Sustainability has a limit

26Nov08

                       

 

     The Global Financial Crisis has a tendency to confuse people by its complexity. A lot of people don’t understand what has happened. Indeed a lot of people don’t understand what is yet to happen. 

     So let’s break it down into layman’s terms, shall we?

     WHAT HAPPENED

1. Banks (nationally) lent billions of dollars to those who couldn’t pay back

2. Due to the defaults, the banks failed. 47 banks have failed in total so far

3. The government financially rescued the “too-important” banks and firms

4. When shareholders realized how big the crisis was, they panicked and sold

5. This combination forced the US (and world) markets to crash

6. The government injected over $1 trillion into the economy to boost it

7. The auto industry, which was already in trouble also requested a “bailout”

8. The new US President refused, telling them to find their own way out

9. After bailing out Citibank, the government injected another $800 billion

10. Due to this rapid and focused response, the markets rebounded

 

     So that’s it in a nutshell. Between mid-2007 and late 2009, this is how the crisis evolved, matured and was dealt with. However, there is a lot more to the story. What was not covered in the above explaination was that the problem with the economic system is intrinsic, meaning that the system itself is what is broken, and needs replacing.

     The US government, among many others has flatly refused to do this, which leads us to:

 

     WHAT IS GOING TO HAPPEN

1. Markets appear to heal as the government announces further ’solutions’

2. The need for ’systemic reform’ continues to be ignored by government

3. Record unemployment peaks in the first quarter of 2009

4. US national debt accompanied by deflation weakens the dollar significantly

5. Consumer & market confidence will fall sharply on the back of this report

6. This will spark a repeat of the October 2008 crisis, but with less resources available to deal with the problem

7. Several nations will consider dumping the dollar as their reserve currency once it is clearly evident that the prior ’solutions’ were unsustainable

8. Political circumstances will see the rise of crude oil to $170 per barrel before the end of the first quarter of 2009

9. This pressure will force nations considering switching the reserve currency to act, possibly replacing the US dollar with the Euro

10. This process will mark the end of the dollar as a major currency before the third quarter of 2009.

 

     The above account of what has happened (and indeed what is yet to happen) illustrates the seriousness of what markets, and people in general, are facing. A telling description of what is around the corner is covered in the YouTube video “Warning Economic Collapse”, which shows the striking similarities between Argentinian financial policy and Weimar Republic financial policy prior to their dramatic and painful collapse.

A link to the video is here:  www.youtube.com/watch?v=ccMJclKpBQI

Also recommended: http://www.foxnews.com/story/0,2933,457550,00.html

 

     It cannot be stressed enough how important it is to recognize previous trends, mistakes and consequences where financial policy is concerned. Not only because this has global implications but because it is possible that the consequences can, in some cases, be irreversable until the economy of the given country collapses and an entirely new system of governance and financial policy is created in its place. Then the process of rebuilding begins.

     The US is not yet at this point. But it will be.

     The reasoning behind this conclusion is that it is abundantly clear that both the outgoing and incoming US administration(s) are rigidly opposed to overhauling the system that governs the financial laws within its borders, and its interests abroad. They would not under any circumstances even whisper of abolishing the Federal Reserve. Neither would they have the political stomach to openly discuss the failings of capitalism, and propose working with the institutions to find a more sustainable system of economic governance.

     Put simply, they emphatically refuse to fix the problem at its roots.

     Anyone with moderate intelligence can understand that with this hubris firmly in control of the world’s mightiest nation, it is a matter of when (and not if) the cogs stop turning and the printing presses run dry. They’ve thrown money at the problem expecting it to go away, and the problem most certainly is not going away.

     Consider the following, which is rarely brought up when discussing this economic crisis in context:

1. The GDP of the US is at present $14.3 trillion dollars

2. The US federal debt as of November 2008 is $10.6 trillion dollars

3. Public debt in the US currently stands at $6.3 trillion dollars

4. The two wars that the US are fighting are costing $12.3 billion per month

5. The U.S Missile Defence System costs (in total) $110 billion

 

     With those figures in mind, the question now is, how much longer can the US sustain not just its national security priorities, but also its national debt and the measures being taken to repair this damage?

     There are limits to sustainability, and the end of the road is less than 6 months away (by conservative estimates)

     -BJH

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Tags: Ben Bernanke, depression, Federal Reserve, GFC, Global Financial Crisis, Henry Paulson, recession, US debt