There seems to be much confusion over what’s going on in relation to the so called credit crunch and the continued fall out of major financial institutions.
The position was much more serious than was initially thought with the amount of debt involved and over reliance on credit reaching mind boggling proportions. The last time you had a similar scenario was in the seventies, which coincincided with the last oil spike which sent economies like the USA into a tailspin.
But then the USA was a net creditor to the rest of the world, not the largest Debtor as currently exists, so this time it’s much worse. No country has ever borrowed its way into prosperity and simultaneously allowed its currency to depreciate as is occurring with the USA dollar.
So I can’t see how the dollar will ever recover should the USA continue to keep borrowing ever larger amounts which in turn means overseas creditors are attempting to avoid the currency and invest in commodities.
I watched the presentations to congress on TV early this morning (our time) with Ben Bernanke and I thought he sounded and looked uncomfortable at times.
I think the only way forward is to ensure the USA dollar reverses the cumulative depreciation and begins to appreciate. The only way to do that is stop borrowing, which means you undertake the herculean task of returning the budget into surplus and ensure the trade cycle (the net trade position with the rest of the world) also begins to turn positive.
No small order.
It will take a very long time, but it needs to be the policy aim, debated and hopefully understood as good policy, as common sense which will give much needed hope for a future generation. The current mix is not sustainable. The debate about how Freddie and Fannie and 96 over extended regional banks should be supported is important but it’s coincidental to the main game.
Longer term what is needed are clear goals which are easily undestood by everyone.
Translating that policy into a stronger dollar will involve continued high levels of distress as a consequence of reduced spending combined with inevitable higher interest rates.
The USA still has some great assets, not least of which is its people but I think they need to hear the painful truth of what’s needed to turn the ship around and head in the right direction. Progress I think can only begin with a stronger dollar and much less reliance on credit and spending. That will also help substantially reduce the oil price.
18 comments:
Just a month ago Bernanke said just the opposite and I wonder how it is that we understood then that things were getting worse and he apparently didn't see it at all.. or at least didn't want to say so. I think one of the very worst things going on in the US is the dishonesty of people in positions of authority.
I don't understand economy very much, but would it help if manufacturing returned to the US instead of being done overseas? Is this going to turn into another depression such as they had in the 1930s? Is someone getting rich off this? Silly questions, I know...
P.S. I have a new blogsite:
http://majorityoftwo.blogspot.com/
I was told two years ago that the US would take a generation to extricate itself from this mess. The debt at that time was suggested to be 7 trillion.
The major problem I'm seeing is that the 'American Dream' is imploding and there never was a plan B.
For many of us outside the US it is desirable that the country retain a level of dynamic leadership, and I expect that will happen.
In the meantime there are going to be some hard lessons to learn, including the fact that democracy is inclusive and the people have a very real role in driving it.
I despair at times that my fellow Aussies are politically inept, but we all know they will only accept so much before they become vocal.
Besides, we have wise heads like Lindsay to pull us into line and to prod and poke at the establishment.
hear here, here hear.
i agree completely.
the thing is, we need to go on an economic diet. that's different than a crash diet, but we need to start eating better.
we need to clean the twinkie packages out of the back seat and pay attention to the road. (better yet, we should walk more).
the way to get better is to eat things that make us healthy, such as investing in productive assets as opposed to consuming empty calories.
Hello, Lindsay.
Just to say that the early signs were there years ago.
I remember reading about the yield rate inversion, and the significance of it, some two years ago.
Surely, Mr Bernanke had the data available to him.
I believe that Susan said it rather well.
Hi Susan, Jo, Cart, Sera & PT
Thanks for your insightful comments.
I think there is a significant structural change taking place which does involves a wealth transfer to the resource rich and Asian economies. Western nations I think have nothing to fear from this and can benefit from increased demand flowing from these developing nations, but your own house also needs to be in reasonable order.
What’s likely to happen is we will become less wasteful and more inclusive, and should that happen, new industries will be created. It doesn’t matter if the industries are in manufacturing or service industries, both equally provide wealth and benefits to its citizens.
I remain optimistic that what will finally emerge will be a fitter more honest society which will herald a better future.
Best wishes
that old saying that you don't get a different outcome but continuing to do things the same way seems pertinent to the US situation. more of what caused the debt (borrowing) won't eliminate the debt. but it seems the bigger players don't think the rules that apply to you and me apply to them. and the world's wealthy like the system the way it is, 'cause it just makes them richer.... one can never have too many cars and beach properties in Dubai..... the mega-rich are the ones with the political clout, and they won't change the way they do business till their money won't buy them a meal or fill up their limo's.
yeah, i'm cynical. i work in the oilpatch with people with more money than sense, and some days i hate myself for it
oh don't forget the savings and loan crisis, around 1990 or 1991. the us government had to bail out the economy -the banks- then too. you can say, perhaps, we don't learn our lessons very well.
Hi Gfid
The scary part about is all is the growing disparity in incomes.
There is the growth in the working poor, the 22 million workers without any form of heath insurance on minimum rates of pay, in stark contrast to those obscene rates of between $22 to -50 million per individual pay packet for the CEO’s of the larger investment banks.
These guys collectively generated about a trillion in synthetic profit of which about half so far has been written off. But that party is over.
Sera
This time you also have huge government debts which will limit the extent of this bailout, although you wouldn’t think that was the case so far.
At the time of the Savings and Loan crisis the Budget was in surplus and you could argue then maybe you could afford to underwrite and take over those liabilities so that depositors were protected.
But the reality to day is you can’t keep printing money and writing IOU’s infinitem unless you capitulate to a run away inflation and a collapse in the economic system.
It’s not in our interest or the rest of the world to see the USA in trouble, so it’s to be hoped good sense will eventually prevail.
Best wishes
Hi Lindsay
I don't pretend to understand global economics, except in a very general way, but I cannot help wondering if what we are witnessing is a 'Rise and Fall' situation with America?
Why should we expect that the USA economy would last as the foremost for ever? Egypt, Rome, the British Empire...
Perhaps it is simply Asia's turn - so I guess thank heavens we are not locked in alignment with any and can cut our cloth (so to speak)...
Good clear analysis though, thank you yet again for helping me to a better understanding.
so my iou's aren't good anymore?
i'm on the board for Habitat for Humanity in nearby Grande Prairie. the cost of living, and especially of housing has skyrocketed to the point where we're having some serious problems providing homes for the people who need them. pay rates have not increased accordingly, so middle income folks can't afford to own a home there, let alone the low income families HFH is committed to helping. meanwhile, the wealthy buy up the land on speculation, and the older residential properties and turn them into high priced, run-down revenue property (read "overpriced slums")
it's very frustrating. even if we do manage to provide a modest home, the cost of maintaining it in this economy is often beyond the means of the people who need it.
Well written and I quite agree, Lindsay!
Hi Delab, Granny f, Sera and Michael.
Thanks for your comments.
The share of world trade attributed to the USA economy had reduced considerably over the past decade, and that trend will accelerate.Important as it still is, the USA I think will be far less of a world power in the future. Eventually the dire postion of debt will curtail expansion.
But I would be very happy to take an IOU from its individual citizens, as I am presuming there exists an expectation by most it for it to be repaid.
The housing situation in resource rich pockets of countries like Canada and Australia does bring its own problems with highly inflated prices.
The solution I think is to increase the supply of land (government releases at affordable prices) and reduce the high infrastructure costs with assistance so as to share benefits with its citizens.
Best wishes
it is confusing..but you know what I've been reading, nay, more glancing at? (the kids are home, school's still out).. the Daily Reckoning which is an Ausie stock site..pretty interesting..and worrisome, they take the aussie and global look at things and boy, it's not happy reading..
have you heard of them?
Ingrid
it is confusing..but you know what I've been reading, nay, more glancing at? (the kids are home, school's still out).. the Daily Reckoning which is an Ausie stock site..pretty interesting..and worrisome, they take the aussie and global look at things and boy, it's not happy reading..
have you heard of them?
Ingrid
Hi Ingrid ~Thanks for your comments. I don’t think the site offered anything materially different to what we generally think about the difficult position, but thanks for pointing it out to me.
As matter of interest our Reserve Bank of Australia (RBA) to day (which is the equivalent of the Fed) said there is a likelihood we can move to move to a less restrictive stance on interest rates, indicative of domestic demand slowing.
The central bank this Tuesday decided to leave official rates unchanged 7.25 per cent after its board meeting. RBA governor Glenn Stevens said that whilst the bank opted for no change, it expected inflation to remain relatively high in the short term.
"The banks forecast remains that inflation will fall below three per cent during 2010," he said in a statement. The likelihood is for rate cuts ahead are increasing with subdued demand.
Economists think maybe the RBA would be cutting rates by the end of this year.
Best wishes
Maybe this is too strangely American for you but you just won an award.If you'd like to come by it's waiting.
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