Saturday, January 31, 2009

How stimulating..............not

The current decline in the world economy became most obvious to the general population in the third quarter of 2008 highlighted by one of what were to be many milestones in the decline, the collapse of Lehman Brothers. 

Subsequent to the Lehman failure each new day has seen a new financial horror of one sort or the other delivered to us by CNN, Bloomberg, the BBC  World News or one of the other media who now, were it not for the world financial crisis, have very little to report, given the end of Bush, the beginning of Obama and the winding down of the Iraq fiasco.

The roots  of the current fiscal malaise are probably much deeper than we either know or care to acknowledge. For me the end of July 2008 was when it hit home when our company failed to secure financing for the acquisition of a gold mine in South Africa. Perhaps the financiers in Vancouver, Toronto and London did not like the deal, perhaps they saw a collapse in mining and mineral exploration coming. Perhaps both. 

It was only when Lehman glowed hot on the monitors in New York and London that we started to hear about national bailouts and multi-billion food packages for the world's largest banks and, famously, our international auto manufacturers.

Curious it is that the two businesses [second only to the business of government] that have the biggest captive audiences need bailouts. There is something very wrong when a bank fails. There is something very wrong when Ford, Chrysler or GM fail. Ford makes and sells the Ford 150 which is touted as the best selling pick-up in history. Banks borrow money from each other at low rates and lend money at higher rates [or at least that is theory]. What excuse can these businesses have for failure?

It is simple, in fact an oversimplification, to say that the reason they have failed is that the costs are too high. But if the costs are not too high then it must be that they are not charging enough to cover the costs as they are. It has to be one or the other. In a recent news piece we learned that auto workers in Detroit earn on average $67 per hour including benefits. Is it any wonder that these companies have collapsed. The sheer weight of cost on the roof of productivity has caused the roof to cave in. Our response is to prop up the roof with more debt. The real answer is to knock the house down and start again. There is no evidence in North America, Europe, the Asias or  South Americas that total restructuring is being considered. The experts simply cannot get their heads around this approach. Doomed to debt is where we stand in early 2009 and it is hard to imagine that we will recover or repay this debt for decades to come.

World leaders, including Barack [I prefer Barack to Mr President or Mr Obama as I feel he is such a nice guy - and enlightened - that he won't mind the informality of just "Barack"] have made a poor choice. They chose the path of borrowing and spending when the more prudent choice would have been to tighten and increase productivity through improved efficiencies. The Federal banks, the IMF and World Bank have taken us down a precarious path. In the worst case scenario is quite probable that if the mass bailouts do not work in the short term that civic action may result on a scale yet unseen. The Internet puts the world's citizens with seconds of one one another. As a consequence it becomes much easier for mass sympathy and mass action if needed. Hopefully we will not go to that place,

Hopefully the pendulum of growth and natural dynamics of supply and demand will swing our way before too long. Given that we live in the age of instant gratification however, the citizens of the world will be quick to ask 'why we could not' having been told that 'yes we can.'

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