Are we in the middle of a "Great Crash"? Better the middle than the beginning.

It is easy to change the financial system, I argued in my May 20 essay. The central banks can assemble on any Tuesday morning and announce tougher lending standards. But it is impossible to fix the financial problems that arise from Europe's senescence. Thanks to the one-child policy, moreover, China has a relatively young population that is aging faster than any other, and China's appetite for savings vastly exceeds what its own financial market can offer.

There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

The world kept shipping capital to the United States over the past 10 years, however, because no other market could absorb the savings of Europe and Asia. The financial markets, in turn, found ways to persuade Americans to borrow more and more money. If there weren't enough young Americans to borrow money on a sound basis, the banks arranged for a smaller number of Americans to borrow more money on an unsound basis. That is why subprime, interest-only, no-money-down and other mortgages waxed great in bank portfolios.

As always, proper understanding seems to hinge on demographics.

Also note that Spengler wrote this a couple of days ago, presciently predicting the collapse of AIG.

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