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In 1944, our country had recently emerged from the Great Depression and was in the middle of World War II when 730 delegates from 44 Allied nations met in Bretton Woods, New Hampshire.
Those global leaders had come together to develop a monetary system to govern the financial relationships between the world’s largest economies.
They set up a system of rules, institutions, and procedures. And they created the World Bank, the International Monetary Fund (IMF), and the forerunner of the World Trade Organization.
It was a rare time when much of the world’s financial interests were aligned, and cooperation was a matter of global survival.
Fast Forward to 2008 —
Much of the World’s Financial
Interests Are Aligned Again …
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| In 1944, 730 delegates from 44 Allied nations met in Bretton Woods, New Hampshire, to develop the financial relationships between the world’s largest economies. |
This time, however, the global economic crisis is spawned by Wall Street’s slicing and dicing of toxic mortgage debt into financial weapons of mass destruction — derivatives.
Even though the participants at Bretton Woods aren’t here today, one of their creations, the World Bank, is. And it is convinced that the global economy will significantly slow down in 2009.
As recently as June, the World Bank was forecasting global growth to increase by 3% in 2009. But it has now lowered that forecast to a measly 1%.
What’s more, the World Bank …
- Expects the economies of established, developed markets — like the U.S., Western Europe, and Japan — to do the worst and shrink by 0.1% next year, and …
- Is more optimistic about emerging markets — like Brazil, China, and Eastern Europe — but is dramatically lowering its 2009 forecasts from 6.4% to 4.5%.
That’s not all …
The World Bank is so worried that it has set aside $100 BILLION to lend to troubled countries over the next three years.
Ample Justification for Pessimism …
That 1% overall global growth rate predicted by the World Bank could be a real problem though.
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| The World Bank is convinced that the global economy will significantly slow down in 2009. |
The IMF has said that it considers a global growth rate of 3% or less to be “equivalent to a global recession.”
Moreover, John Lipsky, the IMF’s first deputy managing director, warned that “there is ample justification for pessimism. Global prospects remain highly uncertain and risks of a global recession loom large.”
Lipsky and the IMF seem to be especially worried about Asia because expectations there remain high and “the financial crisis has spread to emerging economies.”
In fact, the IMF has been warning Asian policy makers to prepare for the possibility of a “sharp slowing” of economic growth as the global financial crisis widens, saying:
“Asian authorities will need to remain vigilant to spillovers from the global turmoil and be prepared to respond quickly and flexibly to a sharp slowing of domestic activity.”
By the way, the IMF is also worried about Latin America and cautioned policy makers to “remain on high alert.”
Any emerging markets slowdown could be very painful …
The International Labour Organization expects the global slowdown to cause an additional 20 million people to become unemployed before the end of 2009. And the number of people living in extreme poverty could increase by 40 million.
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The global slowdown is dire enough that today’s equivalent of Bretton Woods, the Group of 20 (G20) just met in Washington D.C. to come up with a unified strategy to prevent the global financial crisis from worsening.
The G20 is comprised of the world’s major developed and emerging economies: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, and the U.S.
During Saturday’s summit, the G20 pledged to:
- Aggressively battle the global recession by agreeing to not pass new restrictions on global trade …
- Improve regulatory supervision of banks …
- Implement stricter accounting standards …
- Employ oversight of the derivatives markets, and …
- Synchronize tax cuts, lower interest rates, and spending initiatives.
In a statement issued after the meeting, the G20 said,
“Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries.”
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What Does This Mean for Investors?
Three things:
- The global leaders and honchos at the IMF and World Bank believe that the global economy is pretty darn bad and expect things to get even worse.
- Try as they might, the governments of the G20 cannot re-write history and override normal business cycles. Government intervention, even on a global scale, never works.
- The contagion from the U.S. credit crisis has spread to Europe and Japan. And it now has spread to emerging markets, even the red-hot China.
I believe, though, that the Asian markets, because of their still-growing economies, will hold up better than the rest of the global markets. But nobody is going to remain completely immune from the spreading effects of the U.S. toxic derivative mess.
In short, this is a time to stay cautious, raise cash, and integrate defensive strategies like stop losses, inverse mutual funds and ETFs, and portfolio (put options) insurance.
Best wishes,
Tony
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