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Interest Rate Tsunami

tsunamiThe interest rate on loans as charged by the Bank of England has fallen to 1%. This represents a fall of 80% from October 2008.

It takes about 12 months for the effects of an interest rate change to translate into realities in the public arena. So one can expect that, come October 2009, we will be seeing the devastating effects of newly printed money flooding the world economy.

Have a think about that for a second…

Okay, time is up.

If we think back to the great Tsunami which took the lives of tens of thousands of individuals in the Asia-Pacific, we might recall videos of bathers looking perplexed at the sea. The tide went out so suddenly. There were numerous different reactions:

  1. Some stood there, stunned, glaring at the wet sand and the receding water.
  2. Some walked towards the sea in order to get back into the water and go for a swim.
  3. Some realized there was a problem and ran as fast as they could towards the shore. Most of them were too slow.
  4. A small minority looked out from the safety of their hotel rooms, filming the whole spectacle.
  5. Various animals, such as elephants, had made a run for higher ground, at the bemusement of human onlookers.

If we liken the current financial changes to the aforementioned natural disaster, we can identify some interesting parallels. The swimmers are like those living in debt, enjoying the good life. They take some risks, such as being eaten by sharks, drowning or being washed away, but none of them would think for a minute this could happen to him personally. Feew of the swimmers can imagine a tsunami. Falling interest rates and receding credit might resemble an unusually low tide. Animals and people of wisdom can recognize this as an event that precedes a disaster, and some will do a runner. Many of course never go swimming and are thereby not at risk.

Most people, however, fall into the ignorant groups (1 and 2) mentioned above. They are so stupid and so trusting that they welcome the falling interest rates with open arms, going forth and getting deeper into debt since they believe they can afford to do so. Others stand there, reading the amazing headline, perplexed. But already the rumblings of the next phase can be heard by those with open ears and broad reading habits. But even fewer than these remember the words of the ancients on monetary matters:

They have taken gifts in thee to shed blood: thou hast taken usury and increase, and hast covetously oppressed thy neighbours: and then hast forgotten me, saith the Lord God.

Had they remembered not to consort with usurers, our financial swimmers would have contented themselves with the humble and wholesome practice of living in a hut on a hill, rather than visit expensive tourist resorts and wade, semi-naked, into the sea of peril. At this point I think the analogy has stretched to its limit, except to say that the rumbling sound of the shaking earth was audible by some, but not others, well before the tsunami struck.

It is, even now, difficult to discern just what has been making these rumbling noises. Is it God? The commonly accepted story of the Tsunami was that it was a freak natural event. Some of course will see the event in a religious context and attribute it in some way to divine retribution. Other, more cynical characters have considered human malice behind the Tsunami itself. Unlikely as it is, one must admit, that is an interesting idea.

As for the present financial situation around the world, it is not impossible to work out what is coming. Banks are attempting to preserve their assets (people in debt) by not screwing them over with excessive interest rates. Governments are, to some extent, forcing banks to adopt this approach, but for a different reason. Governments want banks to lend anew, yet now people are spooked and generally don’t want to borrow. Banks are also spooked and don’t want to take risks. It all looks upside down and rather messy.

But none of that matters, because in the end, it’s the big things that matter. If there is one thing that can be said about all of this is that it is bigger than any individual. This crisis has been designed to be so big that any independent, organized movement would be unable to stop it.

An ocean of new money has been issued. We might not be seeing it yet, but it’s there, just beyond the horizon, coming like a great flood, ready to “stimulate” the economy. But in fact it will dilute the value of any existing cash into meaninglessness. In fact it already has, but, like the swimmers suddenly dry from the falling levels of water before the wave hits, there is an overwhelming perception that the opposite has occurred.

The advantage of suddenly finding that the sand beneath your feet is dry is that it’s easier and faster to run over dry land than it is to wade through waist-deep water. It is therefore in our interests to get off the beach, get out of debt as soon as possible, before the water (debt) returns. It’s too late already for the majority, and the fools out there who are going out and buying anything on debt are no different to the now deceased who walked towards the Tsunami. It wasn’t a pretty sight.

The most striking similarity this financial crisis has to the Tsunami is the distinct possibility that large numbers of those caught up in the sea of debt may well end up paying for this with their lives.

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