Many developed economies, particularly the US and UK thrived, not on businesses which added value, but on those which serviced 'the Golden Escalator' of rising asset prices.The brightest of society went into finance and real estate which depended on growing amounts of debt. The richest were those who managed to borrow the most, or simply owned assets. Prices rose because the amount of debt you could borrow rose. Borrowing became the way to raise living standards as globalisation took industrial capacity to cheaper locations. The Chinese and Arabs were prepared to lend the money to the west in order to keep selling their products and growing their economies. The system crashed as it became clear that the debtor countries and their occupants, could not pay back the creditor countries and the fallacy of the web of debt unravelled.
Governments have so far responded by replacing the funding which closed to the banks and trying to encourage banks to begin lending again, but they can't because they understand how weak their balance sheets are. The result is stagnating house prices and any attempt to restart the old asset inflation machine will fail. The culture of deleveraging and paying back debt has taken hold.
The problem is that it is impossible for everyone to pay down their debt at the same time (governments and individuals in England and abroad) while society maintains its standard of living. Edward makes the point: "it is hard to default when your way of life depends on borrowing more each month". But if the west stops spending China's markets close up.
The only long term solution - a crisis in the foreign exchange market. Only once developed currencies fall sufficiently against eastern currencies will investment in the developed countries become attractive again and productivity rise sufficiently to meet the debt burden. "The future," Edward argues, "lies in production, not speculation."
So what does this mean? It means that eventually a lot more dollars, euros and pounds are going to be printed. Going on holiday to Asia is going to get a lot more expensive and real assets denominated in creditor countries should do well. It also means that fossil fuels which increasingly come from developing and Arab countries are set to rise in cost in sterling terms, meaning energy costs will rise more than currently expected and renewable sources of energy should become a much more attractive economic solution. The financial crisis has not ended yet, we still are having one almighty collective hangover.
What a hangover!
By Mark Hoskin, IFA at Holden & Partners
5 September 2011 | Market Blog | Comments (0)
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Mark Hoskin is a Partner at Holden & Partners. Holden & Partners are Chartered Financial Planners who provide financial advice to high net worth clients, the majority of whom have a significant interest in ethical or environmental issues.
Mark Hoskin graduated with a History degree from Keble College, Oxford and went on to become a Chartered Accountant with Price Waterhouse. He cofounded Holden & Partners in 2003 and is a Certified Financial Planner and Chartered Financial Planner. Holden & Partners set up Worldwise Investor to help both advisers and investors understand quickly and easily how they can benefit from ethical and environmental investment in the UK market.
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