So, today in the midst of finals week, I don't have time to finish my post from yesterday. I will work on that tomorrow or over the weekend, however I also want to perform a DCF analysis so we will see which takes priority. Today I just wanted to post something quick and somewhat enlightening (at least for me).
Today on the front cover of the Wall Street Journal is an article about the move central banks made which made markets move tremendously yesterday. Basically, they are going to allow cheap, emergency US dollar loans to banks in Europe, if it is needed. "The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity"- said a statement issued by six central banks. (Fed Reserve, Bank of Canada, Bank of England, Bank of Japan, ECB, and Swiss National Bank.)
The reason I take interest is this is because I am here thinking to myself, isn't this the problem of the crisis in the first place? That is, these governments and banks are taking on too much debt and it is drowning them. Sure, this will ease up any liquidity problems in the short term, but the LONG TERM is the issue here. What's going to happen when these funds inevitably dry up? Anyway, I continued reading and was reassured of my opinion and was offered a reason for this seeming idiocy. I had an idea that this was the reason for these actions, but I was not sure.
"The European debt problem can't be solved by liquidity provisions alone," Bank of Japan Gov. Masaaki Shirakawa said at a hastily arranged news conference. "The step is meant to buy time for European countries to proceed with their fiscal and economic reform."
Ay, there's the rub. For in that sleep of death what dreams may come when we have shuffled off this mortal, wait a second, wrong topic.
But really, there's the catch. This is just an effort to give these countries enough time to enact reform. That is, they must reduce debts, perhaps raise taxes. Somehow they must find a way to reduce their debts without simply defaulting. Eventually, these profligate nations must learn that they can no longer borrow to pay pre existing debts. Sounds like a ponzi scheme to me, how about you? These issues could be tackled now, slowly but surely, or we could continue to borrow short term and always put the issue off onto those that will follow. But that is not a good idea, as it is up to us to secure a good future for generations to come. (Sorry for that bit of philosophizing, but it was necessary.)
Anyway, I thought it was good to clarify in case anyone else out there was a bit confused, as I was, about the purpose of continuing to offer funding for these nations. So there you have it, we're just extending the time frame for these politicians to hopefully get their act together and enact reform. Look at the "supercommittee". They were unable to come to a deficit reduction plan. I question how super they really were.
As you can tell, this topic angers me quite a bit, as I realize that it will be my generation who will suffer the blow of these peoples inability to act for the greater good. Hope you all learned something today.
Cheers,
EZ
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