As the ends history unfold itself, where will humans be? Will we have gone out to claim and colonize other planets with peace among our fellow humans? Or, will we be wiped out because of our own reckless stupidity? The longer I’m alive, the more convinced I am that we will be the end to ourselves. A biology major studying nature would learn the complex and delicate balances of sustainable life on this planet. For us humans to grow and mature as an international society we all have to realize the mistakes we have made in history and to never repeat them again. We apparently suck at this. The current economic backdrop will show that we have failed miserably. Its great how Ben Bernanke is our current FED chairman since he is the expert on the Great Depression. Its not so great that Alan Greenspan Fed Funds Rate (FFR) from 6.5% to 1.0% during 2001-2003 and allowed credit to flow freely. So banks lent away, and consumers borrowed and spent away on new homes. Now we all get to see the wave of idiocy (from money strapped citizens who like to buy houses they can’t afford to the former Fed Reserve Chairman) crash and destroy us all. Bernanke has tried the best he can in trying to prevent this all from happening, but its not in his hands at this point. Although Bernanke has tried to make plenty of money available to banks for lending, they cannot force them to. The banks don’t want to lend money they think they’ll lose. Individuals feel the squeeze and are cutting credit and so businesses get backhanded twice from consumers not spending with their credit cards or their cash.
Our biggest threat: Deflation
Deflation could be described as falling prices across the board. Inflation is zero. Stores and services are selling everything cheaper to attract customers, customers want to hold their money, banks aren’t lending despite the amount of dough the government gave them to sit on, pretty soon those customers are losing their own jobs since no one is buying from their company. The jobless rate is 8.5% the highest in 25 years. Check out the heat map from Slate to see it how much trouble we’re in http://www.slate.com/id/2216238/ Deflationary spiral, here we come.
How could we ever fix this? When the Great Depression occurred, we got out primarily because of WWII; the New Deal was a bit of a temporary bandaid for us. But what was added to legislation to prevent it from ever happening again? The FDIC, and the Glass-Steagall act. With the passing of time, regulations to prevent capital markets from becoming violent were unravelled. Glass-Steagall was repealled in 1999. I guess one real way of getting banks to lend is to stuff them with money, let them to bid up the prices for the empty houses they are holding, and hope that not marking to market makes a real difference. Guess what? Not everyone is a fool. This accounting method is basically illusionary. If you’re not selling something at the price others are willing to pay for it then why are you selling anything? Banks are just gonna buy between themselves to make it seem like the houses are worth much more than they really are. What happens when real demand picks up again but the prices are still set artificially high relative to real demand?
Our next threat: Hyper-inflation
What happens when everything actually gets better? At first everything will seem fine and dandy if Obama can effectively add the jobs we lost and re-regulate the financial system. The banks all start lending again and consumers start spending again. But what happens when the velocity of money goes from 0-100? The FED better contract monetary supply when it sees this coming or I’m 100% sure we’re all doomed by stupidity.
If the US is going down the drain, so is the world. A very real possibility is the use of SDRs (Special Drawing Rights) from the IMF as an international currency. This unlikely now but much more likely if the whole world goes through an international depression. It will if the US does so, and I’m just waiting, hoping, praying that it doesn’t happen because forex trading won’t be what it is now.
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