Where did the money come from?
Before we can answer the question posed in the previous part, we need to recognise that the funds were largely the results of trading flows … those countries with exports exceeding imports have had a need to place the surplus flows in safe havens.
In this regard the bulk of these surpluses have arisen amongst the Oil producing Nations as well as the high volume exporters … China, Japan, and South Korea etc. These trading flows still continue in spite of the “Credit Crunch”. Only they are not flowing into the USA and UK at the same rate as before … mainly because it is perceived that the continually increasing deficits of the USA are not sustainable and the Dollar must collapse. A similar perception is held about Sterling … which has in fact devalued by some 20% against the Euro over the last 18 months.
Can we realistically expect foreigners take risk on us, when we demonstrate a singular inability to manage our economies? A little, like Northern Rock and HBOS expecting other banks to continue lending them money when their business practices are perceived to be risky.
While the politicians happily blame a credit crunch for the ills that beset our economy, waving their arms and saying, “it is a world wide phenomenon … beyond our control”. If we look at it very closely we see that the real hurt has happened to USA and UK. Have there been failures around the world in any of their major banking institutions to the extent that government has had to bail them out? Yes, stock markets around the world have gyrated as they consider the effects, on their export led economies, of a USA recession. Most countries in the world are very dependent on the USA consumption led economy.
I think as far back as Roman Times we have known that “printing money” creates inflation. (In Roman Times they discovered that debasing the coin by making an alloy to reduce the amount of gold in the coin resulted in traders charging more until they received the same quantity of gold … albeit a lot more coins).
Most of us don't actually understand what money is … it is simply Debt! The Ten pound note in your pocket is just an IOU from the government … “I promise to pay the bearer on demand”. Traditionally a countries levels of debt were controlled by the government and its Central Bank, this is what budgets were about … how much the government was going to borrow and increase the money supply. The Central Bank would then even out the fluctuations in the market by open market activities … selling or buying government bonds in the open market.
In today's world things have moved on … Gordon Brown in the UK completed what Margaret Thatcher began in 1979, by giving the Bank of England its independence and charging it with the obligation to limit consumer inflation by use of monetary policy. No longer would the government play with money supply. Margaret Thatcher and succeeding Governments had attempted to maintain control of money supply within the UK economy, so thus while exchange control had been abolished there was a degree of political risk as the government might sterilise the effects of large inflows of cash.
We have seen emotional media coverage about the activities of the hedge funds and their short selling.
But where is the blame?
Continue to part 4 ?