- December 12, 2008
- Posted by: admin
- Categories: Blog, World Economics
The economic condition of the world is getting worse on daily basis no matter how much we speculate about the future, a cent rises today and then the market falls a dollar tomorrow. Stocks plunging down as the U.S auto bail out fails. The 700$ billion bailout earlier didn’t really cultivate the economy. Thousands of people are getting laid off on daily basis.
The question is that is this really a recession or its the time to change the world economic system, if it is a recession how long will it last and when its lasts will the investors have the courage to forget the past?
The economic condition of the world is getting worse on a daily basis. No matter how much we speculate about the future, a cent rises today and then the market falls a dollar tomorrow. Stocks are plunging down as the U.S auto bail out fails. The 700$ billion bailout’s partial insertion earlier didn’t really bolster the economy. Thousands of people are getting laid off on a daily basis.
Is this really a recession, or its the time to change the world economic system?
if it is a recession how long will it last? Once it subsides, will investors have the courage to forget the past and look to the future?
I saw a documentary last Saturday on the current economic condition.
The economic experts in that documentary stated that in this economy, massivity and loss of responsibility are the characteristics that lack for a healthy economy.
Their opinion was that it is time for a new system that can interact with the globalized economy.
‘another sale on something
we will buy it while we can
and we will save a lot of money
spending money we don’t got’
Stompin Tom Connors
This is not the end of the world. But there are at least 5 major reasons for the situation, particularly as it affects the US, which is the world’s largest economy. This in turn then affects the rest of the world.
(1). There are several regular economic cycles, one of which is about 9-years in length, which I have been forecasting for decades. Thus there were recessions in 1973-4, 1982-3, 1991-2, 2000-1, and now 2008-9-10, with the slowdown usually lasting 12-18 months and sometimes 24 months. The next recession will be around 2019.
(2.) Every economic recovery period in a market economy is subject to excesses/bubbles and also various types of shocks. The bubbles burst when the economy weakens, because they are not sustainable. Thus we had oil bubbles in 1973, 1980, 2007. We had 9/11. We had a housing bubble. These bubbles encourage rampant speculation in commodities, driving up prices where no rise is warranted.
(3.) The US, by far the world’s largest economy, both nationally and personally, has become almost hopelessly addicted to debt-based consumption of things it does not need nor can afford. The US savings rate is basically zero, thus providing no domestic source for investment and credit. All credit has to be borrowed from abroad. Unless the US cures its debt addiction and starts saving, it will ultimately stop growing or be held to financial ransom by foreign governments.
(4.) The financial sector has seen the creation over a 20-year period of a massive derivatives bubble which as yet is far from being deflated. Derivatives are junk paper. Warren Buffett called them instruments invented by “madmen”. He said they were “time bombs” and the “weapons of mass destruction of the financial system.” He refused to deal with them. These derivatives were left totally unregulated by the US Fed under Greenspan who even tacitly encouraged them, including the latest type being mortgage derivatives. As the economy weakened and the housing bubble burst, these derivatives started to lose whatever value they ever had. This bubble too is still unwinding and there are at least $600 Trillion (trillion not billion) worth of derivatives across the global financial system. If they implode, hundreds of banks will vanish into a black hole.
(5.) The global financial infrastructure of the IMF/World Bank created in 1944 to coordinate the world financial system began to unravel in the 1970s with the (rightful) abandonment of the gold standard. It is now basically irrelevant as they are no more than international aid and emergency loan agencies for developing economies. They should be scrapped. We need to replace them with a true Global Central Bank, which would be funded by national central banks. It would in turn coordinate those central banks and enforce strict regulation of the national financial sub-systems of the now globalized economy. I do not think there is the political will to do so, largely because the existing regime is controlled by the US which will be reluctant to agree to any oversight on its own economy.
Depending on how the financial system can survive, then the underlying economy will recover. The longer the financial system stays unstable and lacking credit, the longer and deeper the recession. If it can be held together, the economy should bottom in Fall 2009 and show signs of recovery by Spring 2010.
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You could ask what you mean, ‘is it time to change the world economic system?’ Who is in a position to do the changing? Certainly not me, probably not you either. Just possibly Obama and his administration, in which case the US electorate has already done most of what they can do do the changing.
The thing you can change is your individual behaviour. Don’t spend money you haven’t got; invest ethically. Chances are you will become relatively poorer than those who choose not to make the same change; but if enough people see it your way then, perhaps, just perhaps, the change you want to initiate will ahve happened. I’m not betting on it, though.
The reality is, though, that the world’s really pressing problem has got itself forgotten in all this. That is, of course, the fact that the world’s carbon emissions are out of control, the world’s temperature is rising unstoppably fast and chances are that – unless the world’s economic system and the behaviours of most of its people change pretty damn soon – there won’t be a world for our children to grow up in. And you won’t be surprised to know that I’m pretty pessimistic about the chances of that change happening on sufficiently large a scale and sufficiently quick a timescale.
Like you, Ali, I’m not a pessimist, but I don’t have much doubt that we’re on our way to hell in a handcart.
I think its time to question ourselves – Is it a crisis or just an example of how a “normal” (uncertain an crazy) world economy would be in the future starting today… Is it just a phase which is going to get over OR a never-ending reality of a new economic world order.
Is it just a flood which the corporate dinosaurus are going to swim and see thru towards a more certain business landscape – or is it a beginning of the end for the large behemoths for ever?
Does it really matter? We can all speculate about the future or bemoan the past. What it is accomplishing? I suspect that this situation (like others in the past ;-))will require us to start doing something. Each of us, at a local level will have to start doing something to improve our own situation or local economy.
Well, after we build more bridges and spend billions on wind farms we’ll be A-oK! Let’s walk into the future!
I hope a zero fed funds rate works this time. It brought about a bit of chaos last we resorted to it.
10-Year 113-03 / 2.27
Inflation Indexed Treasury
10-Year 93-23 / 2.10
So there will be no inflation now?
Well, the regional fed banks say:
“October 31, 2008
We have discontinued the liquidity-adjusted TIPS expected inflation estimates for the time being. The adjustment was designed for more normal liquidity premiums. We believe that the extreme rush to liquidity is affecting the accuracy of the estimates.”
I don’t think the bad news is over yet personally. Also, tough to say whether the TARP turned bank equity investments has done anything yet. Banks are likely still worried about loans they made using reasonable risk assumptions going bad given the current/projected economic malaise, which crimps access to credit. But with the looming trillion dollar deficit, unsustainable welfare programs (SS/medi) and rising unemployment…I just can’t see a rosy future.
the future can be equally painful if your job is to make business plans and projections for any number of investors in the hope of making it big one day!
on a serious note
definitely the idea of profit amongst a few owners (therefore always driven on greed as immortalized by gordon gekko) needs to be revisited and human development needs to find its place under the same sun.
so is it a recession? quite not. those who did not have did not reach the verge of having and the desperate need to give it up. but those who did have seemed like running away with it but thankfully a huge amount of infighting broke up.
hopefully, soon enough we will realise that supporting 6 billion or so humans will require more productivity than profit amongst the current 10 million or so millionaires making more money. and that demands investment from those who have it. so change is again inevitable but again, hopefully, will be beyond the see-saw games of a few organizations and their owners. few because all indices seem to work on a miniscule number of users.