Why the Credit Crunch Matters

I just added London Banker to the blogroll…

This is an excellent summary of why the global credit crunch will sooner or later unleash havoc if the powers that be cannot get it under control again.

If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn’t go to the refinery, there is no plate steel. If the plate steel doesn’t get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don’t buy. If the consumers don’t buy, there is no Christmas.

Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

Fiat currency is attractive to governments because it is based on nothing other than goodwill and a firm belief that it is worth something more than a scrap of paper or bytes in a database.   If need be the supply can be expanded more or less at will, and it can be contracted again for a variety of reasons.    This ability to create cash out of thin air becomes addictive to large governments, as our burgeoning national, state and local government debt loads can attest to.

The dark side of the ease with which we create money is that it is a debt that needs to be paid sooner or later.   Greed causes men and states to issue more & more money.   Creditors start to wonder how likely they are to be repaid, and how much those funds would be worth.  Trust erodes, credit dries up, and the system starts to experience stress.   As London Banker points out, this is a somewhat abstract concept when it revolves around Wall Street gaining or losing a certain number of points on any given day.  It becomes a lot more concrete when you start wondering how you’re going to feed your family or pay the mortgage.

President-Elect Obama appears to be signalling that he’s preparing to flood the monetary system with liquidity if necessary to jump-start the economy again, much like FDR did back in the 1930’s.   Whether that would work or not is a matter for discussion.  I personally have my doubts, but I’m no expert when it comes to such things.

Some commentators are already starting to call a bottom for the market.  I think it’s way to early for that, personally.   Maybe I’ll ask Santa for some 50-pound bags of rice…


2 Responses to Why the Credit Crunch Matters

  1. Rebecca says:

    You might want to ask for some dehydrated veggies too. Man can’t live off rice alone!

  2. Jim says:

    This post highlights the frightening chain of dependency built into our system. This chain has worked well for us in the oil age, but I have a feeling we’re going to see its shortcomings soon.

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