‘Things could get ugly in 2008’

FTW fr eelancer Gareth Costa believes 2007 will be remembered as the year when the US credit bubble burst. And 2008 is likely to see a volatile time in global fortunes as the ongoing effects of credit contraction push the US into recession, dragging a number of other countries down with it. The big question is how many more and to what extent? Until 1980 US debt as a ratio of GDP never surpassed 150%, but now it stands at 330%. And while the US Federal Reserve has tried valiantly for the past seven years to keep the US, and consequently the global economy growing, with commodity prices squeezing inflation, it is running out of options on the interest rate front to bail out profligate consumers. Since July they have slashed rates by 1%, but inter-bank lending rates have proved reluctant to follow as risk aversion has crept into the commercial sector, thus largely negating the effects of the cuts. The US and E urope have enjoyed a virtually uninterrupted 27 year period of sustained growth fuelled by a massive credit extension, but finally it looks as if the momentum has gone. If central banks get it “right” the best to hope for would be sideways movement and below par growth. If they get it “wrong”, with so much debt still out there and the bulk of US mortgage resets still to come, things could get ugly.