Tuesday, November 16, 2010

Second stage

For most people, the GFC did not start in 1989, as it did for Japan, it started in 2006 or thereafter. For Australians it started in 2009, very gently, because it is "the Lucky country", after all!

What has happened is quite simple. All sorts of legitimate, not unlawful, ways exist to make money or credit. Once it is made it becomes very difficult not to borrow, thereby making more money, and buy an appreciating asset. This continues until no one else wants to borrow money. Then, surprisingly perhaps, banks run out of money, having helped to create so much of it.

Banks then reverse some of that money creation and no matter what is tried, the bubble is going to burst. IUn the USA, this happened in 1999. The NASDAQ share market collapsed as all the dot.com share flotations ceased and values collapsed as it dawned that there were very few viable business plans, as not every company can be Amazon or eBay or Paypal or eventually, Google.com.

As the malinvestments collapsed, the banks had to bankrupt those who had borrowed from them, as their security, the shares they had bought, were now worth less and indeed, some were worthless.

So, rather than endure the depression thyen America decided to postpone it and to make it worse by successfully further inflating the bubble. The share markets are large, but the housing and commercial property markerts are larger! They dropped interest rates always a danger signal and sold everyone who could borrow a cheaply financed house. So much was sold that they had to get European banks to lend even more money by selling the mortgages to them.

But eventually, everyone had all the loans they could pay off and then people realized that the price of housing would not grow as to grow more loans were needed. So prices started to fall. Thus the depression started in the USA. It was different in Spain and Ireland and Latvia and every where else, but even though China and India, Russia and Brazil were still growing, the west started to find that most prices were too high and that commodities in demand by the BRICs were the only growth are they could buy into. Thus all the essentials are costing more as jobs disappear to China and elsewhere.

All of this was known and predictable by those who control banking, but they joined in to make even more than they already had. They withdrew first, helping the bubble to collapse, with the intention of buying again only when the most profitable assets were low in price. They still have not invested again.

There will be another collapse when growth falters in the BRICs and commodity prices collapse. Banks will be caught again!

Derivatives will make the situation more complex.

This could happen soon!


Anonymous said...

Hi Exactly as you say.

Anonymous said...

Hello Thanks for sharing your thoughts. Take care.