Why the USA bailout plan won’t work.

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Many of the studies, graphs and data I have produced in previous articles have been about explaining away the financial wizardry that tries to show in this modern age that we can spend more than we earn indefinitely. Financial systems become more and more complicated because the system is flawed, more and more creative methods are design out of necessity to keep the system going. (Necessity is the mother of bad invention in this case)

Signs of the debt money system failing:

Borrowing short and lending long
Many finance companies were created out of necessity as normal lending institutions would not lend to ventures who were seen as risky, if they were too risky that should have been the end of the story, but then out of “necessity” and greed came many finance companies.

Derivatives
These were created to justify the unjustifiable, to cross-insure bad investments, to spread the risk. But since the derivative market is larger than the entire worlds economy many times over, derivatives are futile attempts to continue unsustainable lending and do not take the big picture into account
An analogy would be:
A group of bankers who are on an iceberg in the pacific ocean notice the iceberg is melting, so they all write contracts to each other saying that if one falls in the water the others will save him…but the end will be the same, as they are all in the same position in the big picture so cannot save each other.

Government bailouts.
Long term these will not work, these are about saving today and forsaking tomorrow, (like the above two points)

Government bailout’s make bad debts look like they don't matter and can just be replaced with "Good government debt", but this is not the case. The best way I have found to explain this and other efforts like this to friends and family is to say: You can't have debt not matter, yet have money matter at the same time. Ether they both don't matter or they both do, they are one and the same. Why work to pay off debt if it does not matter? How can bad debt be replaced with good debt? Where did the bad debt go, where did the good debt come from? That's what I say to people who ask, the next level of explanation is that by swapping bad debt for good, that "Good debt" had to be created, so that has expanded the money supply, and that expansion necessitates larger interest payments, so this will actually accelerate even more need for debt. (The US is in trade deficit so it can't come form anywhere else, same goes for New Zealand)
Also dangerously bail-outs are like throwing good money after bad when re-investment and re-building are required after a crashed economy, there is none available as it was wasted trying to save what was not savable.

Confidence will save the economy.

This point defies logic and is akin to broken window economics.
We often hear on the main stream media that “people are talking about the “D” word” as if you mention Depression it will happen through self confirmation, this may well be a trigger but the damage is already done, confidence will only delay the inevitable longer and make it far worse as mal-investments continue to be made.

Here is an analogy for confidence based economies:
A man without a job gets a credit card, he spends but has no income, he gets charged interest so now actually has a negative income. But he is very confident about his future so gets another credit card with a bigger limit, so he can buy goods while doing nothing productive and pay interest on the other credit card. He is still very confident, but eventually the credit card companies cancel his cards and seek to retrieve the damages, he is still very confident about his future but yet he is now homeless and staving.

It seems ridiculous to have to state the above but that is what we get told, if we pretend its not happing then it won’t happen, reserve banks often talk about "managing confidence", these are dangerous words, and show it is about maintaining an illusion rather than something real.


New Zealand has the same problem as the guy with a negative income living on credit. We have had current account deficits every year since 1973, all those combine deficits have not gone away they have compounded and built up. In my own studies I have proved that, just to show myself that logic still works, I should not have needed to do that, it is basic logic, but we keep hearing that it will be OK, but it will not be OK. As a country we must sell more than we buy otherwise we will go broke, no matter how confident we are, end of story.

This is not just a US problem, we have a major problem here also, a very similar one. We are in trade deficit and have been so for 35 years, and its getting worse as our interest payments increase on that building debt.

Please be carful about where savings are, NZ banks will fail this is guaranteed if New Zealand does not become trade positive very quickly. Personally I can’t see that happening anytime soon. Not believing something like this could happen because it is too bad is a dangerous state of mind. The warning sign are there to plainly see.

Take care all.

Yours faithfully

Andrew

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