FinancialGuy Writes!

So how much government borrowing can one economy take?

Really? Imagine, hypothetically, that a country had banking problems and that this was in large part due to excessive borrowing within corporations and by individuals, how much sense can it make for the government to borrow to bail out the borrowers?

So we all know that governments are faced with very tough decisions right now and I do not pretend to have all the answers. I mean really, I do not pretend to even know all of the questions…

But there is only so much government borrowing that can happen before a currency begins to devalue. Right now, since every government is borrowing at an alarming rate, it might be wise to presume that they will all be going down together. If it happens like that, who can say?

However, there has been a lot of government borrowing already for many years. The UK is a prime example. The following link shows that the problem is starting to get out of hand.

BBC NEWS | Business | Consumer inflation reaches 5.2%

I know that inflation can be imported as well as home grown and that a modern economy can cause inflation in many, many ways. This is not a quick and easy topic – I am aware. But, one of the major causes of inflation is simply that of money creation. So much money has been created in the past 10 years or so that a period of high inflation is a near cert sooner or later. It seems that sooner might be the case.

The real world impact of inflation at 5% is tough. But the real problem is that anyone and everyone within the world of finance has believed for the past several years that the inflation statistics are not very real. Many believe that the numbers have been manipulated to make a nicer picture. If that is the case, then real inflation – the kind we feel in the pocket and not see on a TV news report – might be several percentage points higher.

Of course, none of us knows the real scale of this problem.

In the same way that markets are currently “unwinding” trillions of dollars of derivative contracts, the inflation monster will need to be “unwound” from the economy as well. Without considering a credit crunch, this will probably bring very considerable economic pain.

The signs are not good.

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  1. The financial crisis is spreading to all the sectors and the ultimate results will be available by the end of 2009. Anyway the crisis is very crusial to all western markets since its a prestigeous counter movement from these governments and it should show some good results by the mid of next year atleast. But in terms of asian countries, it is a good opportunity to find alternative solutions and reconfirm their best practices followed over the past years. Some of the basic causes of financial crisis is, bad credit loans processed by the financial institutions to the customers and third parties. But in case of growing markets, most of the banks are assuring the creditworthiness of their clients twice since most of the clients are not high profile clients. Hence this didn’t make much impact on their financial systems and processed loan payment shedules.

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