This article will isn’t about what’s happening locally in NZ, but has more of a global outlook. It might even be incredibly boring to some, but I feel its worth reading anyway. I have an interest in economies and how they grow or shrink and why. I believe we have some very hard times ahead of us that may be more challenging than anything we may have gone through before.
Why would I say that?
Our world works on a line of credit. Most families, companies, and even countries work not on savings, but on credit.
- Families borrow against an asset, like a house.
- Companies borrow against money they hope to make in the future.
- Countries borrow against future tax payers. (ones that have not even been born yet).
In all cases, you borrow from the future to consume something today. I’m not saying that it is wrong or right but I find countries that shackle future generations with things they consume now the most distasteful.
Credit works, as long as the entity believe they will get their money back. During a credit crisis however, trust is in very short supply. Hanover Finance lent money to Bridgecorp and we know how that ended up.
Let’s not forget Cyprus, Iceland, Argentina, Japan, Portugal, Spain, Italy, and more recently, Greece.
These countries have all made the news over the last few years. The truth is that virtually every country is in debt up to their eyeballs, including NZ. Currencies that should be fairly stable are up and down like a see-saw.
Believe it or not, we were very very close to a total financial melt down in 2008. This was the result of easy money that caused a housing boom in the US. Everything went well until they ran out of borrowers and house prices started to fall. Over leveraged banks started to crumble. Only the Federal Reserves bailout (QE, or credit creation programmes) prevented banks from a domino style crash what would have swept the world.
We are seeing more and more that everyday citizens are not happy with how things are. The rich are getting richer with the expansion of credit but the poor get no benefit from that expansion as asset prices climb beyond affordability.
Can the world economy be that fragile?
Yes it can, and I believe still is. Why? No country is paying off their debt. No family likes to tighten their belt and go without the things they have gotten used to. I am no different, I love wine, going to cafes, going to the movies etc, even if I am adding it to the mortgage and paying for it later.
Greece is no different, they borrowed from the future and now can’t even make payment on money borrowed. Greece borrowed heavily from Cyprus and hopefully we can remember what happened to them. There is a point that the lender says, I might not get my money back.
Just recently, New Zealand Superannuation Fund was the first to loan money to the Portuguese bank, Banco Espirito Santo, and ended up losing most of it. Read it here.
I truly hope that I am wrong, because it’s going to be ugly. But I feel happier that I have put a warning out there and people can choose to do something.
What could you possibly do?
Two things will probably do very well but at different times. First will be cash. Cash will be king because it will be in very short supply. Credit will dry up faster than a drop of water in the dessert.
Governments will then flood the economy with money and assure us that everything is ok. This will bring a tsunami of inflation the likes of which we have never seen.
Next will be a rush to things of value like gold. There is a new way to hold gold that is convenient, transparent, held with brinks, insured, and incredibly easy to buy. It is also the most cost effective way to buy. Read my full review of BitGold here.
I’m aware my article has an air of ‘doom and gloom’, and even though it’s not a pleasant topic I wanted to raise the issue and make us all think. Taking a step back and looking at something from a different or renewed perspective can be a life saver.
I would love to get your feedback,