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.