Monday, 9 March 2009

The true reason behind the economic collapse

The true reason behind the economic collapse

The chart below shows the $ oil price per barrel between 2000 and Feb 2009

The Number one reason was the extraordinary high oil prices. Why has no one mentioned this?

Number two the Banks made some monumentally stupid investment decisions, but remember the reason many of these mortgages went bad was the knock on effect of the high oil prices.
Peter Lynch, the legendary portfolio manager for Fidelity’s Magellen fund which increased in size from $20 million to over $14 Billion ( between 1997 and 1990), gave some sage advice when he said that you should never buy an investment unless you can explain your reasons to a child of ten within two minutes.

Why have the banks have cost us (the tax payer) £trillions of pounds? Do you know? Has anyone explained it to you in a way that you can readily understand? Do not let anyone tell you that it is too complicated. Anyone who tells you that simply does not understand. The public is due a proper explanation. Mortgages that went bad are not the full story. That explanation should come from our Political Leaders and those responsible for the economy.

The public have been let down by their leaders: Political Leaders, Financial Leaders, Industrial Leaders and the Press.

Yes the Press! The press failed to ask the hard questions. The press failed to do their homework. The press did not investigate wrong doing. The press did not investigate incompetence. The press needs to get back to doing its proper job and stop being spin doctors for their favourite political parties.

The public have also been let down by the managers of their pension funds. These are the people who vote to give company chairman and director’s huge salaries which cannot be justified in any way, shape or form. They have a huge say in how companies are run and have a huge responsibility to monitor the companies in which they invest your money.

Warning signs regarding the management of funds had already been seen when it was discovered that many fund managers were just investing in each other’s funds, paying themselves huge salaries and bonuses and relying on the fairy tale that the stock market would just keep rising no matter what.

The warning signs have been there for the banks since Nick Leeson’s rouge trading caused the collapse of Barings bank in 1995. Nick for his part spent six and a half years in a Singapore jail. Why have none of the traders been prosecuted for their part in the current financial fiasco?

We will now return to the number one reason for the economic collapse: the extraordinarily high oil prices ($150/barrel). The economy is a delicately balanced eco system. There needs to be sufficient money running throughout the system for all the parts to function properly. If you like, the economy needs financial lubrication, or cash.

If one resource gets all the lubrication then other parts of the economy will be starved of that vital lubrication. In the UK we have statistics like 7% of the population control 90% of the wealth. Of course if that 7% got greedy and tried to up the percentage of wealth that they controlled then parts of the economy would dry up. They would no longer be able to buy goods and services. The goods and services parts would also then dry up. The system would begin to fail.

This is what happened when oil prices escalated out of control. People had to spend five times as much on energy costs and other parts of the economy went without. In the UK petrol went as high as £1.30 per litre. It cost some people more than a days pay to fill their tanks for a week (20% of their earnings just to get to work). The system began to fail.

There is no doubt that that catastrophe was made far worse by our greedy bankers gambling their assets on high risk investments which they clearly did not understand. They were paid huge salaries because it was assumed that they new what they were doing. In fact they knew didly squat. We need to remember this and adjust the salaries of business leaders in line with their abilities and not their job titles or their inflated egos.

It must be obvious that many of our leaders are running around like headless chickens. The US Republican Party and their spin merchants are spouting the most unutterable garbage. Gordon Brown, the UK Prime Minister, is full of bluster and bullshit.

Banking chairmen and Business Leaders are the first to look for the lifeboats. What ever happened to Women and Children first?

It must also be remembered that the decisions taken by Tony Blair, George Bush and every single politician who voted in favour of the war in Iraq are primarily responsible for the events that have unfolded since that ill judged decision was made.

What do we need to do here in the UK?

1. Oil prices must be lowered still more to 2002/2003 levels ($30-$35 / barrel).

2. Domestic energy charges for Gas and Electricity must be returned to 2002/3 levels.

3. The massive amount of Government spending must be turned towards investment

projects which will return our investments within 10 years.

4. The UK must be self sufficient in energy (includes vehicle fuel, domestic energy, and

industrial energy usage) within 10 years. This is the best investment we can make.

5. The banks must work out what their investments are really worth and look to see if there

is any true underlying value that can see then make use of these assets. They should not

be permitted to just write them off and let the tax payer pay.

6. High speed broadband (100mbs/sec) should be available to every home and office in the

UK by the end of 2012. The current plans are truly pathetic.

7. Roads, Bridges, and Rail projects must be brought forward and completed by 2015.

8. Hospitals, Schools, and Prison Projects must be brought forward and completed by 2015.

9. The country’s infrastructure must be in a fit state to take full advantage of the economic

upturn when it comes.

The real concern for everyone here in the UK is that the same morons are still in charge.

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