Thursday, January 24, 2013

Global Economy
The Disease in 8 Points and 
The Cure in 4 Points
Charles Hugh Smith (AE) explains:
The Disease:
1. Creating and selling credit and leverage became far more profitable than generating goods and services. Financialization--expanding highly profitable credit by leveraging assets and income to the hilt--began in earnest in the early 1980s.
2. The financial sector captured the regulatory and political mechanisms of the Central State.
3. Financialization incentivized speculative credit bubbles. Speculation reaps huge rewards as the bubble expands, and the economy becomes increasingly dependent on ever-expanding debt for its growth, income, profits and taxes.
4. The only "cure" that doesn't cause political pain is to lower interest rates and flood the economy with liquidity, i.e. cheap money, to reinflate a new credit bubble in another asset class.
5. Speculative credit bubbles (neoliberal or command-economy) led to systemic mal-investment and mis-allocation of capital.
6. The Central State and Bank responded to the popped speculative credit bubbles by recapitalizing insolvent banks with taxpayer money (or claims on future taxpayers, i.e. bonds) and legitimizing phantom collateral/assets.
7. The Central State and Bank attempted to repair the speculative credit bubble machine by diverting income from the productive "real" private economy to the parasitic financial sector and politically powerful but grossly inefficient cartels and State fiefdoms.
8. The demographics of an aging population and shrinking workforce cannot support the promised entitlements and other State spending.
The Cure:
1. Re-take the regulatory and political machinery of the State from the control of the financial sector.
2. Mark every marketable asset held by every financial institution and corporation to market at the close of each day, including mortgage-backed securities and real estate. This will reveal the "too big to fail" banks around the world as insolvent.
3. Liquidate the insolvent banks in an orderly fashion by auctioning off all of their assets on the open market. This will eliminate the shadow inventory of housing and expose phantom collateral.
4. Relieve the State of all obligations other than being an impartial enforcer of transparent markets, open competition and common-sense regulation to protect the common good and public commons.
LINK HERE to the essay

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