Keeping our Nerve

My baby boomer generation is probably living in the last of the best days man has ever experienced. There have been the usual series of small, contained wars in places like Vietnam, Korea, Iraq and Afghanistan but nothing like the carnage experienced in World Wars One and Two. We have experienced unprecedented freedom, wealth and personal liberty and all of this whilst communications, technology, travel and entertainment have all become more available to more people than ever before.

We’re facing a very different, much more worrying world. Facing the twin threats of increasing terrorism and decreasing resources within the context of a diminishing economy will lead to major problems. We’ve seen the first signs of this. The sub-prime mortgage debacle in the States has now spread its contagion throughout the banking world. This has resulted in the juddering halt of inter bank lending which means you and I will not be able to qualify for a loan unless our name is Rockefeller or Rothschild.

This would be bad enough in normal times, but this banking screw up coincides with the general economy backfiring and the start of major food supply problems. Food riots have already happened in the past weeks in various disadvantaged countries. Oil prices have leapt above $100 a barrel at the same time as property prices begin to slump.

The planting of large swathes of agricultural land with ethanol crops instead of food, will, perhaps, have a short-term beneficial effect reducing our use of fossil fuels. However the concomitant, longer term cost in reducing the amount of land being used to grow our food is a disaster.

Economies depend on the general population having faith in the economic system, particularly its faith in banks and governments. That faith is unraveling and our leaders need to work on this as their priority or we will all suffer. We all saw the result in the UK when one of our biggest mortgage banks, Northern Rock, became a basket case about a month ago. Although bailed out by the British Government it is not ever going to be independently financial viable again. This all happened within days, almost immediately after the public realized the bank was under threat. That could happen anywhere operating from within our economic heartbeat in the City of London or Wall St.

This, in turn means that long term bonds, government backed, begin to look less desirable for some of their biggest investors. The big institutional Arabic and Chinese money won’t chase a losing concern which on paper we are. Right now they are, willing or otherwise, propping up our system.

We will be revisiting this theme more in the coming months as this all unravels. For now, the wise thing to do is to hold on to your cash, and hold your breath for the rest. The property market comparison for California is down 28% year on year. It will recover, because property is a finite resource that always will increase in value over the longer term, as long as the whole of society doesn’t crash and burn.

Common sense will prevail, and our economies will more forward, eventually. The amount of damage caused in the interim is going to be in direct proportion to the degree we all keep our nerve.