Economic Black Holes

I have decided to start a blog, if colleague and fellow author, among other things, Tom Winnifrith can, so can I! So here goes…

Economic Black Holes
I introduced this concept in my book Financial Cataclysm Now! (email tt101@aweber.com for a free copy) which I published in 2006 and updated earlier this year. The concept fully explains the current crisis and is very simple. During any mania, including that of the early noughties, asset prices lose touch with reality, but if you are in business you either shut up shop or you are forced to pay those prices.
The most obvious example is property development. You buy your property at an inflated price (as judged against any “rational” valuation – but no one is rational in a mania) and the bank throws lots of money at you (being as wrapped up in the mania as everyone else) and off you go. If you are lucky you get out whilst the mania is still intact (as we have seen these things have great staying power) and everyone does well out of the deal – encouraging them to go in BIGGER next time (which is how the mania builds up steam). Then the tide turns (and this happened in 2008/2008) and the black holes are uncovered and the economy lurches lower as each one implodes.
Lehman Bros is a good example being over-exposed to loans on over-valued, to the point of utter lunacy, property.  I suspect MF Global is another example with rules broken in the “good” times working out OK but not in the bad times. Of course Governments have moved quickly to do what they can to keep these black holes well covered until we get to the somewhat bumbling EuroPolitik. But these black holes are not just financial, they are also moral and ethical.
Winston Churchill is reputed to have asked a lady at a dinner party whether she would sleep with him for an enormous sum of money. She was clearly tempted at which point he reduced the sum to a trivial amount. The lady duly protested “what do you take me for?” To which Winston replied “we have already established that, now we are haggling about the price!” Step forward “Diamond” Bob – clearly not a cheap tart but equally clear that Barclays Bank has not operated to the highest moral and ethical standards whilst he was in charge!
Plus a Government that regularly fudges its own figures is hardly going to look askance at a bank doing the same – especially when it’s many millions of £/$s cheaper than a bailout!

All the best,

JOHN
send an email to jptt@aweber.com for free reports
web site: www.johnpiper.info