The first part of this sorry tale was caused by greed and inflated money markets. This gave near full employment and unprecedented growth around the world.
The last two years has been caused by the markets realization that you cannot carry on and keep re-inflating the money markets as really there was no-one else left to lend to. People max'd out on credit cards, took equity withdrawals. A stupid scheme was enacted to allow people with no money to own homes backed by large mortgages giving to anyone that asked and to a lot that didn't but just signed on the dotted line. .
In all, this took away the spirit of 'working for a living' and for people to be truly entrepreneurial ability to excel. Everyone became an entrepreneur. Of course this isn't possible. Each person was told that if you followed 'the entrepreneurial game plan' written by 'Rich Quick' you'd make money. Everybody wanted IN. Individuals, companies, banks, governments. For different reasons. Governments wanted big revenue as this bought votes. That's why it was allowed to happen. Many legislators also had vested interests. No one wanted it to end. And finally after several dogs received mortgages there was no-one left to lend to and defaults started.
How long will it take to remove the excess from the economy?
It'll only be removed when people with no money stop spending, defaults on credit cards will rise, lending will be reduced. Arguably this has happened. It'll happen when people WITH money stop spending. And arguably this has happened. People with no money or no access to money can't add sales tax. The unemployed are a drain on resources and can't contribute to tax revenues so these will be massively down. The increased cost of benefits will compound this. People who have money will need to save and pay down debts. Their pension funds they know are worth less or are worthless.
Different variants of this have happened all over the world. The biggest problem is that the majority of this has happened in dollars. As the biggest spenders have been in dollars. It couldn't have happened anywhere else except the USA. So the crunch arrived and we have had three years of turmoil. This is only the start. At no time in history has the world economy downsized so quickly and by so much.
Unfortunately it doesn't stop there. The real recession is only just starting. The last three years of pain was caused by a credit crunch .
We are now entering the phase of increased unemployment followed by the destruction of excess consumerism. A real recession , but now starting from a much lower base or arguably from a high three and half years ago that we should never been allowed to attain.
Either way the shock waves still haven't been felt as we have been insulated by the fat of the good years personally or by QE worldwide. Savings have been plundered, more money borrowed to keep businesses from going under and we are now looking into the abyss.
Yes, the world will still keep going but manufacturing capacity will have to be removed. Consumer growth is dead.
In the UK cuts are starting to bite. Income dropped for the first time since 40 years by 0.8%. Plans for foreign holidays are being shelved. In the US we saw a slight increase in spending in February although this was based on a slight increase in consumer borrowing and a dip into savings.
The Casey Shiller index on housing in the US indicates much more pain to come. Inflation in the US hit 6.7%. Strip out food and arguably it's 2.9%. But how can you strip out food?. So if inflation in the US is now running at 6.7% and the US has the advantage of the dollar how is the rest of the world going to fare?
Two words "Rampant inflation" particularly when you consider that in poorer countries the weighting of food in the consumer basket is much larger.
The western policies are affecting the rest of the world now. People can't afford to feed themselves. They are turning against each other.
Can we calculate where the world economy needs to be? That is the really big question that has been troubling me.
Rather than planning growth should we be planning contraction based on a new set of rules?
Deflation or inflation, I don't think the argument changes. We have simply got to cut output. If we take what each household owned 60 years ago prior to mass marketing and consumerism, will we ever go back to that? The answer does not lie in what 50 year olds think but in what the next generation believe.
So whilst governments fuel markets and fill financial voids with funny money is it worth the effort. Increasingly the number of people I speak to believe that this 'depression' could be a good thing for future generations.
It, the depression, will undoubtedly change the way we think.
What is the expectation of the people?. I think the powers to be are losing sight of what people really want and want to hear. I personally work hard and expect to live somewhere where I have freedom of choice and movement and feel safe walking on the streets. A place where I am not overtaxed. I don't want to hear about big banks making billions in profit, which I know must be on the back of my hard work.
Where else can the banks profit come from? These 'criminals' using HFT (High Frequency Trading systems) are stealing money from my pension fund and tax payments by trickery and deception. They should be outlawed. If these select banks/individuals don't have the money, then 'we do' for our future security .
They have done nothing to achieve this profit save through manipulation of a corrupt system skimming each penny along the way. They created schemes to re-package debts and sell onto unsuspecting funds and insured any future losses knowing full well the risky elements.
Like drug addicts they tried to hide the truth for as long as possible injecting out of sight between their toes or upper arms until they slowly infected the whole system and then having sunk to a low level of existence, having been given a soft government withdrawal package, are back for a super fix once more. They can't help themselves and it is nevertheless sickening to most that this is happening.
All we can do is keep exposing the vermin in society and look towards private prosecution through a class action if the new banking laws fails us. Remember though that in splitting retail and investment bankers the skimmers are still out there.
The above aside what do we need to live?. If we look at our everyday lives and remove all excess which this depression might well do for us, we need food, water, shelter and warmth. Arguably the 'system ' in distress is failing to supply even these four basic needs.
The big worry is that the current QE is enslaving our children in future debt. Property enslavement has been compounded by selling or restricting the rights of citizens to the other basic necessities. Profits by water companies and water ownership through Governments selling 'rights' to provide water have enslaved people further. Government legislation on Eco oils have pushed up the price of crops.
Energy companies now run governments and control prices which squeeze the last cent from each person. They know of course that supply equals demand and when the crunch came oil prices miraculously reduced to try to increase demand and meet the falling revenues. YET at the time we were told it was because we were running out of oil. Given though that so few people control the oil tap one can only assume that supply was allowed to exceed demand in a vain effort to stimulate the economy. Or was it market manipulation in the oil futures market as many now claim. Prices are on the way back up again as the cycle re-occurs. The flood of money that QE supplied is been claimed by the oil companies and profits again by the Hedge Funds.
According to a many articles recently we are heading for a ramp up in prices anyway based on Peak Oil. As with the next basic commodities that will send food prices soaring.
There are claims that QE is designed to fill the gap until consumerism picks up again. Of course this is ludicrous. It probably won't for a very long time. So when QE ends the second dip will be sharp and painful. Things never quite happen when expected and with Black Swan moments such as Japan and the BP oil spill we live in a world where a any one of these could prove to be a tipping point to a major fallout . By major fallout I mean further financial market shocks and a flurry of bankruptcies on a global level.
Morgan Stanley for example are currently looking at taking at least a $1 billion dollar hit April/May 2011 on the CDS that they engaged in to try and hedge the mortgage losses they incurred. The losses could be billions.
We are already on the tipping point, which is the next trigger?
I started taking an interest in Gold and Silver in 2005. My background was IT and I needed a new hobby. Today it has become much more than that and I started Spartacus News following encouragement from Friends who I had helped understand more about investing and gold and silver. This remains today my prime interest.
© 2011 Copyright Richard Hartley - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
© 2005-2013 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.