The last great empire builders – the UK and the USA appear to be on the brink disaster due to the collapse of debt financing.

Due to the mountain of debt compared to productivity mainly in the private sector, the banking crisis looks like it inevitably will move to the next stage despite the extraordinary generousity by Governments of tax payer reserves into the banking sector.

It seems that our addiction to capital is an addiction to “productivity free” capital – in other words the acceleration of capital growth over the past thirty years has been a belief system based on attributed value rather than real value. Notice how your house got more and more valueable?

Look at it like this: there is a supply of houses and a demand that together regulate prices in a competitive market. That determined a real price. But there is also a market for money and its value is relative to other things. There is no such thing as a “fixed value”. Everything drifts against everything. That means that the system, to grow, has to mimic an organic system and fool itself into expansion. An economic system that allows debt in excess of money supply causes booms and busts. When debt however exceeds productivity, the value of money is eroded.

What we are now faced with is not so much a debt crisis, but a crisis of value. Instead of enabling bully boy boardroom banter taking punts on failure, investment in real productivity is utterly essential to the availability of jobs. Or is it?

Cash is merely the current in the river. What Governments have been doing – putting more currency into the market place because banks are not lending (due to secondary market problems) – is not fixing things.

Why not? First you have to ask, why would it? It is just flooding the river. The people are not able to draw more water from it as they are too busy painting their huts.

The simple thing to do is reduce social reliance on the banking system.

Imagine this. If there were no mortgages, the mortgage crisis would be over.

Of course, there are many mortgages and too many of those are about to go sour. What possible solutions and what are the results of those?

a) Revert all first home mortgages to long-term very-low-interest contracts; there is continuance and stability in the housing market. Make personal short term debt more expensive. Create a fund to finance business enterprise and employment.

b) Buy the failing contracts and rent to the mortgagees; the Government has a long term commitment to housing

c) Do b) but replace Government with Private Enterprise.

Only b) and c) have been discussed. But if the terms of mortgage were redefined so its a mutually beneficial contract and the banks forgo foreclosure except in cases where costs would escalate otherwise, it follows that a lot of market movement (change in value) would be exposed during the period when funds to support purchase are simply not going to be released by banks. If the market is to be dead, then make it a safe dead market.

Option a) removes from the public risk those mortgage deals that were signed probably in good faith. Extreme cases or criminal cases must be caught but the Government does not want banks to foreclose on a productive household due to the bank’s exposure to secondary mortgages.

The next phase of the problem appears to be that businesses is unable to expand as banks won’t release cash to them either.

Bailing the banks out becomes an excercise in preventing runs on those banks from exhausting them of available resources as much capital is tied into long term contracts. This does not return confidence. Being able to pay one’s rent and earn money does that. And if the businesses in the economy continue to lay off people in droves, the next phase of a real depression would start to exist. And that is a huge reduction in GDP. Then the debt spiral would become more and more ominous.

One solution may be to simply sequester the poison from the economy and that is the conclusion the USA appears to lean toward.

The UK solution appears to be to nationalise the banks.

The NZ solution appears to be to think we are not part of the problem. NZ is a small but active economy, active in trade and very active in property. Property ownership in Auckland extends to boat ownership. This means there is an awful lot of personal investment in luxury and therefore something that will deflate quite nicely. Bricks and morter are great but the NZ problem is skilled people keep leaving (I may too).

But our new prime minister – John Key – is going down the concilliatory route. At least with Helen Clark there was a sense of emergency. His first act of office was of course to go on holiday. The second was to break his arm. So our new ex-Merril Lynch PM really has his mind on his job. But I am prepared to give him a chance. He is calling for conferences on this and that. Next one expects a risk projection or that he has leased the meat industry to Japan.

Oh the horror.

DisturbingTrends has focused on the USA for the last eight years. Now it seems in good hands. Will Obama get the economy back to basics? Is he that good at mathematics? Or is John Key a great one handed chess player?