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The next stage of the credit crisis

If you think the credit crisis is solely linked to the financial sector, you are probably wrong. Sure, the financial sector is the start of it, but consider what will happen to the economy when credit lines that companies have depended on for many years get pulled as the company has to meet payrolls in a declining economic environment. The factory doors will shut and people will get laid off.

Take a small town where there is one major employer which provides 500 jobs. Should that employer go to the wall, there is an effect in the local economy hitting local businesses, retailers, accountants, lawyers and other sections of the local economy. Eventually, if the jobs aren’t replaced, the local community will disintegrate and disperse and schools, doctors and government offices will close. In addition to that, the treasury will receive less tax revenue and the state will have to pay Unemployment and other benefits to the workers until they find new work. This can’t be allowed to happen...but the cure will be worse than the disease.

Obviously, this is bad and the government, on top of bailing out banks, could very shortly be bailing out companies as well. Phew, you think...that’s OK then. Well, not really, because the government doesn’t have the money to cover the payrolls for all these companies whose bank is suddenly unwilling to lend to them in the way that it has lent for years. The answer will be to borrow money or just print it. Once that happens, we all suffer as the currency loses it purchasing power and inflation starts to go up. Yes, inflation will fall initially as the global economy slows and oil price drops filter through. Commodity prices will come down as well...but eventually, the effect of all that extra currency will filter through to the purchasing power of the currency at home. It HAS to be this way.

The bailouts will be paid for...by us all...with inflation....and a de facto robbery of people who hold British pounds

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