translate in arabic. boom across most Western economies the last 5 years or so. In the
wake of 911, decisions were taken at the very highest levels that a
recession at this point would be disastrous, and so it was ‘put off’
with the panacea of low interest rates.
Interest rates, in fact, have been hovering at or near 50 year lows
since that time in most developed nations including the US and
UK, and have only recently begun to rise back to historical norms
in the face of worldwide economic pressures.
The ‘optimistic’ among us seem to think the current situation can
continue indefinitely, with a ‘new paradigm’ of low interest rates,
easy credit, and massive house price inflation in what is otherwise
a low inflation environment. They are, of course, wrong, as the key
phrase ‘new paradigm’ should have alerted you. Whenever anyone
says ‘it is different this time’ you can safely bet your very last
dollar that it isn’t!
But why can’t the current ‘perfect’ situation continue? There are 2
explanations, an easy one and a difficult one. We’ll take the easy
one, of course. Imagine you lose your job. You still have bills to
pay. So you max out your main credit card buying those little
luxuries like food, and mortgage payments. The next month, you
still have no job, so you apply for another card, and max that out
too. The third month, however, to your horror, you discover that
not only do you still not have a job, but the credit card companies
won’t advance you any more money, as they are aware of your
previous credit binge, and the fact that those debts are still
outstanding. You have become a ‘bad risk’.
So what do you do? Go bankrupt? What choice is there? If you
have no income, and have no source of borrowing, yet still have
outgoings, you are bust. Period. In fact, even if you do find a new
job, it must now pay MORE than your old job, because you now
also have the interest payments on your new debt to support.
For ‘You’ read ‘America’. For ‘bankrupt’ read ‘recession’. The US, and most other Western states have relied to an incredible degree
on cheap credit, happily supplied in the main from the Far East.
This situation just changed, with the Chinese ‘warning shot’ across
the bows of the dollar, and the smart money is already exiting
greenback positions, even though relative to the other main
currencies, it should in theory be an attractive home for cash.
The resolution of the current credit bubble may take another year
or so to truly unwind, but when it goes, the bust will be BIG. What
should you do? Go to cash, and in more than one currency!
For the technically minded, the reason why the coming recession is
inevitable, and may even be a ‘depression’, is simply that countries
relying on credit to sustain themselves incur ‘carry costs’ of those
debts. The more they borrow, the bigger the regular payments
become to support just the interest on the debt. There are only 2
ways to pay that off - devalue your currency so the debt becomes
worthless, or inflate your economy so your GDP rises at MORE
than the growth in carry costs on the debt.
The US cannot devalue the currency deliberately, without obvious
severe socio-economic results that will be punishing painful to the
American citizen and industry. Politically, of course, this would be
suicide for the incumbent US Leader.
The alternative is to spark increased internal economic growth, and
this is usually what credit binges are used for - to create new
industries, employment etc. In the case if the US, however, the
unprecedented sums borrowed from Chine and Japan have been
spent on… you guessed it, Chinese Plasma TVs and Japanese game
consoles. Oops.
The carry cost has been rising at a rate almost 4 times as fast as the
internal US growth for some time now, and has already passed the
point where any conceivable US growth schedule can comfortably
cope with it. As the Far East just decided the Dollar isn’t so great
anymore, there really only is one way out now