But, are these mortgages really to blame? Or are they just a convenient scapegoat for the current economic situation?
Recently I read an online article written by Jeff Rubin of CIBC World Markets That gives a completely different viewpoint of today's economic crisis. I feel it’s important to share some of the realities of our current economic landscape, and as such have summarized the article in the following paragraphs.
Pointing the Finger
Over the last few months, we have all heard commentators on national broadcast media blame the current world wide economic melt-down on the US Sub-Prime crisis. But, is that a fair and accurate assessment of the situation, or are there other factors at work?
To put the US Sub-Prime Mortgage crisis in perspective, approximately 2,000,000 homes in the United States have mortgage arrears, about 2% of the total outstanding mortgages. If we put all of those properties in one city, it would be about the size of Cincinnati, Ohio. It does not seem possible to blame the entire world economic troubles on a problem that small. Something else must be going on.
How the World Economy Works
A quick micro-economics lesson might be in order. When John the butcher opens his shop, the money he earns from his sales goes to Bill the cattleman, who in turn pays Betty the equipment manufacturer, who in turn pays for the iron in the equipment. The mine has hired Joan the home maker who buys meat from John the butcher. Money in a free market flows around and around.
This is how the world economy functions as well, with money constantly flowing around the globe through international trade. But, what would happen if something altered that flow of funds? Economic chaos would probably result.
The Real Problem?
Over the past two years, the price of oil rose from, what now seems like a sweet deal, about $50.00 a barrel to just shy of $150.00 a barrel. Most of that money went to the Middle Eastern countries, where they do not spend as freely as we do in Western Countries. Simply put, more than $700 Billion was taken out of the US economy and not replaced. The same phenomena occurred in Europe and around the world.
With $700+ billion removed from the American economy, economic chaos was soon to develop, with fewer dollars being left in local hands keeping the local economy alive and healthy. Financial turmoil was bound to follow, and follow it did.
China has now become the largest debt holder for US bonds. The Chinese also tend to save their money much more than North Americans… another factor in the world fiscal imbalance.
Looking back over the last fifty years, we can see similar economic patterns follow every time the price of oil went higher than would be considered reasonable. Most industry experts seem to believe that a realistic and sustainable price for oil today is around $80 per barrel. But, that is the topic of another discussion.
This treatise is a very simplified explanation. But, suffice it to say, that the world wide credit crunch cannot be blamed solely on the US Mortgage Crisis.
f you would like to read the artcile in its entirety, click here.
