A description of the current financial crisis by Ben Samuel
(liberal)
Friday, October 17, 2008
There is an old saying that is once again becoming pertinent, "One man's trash is another man's treasure." As the financial crisis unfolds before us we are witnessing a first phase wherein a rush to something that appears safe has in the near term enhanced the perceived value of the dollar. The value of the dollar compared to other currencies has rallied nearly twenty percent in the course of a month. Liquidations of assets are occurring at unprecedented levels as a world wide freeze on credit stalls a freer flow of commerce. Governments worldwide are responding by printing currency 24/7.
The intent is to encourage banks to lend, but why should they when the cash with which they have been gifted grows more valuable being held in an environment that is rapidly deflating. Gold, oil, real estate, and equities are cheaper every day. Inevitably, something will give as inventories of necessities grow dear, and premiums will be paid for their production and distribution, but that time is not yet upon us. Toward that end, the current "rescues" engaged by western governments have significantly miscalculated the greed factor that still permeates the financial system.
In America, the federal government has begun a nationalization process of its banking system. However, that process is still too reliant on private banks for credit distribution. Governor Schwarzenegger of California quickly requested $7 Billion of bailout relief for his troubled state, which was quickly followed by Massachusetts for a similar request. While those governors should be lauded for their gutsy actions, their requests are too little given the contributions their states make to the national gross domestic product. The federal government's action leaves local governments in a lurch, and it is local government that will bear the brunt of the crisis as it continues to evolve. The deflationary cycle now in process is drastically reducing revenues to local government. Property and sales tax collections are sinking rapidly and local governments will soon need to reduce their levels of service. Nearly 70% of local government expenditure is labor, and substantial reduction in local revenue will mean layoffs. The past seven years, growth in local government employment has substantially offset the reductions in employment in the private sector. Rather than empower banks, the federal government should have been empowering local governments to become competitive lenders to the banks, to assure intervention on behalf of troubled property owners, and an ability to acquire revenue from means other than taxation. But we have what we have.
As we continue to print dollars, and for the limited time we have of the continuing deflation, those who hold the vast store of dollars and American IOUs will soon look to divest themselves of those and seek to acquire the means of production and the real holdings that provide leverage and power. They will look like bargains or, they will buy trash for their cash. As phase two begins, unemployment and inflation both, at levels unprecedented in modern times, are the likely consequence.
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The views expressed
in this article are those of Ben Samuel only and
do not represent the views of Nolan Chart, LLC or its affiliates.
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You seem to look into blue skies and see nothing but RAIN!
All this money will HELP the situation not compound it. Without all this money being pumped into the economy, we really would have a bleak situation.
It's like letting a bad cut heal by itself (your view), or by having a doctor apply stitches, salve, and dressing (mine). Things heal better and more quickly when helped by the right doctor which, in this case, is the Fed.
It's more like giving a heroin addict, who's going through withdrawal, another and much larger shot of heroin. Great for a short time; but you'll notice those times becoming progressively shorter.
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