Hmmmm very interesting reading lads and lasses... I thought I might chime in with a little bit of simplification to understand the division between what's happening on a macro and a micro scale using the same analysis.
The analysis is simple... let's look at a family situation. In the family there is a Dad, Mum and 2 kids who live in one house and the Grandparents who live in another.
Dad is the primary income earner who owns a business and says to the asset rich grandparents that he is facing a tough time right now and requires capital (for whatever reason) for his business. He advises cash flow is expected to be much stronger in the time ahead.
Using the capital the Dad, Mum and 2 kids appear to be doing OK paying Bills and keeping on top of other commitments but the business still has not turned the corner, so the Dad goes back to the Grandparents to ask for some more money... the business does not meet cashflow commitments and so ends up going into liquidation, taking the Dad, Mum and 2 kids with it. The Grandparents have lost their capital and are forced to sell their house because they needed the capital for their retirement.
This micro exaample is exactly what is happening on a Macro scale:
- Inside countries: substitute Mum, Dad and 2 kids with a company and its shareholders and Gradparents with a Bank and
- Globally: substitute Mum, Dad and 2 kids with a National Reserve Bank and its population and Gradparents with a Foreign Reserve Bank
What is happening right now is that each National Bank and Foreign Reserve Bank is assessing each others reason for borrowings and determining if cashflow is sufficent to meet future obligations.
As Ken reightly points out the strongest companies will survive and so will the strongest contries and their respective Reserve Bank. This process does not happen over-night because the "Dad's" return to the "Granparents" many many times... hence the reason why we see Dead Cat bounces during a Bear market (the expectation that cashflow has returned).
