Financial Crisis Part II: The Present
In the economy money is for consumption or investment. The amortization of companies is sufficient to replace capital goods to continue production. Profits allow companies to expand, diversify or pay dividends.
The high standard of life in Western economies has created a situation where a substantial part of the population will not consume more when income increases while on the other hand citizens with a lower income would like to spend more; those who did are now in trouble.
That people and countries lent more than they could afford is stupid, but it was more stupid to supply the money. Who invented the “products”? Who supplied them the money? Who earned on giving them the money? Who refuses to pay even a part of the damages?
The present (partly) consumption saturated economy is characterized by an abundance of financial means: the USA was able to finance simultaneous two wars with loans while at the same time tax cuts were realized accompanied by declining interest rates despite a downgrade in rating from Triple A to AA+. That tells something about the high need of investors
The Federal Reserve used up all its tricks: nothing seems to help to restart the economy. The USA, Europe and others are a drift. Absurd low interest rates and immense money creation don't work anymore. Why not? Investors might have learned their lesson and/or investment banks have hard times to concoct new scams. Lets stick to reality and the consequences of the observations.
The present financial situation in Western countries is too much money to invest and debtors who must reduce their spending substantial to payback their loans. The past 20 years new “investments” meant mainly providing consumers with debt they now have to repay. Both sides of the economy, consumers and investors, are putting a lid on expenditures.
Investing in the stock market is no solution. When you buy stocks someone else must sell, so the money invested in the economy stays unchanged; a Zero Sum Game. When your savings cannot be invested it stays on your banking account and that allows the banks, because of their ability to create more money, to multiple the amount available for investments.
Investors should realize that although in the past money creation helped the growing economy that in the present situation, where not enough investment opportunities are available, the consequence will be that banks become loaded and will be desperate to concoct investments.
The economy cannot absorb the money available for investments let alone when that is multiplied; one more important argument to separate completely the pay- and saving utilities from the investment banking activities.
There is only one conclusion: a second recession is unavoidable and this time everyone will realize that a revival is not likely. The economic reality combined with the neurotic state of mind of investors and mass psychology guarantees a disastrous crisis unless politicians act.
To be continued.
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