The Scale of the Crash

Yesterday, Japan reported a 35 percent drop in exports from a year ago. This, coupled with the stock market crash, the housing market crash, millions around the world becoming newly unemployed each week, gives one a pretty clear sense that the world economy has fallen off a cliff.

The world has clearly not only entered a depression, but a great depression. Time will tell if it is worse than the 1929-1939 Depression. In any case, things are bad and getting worse.

In a previous post we said, "A halving of income for citizens of the 'Developed Countries' may well be baked into the cake by now." We ought not to have been so provisional. It is almost certain that incomes will be falling on this order. The question arises: will they fall further?

Unfortunately, the answer is probably Yes. It appears the whole credit-based model of economic activity is suffering a fatal, or near-fatal crisis. Remember, gentle readers, the financial architects of the global system gave us an economy that can only grow when people and organisations borrow and spend. When the borrowing stops, the growth stops.

Unfortunately for the model, at present borrowing can no longer grow. Incomes and revenues are falling, so debt burdens are becoming more onerous to households, businesses, and governments alike. Dropping interest rates to near zero is little help since the principal payments alone are the culprit.

Defaults do little to help the situation as they shock and injure the investors. It is looking more and more like gradual monetisation of debt and resultant inflation will be the only way out in the short term. That will be a frying-pan-to-fire operation, though. It will probably take a bit more time for leaders to employ that strategy effectively, as they hope against hope that the economy will fix itself (via consumer attitude adjustments perhaps?), or in response to feeble 'stimulus' programs.

In the meantime folks, prepare for the worst and hope the storm passes quickly.