With oil surging $15 overnight to record levels for a single day’s trading, one wonders if economic theory is understood by Paulson’s panickers. With US$247 billion pumped into the global banking system over the last week by the world’s central banks to assist liquidity in the short term money market, one wonders why the US Fed now jumps to the beat of Wall St rather than considering the wider ramifications for the rest of the economy?
All this new money has to find somewhere to live. Speculators see such pumping within the economic framework as inflationary. Commodities are typically a safe haven when inflationary expectations rise as consumers will always need that certain commodity – be it oil, barley or wheat. Listen to Phil Anderson on the Renegade Economists to hear this explained.
Thus commodity investors were very excited by Paulson’s panick. But what will happen in the long run?
The high money supply will push interest rates down, reducing stresses on new borrowings and perhaps encouraging new business investment. But there is a proviso.
That proviso is that investment will only occur if stability is maintained. However, with nearly 1 million US sub-prime borrowers about to switch over to higher rates under their Adjustable Rate Mortgages, we’ve only just entered the sub-prime meltdown.
But the lower interest rates will also hinder the necessary correction in the land market. This will drag the US economy through a long recession rather than a shorter sharper one if market forces were left to correct behaviour. Did Ben Bernanke learn anything from his time in Japan? (*Please note, land prices are not measured as part of inflation’s ‘basket of goods’ in either Australia or the US.)
Instead Paulson has bailed out his banking mates and the devil is in the detail:
“The proposal would prevent courts from reviewing the Treasury’s actions while raising the nation’s debt ceiling.”
And surprise surprise the US sharemarket tanked over night. All it will take is a Chinese whisper on bonds and we will back to square one – the market trying to correct itself because too much money is being spent on land/ rent/ mortgage repayments, leaving too little for investment or consumption.
Just one more paragraph as this bailout is simply white collar crime! What else can this US regime do for it’s mates? Why on earth do the people who created this bubble get bailed out? Why aren’t the people who came up with CDO’s and ARM’s being hauled through the ringer? A hint can be seen by the fact that Paulson worked at Goldman Sachs until 2006.