Thursday, October 16, 2014

America is stretched to breaking point: watch the markets

The United States is now battling on four fronts - squaring off against Russia over the Ukraine crisis, bombing ISIS in Syria and Iraq, grappling with a threatened Ebola pandemic at home, and trying to prevent its stock market bubbles from busting.

Each of these crises arose from dubious circumstances and long-standing developments.In his recent speech to the UN, President Barack Obama named Russia as a threat to the world. This followed a series of US and EU sanctions against Russia in response to the Ukraine crisis that aimed to destroy its financial and economic stability. Russian President Vladimir Putin has hit back by warning of nuclear consequences if the West and its partners continue to "blackmail" Russia.

"We hope that our partners will realise the futility of attempts to blackmail Russia and remember what consequences discord between major nuclear powers could bring for strategic stability," Putin told Serbia's Politika newspaper on the eve of his visit to the Balkan nation on Wednesday.

Putin said that Obama had identified Russian aggression in Europe as one of the three "major threats facing humanity", alongside the Ebola virus and ISIS.

"Together with the sanctions against entire sectors of our economy, this approach can be called nothing but hostile," Putin said.

"How can we talk about de-escalation in Ukraine while the decisions on new sanctions are introduced almost simultaneously with the agreements on the peace process?" he said. "If the main goal is to isolate our country, it's an absurd and illusory goal."

Obama has finally authorised bombing against ISIS in Syria and sending troops to Iraq to counter the rise of this militant group. Other Arab countries have joined the military campaign against ISIS, while some 40 countries have pledged support. The bombing of ISIS in Syria amounts to a declaration of war against that country, whose government, led by Bashar al-Assad, the US, Saudi Arabia and other Arab allies would like to topple. The war is not likely to end anytime soon. This being the case, it could spill over to other countries in the Middle East and North Africa and eventually become a full-blown regional, if not global, war. Russia, Iran and China are not likely to sit still while the US and its allies try to regain control over the Middle East and North Africa, with its abundant energy resources. The US has once against demonstrated its appetite for the doctrine of unending war. The campaign against ISIS is merely an excuse to exert greater US influence in the region.

Ebola panic is now spreading through the United States after an infected visitor from Liberia, Thomas Duncan, died while he was being treated in a Texas hospital. Two nurses contracted the disease while treating Duncan. The US Centres for Disease and Control and Prevention and other authorities involved have badly mishandled the crisis by failing to issue travel bans for the countries in West Africa that are the source of the outbreak. Hospital protocols were also lax, resulting in the transmission of Ebola in Texas. Scientists are still researching how Ebola is transmitted. If there are as-yet unknown vectors of transmission, millions could eventually die of the disease. The epidemic has been linked to dubious research and development of the virus by US researchers in West Africa. In this age of globalisation, outbreaks such as this one are difficult to contain and are thus a real threat to humanity.

Finally, the US stock market might be running out of steam after six years of the US Federal Reserve's "easy money". In August 2007 when the subprime crisis hit the US market, the Fed had plenty of firepower. Fed fund rates stood at 5.25 per cent and the Fed's balance sheet was only $850 billion. After the Wall Street crash in 2008 the Fed engineered a massive bailout, at one time printing $16 trillion to rescue the US and other global banks. Interest rates were cut sharply, to 0.25 per cent, a level unchanged now for seven years running. And the Fed launched the quantitative easing (QE) programme to buy out mortgage-backed securities from banks so as to keep the banks and the US government afloat.

We all know that what goes up must come down. The US stock market has benefited from the QE programme, which uses easy money to trigger speculative buying of equities. Now, seven years later, there are fears that US stocks can't continue to rise forever, as judged by the swing of equity prices over the past week or so. The trouble is that this time the Fed has run out of ammunition. The interest rate, which is almost zero, can't be brought down further. If a crisis were to hit the US market again, and it will, the Fed will be caught without any rescue tools. Some say the market could crash 50 per cent. Others, such as "The Death of Money" author James Rickards, argue that it could collapse by 70-80 per cent. When will it happen? Nobody knows for sure about the timing. What is certain is that the US is engaging in several battles all at once, each posing huge risks to global stability.


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