.  Less consumer spending has led companies like Toyota to post their first loss.  In addition, a cheap yen is a thing of the past at this point.  All of these factors have led to a reversal of the growth Japan has experienced for 6 years. 

The yen is still strengthening against most global currencies, and the country remains as one of the economies most likely to see a turnaround first along with the US. But the strengthening yen will lead to a shifting of manufacturing out of the country at a time when domestic jobs are needed. 

The Australian dollar is also under pressure and weakened against the dollar to US 64.80 cents.  The Aussie is responding to the news concerning the Eastern European debt issue.  Commodity prices are falling also including crude oil which saw barrel prices fall below $35.  Canada's economy is heavily dependent on crude oil exports. 

The New Zealand dollar also fell against the US dollar to US 63.73 cents. 

Investors remain on alert for signs of further economic collapse.  There is no confidence in the markets at this point which keeps them volatile.