Hello readers of LMOM. I'm sure there are very few of these people still left, but I always found this blog to be a good place to dump my thoughts or opinions.
Today's topic, which has been on my mind for sometime now, is the current financial crisis, an issue which has been bothering us all (if you haven't started worrying about it yet, it's time).
Here's a little background information to those who has not been paying attention or just don't really understand:
*Ahem*
This world has been running on a credit system ever since the introduction of money. What is a legal tender (note)? Why, it's the promise that for whatever services or goods which has been provided toyou, you will pay back that person with that much money's worth in gold. Where is this sum of gold stored? Our national treasuries. This concept of passing down a worthless sheet of paper down as if it's the jewel of the world became quickly popular around the world. What has been a very practical means of transaction was soon taken advantage of by leaders and financially influential people of the world. They started increasing the worth of money when they really didn't have the gold to back up that claim.
If everyone in the world decided to buy back gold at the same time instead of holding on to our money, we would soon find ourselves extremely short changed. The influence on the worth of our money has been slowly evolving and adapting to the changing demands of the consumers (us) and the dealings of business around the world.
No longer solely influenced by the amount of gold a country's treasury has, the price of the dollar has been inflated slowly but surely.
This, my friend, is the credit system.
Does it sound unstable? Well that's because it is. As more demand for a certain country's money increases, their money's worth also increases, just like the stock market; and if demand decreases, the opposite happens. This system can be easily taken advantage of by the richest people world, making them even richer... And it has been! Take a look into the Asian Financial Crisis in 1997.
(I'm not exactly sure if I'm completely right on the above and if you wish to correct me, please do so in the comments section.)
But that was just a short prelude to what I'm about to tell you.
Keeping this in mind let's turn our eyes back to Wall St.
Wall St. has been funded under the credit system where you borrow money to make more money. Doesn't this sound stupid, sounding like the theory of perpetual machines? Well, no, a smart person can take advantage of this and become really rich, and the dumb person will make a poor financial decision equal to the degree of the rich person's financial success, balancing the equation (not every single person can be rich at the same time, and ultimately, there are way more idiots than there are geniuses). But this has just always been a floatsam economy (not a real term, it was made by me), where everything looks steady and firm on the exterior, but will surely break apart or float away one day.
Here's the problem with the credit system. When the financial situation is good, it will function, and it will keep improving. But as soon as the economy hits one hiccup, we could be facing complete and utter failure. Sure things can seem alright in the present, but a problem will come one day, and no one will know when.
As soon as there is enough bad finacial news in the media, some people will abandon their stocks and cease to spend more money, because of this, the demand for stocks decrease, and the price of stocks drop. As soon as there is a slight drop in stocks plus the negative news outputted by the media, more people will start to sell, letting bears (people who either believes or wishes for the stocks to decrease in order to make money or just lack market confidence) overtake the market. If the news isn't bad enough, bulls (opposite of bears) will believe that market will make another rise, thus, restarting the cycle.
But what if the news is really bad?
That brings us back to what happened in 1930.
People were borrowing money to buy investments, markets were HUGELY inflated, and one significant drop made the huge mass of naive fools pull out. Markets plummetted, and people wanted their money pulled out of their banks to ensure their assets. Banks ran out of money, because people who borrowed money to make investments couldn't pay back. Banks went bankrupt (bank raped?), people were left with absolutely no hope, no sense of direction, and, of course, no money.
New policies were developed by our governments after the Great Depression to help prevent this event from ever happening again. But pretty much, as long as this credit system continues, it will always just be a band-aid on an open gash. This system pretty much violates one of the first Chinese peoples' fundamental principles, spend what you have, sparingly, earn what you need, diligently. Of course, this isn't exactly right, if everyone was prudent, no one would be rich. This principle was largely founded after the fall of imperialism in China, and the KMT did a poor job of managing the country. Money was worth less than paper, and vests/clothing were put into banks instead of money. The populace faced extreme hardships and went to bed each night dreaming for a fulfilling meal. Of course, 2 generations later, this sense of prudency will disappear along with their generation, and China's attitude will match that of the Americans'.
Anyways, you should always save a portion of your life savings for emergencies, and you should always spend ONLY what you have / will get in a short period of time with guarrantees. Don't live your life with debts trailing you like a piece of toilet paper on your shoe.
Anyways, in the case of the present American financial situation, the news was bad enough, and there are enough people pulling out.
The subject of the news? Negativity on the reign of Bush (he'll doom us all), huge American debts, oil prices rising at speeds which is only second to that of my penis when my right hand is firmly attached to it, and my left hand is opening a playboy magazine.
The businesses, sensing this change of market direction must follow accounting principles and write off a) their projected earnings and b) their receivable accounts (assuming there is an increased number of people not paying). Giving the investors and consumers a conservative look on their financial situation. This write off will dispel current and potential investors, plummetting their stock prices to new lows. That's what happened with the Lehman Brothers, they acquired an immense amount of bad mortgages, and offered 40-50 year mortgages to people who had no steady income or jobs or appeared to have no valid form of repayment. This caused them to rack up monumental debts when the stocks started to plummet. The problem? They only considered the present. When the times are good, no one remembers the bad, when the times are bad, people wish they would've remembered the bad so the times could've stayed good. Make sense?
Anyways, when the markets plummetted in constant 3 digit figures, they had to write off a bunch of bad debts causing their expected revenue to be lower than their expenses. Seeing this, investors are spooked, and creditors demanded their credit to be paid back in full before they have no more money to pay back (sound familiar?). Since they really don't have the money to pay back creditors - their assets are still tied down with sketchy people who might not even (be able to) pay back - they filed for bankruptcy. Like this, the market crumbles like the dead skin flakes on the back of a 90 year old man. Don't place all your trust in creditors, they will loan you an umbrella when it's sunny, and take it away when it rains.
Just to tell those readers who are confused, the reason the Lehman Brothers offers these of mortgages is because the amount of revenue they earn from interest will be HUGE if the debtors actually pay back in full.
When 1 giant falls, another must be dragged down as well (think of giants falling like dominoes). Washington Manual (WaMu), one of America's BIGGEST banks, the next to follow after Lehman Brothers, fails. The government has to bail it out, people were standing outside bank branches in huge lines waiting to withdraw their money, branches of WaMu run out of money.
This is not a joke, this is not a what if story, this is not a fairy tale with a moral attached recited to kids before they make their tribute to the fucking sand humanoid-monster.
This is happening now.
I want you to take a big breath, and fully grasp that concept. Unless the US government acts soon, more banks will fail, and again, when 1 giant falls, another must be unwillingly tripped in the process, causing a giant(adj) giant(n) rumble on the intersections of Giants Ave and Giantess Blvd, leaving half the world in smoldering ruins, and the other shaking in their own urine, sweat, blood, and tears.
No, it won't be that bad, I'm just exaggerating.
But guys, I mean it, we are witnessing the greatest recession of our time, and the emerging of another world power (after what happens with the US now, no country will be extremely confident with them in a while). Maybe even another Depression, ultimately leading to World War III. This time, we will have the power to wipe this tiny, insignificant, and unspecial planet out of the solar system, and smear it off of the face of the universe. I hope it's not a depression, but who knows what the future can bring us.
What this article meant to do is to inform you people from my point of view. Hopefully, I've done enough to let you want to do research on your own, or to become smart consumer. Know when to spend, and know when to save.
Now's the time to save guys. Technically, in my opinion, now's the time to spend. Everybody in the world, spend your asses off, and our economy will be saved. The $700bn plan will actually help the American people, and probably save the world. But obviously, no one else can hear me, so save up guys, and prepare for an extra harsh, cold, long, and bleak winter.
Oh, sorry, we're already in Canada.
-=n0n4m3=-
PS. Jamie, if you could, can you please ask your dad what he thinks of the situation? He's a prof in Queens teaching economics, I'm sure he has extremely credible opinions, and I'm genuinely interested in what he thinks.
