Blessed Economist: The Economic Situation (2)

Friday, July 18, 2008

The Economic Situation (2) - Credit Blow Out

During the last decade there has been a tremendous expansion in credit all round the world. This started when the US Federal Reserve cut interest rates when the Dotcom bubble crashed in 2001. Since then a huge surplus of money has been slushing around the world distorting markets everywhere.

The growth in money was exacerbated by a whole lot of new banking tricks developed by banks in the United States and copied all round the world. These included securitisation of mortgages and moving debt into off-balance sheet subsidiaries. Cheap money was available to everyone everywhere, including many who could not afford to pay the money back.

This flood of easy money had several effects:

Cheap money created the housing boom. All round the world house prices rocketed upward as banks provided huge mortgages to anyone who asked and some who didn't.
Easy credit fuelled a consumption boom. Consumers used their credit card to purchase more and more consumer goods, particularly electronics. This boom was exacerbated by a wealth effect, as rising house prices made homeowners feel like they were better off. Cheap imports from China also kicked the consumption boom along.
Cheap money enabled people to buy cars than they could afford.
Low interest rates make many marginal business investments viable, causing capital investment to become distorted.

1 comment:

Gene said...: As a survivor of the 60's great society and it's tax nuttiness, the Nixon years and the Brenton woods fiasco and the gold standard being abandoned, the 21% interest rates, oil shortages and long lines caused by over regulation, the volker rate inversion in the early 80s that caused a collapse in property values with the ensuing S&L crisis that had banks closing on every corner and real gasoline prices at today's levels, and tax cuts that fueled an economic boom, with the rise of Islam and the confrontation in the gulf that brought them into focus, the dot com boom and bust (remember Clinton saying that the old rules for the economy don't apply any more?). With 9-11 and the huge bankruptcy wave that followed the collapse of the markets, then cheap oil fueling over speculation, with cheap money fueling over consumption as you have mentioned, My friend, I am not amazed amused or troubled. This is a disaster, but a smaller disaster than we have already had.

All those overconsumption driven items are still in the economy. Used boats are now affordable.

China as a result is no longer the cheap wage capital it once was. Fewer and fewer money driven virtual slavery plants are being built in the world.

This is a shift that was essential , perhaps even welcome. Painful yes. But as you have rightly defined what goes out of whack must come back. In the end this will be a good thing.

You see, Like the Joker said in the First Batman movie 20 years ago (Jack Nicholson)- I've been dead once already. It's very liberating.

So, all the fear and trembling going on in the world doesn't scare me at all. Been There, Done That, have a tee shirt.

Besides, in the Chicago Tribune today there is a report on the obesity epidemic in the USA.
http://www.chicagotribune.com/news/nationworld/chi-obese-states-18-jul18,0,1912364.story

No one starves in the USA. No ONE. We are fat overfed (including me). When the obesity rate slows or drops I'll know the economic troubles have kicked in.

Till then relax. The singular joy of age is you don't get rattled by little things.

I am not afraid or even very concerned.; 2:14 am