1934

http://www.businessspectator.com.au/bs.nsf/Article/Panic-has-become-all-too-rational-pd20120606-UZ2P6?OpenDocument&src=sph

 

Please find above a link to Martin Wolf's article covered in Business Spectator.

In this article Martin makes the following statement:

"Before now, I had never really understood how the 1930s could happen. Now I do."

 

This blog in heading towards its eigth year and I suppose I should comment on this statement. Martin seems at a loss to explain how poor decision making is leading inexorably towards disaster.  Unfortunately, as this blog has long maintained, this disaster started in the 1990's just as the previous one started in the 1920's.  The irresponsible expansion of money supply led to this situation.  This increase in money supply led to an expansion in credit.  The expansion in credit led to inflation, not in CPI's (largely) but in asset prices, like Spanish real estate or US shares.  As the asset values increased so did the apparent collateral to support the underlying debt.  In many cases this increase in asset values was realised as income and cashflow funded by the debt that was borrowed against the asset value.  This occured at many levels.  Individuals borrowing against their houses and spending the surplus from thier refinanced mortgages, and investment banks refinancing infrastructure and property and distributing the refinancing gain to equity investors.

Now the magic roundabout has stopped.  Now we all get off and now we begin to understand where we are:

• Unemployement in the teens and twenties.
• Wholesale collapse in asset values.
• Both governments and systems of government collapse.
• The rise of totalitarian states to replace weak democracies as people seek to blame anyone but themselves.  Greece may be the first.

The cycle is repeating itself.  Welcome to 1934.