This article is adapted from a piece which appeared in Syntagma in March.

The European Central Bank (ECB) remains obdurate about cutting its 4pc interest rate despite the Fed going to the brink of its powers in Washington.

U.S. rates are expected to be cut by a whopping 1pc to 2pc today giving America an effective zero interest rate when inflation is taken into account.

The flight from the dollar will only get worse, especially with the ECB giving a two-fingered salute to the American authorities. It’s said that the eurozone (which does not include Britain) is in no mood to help the Americans — a situation similar to 1987, when the Bundesbank let the dollar slip into freefall, spooking the markets into a catastrophic drop.

Let’s not beat about the bush, Europe is engaging in a financial war with the U.S. As long as the ECB refuses to join in the rescue package, the dollar will fall spreading even more gloom around the markets. Some very senior commentators in the UK are now discussing the potential for a collapse of the entire banking system in the West and elsewhere.

Jean-Michel Six, Chief Europe Economist at Standard and Poor’s says, “There is a monetary war going on. The ECB view is that the Fed is a victim of its own mistakes and should pay for its past crimes. Frankly, they don’t see why they should be cutting rates when inflation is accelerating.”

British inflation measured on the CPI index, which doesn’t include mortgage costs, has risen to 2.5pc this morning. However, core inflation is down to 1.2pc, indicating that, apart from headline price rises in food and energy, deflationary pressures may be the real enemy in the months ahead.

Bernard Connolly of AIG thinks the ECB is making the same mistakes that led to the Great Depression in the 1930s. “The ECB represents the 1930s element in world central banking right now. It is adding to the atmosphere of panic in the foreign exchange markets and ensuring the collapse of the credit bubble in southern Europe and Ireland will be even worse.”

How long before cries of “Cheese-eating surrender monkeys,” are heard once again?

This article is adapted from a piece which appeared in Syntagma on March 12.

The rest of the world may not know who, or what, Fannie Mae and Freddie Mac are, but Americans do. They are the financial institutions that guarantee 60 percent of the U.S. home loan market. Both are on the edge of meltdown.

The U.S. Federal Reserve Bank

They are also the leading players in a top-tier of lenders that control $11 trillion of mortgage lending. A collapse would trigger a catastrophe of unprecedented proportions across the world’s largest economy with swift knock-on effects around the globe.

What is emerging now is the greatest financial crisis since the Great Depression in the 1930s. If America’s huge mortage banks are no longer rock solid, nothing is safe anymore.

The Fed is pulling every string available to it to neutralize the toxic effects of the subprime disaster. It’s predicted to lower rates by another 75 basis points within days, and is now offering Treasury bonds in exchange for mortgage debt. By soaking up some of the poison, the central bank is temporarily providing a shoulder to lean on for jumpy bankers whose world is disintegrating around them.

Like the British mortgage bank, Northern Rock, Freddie and Fannie may have to be nationalized — or their dubious collateral underwritten by government agencies — to shore up the economy against plunging over the edge. And Bear Stearns is in serious trouble too.

All this makes the UK Chancellor of the Exchequer’s budget today rather small beer. And that’s just what we expect — taxes on beer and faux “green” measures to raise a little cash here and there.

The real action is in Washingtom, where the Fed is leading the charge against a U.S.-generated global meltdown of potentially epic proportions.

Bernard Connolly, Global Strategist at Banque AIG, believes Fed action won’t solve the problem of eroded of bank capital. “There is the risk of a very damaging credit contraction. We face the most serious global crisis since the Great Depression. But this time at least the North American central banks are doing their best to stop it spreading to the real economy. We should be thankful that we have people in charge who appreciate the gravity of the situation.”

True enough, but the “perfect storm” is gathering perfection by the hour.

This article is adapted from a piece which appeared in Syntagma on February 26.

The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed, and a financial package from the President that will see cheques delivered to taxpayers — and others on low incomes — by June.

That may not be enough, especially as it’s now emerging that the Iraq war is the principal cause of worldwide recessionary trends from two directions : the rise in the price of oil, and the low interest rates that led to reckless lending to the sub-prime market.

A new book by Nobel prizewinning economist Joseph Stiglitz powerfully demonstrates these effects. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of what must now be deemed a policy catastrophe.

In terms of the current credit crunch, which arose out of the sub-prime mortgage fiasco, many — including Syntagma — had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s becoming clear that the low-rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now begin to assess the extent of the disaster to American interests the war is continuing to inflict. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds, which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years, bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given secretive foreign funds a one-way bet.

It’s hard to estimate the effect all this will have on American power and influence around the world. A war that was meant to eliminate Al Qaeda and secure the world’s oil supplies, has had precisely the opposite effect.

Joseph Stiglitz works out the numbers and they make depressing reading.

The news that stagflation is reappearing on the scene is another blow for the West’s economic stability. Stiglitz’s book is required reading for all who want to understand the future of the global economy over the next two decades and the causes of the misery to come.

This is going to be a long haul.

This article is adapted from a piece which appeared in Syntagma on January 22.

A long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Most economic analysts regard the stock market as an early indicator of economic conditions in a year or 18 months time. London’s market has lost more than 13 percent of its value in just three weeks. Wall Street was closed yesterday, but will doubtless catch up today.

The current consensus is that 2008 will be bad, but 2009 could be much worse. The second decade of this century may resemble the 1930s in the worst-case scenario.

Problems continue to pile up. Banks have been writing off around 14 percent of the 2006 batch of collaterallized debt obligations (CDOs). This percentage is currently being upgraded to 19 percent, ensuring more pain to come. The total exposure by banks could be as much as $500 billion.

Making matters worse, the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Moreover, the very banks relied upon to rescue Western institutions, like the Bank of China, are also said to be exposed to the U.S. sub-prime slice and dice fantasy.

Another crushing problem — now endemic in developed countries — is the level of personal debt. A typical person now spends one-seventh of their income on debt repayments, compared to around 10 percent a decade ago. In Britain alone, household debt is running at an unprecedented £1.4 trillion ($2.75 trillion). Add to that the massive levels of public spending in recent years and it’s clear this can’t be sustained for much longer.

The principle of “moral hazard” means that sooner rather than later everyone has to face up to their debts and start paying them off. There are no lenders out there now who will aggregate them at a lower repayment level. The adjustment to lower debt levels is desperately needed.

Unhappily, it will represent very hard times for many, some very poor indeed, and a massive writedown of Western assets, many transferring to Asia. The loss of that income in future decades will materially affect the West’s ability to dominate as it has done in the past.

Many businesses are also going to be in deep shock this year and next. Those that survive will have low levels of debt, and shares in safe hands — not bankers, buyers or lenders who are desperate for cash to rebuild shattered balance sheets.

So, is a recession a good outcome or is it as disastrous as it seems? On one level it’s totally disastrous, especially to those innocently caught up in the credit crash. It’s also bad for the reason that we’re being pulled down by voracious greed. Greed by the banks for giving NINJA morgages (no income, no job, no assets) and then selling them on in bits and pieces. Greed also by the banks that bought them. And greed by consumers in running up such heavy debts in the good times, leaving little to repay them in the bad.

However, this can also be seen as a necessary correction to a self-inflicted train wreck. Moral hazard demands a reckoning. Our Faustian deal with the Devil has a repayment package at its fulfilment. Soon, we will know the worst.

Update : The Fed has just cut American base rates by an unusually large 75 basis points or 0.75 percent, a sign that Bernanke is serious about taking a machete to rates to head off a recession.

The White House has also indicated the President may increase his upcoming fiscal stimulus (tax cut) from the $150billion already announced.