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The World, the Economy and Deflation

Recently I was involved in the purchase of a house. Due to the inordinate time involved in the completion of the house the value of the house dropped over $140,000 – due basically to our good friend the sub-prime which has led as well to the tightening of monetary policy in the banks.  Whilst for me this might be to my advantage – I had the further thought that this may not be the end of it, what’s to say that it’s not going to deteriorate further.

For some years I have considered that we are walking on the edge of an abyss – although generally the population at a whole cannot conceive of a negative outcome – I consider that we are in line for a correction, a somewhat dramatic one.  I believe we are in the early stages of it as I write.

In Australia this current result of the sub-prime – the credit crunch has had effects on Merchant Banks, Developers and even large-scale industrial organisations such as Gunns – as well as the tightening of monetary policy in the Big 4 and other lesser banking and mortgage lenders.

In the USA it is not uncommon that due to the total lack of capital gain on properties – as well as rampant deflation on the achievable sell prices of these houses – many owners are in the position where they in fact have no equity in these properties – whilst so long as they have an income or a job this is may not be a critical issue – it becomes an issue as soon as they do not have the means to pay for the mortgage, if in fact they do not have equity – then if they are fortunate enough to sell the property – they may end up owing the mortgage provider funds when their house settles.

Hence when you think about this – it is as if the Sub Prime fiasco has become some kind of contagious virus now infecting the status quo – normal Prime mortgages as well – then progressing world wide. The fault and the wonder is that everything is connected which is good, because everything is anyway, but in this instance it is too connected.

This of course has on going effects to financial institutions where this now non-existent equity cannot be called upon for those people who are silly enough to put their house as security for their investments, the companies and the optimistic but totally unrealistic position that this current position is just an aberration – sorry guys it’s not.

One expected outcome of the liquidity crunch is the availability of and the cost of normal operating funds for business in general.

Unfortunately in the USA the Federal Reserve in the USA is not helping – not leading – not doing much at all except making the situation worse – All they seem to be able to do – is either reduce the interest rate or print money – whilst I know that this is one of their primary function, it’s not going to fix America.

Lets look at history shall we. What did the America do last time when they were in a similar situation – in the 1930’s they built infrastructure – roads, bridges, dams  etc. – Currently though there is no strategy here, again no economic or long-term strategy that isn’t tied up with the war in Iraq – the politicians who are supposed to lead the country aren’t talking to the Treasury, the market, and the Federal reserve concerning what would be the strategy for the future. It’s all about the war. What if they placed that money into education, energy or medical research or one of the premier problems in the USA – health cover.

Whilst the optimism in the foreign exchange markets (and the perception of vulnerabilities in the mineral exporters) to the USA the strengthening of the US Dollar is nice (at last its worth something)  – unless there is a positive outcome in the US Presidential elections – with a party that has a plan to stimulate the economy and not just the will to print more money. This is a critical time for the USA and the connected financial world – I am afraid that the future of America is doomed for at least another four years, depending on their response – perhaps considerably more.

It seems that too much of the fan fare on both sides of the political divide is all about how it looks rather than how it is.  Much of the problems are about political games and debts in Washington and not about the future of the country.  For instance – special interest groups, whilst I understand that the religious right in America has every right to be concerned about what is important to them – in their focused and narrow view of America’s place in the world – they need to wake up to the fact that America is not owed anything – God is not on their side, and they are not right much of the time, and like many empires that have gone before –  there may come a time that its influence with fade into insignificance unless they start managing the economy and not being so concerned about how it looks rather, and thereby absolutely ignoring reality. For a supposedly secular state – the prospect of religion and the far right is a bad influence on the politics of the American Union – America talks about religious states such as Iran, etc – but they are appearing to be the same – except to the far right in some areas of the Union – which astounds me. Too many decisions are being made from the point of expediency rather than what is right for America – expedience is never the course to take – as expedience lessens and depreciate the honour and integrity of the goal. Too much testosterone, hate, acrimony and the lack of communication is involved here.

Whilst for instance this ridiculous idea of creationism dogma is something that only the Americans could think up – they are looking very much like children – you know if I don’t get my way – I shall leave and go and play with my toys elsewhere.  Grow up!

Speaking of children – this whole never-ending subject of abortion whilst it is extremely important – it should be the ultimate decision of the mother – not some court – not some legislator and definitely not the religious right – America is supposed to be the ‘Land of the free’ – not the Land of the free – if you agree with me.  The idea that they have killed Doctors and other medical staff – Gosh I just cannot understand – talk about home-grown terrorism. Isn’t murder against the Law, Ten Commandments and the common good.  This act of abortion is as I said a decision for the mother alone – the far right talks about the child is viable and has rights – yes this is true but the mother has rights as well – if the mother does not want the child that may have come about via assault or rape, or cannot provide for it – how can she be made to go full term? Who looks after the baby – does the state – do the far right ? No they talk the talk but unfortunately that’s all it is.

The former Soviet Union with their invasion and occupation of Georgia is playing politics verging on brinkmanship, it is a test which the US and Europe have failed.  The US will get little support from the European Union on this as the European Union has placed itself, strategically in an extremely vulnerable position due to the energy supply from the former Soviet union – who’s dumb idea was this ????  We are in for a rough ride – whilst Moscow sows its oats and flexes its new-found muscles.

I believe that this Sub-Prime situation will have serious rebounding around the world for years to come – as the assets and access to cash are closed or at the very least minimised – this as you know will have roll on effects in the general business community – the general economies and of course in the banks whose willingness to lend money has been severely curtailed – now I know all about this Fractional Lending criteria – but if a bank won’t lend the money to anyone and it still has to pay its depositors – what is its future? We have seen the impact of the current liquidity crisis in the Macquarie Group (more to come), Centro, B&B, Gunns etc ..I don’t think that it will decay all the way into anarchy however I seriously believe that we are in for a huge correction – and unfortunately the Australian Government – as with all governments are all about how it looks and not how it is – mind you the ability of a single government’s ability to handle what is coming may be beyond any single government’s ability or resources.

This idea of the World economy is basically flawed when dealing is strategic areas – for example in areas such as food, energy – (although essential for developing economies with the dictum “lets teach them fish”) whilst trading with countries for the produce whether it be primary, commodities or manufactured and of course in many cases financial – which mostly do not create any true wealth as the money bounces around the world. Anyway getting back to my point – the idea of off loading ones responsibilities to feed, clothe and heat one citizens to some outside source or country – is a very altruistic dream – it is La-La land..the one thing you are banking on (literally) is that your partner in all of these transactions is an honourable entity or country. Not a bright idea – especially for one case in point the former Soviet Union and its sabre rattling and brinkmanship – and with its ambitions to be a world player again (who cares)– so we may soon have another cold war literally as Russia uses energy as it’s weapon of war, in a flawed policy to redefine its identity in the world, a sad reflection of the delusions of the people in Moscow – mainly of course Putin to play on the world stage, the Soviets, again rising perhaps as the harbinger of doom.

I think we are in for a revolution of sorts – where the purpose of life and living it will markedly change – in the short / medium term, yes this will have serious effects on the current structure of business and society – but I don’t think it will decay all of the way into anarchy. In a way – the focus of the individual is about survival – much like it was in the beginning of time – except the tools have changed – instead of going out hunting for animals and the gathering of berries etc – we use money as our terms of trade – the value of which has been so degraded that we are now in the beginnings of serious cost inflation, along with a downside of a serious asset deflation.

In a way the asset deflation will be a good thing perhaps for the next generation. It will take all of the heat out of the property market and should (assuming a similar structure – which I know we can’t) allow a lot more people to buy a property – however – with what I don’t know.

However looking back on history – the only thing that I really know is that history keeps repeating itself – we seem condemned by politicians and expedience of people in power to keep repeating our mistakes again and again.

What we need is a true World Government – a friend of mine is talking to me about sociocracy – where all members have an equal say – perhaps once I have had a chance to look at this in detail it might be the way to go..well after all democracy, Totalitarianism, monarchy, dictatorships and communism don’t seem to be for the good of all men and woman on the planet.

We need to find an alternative that works, how about as money is the root of all evil, we get rid of money all together – but what next – ideas anyone..

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