The Running Commentary

Economically speaking

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Many of my regular readers have asked whyI have not posted about the current financial crises that the globe is facing. I must be quite honest and say that my focus in terms of this blog has generally been on South Africa and the South African population. Not that this has not affected South Africa, but rather that I has chosen to focus on South Africa only, in the past.

I have typically focused, as many of you will know, on our MPC and their decisions and also given much advice about getting rid of your debt and how you can go about that.

Below though my views on the current crises….

The current global crises is one that eventually will sort itself out, this is the nature of capitalism. The reason this is bigger than any other crises we have faced, is that from an evolutionary point of view our creation of wealth and therefore debt has evolved to new levels.  We have over engineered the way we created debt and investments.

In the past we lived in a house and we were told to clear this debt as soon as possible, it was always a type of an asset, but one that folks viewed as a home. The reality today is, that through clever marketing, people were persuaded to “make this asset work for them now” as opposed to later. Folk effectively fell for the banking hype and began using their home loans as ATM’s, drawing “capital” out of these to fund a lifestyle they had not yet achieved.

This then drove the banking sector, who were making billions from these deals, to look for further avenues, enter the sub-prime no income loans, where effectively homeless people were given loans they would never be able to repay. These toxic loans were added to good loans and repackaged as “shares” which were given as collateral from one lending institution to another, for loans.

The banks now no longer trust each other and hence the credit crunch, capital is locked up in the system and is no longer flowing. The very thing that drove the “wealth creation” has effectively come to a grinding halt. 

I think you get what I am saying, banks drove unsuspecting home owners to live a lifestyle in the now and dropped the need to “save” for something in the future. The next step was to shore these loans up and this created the sub prime crises, this in turn has given rise to the financial crises we are now facing. Effectively what we are going to see is a correction to the “old ways”, people will drop their credit lifestyles in favor of a cash based existence.

We were already, as South Africans, being taken down this road, from the start of 2006, when the MPC first began to increase interest rates. I think that as South Africans we can be really pleased that this was the case and that we had legislation such as the NCA.

Initially when I first started talking about the South African scenario, in April of this year, I said that if you cleared your debt and held on, we would need 12 to 16 months to get through it. We thought that, after the Investec report on the calculation of CPI, that this may have come down to 8 to 12 months.

With the current crises, we may have to push back out to the 12 to 18 months, before we see the system start to show signs of a re-bound. This global recession, and it is a recession, will keep hold of us for some time, nowhere is going to be better off than the other. We may see some places might be slightly shielded, but we are all going to be affected by it.

The central banks of the world are needing to stabilise the scenario and I think that sanity will return and the markets will stabilise. This however does not mean a turnaround. Tighten your belts and try to live off cash, don’t stop investing, if you have cash, as you need to plan your future. In fact if you have cash, go against the trend as the market is full of really cheap shares right now and you will get massive returns in the medium to long term. Just be sure to pick them well.

I am only a “couch economist” calling it as I see it. Capitalism will always win in the world that we live in, but it is a hard task master that will cause many to fall, as it has shown now. Let’s see where we go to from here………..

Capitalismcentral bankseconomic policiesFinancial crisesinterest ratesNCAstock markets

Mike • October 13, 2008

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