Friday, June 8, 2012

Let us talk about the crisis

Let us start with the obvious. People are wondering whether the current financial crisis will continue or fade away. And more importantly, when?

There is no right or wrong answer. First, we must contemplate whether we have the right information to even begin considering an answer. I do not think we do.

There are so many variables that can affect a National economy and even more in the case of International economy, that we cannot come up with an answer. We can make educated guesses, but anybody's guess is as good as mine. Does that mean that we should receive the news about the recession in a passive manner? Well...no! But for God's sake do not take what other people are saying for granted.....INVESTIGATE.

Did we see the recession coming? Well, yes we did. We knew it was coming, but we did not know when it was going to hit. In retrospect of course everyone becomes a prophet. "I knew this was coming" or "I told you so" are some of the common phrases that are thrown left and right. Don't even get me started on the politicians. These are the same people that have been amassing millions of Euros in budget deficits over decades.

But if you are borrowing money to survive, guess what? The time will come that you will have to pay the loan back and if you fail to do that, then the lender will stop lending. How many countries have a balance of payments deficit? The vast majority of them.

The other problem with borrowing is that every time a bank gives a loan, it creates money. Take a simple example. Suppose a person walks in a newly established bank and deposits 100 Euros. The bank in order to make profit, it will need to lend that money to someone who requests a loan with a higher interest. Suppose now that you are that person. You are approved for a loan of 100 Euros and the bank deposits that money in an account that was set up for you. Remember there is physically 100 Euros in the bank yet now, both you and the original depositor have a claim over the 100 Euros. In a sense the bank created another 100 Euros from the original deposit.

Now imagine this on a larger scale involving countries and governments. This money that is created is simply imaginary. It does not really exist. When the depositors and the borrowers ask for the money at the same time the banks suffer from liquidity problems. Simply put, there is not enough physical money to go around. Boom....recession.

So do not listen to politicians or investment advisers who think that they know everything. They know nothing. They know what we know. We are currently in a recession, the economic indexes are on the decline.

Will we survive? Of course we will. Just hang in there. The recession is part of the business cycle. Better days are coming, we just don't know when.

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