The financial crisis of 2008 stemmed from cheap money, but was pushed over a cliff by expensive energy.
Rising gas and food costs were the catalysts that squeezed consumers who were already over-leveraged. Studies have shown that the first houses to start dropping were the ones with the furthest commutes. This started a domino effect – the last two dominoes being the investment banks and taxpayer.
The prick for any bubble is rising costs and falling returns – the marginal buyer steps out of the market and inflated prices are no longer sustainable. Sometimes the rising costs are manufactured by central banks. This time the Fed had a partner.
Unfortunately, the answer – throw money at the system – completely ignores the problem.
Jeff Rubin comments:
The fact of the matter is, wherever you go in the OECD, we’re all PIGS now. That’s because we mistook an energy shock for a financial crisis and bailed out everyone under the sun. But we are soon going to find out that today’s bailouts are tomorrow’s spending cuts.
He continues…
Central banks can print all the money they want, but the pairing of record high budget deficits and record low interest rates is a marriage that isn’t going to last—bond issue after bond issue of government debt will see to that.
This points to low-to-negative growth as governments are forced to cut spending.
Source: Globe and Mail
