The average person probably finds it difficult to understand just what is happening with the turmoil in the money markets. We seem to have shrunk back from disaster with the United States government bailing out financial powerhouses such as Lehman Brothers, Merrill Lynch and IAG.
Unfortunately this is a case of America riding to the rescue with money it does not have !
America is broke ! And it has been for decades ! The United States spends more money each year than it earns - and as a result it runs a trading deficit that has reached an unpayable level.
The present crisis is simply a case of the private sector being too greedy by lending money to unsuitable customers and then bundling the resulting dodgy paper into securities. These securities devalued when mortgage defaults became a torrent because of inflationary house prices coupled with static income levels.
The obvious remedy would have been to let market forces prevail. When the blood bath subsided there would have been immense casualties, but realistic values would have returned and those left standing would pick up the pieces and move on.
The American government could not allow that to happen. It's deficit was being financed by other countries - mainly Japan and China - buying Treasury bonds and other government paper.
Should confidence in the worth of that paper collapse a world depression of huge proportions would be certain because the world would cease to finance the American economy.
The strange thing about government money is that it bears absolutely no relation to the financial system we understand. When we borrow money from a bank or any finance institution we expect to repay according to a known set of rules.
Governments do not repay. They simply " roll it over " into a new agreement when the old one expires.
So - we have a crisis that seems to be well on the way to resolution, barring the unexpected. The American Treasury will shuffle paper to finance the recovery - but nothing will really change.
America will continue to run a trading deficit and the illusion of prosperity will continue.
Let us just hope that somewhere down the track a more hard nosed attitude does not emerge in the minds of countries financing that deficit.
If the chickens ever do come home to roost - the meltdown will be beyond recovery !
Well said!!. I watched the political shows this morning and Treasury Secretary Paulson looked and sounded rattled. He could not answer direct questions put to him. The big one being " Will this work?" and his reply being that he was not sure but we ( USA ) have to do something!!! WTF We are seriously considering stocking up on a few months of food. This is going to be interesting.
ReplyDelete