Hi Roo,

Bear with me on this.

It was a bit of a shock to me to realise/find out that banks didn't actually have the money to lend to you before you want it. It's not depositors money, it's not banks money, it just doesn't exist.

So, when you say, I want to borrow 100K for a house, that money (£100k) is magically created, against your promise to pay back (usually) 2.5-3x what you borrowed. It's a claim on your future labour.

So.. if  you were the only one with any money in the world - where would you get that extra 150-200k from?

This is why our banking system is a pyramid scheme. You can't pay back what you owe unless someone else gets into debt to create the money you need. But of course, they have also borrowed at compound interest, and now they've got to pay back more than was created too, and you've had some of their originally created money and given it back to the bank. Rinse and repeat.

The system falls over eventually, as all chain letters/get rich quick schemes do, when the people in last get flakey and can't pay. i.e. when the risk of default exceeds the interest you can charge. Now this should have happened ten or so years ago but the calibre of the 'last men in' was deliberately disguised through derivatives, not to mention self cert mortgages etc.

So.. banks lent more than they should to people who can't pay it back.

Banks lend money at leverage, it used to be 10:1 then went up to on average 20ish to 1 (sometimes infinity!)  when some bright spark took the brakes off.

At a conservative 20:1, a 5% default rate means the bank is technically insolvent. In the states it's now close to 6%. Without bailout (gvts taking on more debt on our behalf) the system would have fallen over already.

Unlike previous recessions, this is not inventory lead, it's not a too much supply problem. It's a fundamental inability to service existing debts that is the problem.

The idea of sticking it out implies things will get better. Things haven't really started to get worse yet. We still have access to international trade, food, clean water, energy and pensions.

There are even pockets of liquidity out there, and government support for house prices and car loans (our biggest money creators) not to mention city bonuses will keep the system afloat for a bit longer, till interest rates rise.

If you live in London you may not see much trouble in the housing market yet in terms of pricing, though lenders are asking for more 'skin in the game'. You may see an increase in the number of houses for sale initally, with house prices only dropping when large numbers of people have to sell to raise cash, rather than want to.

We're still in the 'free smack' stage with interest rates so low. We're having problems even now though. Interest rates on T-bills in the states are negative at the moment - if you deposit $100, they'll give you back $99ish in three months. If you took $100 out and put it under the bed, in three months you'd still have $100. Big institutions are parking their money with the US treasury cos they're shitting themselves something wicked this way comes.

When we can't refinance our global debt this year [looks like about 7 trillion US, 3 trillion €, not to mention Japan etc, from a pool of 4-6 trillion in total] and interest rates rocket, things are going to snowball so badly I squirm from one bum cheek to the other just thinking about it.  Higher default rates lead to higher interest rates lead to higher default rates.

At the moment there exists no viable alternative to the dollar, "the leper with the most fingers" in all this. I wish I could say that any of my main sources predictions have failed, but so far they've been bang on. If they start making bad calls  their hypothesis would be called into question, but that hasn't happened yet.

2009 was called as the year you can still sell your house for bubble(ish) prices. 2010 as the year chickens come home. (aptly enough)

Yes the US can issue money against 'bad' promises to repay or 'nowt down' promises to repay, and attempt to devalue their own debt in a slow and ordered subterfuge. But deflationary bubble bursting events don't play out like that, or every Zimbabwean would be laughing.  When a large creditor who holds what they though was something of value, realises it is being debased, they pull out.

Once this house of cards starts to fall, there's no stopping it.

Resources wars are likely from there on in as the medium of exchange has been removed.  The US move to sell $6bill of weapons to Taiwan looks to me like a potential 'bay of pigs' already.

""There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."

- Ludwig von Mises

I am available for children's parties, etc. Sorry not to have better news :(