We remain astonished that what started as $200 billion in failed US subprime mortgages could have turned into $3 trillion in global losses

Foreign Exchange Outlook : The global financial system is under severe stress, and so is the global economy. Ripple effects are only just now starting to appear in places like China, which was partly insulated from the free-market world but can’t hide forever. It’s interesting that the richest entities are the ones in the most denial that everything has changed-the oil producing Middle East as well as China. OPEC is busy trying to raise prices in a world of falling demand, which seems particularly foolish. Of course, these are the very countries that are getting richer by the minute as their dollar reserve values go up, but these reserves may be needed for domestic spending if their exports, whether oil or socks, start falling apart.

We remain astonished that what started as $200 billion in failed US subprime mortgages could have turned into $3 trillion in global losses, showing that even financial professionals are having a hard time grasping the extent of the leverage that was out there and still remains. It’s easy to see how nonprofessionals are bewildered by the collapse of pyramid-upon-pyramid, including our presidential candidates. We think only two things are clear;

1. the bottom will come only when US housing bottoms, no matter the state of deleveraging at the time.
2. And the US economy will survive, however tattered. It is literally too big to fail. But other sovereigns are not too big to fail.

We already have Iceland and Argentina. Well, Argentina is too easy a target for sarcasm. It always fails the minute the wind blows. The most interesting aspect of this whole debacle is that not one single analyst or commentator is calling on G7 or the new summit group (that will include China) to deliver a global rescue. Everyone seems to assume that no major Bretton Woods-level response is likely or maybe even possible. That’s because you need capital controls to enforce such things, and the US is against capital controls.

At some point in this trend the currencies will bounce up and at some point the trend will reverse, but in the meanwhile, keep the faith—the US dollar is the safe place to be.

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Barbara Rockefeller

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