Year 9-12
Remember Dr. Henry Kissinger former Secretary of State under President Richard Nixon? Even today when this esteemed diplomat speaks, the world listens. Last week he stated that we, as a global community, either solve our problems together or, failing that, court disaster.
President Obama in his inauguration speech voiced a similar message.
The harsh truth is that we, collectively as the world’s inhabitants, are broke, insolvent, unable to make ends meet. That, in short, is the predicament we’re in. Liquidity, access to ready cash, has melted away in spite of governments everywhere pumping in dollars, pounds and euros, because the minute they do, these moneys vanish in the quick sand of debt.
Here’s what triggered this money-drowning affair: both borrowers and lenders assumed that real estate, stocks, tangible assets would always go up in value or at least remain stable. So people bought stuff and then some, and banks loaned money and then some, using the stuff as collateral, when, suddenly, the Black Swan of deflation dived down to destroy this delusionary dream.
Now everything is over-valued, and many loans are no longer covered, so banks don’t know where they stand. That’s why, until they determine their real value, if any, they – the USA and Great Britain in particular – have suspended lending. Fortunately Canada never went overboard that way.
Lowering the interest rate to next to zero and pumping trillions of dollars into the lending bodies makes the problem worse, because all that cash is simply sucked up in the black holes of foreclosures, overvalued collateral, corporate bankruptcies, and public deficits, simply postponing an even greater reckoning.
I have read that these so-called ghost assets now amount to $30trillion (US). By trying to salvage these ‘investments’ governments are choosing short-term band-aids over long-term solutions.
Here’s a personal illustration. I gave a person a small loan, even though I was fully aware that it would never be repaid in full, because economic conditions would make that new activity unprofitable.
The banking world did the same thing, but with a difference: it did not expect, of course, that this money would not be repaid. I could afford the loss, but the banks cannot, because they kept on lending and borrowers kept on borrowing assuming that in the end matters would rectify themselves, because “the future will always be better”.
That assumption is now proven false: the banks have run out of money and the borrowers can no longer repay, thus both parties to the contract are broke: the global financial system is insolvent as liabilities exceed assets.
That’s why banks are hoarding their cash while anxiously scrutinizing their balance sheets, trying to figure how much deeper they will go in the red. They perfectly realize that all aspects of real estate – the McMansions, the office towers, the shopping malls, hotels and warehouses – are still dropping in value, while consumer and car loans and credit card debts are also deteriorating.
The banks are not entirely to blame. They were also fooled by the rating agencies – Standard & Poor’s, Moody’s – that gave liar’s loans triple A recognition. Nevertheless the buck stops at their doors. Now wonder bankers everywhere, from Tokyo to Beijing to Saudi Arabia’s Riyadh to New York and London, have sleepless nights.
To make matters worse, customers all over the globe are canceling orders or stop buying, in spite of discounted prices, while governments world-wide face higher deficits and possible bankruptcies. Russian billionaires are begging the Kremlin for help, and even some wealthy investors commit suicide, as if the possession of money is a matter of life and death.
So what is President Obama going to do? Follow Kissinger’s advice? There were hints in his inaugural address, while his promises of telling the public the true state of the economy, even when it hurts, is a healthy development.
In front of me where I am writing is a batik which I bought in Malawi. It pictures three colorfully dressed women pounding away at corn in clay pots, while a flock of chickens roam around them pecking away at the scattered grains.
These hard-working Africans are closer to self-sufficiency and a responsible life than we, spoiled and spoiling westerners. Henry Kissinger is right: we either solve our global problems together including with our African neigbours, or court disaster. President Obama in person embodies that message of inclusiveness. I am sure he will reach out to Iran, Cuba, China and Russia, because only when we together as world citizens are bailing to keep the global economy afloat, will we succeed.