Juggling Dynamite

I know the news seems pretty dark at the moment. There are massive protests in many parts of the world as working people rise up and push back on further download of bank manufactured debt on to the proletariat. But I think things may finally be moving in the right direction here.

The UK who is leading in budget cuts and austerity is now saying they are looking at ways to separate the retail banking sector from investment banking, shades of Glass Steagall. Good. Irish leaders are saying the senior bond holders are going to have to share in losses. Good. Greece is saying the same thing. Quite right. In the US there are movements to cut spending, reduce deficits, increase capital requirements for banks, hike margin requirements for commodity traders and curtail high frequency trading. All good and necessary steps towards solution and genuine recovery from the train wreck of the past several years.

The message building around the world is that politicians who continue voting in favour of the bank lobbyists will lose their power as the people revolt and toss them out repeatedly.

The consumer has been forced to see the light, and now they have. They are not coming back to gluttonous conspicuous consumption on credit any time soon. We must face facts. The changes we need to make to the financial system today will retard growth. It is crucial to accept this as part of the necessary treatment for the credit plague. We must cut out the credit cancer in order to recover and this will necessarily leave a hole in the economy which was running on credit-juiced artifice the last several years. Real sustainable demand is lower; we must deal with facts and not keep hoping for the excess of yesterday.

Acceptance is key to recovery, because then we stop fighting the inevitable and get on with the solutions. We will clear excess supply of homes by selling them cheaper. We will clear out the packed storage units all over the world by auctioning the contents off for pennies on the dollar. We will clear the backlog of foreclosures, as we did in the Savings and Loan crisis, by people with cash bidding on piles of envelopes of mortgages presently mounded on the desks of overwhelmed lenders. Investors will find value again in stocks once they are marked down to reasonable valuations. All of this is inevitable and healthy. The world is hung over from a massive credit party, it is time to sober up and clean up the mess.

This clip of Robert Schiller offers some important insight on where we are and how to move forward.

Spending at home is part of the solution to correcting massive trade imbalances between the west and the developing world. Yes it will mute global trade. Many argue this is the wrong response. I think it is inevitable.

I liken it to a typical family or company that has been through a period of big and easy money who then experience a downshift or persistent contraction in cash flow. At first they may try to keep spending as they were, but eventually they will suffer much stress and fear and go bankrupt or, they will start to change their habits. Sooner or later they will start to cut their own grass, clean their own toilets and repair and recycle equipment in house. They will learn to live on less and they will get much more efficient with the cash flow that they do have.

In so doing, they will work their way out of debt and out of financial distress. They will learn to compost capital into their own economy rather than spread it everywhere else. If the crisis lasts long enough, their behaviour will forever be altered–for the better. In this way the experience will be life altering, and serve their financial health for the rest of their existence. An economy comprised of people with strong fiscal health and discipline is a strong, resilient economy.

This clip on the legislative proposals being made to reign in speculation in basic commodities is also inevitable and necessary to restore health to our financial system.

Those who are trying to lead us back to the destructive habits and policies that created our current financial crisis must be over ruled by reason.

Lakshman Achuthan, co-founder and managing director of the Economic Cycle Research Institute, sees a long, drawn-out slowdown ahead for the U.S. economy, including more sluggish jobs growth that could be around for months to come.