The Next Revolution in our Credit-Driven Economy

Chapter 2Differences between Liquidity and Solvency Are Thin

Financial systems are always seeking equilibrium. This equilibrium is found when there is enough liquidity to fund growth through non-inflationary wage growth accompanied by productivity gains. When people are earning good money and efficiently making things the world wants at a good price, there is ample prosperity. This prosperity results in deposit and savings and is accompanied by confidence in the future. This confidence leads to a willingness to buy homes and invest in expensive education for their children. Alas, these moments are few and far between.

These moments are found when lending growth is about equal with the growth in savings and income. It is found when the demand for international goods abroad is about equal to the demand other countries have for this same country's goods. The problem lies in the abuse of wholesale funding as countries with excess liquidity (too much surplus in the current account) are looking for a quick buck by lending to countries with a deficit of liquidity, countries that cannot get their act together to create enough wealth to fund the future. When this happens, surplus countries lend too much money, usually at the wrong time and at the wrong price. It almost always leads to excess and implosion. This willy-nilly spilling of wholesale funding to unsuspecting countries has a strong tendency to create destabilizing financial conditions, default, government bailouts, and social ...