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You can hardly have failed to notice the massive consumer-fuelled boom across most Western economies the last 5 years or so. In the wake of 911, decisions were taken at the very highest levels that a recession at this point would be disastrous, and so it was 'put off' with the panacea of low interest rates.

Interest rates, in fact, have been hovering at or near 50 year lows since that time in most developed nations including the US and UK, and have only recently begun to rise back to historical norms in the face of worldwide economic pressures.

The 'optimistic' among us seem to think the current situation can continue indefinitely, with a 'new paradigm' of low interest rates, easy credit, and massive house price inflation in what is otherwise a low inflation environment. They are, of course, wrong, as the key phrase 'new paradigm' should have alerted you. Whenever anyone says 'it is different this time' you can safely bet your very last dollar that it isn't!

But why can't the current 'perfect' situation continue? There are 2 explanations, an easy one and a difficult one. We'll take the easy one, of course. Imagine you lose your job. You still have bills to pay. So you max out your main credit card buying those little luxuries like food, and mortgage payments. The next month, you still have no job, so you apply for another card, and max that out too. The third month, however, to your horror, you discover that not only do you still not have a job, but the credit card companies won't advance you any more money, as they are aware of your previous credit binge, and the fact that those debts are still outstanding. You have become a 'bad risk'.

So what do you do? Go bankrupt? What choice is there? If you have no income, and have no source of borrowing, yet still have outgoings, you are bust. Period. In fact, even if you do find a new job, it must now pay MORE than your old job, because you now also have the interest payments on your new debt to support.

For 'You' read 'America'. For 'bankrupt' read 'recession'. The US, and most other Western states have relied to an incredible degree on cheap credit, happily supplied in the main from the Far East. This situation just changed, with the Chinese 'warning shot' across the bows of the dollar, and the smart money is already exiting greenback positions, even though relative to the other main currencies, it should in theory be an attractive home for cash.

The resolution of the current credit bubble may take another year or so to truly unwind, but when it goes, the bust will be BIG. What should you do? Go to cash, and in more than one currency!

For the technically minded, the reason why the coming recession is inevitable, and may even be a 'depression', is simply that countries relying on credit to sustain themselves incur 'carry costs' of those debts. The more they borrow, the bigger the regular payments become to support just the interest on the debt. There are only 2 ways to pay that off - devalue your currency so the debt becomes worthless, or inflate your economy so your GDP rises at MORE than the growth in carry costs on the debt.

The US cannot devalue the currency deliberately, without obvious severe socio-economic results that will be punishing painful to the American citizen and industry. Politically, of course, this would be suicide for the incumbent US Leader.

The alternative is to spark increased internal economic growth, and this is usually what credit binges are used for - to create new industries, employment etc. In the case if the US, however, the unprecedented sums borrowed from Chine and Japan have been spent on... you guessed it, Chinese Plasma TVs and Japanese game consoles. Oops.

The carry cost has been rising at a rate almost 4 times as fast as the internal US growth for some time now, and has already passed the point where any conceivable US growth schedule can comfortably cope with it. As the Far East just decided the Dollar isn't so great anymore, there really only is one way out now. Down. Don't say you weren't warned!

About The Author

Peter Parsons writes for www.nodebtever.com the free site full of advice on debt.

This article was posted on August 22, 2005some content courtesy ArticleCity.com

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