Monday, July 6, 2009

Desperate measures

Greetings good citizen,

The crisis deepens, some world players are taking desperate measures and at the end of the day you an only wonder why anyone listens to the hair-brained economists and their beyond goofy ideas.

To a rational person this crisis has turned into a farce, we all know what needs to be done and we also know why what needs to be done is the last thing they’ll do.

The economics ‘whiz kids’ are arguing about whether the economy is poised for inflation or deflation

The central question here is: "But what actually happens when credit is destroyed at a faster rate than our central banks can print money?”

The principle argument in support of ‘deflation’ is the skyrocketing default rate.

Individuals that don’t earn enough to support their personal debt as well as corporations that fail to attract sufficient (paying) customers literally destroy money when they default.

What is ignored here is how money is supposed act as a storehouse of ‘value’. A defaulting debtor surrenders whatever collateral they possess so the lender can re-sell it to recoup their loss.

Um, I have yet to see a lender pump out someone’s septic system in an attempt to recover the credit they ate…nor is there any way to recover the gasoline that has been purchased with credit.

Understand, food, fuel and other ‘expendables’ purchased with credit is long gone but the balance lingers right up to the time the card is deactivated.

Even funkier is the fine pile of ash and smelly cellulose filters, which is all that remains of cigarettes purchased on credit cards. Like excrement, there is no ‘market’ for these particular ‘by-products’.

As long as the lender gets paid, it hardly matters what you use credit for…it’s when the lender doesn’t get paid that the problems begin. (A problem often exacerbated by sky high interest rates, penalties and fees.)

The disturbing factor that is repeatedly ignored is how much can the economy ‘shrink’ before it suffers systemic collapse?

The labor market has shed several million jobs in nearly as many months and a vast majority of the people let go weren’t greeters for Wal-Mart…

How will our capitalist model put even a small fraction of these people back to work? Not only does nobody know, but apparently nobody cares!

It’s more than a little bizarre that economists care more about deflation driving down equity earnings than they do about a disenfranchised population that will soon dwarf the employed populace.

More perplexing is how this will become a ‘humanitarian crisis’ that is somehow divorced from the financial crisis that created it!

So now, two years into this crisis, where do we stand and where do we go from here? History offers limited guidance, as we have never experienced the bursting of a bubble of this magnitude before. The closest thing is the collapse of the Japanese credit bubble around 1990. As the Japanese have since learned, recovering from a deflated credit bubble is a long and very painful affair. [Worse, they haven’t done it yet…]

Governments and central banks on both sides of the Atlantic are pursuing a strategy of buying time, hoping that a recovery in economic conditions will allow our banking industry to re-build its capital base. The Japanese pursued a similar strategy back in the early 1990s. It failed miserably and set the country back many years in its recovery effort. Ironically, the Japanese approach was almost universally condemned as hopelessly inadequate. It is funny how you always know better how to fix other people’s problems than your own. A little bit like raising children, I suppose.

One would be tempted to retort that the reason we’re in this crisis is because the people in charge of the situation refuse to accept reality while continuing to embrace the ‘it’s different this time’ attitude.

Yes, they all see quite clearly that Japan failed to take the appropriate action while similarly refusing to do so themselves.

Well-capitalized banks don’t do dick for your economy if your customer base is broke!

There is a growing recognition of the need for a ‘Jubilee’ (universal debt forgiveness) but we are rapidly approaching the point where a jubilee will be meaningless. Forgiving your debt won’t bring your old job back at your old pay rate.

Naturally, smaller economies are suffering more than larger ones as there are fewer ways to hide the economic devastation.

Pretty aggressive plan, if you ask me. Will it work, though?

Well, first of all, most every major central bank in the world, certainly the biggest: the Americans, the Eurozone, the British, the Swiss, and the Japanese, have rates near zero and are printing money. The world is awash in money and the incentive to borrow is huge. So, is the Swedish announcement qualitatively different? On some level, it is not. Nevertheless, it is the most aggressive policy and the fact that they are charging negative interest rates for deposits is unprecedented. This does make events in Sweden something to watch.

Moreover, the situation in Sweden is bleak. GDP is expected to contract 5.4% this year and inflation is expected to be negative. Clearly, the Swedes are in a deflationary spiral. It doesn’t help that its banks lent recklessly to the Baltics and that those countries are imploding. The Swedish banking system is at present severely undercapitalized – this is why lending is not taking place.

Bizarrely, our banking system is ‘supposedly’ well capitalized (if we disregard all of the recent failures of smaller banks) and our banks are lending…they just aren’t lending in sufficient quantity to support the economy.

This essentially means we are no better off than the Swedes. Does the ‘answer’ lie in making banks lend by giving them ‘free money’ and punishing them for holding reserves?

It is here that we encounter yet another serious disconnect. Money ‘represents’ value, banks do not add value at any step of the banking/lending process. Banks ‘extract’ value from the borrower for the ‘luxury’ of providing access to money, which is essentially free to them!

There’s something radically wrong with the notion that a service, which is not essential to survival, is capable of holding the productive part of the economy ‘hostage’.

Simply put, this is ‘caving in’ to extortion and the ‘extortionists’ are the owners of commodities, which use their control of the banking system for their money.

If we use our ‘desert island’ economic model, the last thing you’d do would be to establish a bank. Until you had a surplus of goods, money is meaningless.

Which is all the more ironic since there never has been a genuine surplus of goods.

Even now in our world of ‘too much capacity’, there are plenty of people that need products, they are simply too poor to buy them so the products ‘sit’, waiting for a buyer that can pay the asking price.

Perhaps this is the crux of the crisis, this is extortion, not a monetary famine.

Thanks for letting me inside your head,


No comments:

Post a Comment