Gaza, Russia, and Bank Bailouts

Israel's unilateral ceasefire last night was an excellent development marred by reports that the Palestinians are still firing missiles into Israel. From an outsider's point of view, tragic though this conflict is, it is turning out to be of no great international importance. Clearly the Arab world has no stomach for a fight on this issue at this time. That is truly excellent news; a great relief.

Meanwhile with oil at the mid $30s the oil producers are in deep poo. While Saudi, Iran and other Middle Eastern fields can produce profitably at well below this price, the high oil prices of last year was a bonanza that most of them have already spent. Few offshore fields can pump profitably at these levels and the Russians are very badly hit. There will be a battle and those with the cheapest production costs will win. That competition will hopefully keep oil prices down for the time being and this will help world economies.

The problem with under-capitalised banks is surfacing again. in the UK they are talking about a £200 billion bailout. Be aware that the bailout is not just to provide money, it is to provide solvency. Banks' collateral bases are decreasing in value as debts go bad and shares fall. Income will be falling as the economy continues to plunge. It is a self-tightening screw since the inability of the banks to lend is harming the very economy that the banks need to be growing.

Governments have got to realise that you cannot push on string. It is one thing to make funds available for potential borrowers and another thing to make them borrow it. No prudent company, large, small or even self-employed, is going to borrow if by doing so they dig themselves deeper into the hole. Companies have realised that this isn't a 'blip' or a short-term pullback, this is the start of a world depression the like of which has not been seen since the 1930s. The scale of this depression is likely to be far larger than the '30s, affecting more people and more industries. The danger of loss of social cohesion and civil unrest is high and the consequences frightening particularly for the rather genteel, street-dumb folk who inhabit most of Europe and the USA.