[Traduk]

Chrysalis,

You cover many different points but within them is the reality factor that governments are trying to avoid like the plague.

Recessions are the consequence of too much growth and the effect is comparable with evolution which leads to the destruction of the weak. The weak in that instance are companies which were poorly run and people who had grossly over-extended.

The last administration put in place all manner of safeguards to give short term stays of execution to the over-extended in the mortgage market and to hold back the attack dogs for companies with less than stellar bank transactions status.

In the budget the stay of execution was extended for another year for mortgage holders in trouble. It followed a comparable stay in the USA which is a relief for those in trouble but solves no problems at all.

What the gist of what you think should happen is mega destructive and thus the short term palliatives. Deflation is what must happen but it scares the living daylights out of everybody because it is competitive down pricing to find bidders and in so doing destroys not only asset values but businesses and jobs. Greenspan when he was Fed governor stoked inflation because he could control it but feared deflation because nobody knows what to do and the only real model was the 30's in the USA.

The dilemma is that for prices of houses to drop tens of thousands go into negative equity. If they are re-possessed, they and their families are homeless and if linkages exist with business loans the businesses fail. Failing businesses spreads the problems and the dominoes start to fall at a potentially alarming rate. People will tolerate pain only so far and if they are comforted by paper profits on their home at least it countermands some of the bad feelings of lowering purchasing values in income. If their house also becomes a losing liability you can imagine the psychological blow.

In the late 70's the business environment had descended into a landscape of boarded up shops and factory units. Pay was low where jobs could be found but with the supply side of the economy crippled demand picked up and with no supply, up went inflation. The economic changes brought about from the USA (fiat money) kicked in and we as a country were off to the races big time.

Fiat money has no intrinsic or tangible value as did the gold standard and relies on market forces to set values. As valuations of everything is set by ability to pay or credit worthiness you can probably appreciate that everything is inter-twined. You cannot have low value houses with disproportionately high incomes because competition will bid them back up to a high level. Poverty is the only thing that will substantially lower house prices and that will be avoided or Saturday's rally will look very small and tame.

There is no answer to our problems that is apparent currently. We cannot compete with low cost foreign manufacturing so unless somebody comes up with a brilliant answer from somewhere I have no idea where our destiny lies.