The whole world has been run on unlimited credit for years and years. It's great when everything is going along swimmingly; wages are rising; inflation is under control; productivity is up, etc.





But unfortunately, since 2000, certainly here, and probably in the UK as well, we've had a situation that is inherently barmy: namely, corporations making huge and excessive profits by "outsourcing" jobs, first manufacturing, then services (call centres), and then the middle class backbones like accounting, stock and bond analysis, legal editing and legal paperwork, etc., and at the same time cutting the pay of the remaining employees, or at least not increasing them in line with increased profits or productivity gains, whilst at the same time enriching the CEOs and other top executives with crazy rewards for increasing the "value" of the stock of the corporation, with the profits gained from paying Indians and Philippinos $12,000 a year for doing jobs that used to cost $120,000 for Americans to do in the US!





All this was fine, as long as cheap and easy loans were given to the masses to buy houses they couldn't afford, and when people were encouraged to borrow against the ever-increasing value of their houses (and even given tax-breaks to do so, since the interest on borrowing against your appreciating home asset is tax-deductible), so that instead of being paid a serious wage (instead of the real wage stagnation), people could feel "rich" by being given "access" to borrowed money from the make-believe appreciation of the bricks and mortar that they called their "home."





When this virtual "Ponzi Scheme" finally came tumbling down, because the merry-go-round of leveraged asset inflation stopped, all the banks, who should have known better than to listen to smooth-tongued Wall Street types, who came up with yet one more of their con-job ideas to make money out of nothing (remember "junk bonds"?), and bundle hundreds of loans into small pieces, and sell the whole "pig's ear" as "highly desirable derivative bonds" all backed by the "never-to-go-down" property boom in the US, "Hey, what can go wrong, right?" suddenly had "assets" with no value at all!





Worse still, nobody knew (because of the nature of the "chopped up" and "sliced-and-diced" assets in each bond) what they actually had, and if indeed they had either valuable property, or worthless property! Worse still, nobody knew (because of the nature of the "chopped up" and "sliced-and-diced" assets in each bond) what they actually had, and if indeed they had either valuable property, or worthless property!





Then, all those poor people who had been conned into buying houses for crazy sums of money which they could "afford" because they were paying interest-only loans of 2-3%, which results in negative amortization on the asset, but which they were told didn't matter, because the asset inflation (sorry, appreciation) would cover the difference in 2-3 years time, when they could re-finance easily at a lower fixed rate because their home (asset) would be worth 20-30% more than they paid, and so they would then have built-in equity, suddenly discovered that the merry-go-round stopped, as it inevitably would, and always has done throughout history (I've lived through at least four property booms and busts in my 50+ years, but then when you have a whole society that ignores history, even just 10-20 year-old history, it may not be surprising after all) and woke up to find their asset to be declining; the new "interest-meter" about to restart at a much higher rate, based on the older inflated asset price, which was now worth less than what they purchased it for.





The whole thing reminds me of that immortal saying of PT Barnum in the 19th Century, "Nobody ever went broke underestimating the stupidity of the American public!" But in this case, it seems all the bankers, including the Brits, Irish, Germans, Swiss, French and Japanese all fell into the stupidity category this time as well!











Next stop? Who knows? But it would be a good bet that it will be a Great Depression. The last time everyone, including the bankers, got universally conned, and we had worldwide inflation in food and fuel costs at the same time as a shrinking economy, we had the Great Depression, the rise of Fascism and the ultimate catastrophe of World War II. History tends to repeat itself, sadly. As Harry Truman once said, "The only thing new is the history you don't know!"