Does more debt to beat the debt-crisis make sense?
Posted on 15 January 2009 with no comments from readersOrder my book online from this link
The UK newspapers are full of a new $33 billion government-backed debt facility for small and medium enterprises, while in the UAE credit for SMEs remains very tight and 1,500 people are losing their jobs daily.
The UAE has a rather unusual labour market in which the largely expatriate workforce can be sent home if projects are cancelled. And the number of labour visas being cancelled by the authorities on a daily basis is a measure of the depth of the economic crisis that has now even reached the oil states.
Now the UAE authorities have announced substantial increases in public spending on projects for 2009 to keep the economy from grinding to a halt, and much of this spending is on infrastructure which carries a long term economic return, as well as guaranteeing the jobs of many expatriates.
Debt does not solve debt problems
However, there is a reluctance to get into directly supporting SMEs in the way that the UK government is now doing. The argument is simply that providing across-the-board increases in funding does not work: for some businesses offering more debt to firms that are already deep in debt is not going to help, or at least not for very long.
Does it really help to give a man who is an alcoholic another drink? If a company is credit-worthy then it is worth considering for an emergency loan but handing out money at great speed without due diligence is pure negligence.
Indeed, was it not lax lending standards that got countries into the current financial mess in the first place? In the UK banks kept on lending to home owners with easier and easier terms for far too long. They fueled up a housing bubble which has now collapsed leaving the owners with big debts and banks with bad loans.
How can providing more loans possibly help? At worst it will cause the bubble to reflate and the problem will be repeated.
Market forces
In these circumstances there is a good case that says the strongest should survive and the weak fail. This is how resources end up allocated to the strongest and most productive companies. Subsidizing the weak by penalizing the strong does not work, and we have seen how the communist empire eventually collapsed under its own contradictions.
Could governments now make a bad situation worse by their well-intentioned initiatives to save everybody from their own folly? That is looking inevitable I am afraid, and we will all have to live with the consequences of a longer recession and a nasty bout of inflation.
Would it not be preferable to allow the free market to work in allocating resources when we know that socialism is always a poor substitute that results in lower levels of GDP and the direction of resources into uneconomic businesses.
Then there are the huge debts being accumulated for future generations to pay off, or for an awful period of inflation to erode. Inflation you might recall is a highly unfair economic process that hits the old and weakest in society most harshly. We have learned that socialism does not work so why is everybody rushing back into it?
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The new World Economic Forum report said a major risk was that rich countries including the US, the UK, Spain, Australia and others build up excessively large budget deficits as they attempt to spend their way out of recession. The extra amount of debt could in turn cause fiscal crises, in which governments find it hard to raise money from overseas, causing a further slide in their currencies and undermining their efforts to kickstart their economies.
Because most people don’t pay attention to the world around them. If you would ask people under the age of 30 here in the states if socialism was good or bad, I bet most would give you a blank stare. We have learned nothing from history and it will bite us in the ass every time it repeats itself.
Yes, Peter. The poor. The old.The young and defenceless. They suffer for the profligate ways of those in ‘power’. Not the case in the UAE, it seems to me. The UAE is trying to pursue sound money, and economics. A new dawn.
The UK government is working this weekend on another rescue package for its bankrupt banks in the hope of making a statement before markets open GMT Monday. On that day, it is a U.S. holiday. Coincidence? No.
In late trading today, Friday, Barclays Bank shares fell 25% approximately. Coincidence? No.
One UK bank will fail in order to ’sell’ the UK government’s plan to rescue UK banks with taxpayers’ money. Just my suspicion. No facts to back it.
On Tuesday, the new US President is inaugurated. Coincidence? No. The tsunami of credit defaults break after then, imo.
Time will tell which UK bank breaks next week. UK is major US investor.
For UK and US investors…run to gold and silver. I am.
There is a $390 billion UK bank bailout coming next week, according to The Telegraph. Yet UK property prices are still falling so it has to be impossible to assess the level of bad debts, quite apart from the massive international lending.
The government clearly wants to unfreeze the banking system by removing toxic loans. However, the real way it will do this is by creating an inflation to devalue debts and support house prices. This will leave everybody poorer, unless you invest in precious metals which the government can not devalue – it might try but the rush into gold and silver will be against them. Bond holders and sterling holders beware!