The Rest Of The Credit Story

Just on cue, as the federal government announced a 0.3 percent decline in real GDP last quarter, the stock market this week seems to a have turned a corner, starting with a 900 point climb in the Dow in the aftermath of the short squeeze on Volkswagen stock.

Don’t look now, but when the US catches cold the rest of the world gets wiped out. The Asia Times columnist Spengler has the story.

The financial crash exposes the fragility of large swaths of the world. The political consequences will be terrible... Worst affected are the most populous Muslim countries, and Russia’s "near abroad".

In the US we have had a credit squeeze. But you can still get a mortgage to buy a house. In the rest of the world the credit faucet has been completely turned off, and many emerging countries are facing economic Armageddon as their currencies tank. Spengler uses the cost of five-year default protection as a gauge of just how bad things are going to get. For countries like Argentina and Venzuela, it’s not available.

The solution is pretty obvious. The US is going to have to use its credit to bail out not just the banks but a number of nations, especially including the countries that escaped recently from the old Soviet Empire. Already the Fed and the IMF are working to spread money out around the globe.

[Treasury Secretary] Paulson said he welcomes the Fed’s decision to create swap lines with four central banks as well as the IMF’s decision to establish a short-term liquidity facility to provide various countries with loans. The Fed Wednesday announced swap lines totaling up to $120 billion with Brazil, Mexico, South Korea and Singapore.

Let’s propose that the bank bailout is working, that the major credit markets in the US and Europe are returning to normal as LIBOR rates decline from the mid 4s to the mid 2s.

That is fine and dandy. But the rest of the world is still completely frozen. The next step is to help them.

Because it doesn’t do the US any good if the rest of the world suffocates on a total credit seize-up.

And it also looks like the gleeful reports of the end of the US hegemony were greatly exaggerated.

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Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

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