The International Monetary Fund (IMF) is forecasting that British GDP will contract 2.8 percent this year, worse than the U.S., the eurozone and Japan.

The IMF expects the U.S. economy to contract 1.6 percent; Japan to shrink 2.6 percent and the eurozone to decline 2 percent. Overall, the IMF expects the global economy to expand 0.5 percent, its weakest showing since the Second World War.

Economists at the IMF also estimated that bank losses may reach $2.2 trillion, almost twice the $1.4 trillion the organization predicted in October.

It warned that, “unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth.”

In Britain, the bank bail-out is already projected to take national debt to 8 percent of GDP, and today the Institute Fiscal Studies warned that national debt levels are unlikely to return to the pre-crisis levels for more than 20 years.

It’s a simple proposition. Assets prices are falling so fast, no financier can back them until a loan against them is guaranteed against loss.

What that means is that asset prices have to find a floor. Only then will the real economy find willing partners in the financial economy and finance start to flow.

The question is, when will that happen?

The answer is, no-one knows.

Guesstimates vary from the ridiculously optimistic — the British Treasury forecast — to the ridiculously pessimistic — “never”.

In between, the more realistic: “2012″.

From there we may see a slow growth back to financial and economic health, but it will need a sea-change in regulation and business administration. In particular we need to create bulkheads against the madness of globalized swings that can disrupt the strongest of economies. As David Brook wrote in the New York Times:

“We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.”

As the BBC’s Business Editor, Robert Peston points out: “If you combine consumer, corporate and public sector debt [in the UK], the ratio of our borrowings to our annual economic output is a bit over 300 per cent, or more than £4,000 billion [six trillion dollars].”

Those numbers make even 2012 seem optimistic.

The only safe answer is, “Rebuilding starts when there are no more cliffs to fall off.”

Have you ever been confused by the jargon used by insiders to describe financial transactions? It’s easy to get the impression that some sellers go out of their way to confuse the issue.

Thisismoney.co.uk has a fairly comprehensive online A-Z guide to terms used in the financial services and banking sectors.

For example:

Credit Default Swap
A CDS or credit default swap is a contract issued by big City firms or funds that guarantees the holder will be covered if a particular company defaults on its debts. It is basically a type of insurance used by large investing institutions and reflects the cost of insuring their debts. It is used as one (controversial) way of measuring bank stability — the lower the figure, the stronger the bank.

Credit crunch
A credit crunch happens when banks hoard cash. If the supply of loans evaporates, the economic outlook quickly becomes bleak. The credit crunch that began in August 2007 was sparked by bad loans in America’s mortgage market — sub-prime borrowing. It can be measured by the level of Libor — the interbank lending rate.

Forex
The exchange rate is also known as the foreign-exchange rate, forex rate or FX rate. It is the rate between two currencies that specifies how much one currency is worth in terms of the other.

In the present financial climate it’s a good idea to scan through the list and update your knowledge of any unfamiliar terms, or those you hear frequently but wonder what they mean.

Equally, when a word or phrase suddenly arises, as “credit crunch” did on August 9 last year, this is a good place to go to check its meaning.

A-Z of Financial Terms and Jargon.

Deflation is looming as the greatest threat to Western economies, especially for heavily indebted nations, like the U.S. and Britain.

Many people are belatedly waking up to the gravity of the situation. In Britain, former Chancellor of the Exchequer, Ken Clarke, has dismissed comparisons with the 1970s, ’80s and ’90s, likening current conditions explicitly with 1929/30.

Normally cautious Bank of England Governor, Mervyn King, forecasts a 2 percent contraction in the British economy next year, with interest rates falling rapidly to nought percent for the first time in history.

Deflation is now the enemy we must all factor in to our expectations in the near-to-medium terms, even in the dependably buoyant American economy. The Japanese “lost decade” of the 1990s may be set to play out across the world.

Why then is deflation necessarily worse than inflation?

In an era of massive indebtedness, both private and public, deflation increases the burden. As incomes decline, debts remain the same — at levels signed for in better times. It’s the exact opposite of the apparent wealth created during periods of rapidly rising house prices.

Professor Peter Spencer of York University says, “It is going to be absolute murder in Britain if inflation turns negative. The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s. Debts were miniscule.”

Another symptom of deflation is that consumers wait for lower prices before shopping, causing job-losses in Main Street and yet more bad economic news.

So what can be done either to pre-empt or cure the curse of falling prices across the board?

Curiously, Keynesianism which, in its misunderstood version is disastrous in normal times, does hold out some hope in depressive conditions. Expect central banks to start printing money soon and dropping it from helicopters, if they haven’t started already. Want to buy some rising stock? Buy helicopter shares. [This is not financial advice.]

If you’re one of those noble souls who saved assiduously during the asset bubbles, you will just have to stand by and watch the profligate oafs who caused the problem clean up, while your own responsible hoard of value drains away.

It’s just not fair, but it will probably have to happen “for the greater good”.

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