It is said that the current financial crisis is the worse the world have seen since the last depression in the 1930. So it is not surprising that big problems requires big effort to deal with them. The problem then becomes even bigger in itself when the effort turns too drastic.
The world greatest printing machine
A special report was published on cnn website sometime in early December 2008 that summarised the amount of bailout money US allocated and spent. The table does not include the recent auto industry bailout. At the time the report was published, 2.6 trillion USD was spent, out of 7.2 trillion allocated. On top of this, the coming US president, Barack Obama, is currently putting together an economic recovery package, possibly amounting to just under another trillion USD. United State’s current account deficit is now about 700 billion USD, or 4.5% GDP, according to the latest issue of The economist, dated January 3rd-9th 2009. And the US government budget for 2009 is projected to be a deficit of USD 1.2 trillion, or 8.3% of GDP!!
One of the reason US can continue to borrow and spend is because they borrow in USD, and pay back in USD. Unless the creditor countries such as China and Japan stop lending to US, there is virtually no disincentive for US to print ther way out of this crisis. The lending will not stop, China and Japan (and other export oriented economies) lend to US, so that US can continue to consume their exports, a ‘win-win’ situation?
This is like running a business, and keep selling to clients on credit. The business keep recording rising profit (foreign exchange reserves) year after year, and the credit (receivables) snowballs. The only difference is the client do repay one day, by printing money.
Thus, its either everyone will be millionaires or billionaires in USD one day, or the lending stops, and plunge the world into deep recession. Either way, printing the USD solves the problem now, by creating a bigger problem later, hopefully a few Presidential elections away.
With the onslaught of credit crunch, threatening a world wide recession, global interbank rate cuts are announced one after another, chasing each another to near zero (FED and BOJ), short of borrowing for free.
The following links shows the global interbank rates changes for 2008 and 2009:
FED at 0-0.25%, Bank of Japan (BOJ) at 0.1%, Bank of England 1.5%. Sooner of later, European Central Bank (ECB) will cut rates too. While warning of potential global recession leading to a wide spread deflation, the aggressive rate cuts is just setting the ground for hyper inflation many years later.
The current credit crunch, due to the over paranoid banks unwilling to lend for fear of losing a single cent more than losing business, will not see cheap money flooding pockets any time soon. But once most of the market excesses have been cut back, restructuring completed, scaling back done, business projections brought back to earthly expectations, really cheap money will start to flow. People will start to borrow to spend. Business will start to borrow again to expand to meet demand. The problem will be back, with greater vengeance. Read more…