Thursday, August 16, 2007

BLOB strikes back

Bulls in distress
Finally, few bad debts in subprime mortgage market in the US, take the wind outta charging bulls. Breathless bulls in sheepish fall over the cliff, rip through the Federal Reserve's inadequate paper cover and continue their downward journey. The Toms, Dicks and Harrys of money market, feeding raging bulls with borrowed grass see only a heap of dung down below. Milk and beef party is over for now, so it seems.

Money makes money
Ailing with low growth and deflationary economy, Govts. started lending money at very low interest rates. Commercial banks enjoying low cash reserve ratio (CRR) at the central banks, started lending left right n centre, thus multiplying money which had no value. This excess money flowed into various assets including those of high risk. During early stage of injection, these assets set on moon march. A sure shot to heaven.

Too much too soon
Man by nature is consumer. With new found wealth his needs grew giving rise to a sudden rise of the commodity market. Chinese production assembly started churning out low cost goods at breathtaking speed. And soon the raw markets, which saw almost no investment in the past due to a long period of lull, failed to keep up with snarling demand from all corners of the world. Result was 'Raws on rampage'. High cost of man and material soon built up strong inflationary pressure on economies thus prompting the central banks to increase interest rates.

Shoe bite
Investors were growing out of their boots and interest noose was tightening round their neck. This was the time, the cowboys of US real estate market started to falter and were unable to meet the higher debt repayments leading to foreclosures. This led to financial institutions to cover their bets by making provisions for bad debts, and losing their high interest rate / low risk subprime cash cows. The excess lending was being wiped out in shape of bad debts and thus money was on a re-course. Liquidity squeeze was to cast its shadow in all walks of life. and soon we saw the humpty-dumpty fall.

From here where
Most logic solution to this epidemic lies in vaccine of interest rates. Virus of interest rate must be countered with a milder dose of it. i.e.. central banks must lower the interest rates in order to bring back liquidity into deserted markets. But that would just be a repeat of same cycle once again.

Prudence says, world economy calls for a breather, while investment goes into E&P of natural resources and development of nature friendly infrastructure. With advance technology and high determination, man should be able to catch up with nature within no time.

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