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Where is the financial crisis heading?

by : Prof. Dr. Eberhard Hamer
Sunday August 8, 2010 - 22:06

Where is the financial crisis heading?

by Professor Dr Eberhard Hamer, Mittelstandsinstitut (SME Institute), Hanover, Germany

The onset of the financial crisis surprised most people. And until today most people have not yet realized the importance of it.

About 50 experts in my institute published a book as early as 2002 studying the question “What to do if the crash happens”? (“Was tun, wenn der Crash kommt?”), a book, which the dominant circles among bankers, politicians, journalists and unfortunately also my scientific colleagues laughed about and dismissed as absurd. In the meantime, however, our hypothetical analysis has become reality. The financial crisis was inevitable

The present financial crisis was not only predictable but almost inevitable, too, because the amount of dollars has increased fortyfold based on an only quadrupling material economy, i.e. a huge naked financial bubble from surplus printed money, overrated investments, carelessly granted credits and even criminal financial gambling products has been built up. This became possible because the Federal Reserve Bank (FED), a private bank with the privilege of printing money, was abused by its owners as a cash cow for unrestrained money multiplication, just like in the fairy tale. In the guise of globalization, this money was then pumped into the world markets, the FED owners bought up the raw materials and tangible assets of the world, supported states, waged wars, bought up whole market segments particularly those of raw materials and industrial sectors. The foreign central banks were forced to invest their currency reserves in putrid dollars.

Thus the dollar oversupply spread an illusory boom all over the world. People wanted to become rich by speculation faster than by work. Increasing parts of the population took a share in the financial products, so that the stock exchange courses constantly rose, thousands of putrid funds found a ready market for their certificates and the banks operated ever more risky investments up to eight-hundredfold of their own capital funds.

The collapse of this financial revelry was only a matter of time. However, those who publicly said so were laughed about, slandered, discriminated. Only lately, our “Crash” book has become a bestseller, after five years of being scoffed.

The financial revelry began in the USA and also the collapse. When the houses, financed by credits up to 120% of the purchasing price, were no longer marketable their prices fell, the first mortgage crisis came, which continued with the second credit card crisis in the USA. The consumers could overdraw their accounts up to 20,000 dollars each with twenty credit cards. These credits at a value of nearly 90 billion dollars were likewise sold with maximum credit value granted by the own rating agencies all over the world. Thus, the tenfold-large third derivative crisis is lined; it is the collapse of credit-financed bets and hedge funds’ deals, with which ruthless gambling gangs inundated the world. The crisis was systematically globalized and expanded to a worldwide financial crisis.

Consequences of a deflation

Shrinking the naked funds bubble is called deflation. The money supply excessively expanded by bad financial products and financial speculations must be decreased again, so that the flow of money and the flow of goods will be rebalanced.

Just like the expansion of the money supply which caused an illusory bloom, a reduction of money supply (deflation) will come as a crisis for the real economy:

• The collapse of banks, credits and bank investments will also lead to a credit crisis for business. • If enterprises do not get any more credits or the credits are even reclaimed, liquidity problems will be the consequence; businesses do no longer invest money, they might even disinvest. • The capacities of enterprises will be reduced, not only in production but also in personnel. Collapses of enterprises and dismissals will be the result, the amount of orders is going to shrink, and prices will sink. The most indebted enterprises will have to give up first. The wages will shrink and unemployment is going to rise.

In the first world economic crisis, nearly a third of all enterprises had to give up, wages were lowered about a quarter of the average and in all industrial nations mass unemployment followed. We will have to reckon with this once more.

Finances of the state are affected

Surprised politicians, economists and trade unions consider the deflation and material crisis a disaster. A financial crisis actually does not only affect the real economy, but also continues to have an effect on the state’s finances as well. Sinking turnovers and sinking profits and sinking employment make taxes and social security contributions sink, so that the states will also run into financial difficulties and the social insurances will get into trouble, particularly if they do not only have to handle sinking incomes, but also rising expenditures.

Therefore the former US Secretary of the Treasury Paulson, former chief executive of the biggest American gambling bank Goldman/Sachs and thus one of the persons mainly responsible for the production of the financial toxic waste – immediately tried to stop the deflationary decrease of money supplies after the collapse of the first gambling bank by flooding the market with state money. He thus wanted to shift the losses of his banker mates onto the state, i.e. all taxpayers. By American pressure, the satellite governments had to copy the same mistake and get into debts, up to their ears. Thus the real crisis will become a state crisis and lead to state bankruptcy, not only in the USA but in other countries as well – probably in Germany, as well. Even today, we can observe that the financial industry does no longer believe in the currencies, flees the dollar and reckons with an ensuing monetary reform, at least in the USA. The financial crisis will result in the state crises we described in our book.

Social crisis as a consequence

Real crisis and state crisis always result in a social crisis, a crisis of our societies. A part of the small and medium-sized enterprises will be impoverished, because they invested in evaporating financial investments instead of material assets, because they got into too much debt or because they could not manage the defensive strategies of a decreasing market. The shrinking of the small and medium-sized business level will again result in a society divided into upper and lower social classes. And if the SMEs are no longer strong enough to support the freedom systems of democracy and market economy, this systems will also collapse during the crisis. We will see if and to what extent we can save our democracy throughout the crisis. We may expect at least that the current politicians and parties will be made responsible for the crisis, so they won’t survive.

Especially the lower social classes will suffer from the real crisis and the state crisis. Mass unemployment and insolvency will result in an impoverishment of the lower social classes.

And how will the pensioners react if their pensions are either cut down or devaluated by inflation, i.e. if they become poorer? We have described and discussed all these consequences, before. We are expecting violence and social upheaval. Politicians and the media have been promising luxuriance and wealth without any effort to the people in our country for a very long time. They did not inform them about the necessity of correction and even lied to them about the safety of pensions and social security. People will be surprised by the consequences, they will have to face and could thus react differently from what their seducers are expecting.

Anyway, in this crisis not only the illusionary boom but also the illusionary security will break down which the people thought granted them a sense in life and security of existence.

• Their savings deposits and their assembled capital funds will evaporate, • their income will extensively decrease – and that of the state as well • the statutory pensions will be reduced or by inflation be reduced to a minimum provision • and the social security benefits will have to be drastically corrected. Social security benefits without work and life-long social benefits will no longer exist in the future. The majority of our population will have to bid farewell to prosperity and bitterly recognize that their previous aim of material prosperity has collapsed, and thus that they had committed their lives to a fading delusion, so far.

After the crisis

In each crisis there is a ray of hope: It does not last eternally. The last world economic crisis lasted 5 years. The corrections of this crisis won’t take much longer, perhaps less. We must thus try to get through the crisis with defensive strategies as well as possible during the next two or three years so that we will be able to reconstruct afterwards.

I don’t want to catastrophize but I want to prepare the reader for predictable developments so that the coming events won’t be suppressed but considered in due time. Only those who anticipate and accept a danger will be able to survive it.

We have to accept the identity crisis in this crisis as a challenge going beyond our self-interest, which has to do with our personal identity and the aims of our society: My generation experienced times after World War II when people were looking for new purposes in their lives. It was then that there was a sense of a new piety, the search for a life in Christian faith.

However, the Americans with the help of media manipulated by them, made it clear to us that idealistic aims were no longer on the agenda, but that our lives had to be dedicated to the achievement of prosperity and material goods. Our elite then changed from the arts into economic and technical disciplines and the economic miracle developed.

For too long a time we have however believed in prosperity as a purpose in life, even when we did no longer achieve genuine prosperity, but increasingly achieved a kind of illusory prosperity. This purpose in life of reaching material goods will now collapse in the crisis. People will realize that they stand empty-handed, having chased the wrong idol. Just like after 1945, they will be searching for a new and viable sense and purpose in life. No society can keep together without common aims. If the old aims proved to be a fallacy, the people need new ones in order to find not only the sense of their own lives, but also in order to stick together and develop the society that pursues common aims.

Where do we find the new sense of life for ourselves and for our society after the economic collapse? We do not know this yet. 98 per cent of our people do not see the necessity for a new purpose in life yet, because they have not yet realized the crisis with the collapse of the old material values. We therefore face two crucial questions:

• Where will we have to look for new viable purposes in life for ourselves and for our society? • And from which groups can we expect the development of such new central ideas? If we examine the different epochs in history and their central ideas, we will realize that there has always been a change between material and immaterial, idealistic or religious dominant ideas. The happiness of people was even more frequently considered to be immaterial than material. Remember the Gothic period, the Reformation, the Classic period, Romanticism or also the different socialist ideologies. They all saw the people’s happiness is being brought about in the realization of religious or idealistic instead of material aims. Indisputably, people can also be happy in their faith, in their idea, in the realization of personal aims, such as having a family or other immaterial aims.

When it becomes obvious, how thin and ephemeral material aims in life have become, the next central idea will probably be searched in idealistic, religious or humanitarian purposes in life. Whoever can formulate these new central ideas for our society after the collapse of materialism will be able to present a new sense in life and thus inspire people for a new beginning. Our task is thus to formulate new, non-materialistic central ideas which can show people how to live happily without prosperity.

If we think about who could develop such new central ideas, we will have to forget about the big world powers: The USA, as the export country of materialism, will implode in this crisis, will lose their empire and will be more severely hit than other countries. And China is only at the beginning of materialism, without an ethic change emerging. I assume therefore that new central ideas may be developed particularly in the classical cultural areas of Europe and India. Above all, it will happen in Europe, because Europe still owns a unique cultural variety and tradition despite all globalization and centralization tendencies.

Where however are the masterminds in Europe that can think about new central ideas, about idealistic happiness of the people and about viable ideas?

In former times, these viable central ideas for our Christian West were taken from the Christian churches. I doubt whether these still have the power for a new reformation today.

In Feudalism, new ideas and new values were predominantly developed by the upper class of the aristocracy. However, they have not only lost their function, but also their power and importance.

The middle classes remain, in particular the cultural middle classes. We owe them all the great ideas of the last 200 years. Just remember what the parsonages meant for our cultural history, for literature, philosophy and science. As a researcher of the Mittelstand, after the past 50 years of the enormous achievements of the SMEs and the entrepreneurs, I see a revival of the time of the cultural middle class – the scientists, the teachers, the artists or writers. Of all the subpopulations, they seem to be closest to new idealistic central ideas. But this would however require from our cultural middle class in Europe that it divorces the leadership and manipulation of the still materialistically oriented global media rule and gets deeper to the roots of our national education and ideas, mentally. This is the task for the best of our people, i.e. to look for a mental rise out of the economic crisis and to find new idealistic aims for the people beyond materialism.

Anyhow, it would be worth all nobles’ efforts to jointly meet such a task and adopt their new role in searching for a new central idea and the aim of the people’s happiness.

Let us understand the crisis as a chance in this sense. A lot will break down. From this collapse, however, new things will develop. It would be nice, if towards the end of the crisis a new idealistic and cultural resurgence were then developed by us and we could contribute to a new happiness of the people with new viable essential ideas.

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