The escalating US financial disaster is fast forwarding into a grapple for handouts, with the vested interests having the ear of the policy makers whilst the less privileged are left behind in a trail of bewilderment, attempting to grasp the unfolding situation one fragment of horrible data at a time.
The call for the US Fed to cut interest rates tonight by as much as 0.5% spells disaster for the middle classes. This will in effect reward those that have leveraged the US system into such debt. What is the debt based on? Primarily land.
An interest rate bailout, following the massive tax payer funded cash injections in those institutions dominated by Chinese investors (Fannie, Freddie & Bear), will prolong the recession. The Japanese economy suffered for 16 long years as the government tried to bail out or pump prime the economy. A 16 year recession ensued until land prices fell back to what can be realistically earnt off them – reflecting their true land value.
The interest cut may help McCain get elected by postponing further financial bloodshedding, but will hurt the economy in the long run. Land prices will teeter along, rather than drop, meaning that small business will pay more in rent than they should. This retards their ability to employ more people or maintain/ improve wage levels. The same principle applies for households – more interest on loans (due to high land prices) means less food. Less job prospects means a longer struggle at lower wages.
The speculative rewards made possible by the failure of governments to capture the community generated economic rents inherent in prime land locations has festered this boom-bust type of economy.
It will be spell-bounding to see how many of the big financial behemoths get scooped up by those with guaranteed income streams. Traditionally, those that earn land rental income (with the least exposure) will be the safest companies most able to expand at this time.
Of concern for the corrupt US system of lobbyocracy is who will fund the election campaigns of McCain and Obama? Unfortunately, a global recession is only a matter of moments away, with the derivatives market the next on the chopping block. Anyone with a spare US$50 trillion dollars?
Like a sliver of light, the productive sector of the economy must awaken to genuine tax reform, where taxes are taken off our labour and placed onto natural resources like land, oil and carbon. Then all we laymen can get a share from the naturally appreciating value of resources whilst simultaneously putting a lid on such rampant land speculation. This reduces the chance of our minds boom-busting. The big question is – why should the Bubble’s Enablers be Bailed Out?