Tuesday, November 25, 2008

You can't rely on borrowed money alone

I like this mess. Everybody is scrared, screaming, clinging on to cash, not understanding what the hell happened. Well, reality struck back.

For the past 20-30 years most of the "gain" of economy has been built on borrowed money. Companies borrowed more in order to increase the ROI. Private persons could borrow more and more as the value of their housing rose and the credit in general became available everywhere. Why not by a 42" plasma TV, I don't need to pay it until next year! Why not buy a car, the bank is willing to give me the money!

This is not economic growth, this is living on money that does not exist. Well, sure, right then you could have made a fortune selling your house, but you never did. So did that money ever exist, really? I'm not going to go as far as some left-wing people claiming it's all fake money, that most of the money we see is not real. Look at "The truth about Central banks oppression" and "Failing monetary system" for some loony examples. But sure enough, they have a point, after all.

You can't rely on borrowed money alone. As long as everything goes well it's not a problem. But since much of the value in the system actually isn't real (somebody says your house is worth a million, but if you don't sell it, how do you know?). The bank trust you to borrow a certain sum of money only because they think you could get that much for it if you sold it. But if they suddenly, for whatever reason, don't believe you can get it, you're in trouble. Because the whole system relies on trust. There used to be silly amount of trust, banks etc were just throwing money at you. But now suddenly there is no trust left at all. Not anywhere. But has anything really changed? No.

The only thing that happened was that the trust died. Well, it didn't die totally. After all the whole monetary system is based on trust, so if the trust totally died money would be worthless. We'd be back in a barter trade system. Now, that would be a disaster!

We're nowhere near such a disaster, though. We only see a correction of the values, down to more reasonable levels. Finally!

No comments: