Monetary Crisis … Things begin to unravel


Buckle up your seatbelts the Keynesians are back on top and we are in for a bumpy ride.

Well Flash Gordon doesn’t like to be outdone. He has unveiled his “world saving” deal … rescuing banks getting money moving again. True to form our commentators have hailed it as a master stroke of genius … everything is going to be alright again, back to business as usual. He has managed to persuade governments from around the world to follow his lead.

Let us have a closer look; in the UK our primary regulatory banking authority is the FSA, who have imposed on banks a more stringent solvency ratio requirement leading to a collapse of banking share prices. He then underwrites the rights issues of the three major Banks closest to insolvency, imposing conditions on the underwriting that can only affect the value of shares in these Banks adversely. The ban on dividends hurts … but who does it hurt most … those hundreds of thousands of little old ladies who hold shares in “their Banks” … they also happen to be a group called pensioners. Alas! It’s a case of bugger the pensioners, they will die off, we need the support of the young people.

He tells us that those Banks have also been told that they have to maintain their levels of lending to small businesses and on mortgages, at the levels of 2007. In other words he wants the property market to remain propped up, but can it be? There are some of us stupid enough to believe Flash … I mean the commentators … and yet others naïve enough to believe in him.

Here are the facts … The UK foreign debt which has sustained the lending boom of the banks stands at $10.45 trillion this means that the economy needs to generate a current account surplus of at least $1 trillion to service this existing debt (Assuming all this debt is repayable over 20 years at an interest rate of 5% … and hopefully that it is sterling denominated … if it is foreign currency denominated …. Heaven help us). Currently we are creating a current account deficit of around $1 trillion.

In a nutshell, unless we can persuade those countries generating trade surpluses to continue pumping cash into the UK economy at a rate exceeding our requirement to service existing foreign debt of at least 100%, Banks will not have the liquidity to continue lending at the levels of 2007, unless of course Flash is still around to continue printing money.

Gordon, with liberal use of smoke and mirrors, has tried to divert the attention away from the UK economy, pretending that it is a big global issue … it is simply a UK/USA issue with the rest of the world catching a cold because the USA is sneezing. In the medium term we will see the flow of foreign money to the UK slow down, as there will be a clear perception that the pound has to devalue to correct the excesses of the Brown years.

Nothing will happen instantly, but when it does the correction will be sharp and painful.

Gordon I am afraid you are not Flash … only a flash in the pan … unfortunately, the flash that burnt the “fish fingers” granny was going to have for her tea … as there was nothing left in her piggy bank for anything else!

Flash is like the gambler sitting at the roulette wheel who desperate to recover his losses ventures his everything on a last roll of the wheel … putting everything down on the number 0 … no hedges no cover.

Only trouble he never told you that he had “borrowed” your grannies piggy bank as well! If it comes off he will smell of roses … if it fails it was your shirt and underpants on that roulette table.

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