The Economy on Drips

The Economy on Drips


If you’ve read our posts on Monetary Policy and Aggregate Demand you should have a fair idea of the meaning and intentions behind the economic measures announced today. If not, go look for it at TANA-NOMICS (<<<<click dat) see how I make it real easy for allyuh.

Let’s be clear, the measures announced today aren’t meant to provide stimulus. They’re meant to stabilize a fragile and vulnerable domestic economy. Frankly, there is little else that could have been done to put things in place to support those most at risk economically without exceeding the country’s capacity.

I just want to give some words of caution. These measures aren’t for those who don’t need it. The reduced credit card rate, the waived mortgage and loan payments, the waived rent, the increased credit card balances, all these things are for people who need it to weather the next few months.

Right now between Covid and energy prices we’re facing a perfect storm. We are facing what we call a “black Swan” scenario or an event that happens once every 100 years. The world is a perilous place both medically and economically.

What people need to remember is if you take on more debt now and overextend yourself because cheap money is available you could be setting yourself up for problems down the road. This is exactly how the subprime mortgage crisis developed and led to the global financial crisis aka the “great recession”.

Low interest rates and basically “free money” caused people to enter into adjustable rate mortgages (ARM) with low introductory rates. This allowed people to purchase more house than they could actually afford. When the introductory period expired and rates adjusted upward people were unable to pay. They started turning in their keys to banks which lead to the collapse of the housing market. Banks had already used these mortgages to create packages of investments they sold to investors and other financial institutions which were now worthless. The financial system had to be bailed out and yadda yadda….you know the rest of the story.

Another thing to keep in mind is that when cheap money is available it causes investors to borrow and push up the prices of assets such and stocks, bonds, real estate etc. Some “bright sparks” out here might be brave enough to use these measures to borrow money to invest in these assets. Be very careful as this leads to what’s known as a “bubble”. I think it’s called that because all bubbles burst. When asset bubbles burst they do so spectacularly causing a world of hurt. Like when Destra drop that leg across the man on the stage and buss he bladder.

All this to say, if because of the current situation you find yourself in need of a little assistance and some credit then by all means access everything the government has made available. However, bear in mind that none of this is a grant. You will have to repay when things normalize. If you don’t need the assistance, count your blessings and see if you could help someone.

I’m not usually the warm fuzzy type but these are extraordinary times we’re living in. We usually say “each one, teach one” but in this situation, for us to get through this together, we’re saying “each one, help one”.

TANA

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