Any stimulus package involves a government cutting taxes and increasing spending, thereby generally increasing the money supply in the market.
But this measure has an inflationary cost associated with it. The free market has a tendency to devalue anything that is in excess. This leads to depreciation in the value of the currency and, as a result, commodities become expensive.
By definition, currency is a unit of exchange that facilitates exchange of goods and/or services. It can be anything from paper, gold, silver, copper, brass, seashells and even tobacco leaves.
In fact, tobacco leaves were legal tender in Virginia, Maryland and North Carolina during the 17th century, before lack of portability, excessive supply and variability of value led to their demise in the early 18th century.
The excessive supply of currency apparently fuels the economy and it grows at a staggering rate. But, I believe that this growth rate is completely unsustainable as it breeds inflation and creates bubbles, which eventually burst.
Now that the bubbles have burst, the government is bailing out the high rollers in the casino. Suppose you went to a casino being well aware of the risks associated with gambling and lost all your money.
Obviously, there are winners and losers in a casino. Now you want the casino regulator (government) to bail you out and provide you with some more chips to play with, so that you can make up for the losses incurred.
The American automakers are a classic example of this phenomenon. They expanded capacity, hired an excessive workforce, built inefficient cars based on the prediction that people will change cars every five years and gas will remain cheap.
I have never come across a mathematical model that can accurately predict the behavior of people. Thus, they knew the risks associated with their bets, they simply lost out. So why should they be rescued with the money of honest taxpayers?
Nobody comes to my rescue when I lose out in a casino. Well, let us just take the example of a city where people decided to settle down on land near bushes prone to wild fire. They took this decision with the knowledge of the risk associated with the venture and must have paid a reasonable price according to the nature of the property.
Now suppose there is a wild fire and a few houses were burnt. In this case, it is not justifiable to provide relief through the government as it essentially means taking money from wise people who did the right thing and did not build their house near the area prone to the wild fires and paid a premium for their property.
And now, additionally, they have to pay for the gamblers who got their property at a discount due to the inherent risk. In a fair system, one should be rewarded for virtue and punished for bad behavior.
I strongly feel that recession is the cure for the disease. It is like a medicine to eliminate the root cause of the problem. And the sooner the medicine is administered the better the results. Let us say, for example, somebody had a heart attack and requires open-heart surgery which obviously is a painful procedure.
However, as it is painful, the patient takes steroids, which, although relieve the pain, do nothing to improve the individual's health. Eventually such a person will die. It is a human tendency to ignore what is true but painful and embrace what is false but comforting.
Recession is a market phenomenon to punish people who made the wrong choice as a result of greed. The best thing that can be done by the government is to remove trade barriers and subsidies. The government should not offer any protection to private conglomerates; in fact, the strong should get the least protection.
The welfare programs need to be reviewed because no prudent government can afford to hand out money without getting any productive work in exchange. People should be allowed to innovate and grow. A free market has always produced wealth and prosperity.
One of the great mistakes is to judge government programs by their intention and not by their result. Hence, even though the stimulus packages are designed with the best of intentions and by wise men in positions of power, they do not solve the problem but just ease the pain and delay the day of reckoning.
Why are we so addicted to a high growth rate? We need to grow in a sustainable, organic way, without imposing an excessive burden on our limited resources. The economic growth rate is essentially required to feed, nurture and improve the living standards of an ever-growing population.
We need to control this population growth in order to preserve our limited resources, environment and human dignity. Because anything in excess loses value.
Monday, February 23, 2009
Wednesday, February 4, 2009
Economic Thoughts
ASIAN SURVIVAL WITHOUT AMERICAN APPETITE
It is very common to describe the American economy as the growth engine for the world
economy. However, It is fair to assume that it is actually the brake wagon tied at the end of the
world economic train. The American dollar is actually a fiat currency with insufficient backing in
terms of gold or any other tradable commodity and rest purely on the faith and credit of the
American government. All they have is essentially a printing press which is working overtime this
season to print dollars. Americans constitute roughly 5% of the world’s population and consume
25% of products. I believe it is their printing press that has allowed such obscene consumption.
Combined with the trust of the Asian governments in their paper which leads to many countries
building up huge foreign exchange reserves nominated in American dollars. Why do we have to
depend on the American consumer with these worthless paper dollars? Why can’t we have
domestic consumption which improves our own living standard rather than that of gluttonous
Americans? We have a large population here in Asia which is perfectly capable of consuming.
What we are doing right now is working as hard as we can to feed the American Consumer? An
economic expert would say that American economy is driving world economy as it is providing
the all important consumption, but here I would like to ask if it is prudent for us to keep selling
them goods and services and keep building up huge foreign exchange reserves in their currency
which can get hugely devalued.
I can predict that sooner or later the dollar is going to get
devalued, based on the fact that the total American debt is about 10 trillion dollars and some day
this debt will become due. Americans have borrowed this money to consume Asian products
which they could not afford instead of using it for productive activity such as building up new
factories or production centers. When Asian countries are faced with a dollar shortage they are
forced to devalue. The recent devaluation of Korean won is essentially due to the dollar shortage
in the market. However, when America runs out of American dollar it prints more, and takes on
more debt. The Federal Reserve has no oversight of the US congress and is fairly independent. It
has the power to increase or decrease the dollar supply in the market. American economy is a
credit economy and credit is vastly used to pay for voracious consumption. Maxing out on a
credit card is a normal, and indulgence on credit is encouraged. When goods are consumed on
credit, it can only lead to reduced future consumption or credit should be repaid with grossly
enhanced future income. Once the world realizes that Americans are not capable of paying their
debts in form of tangible assets and printing paper money to pay off, there will most certainly be
a huge decline in the value of the dollar.
We need to have a firm belief in the principle of free
markets. However, due to recent governmental interventions the market is not free any more. The
American government is buying up toxic assets with tax payer money without a mandate to do so
from the tax payer. They are trying to re-inflate the bubbles which burst recently. This can cause
even bigger bubbles in not so distant future. I think it is legitimate to let the market decide the
fair value of an asset, company or Currency. But the governmental interventions do not allow the
discovery of a fair price. This encourages bad behavior and does not reward better managed
companies. This is indicated by the recent bailout of American Automakers. Had the government
not bailed out these private companies with inefficient management, then at the right price a
private buyer either American or foreign would have come in and taken over the management
and brought in the much needed productivity and efficiency. This kind of intervention shakes our
belief in the free market system.
Another area of concern is the rising unemployment in Asia due to
loss of the great American appetite. I suggest that a longer term solution for the present crisis
would be to reduce or eliminate our dependence on the American consumer and currency. We
need to promote regional trade and start to believe in each other’s economies and currency. We
need to find ways to stimulate domestic consumption of goods. We need to reduce our
dependence on American controlled Middle Eastern oil and American technology. Instead we
should promote innovation in renewable sources of energy and move towards self reliance. There
is no need to depend on the American printing press to provide us paper to trade with our
neighbors.
It is very common to describe the American economy as the growth engine for the world
economy. However, It is fair to assume that it is actually the brake wagon tied at the end of the
world economic train. The American dollar is actually a fiat currency with insufficient backing in
terms of gold or any other tradable commodity and rest purely on the faith and credit of the
American government. All they have is essentially a printing press which is working overtime this
season to print dollars. Americans constitute roughly 5% of the world’s population and consume
25% of products. I believe it is their printing press that has allowed such obscene consumption.
Combined with the trust of the Asian governments in their paper which leads to many countries
building up huge foreign exchange reserves nominated in American dollars. Why do we have to
depend on the American consumer with these worthless paper dollars? Why can’t we have
domestic consumption which improves our own living standard rather than that of gluttonous
Americans? We have a large population here in Asia which is perfectly capable of consuming.
What we are doing right now is working as hard as we can to feed the American Consumer? An
economic expert would say that American economy is driving world economy as it is providing
the all important consumption, but here I would like to ask if it is prudent for us to keep selling
them goods and services and keep building up huge foreign exchange reserves in their currency
which can get hugely devalued.
I can predict that sooner or later the dollar is going to get
devalued, based on the fact that the total American debt is about 10 trillion dollars and some day
this debt will become due. Americans have borrowed this money to consume Asian products
which they could not afford instead of using it for productive activity such as building up new
factories or production centers. When Asian countries are faced with a dollar shortage they are
forced to devalue. The recent devaluation of Korean won is essentially due to the dollar shortage
in the market. However, when America runs out of American dollar it prints more, and takes on
more debt. The Federal Reserve has no oversight of the US congress and is fairly independent. It
has the power to increase or decrease the dollar supply in the market. American economy is a
credit economy and credit is vastly used to pay for voracious consumption. Maxing out on a
credit card is a normal, and indulgence on credit is encouraged. When goods are consumed on
credit, it can only lead to reduced future consumption or credit should be repaid with grossly
enhanced future income. Once the world realizes that Americans are not capable of paying their
debts in form of tangible assets and printing paper money to pay off, there will most certainly be
a huge decline in the value of the dollar.
We need to have a firm belief in the principle of free
markets. However, due to recent governmental interventions the market is not free any more. The
American government is buying up toxic assets with tax payer money without a mandate to do so
from the tax payer. They are trying to re-inflate the bubbles which burst recently. This can cause
even bigger bubbles in not so distant future. I think it is legitimate to let the market decide the
fair value of an asset, company or Currency. But the governmental interventions do not allow the
discovery of a fair price. This encourages bad behavior and does not reward better managed
companies. This is indicated by the recent bailout of American Automakers. Had the government
not bailed out these private companies with inefficient management, then at the right price a
private buyer either American or foreign would have come in and taken over the management
and brought in the much needed productivity and efficiency. This kind of intervention shakes our
belief in the free market system.
Another area of concern is the rising unemployment in Asia due to
loss of the great American appetite. I suggest that a longer term solution for the present crisis
would be to reduce or eliminate our dependence on the American consumer and currency. We
need to promote regional trade and start to believe in each other’s economies and currency. We
need to find ways to stimulate domestic consumption of goods. We need to reduce our
dependence on American controlled Middle Eastern oil and American technology. Instead we
should promote innovation in renewable sources of energy and move towards self reliance. There
is no need to depend on the American printing press to provide us paper to trade with our
neighbors.
Friday, August 1, 2008
Wednesday, July 18, 2007
Last day in Singapore
Well today I complete a journey through Islands in the south east Asia.I feel it was a enriching experience.One thing I noticed is that people like to take a lot of pictures in night clubs which to me is strange as there is nothing new or special about the experience just same loud music,smoke,booze... And then they will post them the same morning on the net.But anyways black hole must mind his own business and continue his flight.
Wednesday, June 6, 2007
shubh muhurat
So I am introduced in the world of blogging today by this damsel in distress or lets say a distressing damsel.Whom I adore.
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