Bubbles
Can you remember when we were children and our fascination with bubbles, how with a little puff of air these magnificent globes of suds would appear and hover in the air; then slowly they would start to float away on the current and bob around mesmerising us as the suns’ rays changed their iridescent colours through the spectrum of the rainbow.
The bubble would then gain speed as it floated away until it met a solid object and burst or as it gained height and the air pressure changed it would expand exponentially and burst showering us with miniscule amounts of water that vanished rapidly.
This is what is happening now with the global economy, it has become one huge bubble that is going to burst in a catastrophic way and bring ruin on billions of people.
We have seen a number of small “bubbles” burst in the last 20 or so years; such as the DotCom bubble where investors ploughed millions into companies that just produced software but had no assets to back up the share price; granted some of these companies are still around and making millions in charging for a service that we all use, but most of the DotComs went down leaving investors holding shares that weren’t worth the paper they were written on.
We also saw the bubble created by the banks in packaging up bad debt and selling it on as an investment; debt that had no chance of ever being repaid. Added to this was the trading in derivatives on goods or minerals that may or may not be produced in 5 years’ time. We all know the results of this and we are all suffering the fall out.
Despite this there is now another bubble that is growing bigger than any of those in the past. It is once again growing from debt and no return on money.
This time however the central banks are to blame; central banks that take their lead from governments and politicians.
Central banks are responsible for setting the base rates in individual countries taking into account the country’s financial state and its requirement for money on the global market. Since the economic downturn central banks have been keeping individual base rates artificially low to enable more borrowing in the hope that more money in the economy will stimulate growth and speed up the recovery; added to this central banks have introduced “Quantitative easing” which in itself is not a bad idea.
The result of introducing Quantitative easing coupled with low cost borrowing should be to make that country look more attractive for investment as it is offering something others countries are not as in low rates and a devalued currency without actually devaluing the currency. However since the introduction of low rates and Quantitative easing many other countries have done exactly the same thing, which can only lead to everyone still on a level playing field and the status quo remaining the same.
Low borrowing rates has lulled too many people into taking out loans that have stretched them to the limit. We are once again being chased by many deals to “buy now and pay later” regardless of how repayments will be made should there be an increase in the interest rate.
This type of reckless lending is creating a massive lending bubble that will eventually burst.
On the converse side we are seeing many people, primarily pensioners, who have saved all their lives for their retirement only to find the return on their investment has been decimated and any saving they have is paying a paltry rate of less than 1%.
With such a low return on savings people have to “dip” into their nest egg to survive, which in turn reduces the amount of money available for banks and investment companies to invest in industry and growth; which will kick start the economy and generate real wealth and stability.
With interest rates so low people can see no benefit in putting money away “for a rainy day” or to invest in a pension; especially as every pension scheme seems to end up being robbed by various chancellors in order to raise money, under the pretext of robbing the rich. Instead people are spending on material goods and frivolous items, mostly manufactured in the Far East; so benefiting their economy rather than ours.
This world debt is growing completely out of control with every country owing unimaginable amounts of money to the country next door, unlike the banking debt where a default would lead to a bank declaring itself bankrupt, we now have the certainty that countries are going to be declared bankrupt. Which in turn will bring many other countries to the brink of default and bankruptcy.
This time the bubble is being controlled by the central banks, governments and the bureaucratic machine behind them; like most things run by governments their experience and knowledge is limited.
At the same time we must have some sympathy with the central banks as they are sailing between Scylla and Charybdis; on one side they feel obliged to protect home owners who have a mortgage and cannot afford an increase in loan repayments because they have borrowed up to their limit and on the other side are investors who need a return on their money to live before they too have to borrow thus increasing the lending bubble even more.
Should Britain decide to exit the European Union the bubble will be put under so much pressure, because Europe relies on the UK’s contribution, that it will burst resulting in world-wide monetary Armageddon.
The only solution must be to reduce debt and increase saving and this can only be achieved if interest rates rise slowly but in a controlled way, rather than across the board; starting with new lending. This will not put pressure on those with existing mortgages but will allow those with money to invest to get a return on their money that they can then reinvest or spend.
