Friday, January 30, 2009

Reaping and Sowing

The current economic crisis is not the end of the world. It is not the great tribulation.

We are mostly just reaping what we have sown. Businesses that make to many bad decisions eventually fail, as the American auto industry is learning. Banks that buy shonky assets for excessive profits are eventually caught short. Households that borrow too much to speculate in a housing bubble, will often get caught between falling prices and rising interest payment.

Excessive reliance on debt usually has a bad consequence. During the good times, businesses and households used cheap credit to amplify their profits and gains. The problem is that leverage wacks back during bad times. The world that sowed leverage in abundance is now reaping a harvest of leveraged pain.

Unfortunately, the pain of the reaping is being amplified by two negative factors.

  1. A flawed banking and monetary system. Fractional reserve banking amplifies the pain of recession, just as if fed the exuberance of the preceding boom.
  2. A flawed system of government. Democratic governments are expected to solve all problems faced by society, but when dealing with a sick economy, they usually make the situation worse.
The pain that people are feeling is real, but that does not make it into the end of history. We are still just reaping what we have sowed.

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