This is an editorial to help the masses understand what economics are and what is happening to the US at this very moment. For the US populace, this is very important as it will probably give you a good idea of what to expect in the near future. So pay attention if you live in the US. (VERY LONG)

All eyes are on the US housing market as one of the most devastating credit crises rages on. So far, no credible evidence suggests even a slow down or stop to this crisis even having spread to many other countries and economies such as New Zealand and the UK. But that was not the only thing that began this economic recession? No. The other main culprit, is the Iraq war, and this is not some conspiracy theory as you shall find out. So how did this disaster really begin, how was it intensified and how are they (the fed) planning to stop this? Read on. (For this article, assume what I say is true for most of the economics jargon and look it up if you are in doubt, it should be fairly easy to find and most should match what I say, thanks. Still, I will site everything I can at the end.)

In 2001, the US experienced what will probably be known forever as 9/11 (they really have to come up with a better name). For those specific hermits reading this that would be the most devastating attack on US soil since Pearl Harbor (I think) and rightfully blown out of proportion it was. At that point, the economy hit the floor and a recession was immediately under way and just as quickly, blamed on 9/11 (because the dot com bubble and investor stupidity had nothing to do with it). So what did the Federal Reserve (Feds) do, they cut the overnight rate from 6% to 1%. What is the overnight rate? It is the interest rate at which the banks (Citigroup, Wachovia, etc.) borrow money at from the Feds. Since she Fed can print money infinitely, the banks had a field day on that one and borrowed as much as possible. This added tons of money to the system, money that was not there before (money multiplier effect, google it). Of course, inflation began to rise and unemployment started to fall (google macroeconomic Phillips curve for details) and all was going well. The US economy started to "boom" and several major indexes began rising in leaps and bounds. The housing market began its climb since land was "running out", loans were in good supply (richer banks) and at low fixed and non-fixed interest rates. The US also experienced record demand for goods and services. For that matter, the Whitehouse even towed the line "Get out and spend" as you may have heard many times from President Bush's mouth. This is classic Keynesian economics for those who are not aware.

Let me explain Keynesian economics right quick since this is fairly important (you can also look it up for more information). Basically, in a normal economy, there is always excess capacity to produce which is not utilized. This can be caused by many factors such as frictional unemployment (individuals looking for jobs that suit their desires and such) or lack of demand. So what the Keynesian model suggests is that the government can increase productivity by increasing aggregate demand (the amount of demand for all goods and services in an economy). If the government starts spending more, by buying planes and more .... toilet paper, they can increase the amount of jobs in these industries. Since more people have jobs now, demand for other stuff goes up such as let's say ice cream and peanut butter. This produces more jobs and more demand and everyone is happy. The government can now tax more people, and it can also stop paying lazy ass unemployment insurance collector types. More government money means more spending and more demand and more productivity ad infinitum. Sounds amazing and makes sense right.

So the US government has been encouraging this policy of spending like crazy to get this cycle going. Yet, why stop there? The government itself has been spending like crazy....on the Iraq war. So this is where the Iraq war will enter into the big picture. This war has accomplished two things, one it has raised aggregate demand since war requires a ton of stuff to get going. The second is that it has raised oil prices beyond belief. For those of you who think that the current oil prices are based on demand, you are damn wrong. Current oil prices are based on oil futures speculation. Since after the Iran-Iraq war, oil rose from about $10-$20 per barrel in 2001. Since 2002, it has gone to about $115 per barrel from about $20, which would mean demand went up 500-600% or so, enough said. For that matter, before the Iran-Iraq war, oil was about $10 per barrel. When the war started, it went up to $70 per barrel or so, and went straight down to $10 after the war ended (cited later).

Anyway, back to the main topic, so now aggregate demand has been raised significantly. What is the down side to all of this? As you all should be aware, you have to give something to get something, you cannot create something out of nothing in this universe (as far as we know). The down side is that inflation goes up, people lose all of their savings, and the government starts to lose all of their savings. The private savings of the average household, are used for investments and such. People save in banks, banks lend to investors, investors invest in upcoming and profitable industries. So if everyone is spending their money, little investment takes place. On top of which, when the government is spending, they run out of money pretty fast when they do not control the spending, such as on the Iraq war, where you have no choice. So they start borrowing from banks, domestic ones and international ones. The domestic banks lend to the government because that guarantees a repayment at some point unlike when lending to the public. This causes a crowding out affect, where even less money makes it into investor hands since most of it is borrowed by the government. This causes insane short term growth, but at the cost of long term growth.
Fast forward to 2007 and let us see the affects. So now, the US housing prices have reached their height. People can no longer afford these high prices but still need homes to live in. They get mortgages they cannot afford, and end up not being able to pay. They abandon their homes and run away, the bank gets the house. All is well??? NO. House does not equal money, and land is not very liquid. This causes banks to have a shortage of cash which people want to withdraw, so they have to take a write down until that house is sold. If enough foreclosures happen, people begin to freak out and start withdrawing money from banks to save their cash. Banks take more write downs, houses begin piling up, housing prices start to drop since now no one wants houses anymore. The banks already gave the money for that mortgage though, and if they gave 500K for one house that is now worth 400K, they just lost 100K. Likewise, more people begin abandoning properties because they do not want to continue paying a 400K mortgage on a house that is now worth 300K. This cascades into the housing bubble burst or mortgage market crisis. Along with this, inflation is already fairly high due to cuts in overnight lending rates which only went up to about 3.75% from 1% from 2001 to 2006. The Feds cut the rates further to give banks a chance to fight write downs. The rate is about 2.25% now, and is being reviewed for more cuts. Inflation keeps rising, and the US dollar is worth even less now than ever before. Wages have not adjusted for inflation, and price levels are going higher. People who could once live according to their means at regular salary can no longer do so, and are now in record debt. The government cannot get out of the war and is also in record debt. The cycle is starting to break as people cannot continue to spend money they do not have. Aggregate demand drops naturally and so do jobs being created. Layoffs increase and that is where the US is right now, in the makings of a recession.

So why does this not happen in a normal economy not lead by idiots. Well basically, that investment I mentioned earlier is a very important necessity to the future of an economy. It is supposed to help jump start industries which are future proof, and other industries that are technologically advanced or are going to be needed in the future. When that investment does not happen, you are stuck with skeleton industries and corpses that are meant to die and there is nothing to replace them when the time comes. That time is now as most of you will figure out. Also, the price level is supposed to be maintained by changes in wage inflation. Yet what happens when this change happens too fast and wages do not adjust in time? The entire middle class can essentially become the lower class and that is a disaster leading to depression, not just recession. What is the government's response? Believe it or not, it is basically, "stay the course". The Feds so far want to cut more of the overnight rate. The Bush administration is just about to release a stimulus package aimed at giving people money to spend. Congress is planning on approving more funding for Iraq and such "stimulus" measures and more unemployment benefits. So basically, doing more of the same will apparently fix the problem. On top of this, oil prices are high as hell, and the government's response is to encourage alternate energy sources such as coal.......that's right, because we need to jump back to the 18th century. Also, they want to kill NAFTA and other free trade agreements, because protectionism is not retarded (sarcasm).
Here comes my opinion.

Soooooo the US is basically dying, and no one wants to admit to the right solution. Instead of having your cake and eating it too, the government and people need to admit they fucked up, and need to change their policies now. Take the damn recession, there is no avoiding it. Encourage people to save and live with your stupidities and the cost of your over indulgence. Have the economy recover naturally and stop fucking with the natural way it balances itself to equilibrium. Invest in future tech instead of dying industries and look at history for help (the Keynesian model has failed many times before, why the fuck do they not learn). The country needs to be dynamic in every aspect, that is why democracy is the best form of government since people are supposed to elect those who are most fit for today's world. Invest in education so what I just said can be done, since a democracy requires an educated and informed public. Americans have been resting on their laurels for too long and are now going to pay the price. The US was competitive worldwide because of their industrial might, and hence, with cheaper labor available worldwide, they were still one step ahead. Yet now, the world has caught up, and China and India now possess the same industrial abilities with cheaper labor. Instead of advancing and mechanizing more, the US has stagnated and can now no longer compete. This can be changed quickly, but the public and government are too incompetent to make this happen and will most likely continue to degenerate their country unless significant change takes place fast. All of this protectionism such as stopping immigration are backwards policies. Americans are getting dumber by the second, and the reason companies are hiring Indians is because they are smarter, and cost less. Yet the public cannot get off their collective lazy ass to compete and become smarter, they just want the government to stop immigration. They also want to live way beyond their means for as little work as possible. One big screen TV in the house is too few, and those huge luxury cars are a necessity for the average fat ass US citizen. The average immigrant lives by his means in the US, while sending money back to their home country to family. So why the hell can Americans not live by their means, because they are not used to it. The only way to recover now is through hard work and sacrifice, and that is something I have yet to see the US population willing to do.

« View full article »

• 
• 1
• 2
• Page 2 of 2

Post your comments