Tuesday, July 17, 2012

What could be the best scenario for BEN—FED Chairman ? By Shan Saeed

Ben Bernanke is doing his best to ward off recession for the US economy. Lets give credit to the gentleman who is sitting on the Hot seat and trying to revive the economy. The current financial crisis may spark a new depression, so severe that I don’t think our civilization could survive it. Governments in developed countries should borrow “massive” amounts of money at the low interest rates currently and invest in new technologies so that trade comes back into balance and economy takes momentum. In order to understand this crisis, it’s necessary to understand the role that credit has played in bringing it about.

When you broke the link between money and gold, this removed all constraints on credit creation. This explosion of credit created the world we live in, but it now seems that credit cannot expand any further because the private sector is incapable of repaying the debt it has already, and if credit begins to contract, there’s a very real danger that it will collapse into a new Great Depression. Policymakers believe that if they allow credit to contract, there will be a new depression. So they are going to do whatever it takes to keep credit expanding. And that means more quantitative easing (QE), and when the Fed does QE3, everyone knows that stock prices are going to go higher and people would start to believe to spend more.

If this credit bubble pops, the depression could be so severe that I don’t think our civilization could survive it.  To prevent the credit bubble from bursting, I suggest that governments borrow money to invest in new technologies, such as energy market like shale and natural gas, renewable energy, Biotech revolution like Stem cells, Tissue culture, IVF, RFID and other genetic advanced engineering technology.

Even if this is wasted, at least the world could enjoy this civilization for another ten years before it touches the abyss of the financial system. The recent stimuli from central banks seem to be just prolonging the inevitable depression. It could keep deferring the depression, but that could just encourage the bad guys. If you do this, you possibly do more harm than good.  When you throw money into the system at a rate much in excess of the requirements of the real economy, you’re trying to get people to borrow and spend, but the good guys out there won’t because they’re too cautious. It’s the bad guys who come in, the malefactors. Once the central banks realize what is happening and increase interest rates, the world economy gets thrown into a depression.

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