Saving America

The US financial system could go under without swift action from the global community

Banning short selling, establishing a government entity for warehousing bad assets and guaranteeing money market funds have brought relief to financial markets. But this may be temporary. The US still needs to find money to pay the losses from disposing of bad assets, decreasing leverage in the real economy and financial sector, and finding a non-debt-driven method to make the economy grow. The road ahead will be long and hard. The global community may have to work together for a solution.

Market pressure has forced the US government to adopt the barrage of newmeasures. The origin of the crisis is excessive leverage, especially at Wall Street brokerages. Short sellers have learned to bring them down. They short their shares to create a panic that sends their trading counterparts fleeing. The resulting loss of liquidity bleeds the highly leveraged brokers to death. Obviously, banning short selling allows them to live longer. Ironically, Wall Street created the short sellers or hedge fund industry after the hi-tech bubble burst to juice up its businesses.

Like a modern day Oedipus tragedy, they have come home to slay their parents and take their homes.
However, technical changes don't alter the fundamentals. Businesses that live solely on increasing leverage are no longer viable.
Deleveraging is inevitable, which could lead to a gut-wrenching recession. Every sector in America is overleveraged. Where can they find the money to recapitalise the economy?

The solution to America's crisis must involve the countries that own US$10 trillion in foreign exchange reserves. The US economy is undercapitalised. An internal solution is usually one form of debt replaced with another. The current proposals fall into this category.
When the shell game runs out of options, printing money is the only way out. That will eventually lead to the US dollar collapsing and hyperinflation in the US economy.

The world should come together to prevent such a tragic ending.
Countries with big foreign exchange reserves like China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates, for example, should sit down with the US government to find a way to recapitalise its economy.