Scottish Bank Issues Warning

If I give you a $20 bill, why would you give me 5 pounds of ground beef in return? Because you have confidence that you will be able to use that $20 bill tommorow, or a year from now, to buy something that has $20 of value. What if you found out that no one would take your $20 bill because it turned out that it wasn't worth the paper it was printed on? You would then demand that I come up with some other form of payment. So it appears that the earth's entire financial system is tied together by trust and confidence that it will always be there tomorrow. This headline from the Royal Bank of Scotland is concerning because if you start casting doubt on the whole financial system...it can end up becoming a self-fufilling prophecy. Below is the headline and some of the key paragraphs of the article.

ROYAL BANK OF SCOTLAND ISSUES GLOBAL STOCK AND CREDIT CRASH ALERT

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist. A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.
"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
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If you want to read the full article you can access it here; http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

Hat tip to Adam for sending the article.