Economic Crisis as a Purging Mechanism

With the current interest rate base economic system, where an amount of interest is applied to any kind of debt, economic crisis is Inevitable.

No, it is Inevitable. Growth cannot help countries escape debt, it is wrong to assume that growth can outpace interest. Impossible, for the banks will always charge an interest rate that is higher than the economic growth rate.

It is the side effect of growth that allows debt to be repaid, inflation.

Inflation allows government, individuals, and corporations to pay debt that is growing faster than the economy.

So in effect, by allowing inflation to take place, government is saying “go f yourself” to the banks who disburse debts in the government’s currency.

But what happens when the rate of inflation is less than the interest rate the bank is giving to the government, individuals, and corporations?

Again, it is literally impossible for all, and truly all, of these debts to be paid in full, since the interest rate being charged is almost always higher than the economic growth rate.

It’s like asking a runner to wound a rope that is being unfurled by a horse drawn carriage. The carriage will almost always unfurl rope faster than the runner can wound them.

So, what happens?

Crisis happens.

It starts with credit crisis. Mortgage crisis is the main culprit. Why? Because there are always less than smart bankers who dare to assume that property can only perpetually increase in value, then when that assumption is proven as what it truly are, the less than smart bankers got burned, starting a credit crisis.

A slight detour. Actually, all smart bankers know that the interest rate base economy is unsustainable, but as long as everybody (the central banks, the governments, the corporation) are willing to play this charade, then smart bankers are more than happy to facilitate this musical chair game. For it is a musical chair, for when the music ends (everyone ask for the get paid) there really aren’t enough chairs for all the players to sit on (interest is almost always higher than economic growth). So, if you are banker, and you are reading this, let us understand that the industry we are in, at it current state is always a game of musical chair, always be ready to hear those telltale signals of when the music is about to end (hint, the music ends when the ratio of players to chairs become to high).

But wait, why do everybody willing to play the musical chair game? Greed. Greed in the form of wanting profit with zero risk. Interest rates are basically that, guaranteed profit with zero risk. Since depositors themselves want profit without risk, the banks’ charge profit without risk to borrowers. Where the accumulated burden of interest going faster than the economy can no longer be sustained, the music stops, crisis happens, and everybody ended up losing money that is not supposed there to begin with.

So, in “real” economy, crisis is inevitable since the interest rate being charged by banks is almost always higher than the economic growth.

How about in the “virtual” economy, the world of Wall Street where money can magically appear from money. No goods are made, no labor are paid (not that much to justify all the money being made), no real services are rendered, yet there are numbers being added to other numbers in a computer screen.

And the silliest thing is, these numbers in computer screen can then be redeemed at full value with real goods and services. So as a result of me doing a leverage bet on the soybean index, I can then take the proceeds of that bet to a car dealership and buy a real physical space occupying car.

It’s like me playing video games, getting all these video game money, then my bank agree to give me hard currency in exchange of the video game money, then I buy real goods and services.

Imagine if there’s tens or hundreds of thousands of video game players, all making these video game money, all sitting there pretty believing the video game money can be exchange at face value to hard currency.

How can the world not face a problem when all these video game money is fully convertible to hard currency?

Imagine the vast ness of wealth that can be made in videogame land, it’s a virtual land, there’s no limit to the wealth that can be made in videogame land, no labor that needs to sleep, no steel that is finite in amount, no oil that is also finite. Videogame land, Wall Street land, is boundless for it is virtual.

Thus when governments allow videogame money to be fully convertible to real money, big problem happens. Investment banking holding more oil reserves than the US Government. Naturally it can, for the investment banking firm lives in videogame land.

Let’s try to imagine, if tomorrow, all the investment bankers decide to liquidate their portfolio , exchange it with hard currency, and then buy real property, goods, and services with the money earned from video game land. There could be not enough real property, goods, and services to trade all this money with. And yet all this money is created without producing real goods and services.

So when in “real” economy, greed prompts people to make profit without risks, yet still producing some goods and services. In video game land, greed squared prompts people to make profits without producing goods and services.

In video game land, as greed squared, the game of musical chair is also squared. If we believe that it’s impossible for all debt to be paid since interest rate is higher than economic growth, what would happen to money made in video game land, where money grows faster than, nothing, it’s based on static money in computer screens.

So in video game land, crisis is both more Inevitable and stronger when it hits, since the amount of silliness that needs to be cleansed is also squared.

So, we can conclude that economic crisis is a purging system, both for silliness that is being made in the real economy, and the silliness being made in videogame land.

The silliness is illusion money, money that is not represented by real production of goods and services, money that is being made through interest that is higher than economic growth and being made on bets at videogame land, money that really isn’t there in the first place.

But wait, doesn’t government always step in crisis?

Yes they do, and by doing that, they prevent the purging process that was supposed to happen and allow past silliness to remain in the system, whereupon this past silliness will be given compounded interest to become even more silliness.

What then will happen? Then the mother of all reckoning will come forth. Bankruptcy.

When a government closed it’s eyes for too long, it will find itself simply unable to pay the debt that has been growing faster than it’s economy.

Witness this quote from the New York Times ““Portugal’s debt is just not sustainable,” said David Bencek, an analyst at the Kiel Institute for the World Economy, a research organization in Germany. “The real economy does not have the structure to grow in the future and thus will not be able to pay back its debt in the long run.”

Source: http://www.nytimes.com/2012/02/15/business/global/portugals-debt-efforts-may-be-a-warning-for-greece.html?ref=business

In this example, it is Portugal that is meeting the mother of all reckoning, actually, no, it is Portugal’s debtors that is meeting the mother of all reckoning. The banks and institutions that has been lending to Portugal has been claiming this revenue that simply doesn’t exist, and now, the banks and institutions are going to be force to wipe off this doesn’t-exist-from-the-first-place revenue from their books.

The question is, with IMF playing firefighters in the last 3 decades, will the same fate meet all world governments?

Save for maybe Germany and the Scandinavians.

Ponder and identify the market opportunities that unfolds as chaos furls upon the known economic system.

United States of Europe

What Germany failed to achieve with krieg, they (will) achieve with being frugal.

By today (19 November 2011) The government debt crisis in europe had went on for months.

Bringing a drama of continuous cycle of economies being at the brink of ruin, emergency solution being put forth, then the same to be found inadequate or in peril.

But throughout this drama cause by “southern european spending more than what they earn and when bankrupt, ask prudent germans to transfer their savings to the southerners”, there’s an under current of it will all belong to Germany.

As a famous CEO once said “if you cannot control your destiny, someone else will”

As weeks pass by, this undercurrent became more visible. Bolder language were used. From the inherent unfairness of Germans having to pay for someone else’ profligacy, to needed concession from sick countries and private creditors if a rescue program to be made, to how economies joining the euro zone might need to relent some degree of fiscal authority, and finally,  this article in the economist (Nov 19th 2011)
http://www.economist.com/node/21538701

“The Germans are right to argue that, if euro-zone countries want to save their currency, they must surrender much economic sovereignty. But the argument would be more persuasive if, in return, countries knew they would get more mutual protection. This could be a real step to political union. If it is not what Mrs Merkel wants—and it is unclear how many German voters would support it—then she might have to abandon her rhetoric and start planning how to manage a euro break-up instead.”

The problems brought forth by monetary union, requires solution that only fiscal union can achieve, which will be only possible if, or instead having the implication that, some political union is required.

We are, ladies and gentlemen, quite possibly witnessing the birth of the United States of Europe.

An unwanted, but inevitable love child that was conceived in 1992

And no matter how the parties involved would deny this love child, the time has come to decide as to whether to give birth to this United States of Europe (which full mature form might take quite some time) or to kill the fetus called Euro.

I wonder what the flag will look like..

Stop the War on Workers. Rise of the Proletariat?

Stop the War on Workers

http://en.wikipedia.org/wiki/History_of_economic_thought

“People are therefore alienated from both the fruits of production and the means to realise their potential, psychologically, by their oppressed position in the labour market. But the tale told alongside exploitation and alienation is one of capital accumulation and economic growth. Employers are constantly under pressure from market competition to drive their workers harder, and at the limits invest in labour displacing technology (e.g. an assembly line packer for a robot). This raises profits and expands growth, but for the sole benefit of those who have private property in these means of production. The working classes meanwhile face progressive immiseration, having had the product of their labour exploited from them, having been alienated from the tools of production. And having been fired from their jobs for machines, they end unemployed. Marx believed that

a reserve army of the unemployed would grow and grow,

fuelling a downward pressure on wages as desperate people accept work for less. But this would produce a deficit of demand as the people’s power to purchase products lagged. There would be a glut in unsold products, production would be cut back, profits decline until capital accumulation halts in an economic depression. When the glut clears, the economy again starts to boom before the next cyclical bust begins. With every boom and bust, with every capitalist crisis, thought Marx, tension and conflict between the increasingly polarised classes of capitalists and workers heightens. Moreover smaller firms are being gobbled by larger ones in every business cycle, as power is concentrated in the hands of the few and away from the many. Ultimately, led by the Communist party, Marx envisaged a revolution and the creation of a classless society. How this may work, Marx never suggested. His primary contribution was not in a blue print for how society would be, but a criticism of what he saw it was.”

http://en.wikipedia.org/wiki/History_of_economic_thought

Clearly, the Communist Party had failed  But it is also clear that with each cycle of boom and bust, their amplitude widens, for when in a bust, in an a effort to maintain valuations to their bubbled assets, man launched more creative financial engineering. Preventing full impairment of bubbled assets and with it, acknowledgement of its underlying value, while delivering growth.

We had it long coming, and this will continue, just be smart and make sure you get yourself a chair when the next round of music ends.

Or is that the only way?

Is there an alternative blueprint?

 

By ceding your ego, you become the predator.

This thought pattern emerge after the most unexpected mingling of two events: Discussion about ego and watching both “Extreme Hollywood” and “Fashion Police” in E! channel.

One of my vendor, a businessman with much more maturity and experience than I am, had explained to me that quite possibly, the persistent problem I have with a colleague at work stems from my failure to stroke his ego. I silently agree that this failure came from my inability to cede my own ego.

In my insecure need to feel important, to be regarded as important, I have not been willing to cede my own ego when in contact with this particular colleague.

Continue reading

“When decision is made, there’s money to be made”

I heard this quote sometime ago, I forgot through which medium, TV, cinema, book, or magazine, but the quote didn’t come from me.

What I like about it is, the more I think about it, the truer it became.

On a micro scale at my own job, people made money when we make decisions. We decided to have a training program, ka ching for someone else. We decided to put above the line marketing, ka ching again. We decided to reward our staff who make good sales, ka ching again. When we didn’t decide or decide less prodigiously, there’s no or less ka ching to be made.

On a macro level, I learn that economic growth comes from money being spun again and again into the economic system. That’s why when an economy has too much savings, it could fall into a deflation trap, and face a zero growth period.

But I haven’t considered the effect of decision making to economic growth.

My theory is, the impact to growth from 1 people deciding shoes for 1 million other people would be far far less than when 1 million people deciding what shoes to buy for themselves.

The key is in the number of decisions made to achieve fulfilment of need or desire (1 million people deciding their own shoes), n of decision, not just the state of fulfilment (1 million people having shoes)

I will discuss the empirical support (I dare not say evidence) and the reasoning as to why such is the case.

In non-modern society, life is simple, both supply and demand of need and desire are few. Your decision revolves around waking up, going hunting, forage for fuel, cook food, eat, sleep.

Also in non-modern society, more decision are made by ruler, rather than individuals. Move your habitat from point A to point B, if you live in a community, most likely the decision will be made by an elder within that community.

Yet in modern capitalist society, there’s much to want, there’s a lot of decision regarding want that one can make. You wake up, you can decide that your bed is not comfortable enough, your pillow lost its fluffiness, the wallpaper in your bedroom has the wrong color, your flip-flops has lost it’s charm. Between the bed and the bath room, an American can make more decision that a tribesman would ever make in his life time.

Furthermore, in modern capitalist society, there’s more decision to be made by Individuals, rather than by a Grand Leader. This sounds a lot like liberalism, free individuals to make economic decision, reduce the role of government in making decisions. People are free to choose what brand of car to buy, rather than the 3 state own automobile company. People are free to cover their walls with paint, wallpaper, ceramic, granite, or other materials, rather than the dreary grey beton brute supplied by the state.

From the last two example, we can see, lo and behold, that what’s true in non-modern society is also true in communism. In communism the variety of want that the average citizen can have is limited, demand is controlled. And also in communism, not only that citizens has fewer wants, whatever wants they have is decided by the state.

This theory is supported by each explosive growth that occured after an economy becomes freer in 2 aspects:

– The variety of needs and wants of the participants (consumer electronics entering China, the variety of consumer electronic items)

– The decision to fulfill those needs are owned by the participants (chinese consumer can choose what consumer electronic to buy, can choose what brand, model, features to buy)

Why?

Why does 1 million people deciding their own shoes give more growth than the state deciding shoes for 1 million people?

The need is fulfilled, the economic resource needed to fulfill that need is deployed, and with that, money moves and economy grows.

Several reason:

– Innovation. When people are allowed to want more things and variety of the same things, this drives innovation. I want my wall covered with something other than paint, I want wallpaper, I want ceramics, I want granite. And when decide on wallpapaer, I can decide on texture, color, pattern, weight, material quality. All these variations exist due to innovation.

– Innovation cost more, it needs more money, more money are pump into the economic system. Innovation, in itself, is expensive. We move labor from producing food and other goods to imagining things (design the wallpaper, design the production of the wallpaper), to talk (discuss the design, negotiate the materials), to write (legal agreements, trade agreements). Millions dollar worth of labor diverted from the production of goods to produce innovation.

But, additional cost means more money is needed. More money is made and enter the economic system, giving more fuel to growth. Furthermore, this specialize job allow more people to join the productive workforce. People who were thought to be dreamers, talkers, and writers, unfit as labor in the muscle intensive pre industrial world can now find an occupation.

– Innovation increases the velocity of money. With more variety of wall coverings and wall paper, there’s more company designing and making these wall coverings. Each of these company do transactions, with their supplier and buyers, and who in turn do transactions with their own supllier and buyer. This increase the velocity of money.

Within these institutions, there are people working in them. And you know what? People make decisions that requires money. With more corporations and specializations, there’s more transaction made by individuals. Again, velocity of money increases.

– With both higher amount and velocity of money, the economy grows faster.

This is why, an economy system that allows more decision to be made would grow faster than an economy system that is more restricted.

Protected: 06-08 Crisis – How the Banks Did It – Record 002b – Banks Bundled Bad Debt, Bet Against It and Won

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Protected: 06-08 Crisis – How the Banks Did It – Record 001a – Wall Street Plays Hardball

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