Subprime America Infects Asia And Europe Part 2

Globalization has been a wealth builder, perhaps unequally so, but nonetheless wealth has been created. Soon, however, another darker side of globalization is about to manifest. Risk as well as money move quickly across global highways recently built and made possible by a one world financial marketplace, and that risk is now about to become apparent.

Global currency flows move swiftly and quickly and turn on a dime. The Asian liquidity crisis of 1997 was a recent manifestation of this phenomena; the next crisis will be the US. The subprime losses suffered by the buying of America’s bad debts may be the final straw in the diversion of foreign moneys away from America.

By selling foreign investors its bad debt, America has shot itself in the foot. Because America is now the world’s #1 debtor, because America needs over $1 trillion in foreign investment capital each year to pay its bills—and because it was foreign investors that were primarily burned by Wall Street’s subprime CDOs, the flow of foreign capital to the US may soon be going elsewhere.

In April 2007, a Merrill Lynch survey showed 38% of global money managers believed the best prospects for corporate profits were now in the eurozone, 42% believed the worst prospects were in the US.

Today, the word “de-couple” is increasingly heard where global markets are discussed. No longer referring to freight trains or dogs in delicto flagrante, de-coupling refers to the distancing, i.e. de-coupling, of global economies from the US, to wit, the increasingly perceived expeditious act or art of separating still-healthy economies from the slowing US economic engine.

While it is true the US has been the driver of the global economy, it is no longer. The sobriquet “has been” is literally correct in this instance. The US share of global economic growth so far in 2007 is 10%, a figure analogous to Barry Bonds batting .134.

Global capital flows, like tsunamis, are not something to be taken lightly. If the flow of foreign money to the US slows, the US dollar will collapse and the US will be forced to raise interest rates to continue attracting foreign capital. And, if US interest rates are raised, the US economy will collapse. Greenspan might call this a conundrum. Other people might call it and Greenspan something else.

Whose feet?

Whose fire?

America apparently cares little what happens to the primarily foreign investors and institutions who bought its subprime loans. On April 24th, Bloomberg reported the head of the US Federal Deposit Insurance Corporation, Sheila Blair, testified before a congressional committee, ``We should hold the servicers' and the investors' feet to the fire on this…We did not have good market discipline with investors buying all these mortgages.''

It is highly doubtful Ms. Blair will exhibit the same attitude should the flow of foreign moneys upon which Mr. and Ms. Average America depend go elsewhere. Thailand’s economy went into apoplectic shock and its currency and stock market fell by 50% in 1997 when international currency flows suddenly changed direction. America may soon be in for the same.

And if America falters and falls, the consequences of such will be felt around the world. Today, afternoon tea and scotch flow freely in The City as does dim sum in Hong Kong and Shanghai and sushi in Tokyo around their respective bourses. Soon, however, the risks that have lain dormant beneath globalization’s foundation are about to erupt and a reordering of the world’s financial geography is about to ensue.

It’s spring 2007 and the sun is shining in the US, backyard BBQs are being cleaned in anticipation of summer’s use. A severe financial crisis, however, is in the offing; a crisis as unexpected as the Golden State Warriors’ last minute streak to the NBA playoffs.

An unexpected financial crisis, however, will be much more consequential than Don Nelson’s magical resurrection of the Warriors’ NBA hopes. There, at least, the Warriors had a chance. But because most don’t know a financial crisis is coming, they will have little chance of survival. This summer, America’s subprime CDOs are coming home to roost, and not just to the US.