Why Is This Downturn Occurring?

The world economy is now entering a severe and prolonged recession. The cause of this recession lies with the financial and banking sector.

Our banking systems works through a mechanism known as fractional banking. In this system, customers give their money to the banks in the form of savings, while the banks lend this money to customers to set up companies or to buy cars. This lending fuels the economy and improves economic well being. However, fractional banking requires banks to ensure that the ratio between their lending and deposits are at a level that allows them to have sufficient cash to cover their liabilities as they fall due. 

However in recent years banks lending was not based on the amount of customer savings they had, but instead on external sources. As a result, banks were now abandoning these ratios and overextending themselves. In the process they were pumping huge amounts of additional capital in the economy

This additional capital led to a significant increases in asset prices. Capital thus chased these higher returns and this money then trickled down and created a significant sense of well being among the population.

Thus, a huge correction is now required as we pay back this debt and reach a new level of equilibrium, where the economy learns to functions without these external capital inflows.