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The coming crash – who gets hurt?

If the word ‘crash’ causes unexpected sweating and a queasy feeling in your stomach, read no further, because the business world as we have known it for the past few years is about to undergo a rapid change.

Crash might be a bit strong. Correction certainly is not.

The difference to those caught in a fall in market values of between 10 per cent (a correction) and 20 per cent (a crash) is probably irrelevant, especially to anyone using borrowed money.

However, having predicted a ‘sustained correction’ (perhaps this euphemism will make readers feel better), Briefcase would also like to forecast that the events unfolding today are both very similar to 1987, and quite different.

The similarities lie in inflated asset values. If you doubt this, just look at the stock market.

Penny dreadful mining companies have not suddenly changed just because they have become dot.com dreadfuls.

Management is often the same, the corporate excess the same – so, too, the greed factor, and the rate of ‘cash burn’; the speed at which money is wasted.

The burn is roughly proportional to back blocks mineral exploration.

What you see on the market is nothing more, and nothing less, than the “irrational exuberance” of speculators on a self-perpetuating feeding frenzy (they are starting to believe their own nonsense).

This is exactly the thing US Federal Reserves chief Alan Greenspan is trying to stomp out.

And, guess what? Greenspan will win – because he has a weapon as powerful as gravity and as inevitable as time – interest rates, or to explain it more simply, the cost of money.

Like gravity, time, taxes and death, the cost of money is an irresistible force.

As the cost of money goes up (rising interest rates) the value of assets goes down.

Yes, there will be resistance – for a while. But the longer the market resists the more sudden and painful the ‘correction’.

Even so, do not think that this is a repeat of 1987. In that interesting year, it was corporate Australia which failed.

Captains of industry fell victim to easy money from careless banks, only to fail when the call came to repay.

This time it will be thousands of small Australians who will fail because they are the latest victims of the banks and their easy money policy, money that is being borrowed to punt the market – a market which is turning more bearish every time Greenspan turns the interest rate screws.

Unlike 1987, corporate Australia is fundamentally healthy, though the banks might suffer a repeat dose of the bad debt blues.

And that brings a nasty thought.

Are there any staff left in the banks to enforce thousands of loan agree-ments, foreclose on mortgages and mop up the mess?

Advice from Briefcase (worth the cover price of this newspaper) – hang on to your hat and get ready for the crash of the dot.coms, the wails of small investors and a crisis in Australian banking.

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