A Simple Guide to the Ongoing Crisis

Here is a simple guide to the ongoing financial crisis. Wanting to do more, to print more is exactly the wrong thing to do. Here is the way it goes (this is a threat – you will look very clever in a cocktail talking to an economist):

• Low interest rates fuel capital goods/bubble sectors (housing, internet stocks…)
• Government revenues are inflated (from housing, construction,etc)
• New government spending programs (and we know how those are hard to repealed)
• Bubble burst (credit tightened) – Revenues disappear
• Banking/financial crisis
• Governments step in – save banks, well connected companies (TBTF), new programs
• Result: more government debt / less revenue
• Sovereign Debt Explose
• Government expenditures in the crisis prevent the structure of production to realign (those house builders need to do something else, too much houses=prices must fall)
• Governments socialize the losses and malinvestments
• Sovereign Debt Crisis > Currency Crisis
• Value of fiat currencies rests on governments/central banks
• Balance sheets of central bank deteriorated during the crisis (back the currency)
• Central Banks maintain low interest rate to save the banks and limit bankruptcies
• Government debts continue to grow
• Pressure to print to pay governments’ debt (QEI, QEII, ECB buying bonds, China fuelling its banks)
• Central banks increase base money and see the quality of their assets go down (Greek bonds…)
• Governments in bad shape to recapitalize the banks
• Need more money production
• Governments can default 2 ways:
o 1-Cease payments – banks have a problem – they’re holding bonds – need bailout – feedback loop…
o 2-Inflate away (another form of default)
• Currency crisis:
o Depreciation is masked now as the US and Euro are eroding at the same pace
o You see the depreciation in gold
• Who is paying for the bailouts?
o Holders of US dollars, Euros, Canadian dollars, etc… via loss of purchasing power

So – still want those bailouts?