Credit Crises Depression
Credit Crises Depression.
As a knock on effect from the Northern Rock Bank fiasco and the governments subsequent bale out of it, to the tune of £50bn, (or £25bn after a trade off) a great deal of angst has gone into what has gone wrong with the operating philosophy of the banking system in general.
Although the initial blame seems to rest with the USA sub prime housing market, which was the apparent catalyst for the unfolding of the current ‘credit crisis’ that has sparked off the lack of liquidity ‘lending’ between banks around the world; the generated cash flow problem that paralysed northern rock and subsequently forced a number of noted banks to write down loan assets and in some cases to write off billions in value, has a more prolonged worrying element attached to it. This foreseeable event of credit retrenchment is just the early mechanism of what is to follow.
The real problem with the current crisis has its roots much further back and is wrapped up in the west’s creation in the belief of expansion in all things continuing without pause, particular their economies. In part this belief has been well placed stemming from the post war development of new technologies, expanded markets and financial sophistication with the global movement of investment, money markets, corporate influence and pliant government policies being complicit in the pursuit of lasisez fair economics. That there has been a rapid expansion of wealth in the most active countries is undoubted although predominantly this has been concentrated in the northern hemisphere up to the 1970’s. However for the past 30 years there has been an inexorable accommodating drift of wealth too and it has been in the direction of the Middle East, Asia (India / China) and in the more recent decade Russia.
That the western economies have been successful up to the early 1980s sustained apparently in the inexorable growth of confidence of the worlds ‘free markets’, has to be seen as a justifiable boom time for the some ‘free market’ exponents. Although in this boom time there may have been one or two blips in the growth of individual economies driven by the faults caused by energy, aggravating conflicts and confidence retreats; with the continuance of productive output to rely on, pushing into new expanding consumer goods, the productive bounty eventually overcame the drag of minor recessions to drive forward the onwards explosive expansion of the free market philosophy. This exuberance of expansion was hardly ever questioned and was inculcated as a self replicating fact of modern economics.
The ability of the expanding market opportunities in producing more wealth and more consumer things, was made by fortuitously exploiting developing and emerging new ‘markets’ by exploiting the weaknesses of countries with unsophisticated administrative, labour, social and environmental controls. However although the benefits of the generated wealth from the created ‘global market’ supported by the off loading of manufacturing to more ‘flexible labour’ areas was seen to be beneficial for all participants; what was actually happening was that social degradation was taking place in the “post manufacturing counties” like the UK, USA, and parts of the EU and a range of economical asset wealth was drifting away from these very countries that seem to controlled the world economy.
This period of rapid growth which could be said to be the period of hyper inflated economies was to a large extent driven by imported productive subsidies, the creation of disposable easy money and with the economic generators demanding increasing profitability; driving down any form of detachable cost. In addition the enthusiasm of the market in generating ‘new’ financial mechanisms to milk the market and support the excessive boom times was never really looked at in a critical way by governments that leaned on and facilitate market forces and allowed world dominant corporations and financial vested interest banks to run unfettered in the pursuit of expansion at any price.
To finance the expansion of wealth, for thirty years the idea of open markets promoted the subtle proposition that ‘market forces’ could not be stood against and with the ubiquitous penetration ability of advertising, whatever individuals wanted could be gained in the moment by using created financial instrument and credit of any sort. The fundamental of supply and demand where exacerbated to create the increased supply of money in a created demand to pander to the fashioned claim for borrowing against future earning or using an element of equity from appreciating capital assets. The corruption and weakness of the financial system may have now been exposed. In all this time banks and smart money have had a ball, ignoring caution and now they want subsidising to the tune of (in the UK £100bn+) to save them from going down, or as they will say, saving the confidence of the economic system from systemic collapse resulting from the ‘sub prime’ gambling.
It can be argued that normal financial prudence has been cast aside by banks in the pursuit of an over exuberant spending spree by credit, loans, high borrowing and asset conversions or disposable earnings to support the expansion of the economy, particularly in the UK. This over exuberance action by the banks as tacit instrument of government policies have allowed excessive financial freedom to operate in the market pumping out easily available cheap money in part extracted from the real cost of goods produced by foreign cheap labour.
The problem of the credit crunch has been caused by primarily US and UK government laxity to control the exuberant perspective of the Market and the desire to continue the illusion of the ever demanding economic growth. The US being the perceived powerhouse of the global economy has been sucking in money and buildings up terrify debt built on world credit. It has been a process that many countries have bought into by continuing to use the dollar as the world trading currency so much so that they are holding mega billion of dollars and dare not sell them to do so would precipitate a trade and economic shoot out.
During this same period, most notable in the UK there has been a careless disregard by the government for building up reserves to cosset against a future decline, reliant instead on private sector with its creative marketing to sell products, raise awareness and demand for all types of consumerism. Government and bank polices helped feed the demand with cash to purchase products that reinforced the selling / marketing consumerism to fuel more production and ‘growth’. It is a consumptive cycles that only works with the ability of consumers to consume within the use of disposable incomes. However as consumers have raised their expectations to satisfy acquisitions beyond deposable resources, they also borrow against future unearned resources.
With the idea of expansion and increasing wealth continuingly being obtainable, saving became unpopular. Credit was very easy to get and was pressed onto consumers to create banking churn. In the time of low interest rates the tendency is for people on income to borrow and spend or for others to manipulate resources to acquire goods / assets on credit. In times of high interest rate and low inflation some people with disposable income will become savers however there is very little incentive to save when the marginal cost between saving, inflation, credit and spending is so little. It may well be that it is the savers, who may be the middle aged – mature individuals that possibly help fund this credit boom period matched with expanded money supply?
It is assumed that credit will in the future more accurately have to reflect the risk attached to borrowings or investments and this means that interest rate will be moving up and with the recent rise in commodity market, it is most unlikely that at bests a recession or at worst a depression will be avoided by 2010.
As the cheaper credit options now close down due to either increases market insecurity, increasing material cost, the tension between inflation vs. interest rates and labour cost, markets will have to find new exploitable assets and this could mean that for investment growth to continue with the production of cheap products; exportable cost will go to countries with cheapening production.
Where such cost gains will come from depends on overall flexibility to corporate influences and S America or Eastern Europe countries that are seen to be comparatively stable, with lax corporate regulation and social care but compliant ruling controls and with an educated malleable disposable humans assets, could gain. It would be desirable to consider Africa as being better placed to be the next home off FOI for Europe and possibly the USA but its natural resources the historical, cultural, social, educational or stable political blend will preclude it as it does not offer any comfort in its long term ability to meet the demands of the market and consumerism for the west.
An additional affect of this credit squeeze will be the fall in the value of the dollar and exposure to the ‘market’ for the pound, possible driving its value up for a short while but the long term will be for both currencies to fall in value as their economic weakness become evident. A further dawning factor will be the end of the belief in the dominance of market forces and lasisez fair economics. Banks and financial institution have lost all claims to display financial prudence, to the extent that from now on they will have to be forced to be considerably less exploitive and more financially astute in the creation of financial instrument that can be traded into the global system – hard currency and hard credit. Where the various states have to intercede to prop up negligent banks, the senior management should face penalty and not look to reaping the golden bonuses of yore.
The cycle of boom and bust has not been broken as recent governments are want to proclaim; they have merely gone through a beneficial period built on the back of sub economy labour and easy material commodity opportunism. The west may be entering the bust cycle driven by high import produce cost feeding inflation, depressed housing market and prices, curtailed consumer spending, bigger demands for wage increases to counter inflation cost and much higher interest rate to fight inflation and bolster their currencies against the money market off loading especially the pound. Pressure will be needed to keep overall consumptive demand down, which has no effect on essential imported cost but weakens profit margins for companies.
It is no wonder that both China and India are now seem as the next major influential world player in the western economies, with their huge labour and productive ability, private and state financial clout buying up the fixed assets of the impoverishing west, miniscule social cost and a virtual command economy control; for them though it is also the cost of energy that has the same economic porosity as the west. In due course Russia with its ‘sovereign’ oil and gas will be a big influence as well.
So those countries without natural resources, reliant on energy imports, imported manufactured goods, little exportable goods or services will see a fall in the value of their currency that will in the main make all imported products more expensive to acquire and whatever they can export, cheaper. The UK particularly is in a very precarious position; it has no large scale sovereign capital resources, diminished manufacturing output, miniscule positive trade balance and will shortly have to buy all its energy imports at unsustainable cost. Trade deficits will increase and with a decreasing ability to offset cost, the population will be in for a hard time as the financial expectation of the country will have to be forced down against the pressure of inflation and higher interest rates to countered price raises. Public expenditure will be made to fall. Taxes will have to rise to fund a balance of the PSBR.
The future is looking grim and it is painted red. All of this stems from the spike of the “credit crisis” however its root cause goes further back but its solution is for a new economic paradigm.
1.5.08
© Renot 2008
As a knock on effect from the Northern Rock Bank fiasco and the governments subsequent bale out of it, to the tune of £50bn, (or £25bn after a trade off) a great deal of angst has gone into what has gone wrong with the operating philosophy of the banking system in general.
Although the initial blame seems to rest with the USA sub prime housing market, which was the apparent catalyst for the unfolding of the current ‘credit crisis’ that has sparked off the lack of liquidity ‘lending’ between banks around the world; the generated cash flow problem that paralysed northern rock and subsequently forced a number of noted banks to write down loan assets and in some cases to write off billions in value, has a more prolonged worrying element attached to it. This foreseeable event of credit retrenchment is just the early mechanism of what is to follow.
The real problem with the current crisis has its roots much further back and is wrapped up in the west’s creation in the belief of expansion in all things continuing without pause, particular their economies. In part this belief has been well placed stemming from the post war development of new technologies, expanded markets and financial sophistication with the global movement of investment, money markets, corporate influence and pliant government policies being complicit in the pursuit of lasisez fair economics. That there has been a rapid expansion of wealth in the most active countries is undoubted although predominantly this has been concentrated in the northern hemisphere up to the 1970’s. However for the past 30 years there has been an inexorable accommodating drift of wealth too and it has been in the direction of the Middle East, Asia (India / China) and in the more recent decade Russia.
That the western economies have been successful up to the early 1980s sustained apparently in the inexorable growth of confidence of the worlds ‘free markets’, has to be seen as a justifiable boom time for the some ‘free market’ exponents. Although in this boom time there may have been one or two blips in the growth of individual economies driven by the faults caused by energy, aggravating conflicts and confidence retreats; with the continuance of productive output to rely on, pushing into new expanding consumer goods, the productive bounty eventually overcame the drag of minor recessions to drive forward the onwards explosive expansion of the free market philosophy. This exuberance of expansion was hardly ever questioned and was inculcated as a self replicating fact of modern economics.
The ability of the expanding market opportunities in producing more wealth and more consumer things, was made by fortuitously exploiting developing and emerging new ‘markets’ by exploiting the weaknesses of countries with unsophisticated administrative, labour, social and environmental controls. However although the benefits of the generated wealth from the created ‘global market’ supported by the off loading of manufacturing to more ‘flexible labour’ areas was seen to be beneficial for all participants; what was actually happening was that social degradation was taking place in the “post manufacturing counties” like the UK, USA, and parts of the EU and a range of economical asset wealth was drifting away from these very countries that seem to controlled the world economy.
This period of rapid growth which could be said to be the period of hyper inflated economies was to a large extent driven by imported productive subsidies, the creation of disposable easy money and with the economic generators demanding increasing profitability; driving down any form of detachable cost. In addition the enthusiasm of the market in generating ‘new’ financial mechanisms to milk the market and support the excessive boom times was never really looked at in a critical way by governments that leaned on and facilitate market forces and allowed world dominant corporations and financial vested interest banks to run unfettered in the pursuit of expansion at any price.
To finance the expansion of wealth, for thirty years the idea of open markets promoted the subtle proposition that ‘market forces’ could not be stood against and with the ubiquitous penetration ability of advertising, whatever individuals wanted could be gained in the moment by using created financial instrument and credit of any sort. The fundamental of supply and demand where exacerbated to create the increased supply of money in a created demand to pander to the fashioned claim for borrowing against future earning or using an element of equity from appreciating capital assets. The corruption and weakness of the financial system may have now been exposed. In all this time banks and smart money have had a ball, ignoring caution and now they want subsidising to the tune of (in the UK £100bn+) to save them from going down, or as they will say, saving the confidence of the economic system from systemic collapse resulting from the ‘sub prime’ gambling.
It can be argued that normal financial prudence has been cast aside by banks in the pursuit of an over exuberant spending spree by credit, loans, high borrowing and asset conversions or disposable earnings to support the expansion of the economy, particularly in the UK. This over exuberance action by the banks as tacit instrument of government policies have allowed excessive financial freedom to operate in the market pumping out easily available cheap money in part extracted from the real cost of goods produced by foreign cheap labour.
The problem of the credit crunch has been caused by primarily US and UK government laxity to control the exuberant perspective of the Market and the desire to continue the illusion of the ever demanding economic growth. The US being the perceived powerhouse of the global economy has been sucking in money and buildings up terrify debt built on world credit. It has been a process that many countries have bought into by continuing to use the dollar as the world trading currency so much so that they are holding mega billion of dollars and dare not sell them to do so would precipitate a trade and economic shoot out.
During this same period, most notable in the UK there has been a careless disregard by the government for building up reserves to cosset against a future decline, reliant instead on private sector with its creative marketing to sell products, raise awareness and demand for all types of consumerism. Government and bank polices helped feed the demand with cash to purchase products that reinforced the selling / marketing consumerism to fuel more production and ‘growth’. It is a consumptive cycles that only works with the ability of consumers to consume within the use of disposable incomes. However as consumers have raised their expectations to satisfy acquisitions beyond deposable resources, they also borrow against future unearned resources.
With the idea of expansion and increasing wealth continuingly being obtainable, saving became unpopular. Credit was very easy to get and was pressed onto consumers to create banking churn. In the time of low interest rates the tendency is for people on income to borrow and spend or for others to manipulate resources to acquire goods / assets on credit. In times of high interest rate and low inflation some people with disposable income will become savers however there is very little incentive to save when the marginal cost between saving, inflation, credit and spending is so little. It may well be that it is the savers, who may be the middle aged – mature individuals that possibly help fund this credit boom period matched with expanded money supply?
It is assumed that credit will in the future more accurately have to reflect the risk attached to borrowings or investments and this means that interest rate will be moving up and with the recent rise in commodity market, it is most unlikely that at bests a recession or at worst a depression will be avoided by 2010.
As the cheaper credit options now close down due to either increases market insecurity, increasing material cost, the tension between inflation vs. interest rates and labour cost, markets will have to find new exploitable assets and this could mean that for investment growth to continue with the production of cheap products; exportable cost will go to countries with cheapening production.
Where such cost gains will come from depends on overall flexibility to corporate influences and S America or Eastern Europe countries that are seen to be comparatively stable, with lax corporate regulation and social care but compliant ruling controls and with an educated malleable disposable humans assets, could gain. It would be desirable to consider Africa as being better placed to be the next home off FOI for Europe and possibly the USA but its natural resources the historical, cultural, social, educational or stable political blend will preclude it as it does not offer any comfort in its long term ability to meet the demands of the market and consumerism for the west.
An additional affect of this credit squeeze will be the fall in the value of the dollar and exposure to the ‘market’ for the pound, possible driving its value up for a short while but the long term will be for both currencies to fall in value as their economic weakness become evident. A further dawning factor will be the end of the belief in the dominance of market forces and lasisez fair economics. Banks and financial institution have lost all claims to display financial prudence, to the extent that from now on they will have to be forced to be considerably less exploitive and more financially astute in the creation of financial instrument that can be traded into the global system – hard currency and hard credit. Where the various states have to intercede to prop up negligent banks, the senior management should face penalty and not look to reaping the golden bonuses of yore.
The cycle of boom and bust has not been broken as recent governments are want to proclaim; they have merely gone through a beneficial period built on the back of sub economy labour and easy material commodity opportunism. The west may be entering the bust cycle driven by high import produce cost feeding inflation, depressed housing market and prices, curtailed consumer spending, bigger demands for wage increases to counter inflation cost and much higher interest rate to fight inflation and bolster their currencies against the money market off loading especially the pound. Pressure will be needed to keep overall consumptive demand down, which has no effect on essential imported cost but weakens profit margins for companies.
It is no wonder that both China and India are now seem as the next major influential world player in the western economies, with their huge labour and productive ability, private and state financial clout buying up the fixed assets of the impoverishing west, miniscule social cost and a virtual command economy control; for them though it is also the cost of energy that has the same economic porosity as the west. In due course Russia with its ‘sovereign’ oil and gas will be a big influence as well.
So those countries without natural resources, reliant on energy imports, imported manufactured goods, little exportable goods or services will see a fall in the value of their currency that will in the main make all imported products more expensive to acquire and whatever they can export, cheaper. The UK particularly is in a very precarious position; it has no large scale sovereign capital resources, diminished manufacturing output, miniscule positive trade balance and will shortly have to buy all its energy imports at unsustainable cost. Trade deficits will increase and with a decreasing ability to offset cost, the population will be in for a hard time as the financial expectation of the country will have to be forced down against the pressure of inflation and higher interest rates to countered price raises. Public expenditure will be made to fall. Taxes will have to rise to fund a balance of the PSBR.
The future is looking grim and it is painted red. All of this stems from the spike of the “credit crisis” however its root cause goes further back but its solution is for a new economic paradigm.
1.5.08
© Renot 2008
posted by Renot at 5:49 am
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