Code Red

Code Red: When Lehman Brothers went bankrupt and AIG was taken over by the united state. government within the fall of 2008, the world almost came to a finish. Over the following few weeks, stock markets went into free fall as trillions of dollars of wealth were wiped out. However, even a lot of worrying was the real-world effects on trade and businesses. A strange silence descended on the hubs of World commerce. 

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As international trade froze, ships stood empty about to ports around the world because banks would no longer issue letters of credit. Factories shut as millions of workers were set off as commercial paper and money market funds used to pay wages frozen. Major banks in the US and the United Kingdom were literally hours away from shutting down and ATMs were on the verge of running out of cash. 

Bank stopped supplying letters of credit to former trusted partners worldwide. The interbank market merely froze, as no one knew who was bankrupt and who was not. Banks could look at their own balance sheets and see how bad things were and knew that their counterparties were also loaded up with too bad debt.

Code Red

Code Red: The world was threatened with a large deflationary collapse. A crisis that big comes around twice a century. Families and govt were swamped with too much debt and not enough money to pay them off. But central banks and govt saved the day by printing money, providing almost unlimited amounts of liquidity to the financial system. Like a doctor putting a large jolt of electricity on a dying man’s chest, the intense measures brought the patient back to life.

The money printing that central bankers did after the failure of Lehman Brothers was entirely appropriate in order to avoid the Great Depression II. The Fed and central banks were merely creating some cash and credit that only partially offset the contraction in bank lending.

Code Red

Code Red: The initial crisis is long gone, but the unconventional measures have stayed with the United States. Once the crisis was over, it was clear that Global was saddled with high debt and low growth. In order to fight the monsters of deflation and depression, central bankers have gone wild. Central bankers kept on creating money. Quantitative easing was a stunning development when it was first trotted out, but these days the markets just shrug. Now, the markets are worried about losing their regular injections of monetary drugs. What will withdrawal be like?

The amount of money central banks have created is simply staggering. Under quantitative easing, central banks have been buying every govt bond insight and have expanded their balance sheets by over nine trillion dollars. Yes, that’s $9,000,000,000,000—12 zeros to be exact. (By the time you read this article, the number will probably be a few trillion higher, but who is counting?) Numbers so large are difficult for ordinary humans to understand. 

As Senator Everett M. Dirksen once probably did not say, “A billion here, a billion there, and soon you are talking about real money.” To put it in everyday terms, if you had a credit limit of $9 trillion on your credit, you could buy a MacBook Air for every single person in the world. You could fly everyone in the world on a round-trip ticket from NYC to London. You could do that twice without blinking. We could go on, but you get the point: it is a big number.

Code Red

In the 4 years since the Lehman Brothers bankruptcy, central bankers have torn up the rulebook and are trying things they've never tried before. Usually, interest rates move up or down depending on growth and inflation. Higher growth and inflation normally mean higher rates, and lower growth means lower rates. Those were the good old days when things were normal. But now central bankers in the US, Japan, and Europe have pinned interest rates close to 0 and promised to leave them there for years. 

Code Red: Rates can not go lower, so some central bankers have decided to get creative. Normally, central banks pay interest on the cash banks deposit with them overnight. Not anymore. Some banks like the Swiss National Bank and the Danish National Bank have even created negative deposit rates. We now live in an upside-down world. Money is effectively taxed (by central bankers, not representative govt!) to get people to spend instead of saving.