Recession is running to twelve noughts now

Peston has gone stratospheric. He actually dismisses the Bank of England’s estimate for credit crunch losses at £1,800bn – rather bigger than the annual economic output of the UK.

“it’s peanuts compared with the losses suffered over just the past month by pension funds, insurance companies, banks and all of us from the slump of more than 25% in the average value of shares listed on global stock markets (just this morning Aviva, our biggest insurer, announced that its capital surplus has fallen by £600m or 32% in less than a month).

£5,000bn has implicitly or explicitly been made available by central banks and governments since April 2008 to support wholesale funding by banks. That is a genuinely big number. It’s equivalent to about a sixth of the total annual economic output of the whole world. So to put it another way, we as the taxpayers of the world are funding our banks to the tune of one-sixth of everything we produce.
Blimey, if I may be so bold.”

What’s pointing towards world wide depression?. In the Times, investment analyst Oliver Kamm says it makes sense for people to save their money or repay debt rather than lend or invest.

Stock markets have been collapsing for three main reasons. First, in more stable economic times, investors often employed a practice known as the “carry trade”. This meant borrowing in a currency with a very low interest rate – typically the yen – and investing the money in higher-yielding markets (Australia and New Zealand are good examples). As interest rates have been slashed throughout the developed world, this trade has become much less attractive

Hedge funds have suddenly assumed the role of villain, according to tabloid mythology of the credit crisis. More seriously, regulators have curtailed their capacity to sell short. This is misguided. It is contributing to a flood of redemptions from hedge funds – which requires the funds to sell their assets..

A dividend payable in 2010 is less valuable to an investor now than a dividend paid in 2008, because it is less certain – so you have to apply a higher discount rate it to work out its value today.

  • Guru

    Stratospheric, you say?

    Have I got this right? “Peston” has declared that the the latest news is that the worst financial crisis in history is still the worst financial crisis in history.

    I think there might be a run on the US dollar leading it to crash and burn. This will lead to unimaginable panic and economic chaos. That is my prediction.

  • The Raven

    *I* believe, however, that the world will continue to turn, it will learn its lesson for another few years, and perhaps we might have some good things come out of this in terms of financial regulation, property prices and general levels of greed and consumption.

    I would write more, but it would only show that I may not be a guru, but I am an optimist.

  • aquifer

    Maybe the limited liability company (losses limited to your original stake) was not such a great idea after all. The Hedge fund managers had worked out that they could put their stake in, borrow some extra from the silly bankers, and then get very high returns on risky investments. It would not matter if a few funds went bust as nine times out of ten they had already made their money .

    Except it did matter, to the bankers’ bankers -you and me.