Wednesday, 8 October 2008

Goodbye Grapes of Wrath, Hullo Weimar Republic?

OK: so the government has part socialised the banks at a cost of £50bn. They've also made £200bn available as short-term loans in an attempt to thaw the frozen interbank lending markets, with yet another £250 bn on offer as guarantees.

In other words I think my family of 4 has just spent c£3300 to acquire a minority stake in some insolvent banks, loaned these same banks a further £13200 or so and suggested that if they pay me some trifling fee I'll insure them for another £16,500 worth of deals. Always glad to do my bit for the nation's economy.

Oh - and there has been a globally co-ordinated interest cut - here, in the States the Eurozone, Canada, Sweden and Switzerland. (Presumably Japanese interest rates are already so low it doesn't matter.Money is now cheaper, worldwide.

The immediate indications are that markets are now rising in response. But will they stay that way? The debt is still there: there is simply more money than underlying assets. A sea of money has come crashing into the market to try to make people forget about it. But will it work?

Let's be clear about what 'working' might mean: this is a massively inflationary move. The value of the debt will be diminished by an inflationary growth- as will savings of course. Not to mention wages. So 'working' means the City gets its' money back and we all embark on a re-run of the 1970s. But it might not work- in which case we'll still have the inflation plus a depression. Now that would be nasty.

It's not over yet, I can feel it in my bones. The markets may stall, there may yet be a bank run. There were significant ups and downs during 1929, and we'll see them again. It's still pass the parcel and it's not yet clear who is holding the debt...

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