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July 15, 2009

The Great Inevitable
by Adrian Ash

"...At last! A singular name for the financial/banking/credit/mortgage crisis/meltdown/depression/deflation..."

SO SUDDENLY EVERYONE'S NOTICED what a handful of nutty doomsters said about the financial crisis, long before it broke.

The end of the bubble was inevitable. Only the timing was ever in doubt.

From the Wall Street Journal's 2009 guide to the crisis starting two years ago...to new BBC drama, set "when the bubble was yet to burst"...it doesn't matter. Whatever you want to call this on-going crisis (and the Great Depression didn't get its name until perhaps 1934), it was plain to see ahead of Bear Stearns' collapse and the Lehman's failure.

Those who missed it all nod in agreement today. And here at BullionVault, we flatter ourselves that, once or twice, we somehow managed to spy it looming before us as well.

"One day there will be an uncontained financial accident. Within hours credit facilities will be withdrawn, and there will be forced derivative position liquidations at organizations around the world. Modern derivatives will be the brokers' loans of 1929, resulting in margin calls, liquidations, the evaporation of confidence, spectacular losses, a credit squeeze and financial chaos. The liquidations of assorted off-balance sheet positions will cause the realization of big losses in many highly geared positions. This will in turn cause dramatic re-ratings of the creditworthiness of many borrowers..."
- Dead Cats & Live Rabbits, summer 2004

"Nothing will stop the markets rediscovering risk in 2007, we guess...And the search for yield, when it blows up, will become a scramble for settlement, a rush into anything offering simple ownership over complexity, real value instead of gearing. If that sounds a little like gold to you, you might be advised to pick up some more at today's fire-sale prices..."
- Quantum Finance & the Scramble for Gold, 22 December 2006

"Once everyone gets back from vacation and starts to focus on what's really going on, we may be in for a torrid few months in the financial markets. I believe the current lull in gold prices could offer a good opportunity to defend yourself before the real trouble begins..."
- Email to BullionVault users, 25 August 2007

Of course, "Like most predictions these particularly wild ones [were] almost certainly wrong" as BullionVault director Paul Tustain wrote some five years ago. Because even as we dared hazard them, these stabs at what the coming crisis would look like remained mere guesswork. Albeit guesswork built on the history of how all bubbles end, with the inevitable hilarious consequences for over-geared debtors and speculators.

Regardless of our attempts to judge what's now been upon us for almost 24 months, however, investors and savers - let alone central banks and their financial watchdogs - really should have paid closer attention to what respected, sober economists were also saying way back when.

"As far back as 2003," reports Germany's weekly Spiegel, William White - then chief economist at the Bank for International Settlements (BIS) in Basel, Switzerland - "implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation and become the new 'villain' in the global economy."

Come 2005, even the bubble-blowers themselves could see what was coming. The Mortgage Insurance Companies of America (MICA), a trade body for US mortgage providers, wrote to the Fed on 23 September that year to say it was "very concerned". (The FDIC also received the letter, but seems to have filed it under "mosrgagce" rather than "mortgage".)

At the same time, veteran banking analyst Richard Bove at Punk, Ziegel & Co. in New York sent clients a report that deemed the inevitable blow up so inevitable, it was titled "This Powder Keg Is Going to Blow". In it, Bove stated that America's "nuclear mortgages" had no secondary market once they'd been dumped - like so much Investment Landfill - into institutional and banking portfolios.

"One hopes it will not require a disorderly unwinding of current excesses to prove convincingly that we have indeed been on a dangerous path," said White of the BIS in 2006. But too late! The dangerous path had led right to the top of the cliff, only to crumble away behind us. That's what made it so dangerous - the fact it would inevitably lead to an inevitable plunge.

Economists, policy-makers, newspaper editors and TV critics who didn't even know there was trouble two years ago are now queuing up to agree. So in lieu of a better name, how about precisely that - the Great Inevitable. It couldn't be avoided. Not with cheap money, PhD finance and government-mandated cuts in lending standards all stoking the furnace that kept credit growth boiling.

Only the first of those three is still at work today, so the next crisis may well look different at first. The other two are on sabbatical only, however, rather than permanent leave. The outcome when they return is sure to be ugly once more.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events and should be verified elsewhere if you choose to include it in your own analysis.