A Year of Chaos and findings - A guide for a novice by a novice

Its almost a year from my last blog !.. So What has changed till now..

1) From economic point of view.. US has added about 2 Trillion debt. Amounting to 13 Trillion till now

2) Gold price has zoomed to $1100 levels.. and is still looking strong as dollar weakens.

3) I have read quite a few articles on economic scenario in US and heard various economic analysts and would like to present my conclusion based on knowledge acquired.

US was a manufacturing nation back then. Enormous quantities of goods were produced. It was a golden period in late 1800 and early 1900's. Industrial revolution of Europe was being applied in US. Agriculture was thriving and internal consumption was low in US(US had trade surpluses). Soon US had surpluses in trade and purchasing power of US was ever increasing.

In order to trade for Oil, Agriculture produce and other articles, world needed a currency which would stand strong with minimum or no inflation. Which currency could be the best bet? The ideal currency should have following properties:

1) Currency should be highly liquid.

2) Currency should be non-volatile (in terms of inflation and deflation). GOLD back currency is ideal.

US had enormous wealth, its GOLD reserves enabled US to have extra dollars which can be easily loaned. Even if countries held those extra dollars to carry trade, US wouldn't be short of credit. Since USD was the currency which could satisfy all requirements, it was easily excepted as a global currency.

It was best thing for US to happen at that time.

Since US was such a strong economy, US citizens had huge buying power, it was natural to put money to better use. Every industry wanted latest, best technology. US had courage and capability to reach moon and advance in each and every aspect.

The major innovations, research, inventions and discoveries were done in US. US gave world new ways to communicate, interact and live a prosperous life.

Now, if everything was so rosy rosy.. when did problem occur.. what went wrong.... The answer to these questions are as following.

Wars:

US had developed weapons, ammunition and there was whole industry to support. You could profit from the world wars if you sold ammunition, war weapons. This was the one of the major income source for US.

After 2nd world war, organisations had enough manufacturing capacity to serve all countries' military requirements. But to carry trade, you need a buyer/demand :). US wanted to support non-communist government, so supported North Vietnam in Vietnam War. Hey wait, even the ammunition industry wanted a buyer. US govt itself became the buyer. Win-Win situation for Govt and Companies, but it was non-productive spending (US was net consumer). Followed by All other wars...

Outsourcing:

By this time US was global currency, and all countries had reserves as Forex in USD. The USD once perceived as highly liquid was no longer the same. In order to make it liquid (due to enormous demand) it was required for US to drop from GOLD backed currency. It was one of the major change in US financial history.

Now US can print the money it required, irrespective of its GOLD reserves. But, we all know that if the money supply increases, so follows the inflation. How did it not happen in US? The reason is insatiable hunger for USD from foreign countries to hold as foreign exchange. To profit from the huge buying power, corporations slowly shifted attention from production to services.

Why would a rich man in US spend his time, effort on production issues when he can easily outsource it, save money and make more profit? Getting things done for worth of pennies to a dollar is any businessman's dream come true. Outsourcing of manufacturing lead to lots of job in the developing nations. Both countries were at win win situation. But wouldn't it cause change in the exchange rate for that country ?

Yes, definitely it can affect the exchange rate. But, this would lead to lesser profit for developing nations. In order to keep the exchange rates artificially low, countries can buy US bonds. Viola !.. US can buy things for cheap as long as exchange rates are such low level.

It would be logical for a company to take advantage of cheap labour in other countries and make profit. Natural market forces to correct the exchange rate was never executed.

(US was net consumer)

US had enough time and money to solve global issues.

To be the best in everything requires investments and spending. Loaned primarily from banks.

With building communications, trade with other countries became easy and possible. Easy credit and relentless spending lead US to current state.

Can you imagine what would happen if you spend for 30 yrs with credit card and by paying minimum limit? You go into enormous debt ($13 trillion) It will take whole world to work for a year to pay that amount of debt.

Once a boon, became a bane. A global currency in enormous trouble. Who is to be blamed for this ? Well there is no time for blame game....

In order to pay this debt, its inevitable that US cannot outsource more!!..

1) US needs to produce more than it consumes.

2) Govt spending needs to be cut.

3) Outsourcing is a luxury only for rich and surplus country.

4) Wars are not solution to any problem.

5) Govt should become selfish by solving own problems and then look what is wrong in the world.

Obama seems to be working on those lines :).. Next 15 years would be damn interesting if Mayan prediction is wrong :P....

Disclaimer: I don't have any degree in economics, nor have any proof of the above. Its compilation of facts that I have heard, read, listen to postings freely available on Internet. If you find any piece of information which needs to be corrected or added then your most welcome. I am open to positive criticism. I can be wrong just like any other human being.

What makes US a strong economy ? - a secret we all should know

Hi guys,

I always wanted to know why America is considered to be the strongest economy. Rather, How did US became worlds most powerful economy.

As a thinker I had some thought that, there is something in spending culture which was major difference between Americans and Indians apart from party culture.

The article below is an email sent by my friend which I would like to share with you all.

.....

Japanese save a lot. They do not spend much. Also Japan exports far
more than it imports. Has an annual trade surplus of over $100
billions, yet Japanese economy is considered weak, even collapsing.

Americans spend, save little. Also US import more than it exports. Has
an annual trade deficit of over $400 billion. Yet, the American
economy is considered strong and trusted to get stronger.

But where from do Americans get money to spend? They borrow from
Japan, China and even India. Virtually others save for the US to
spend. Global savings are mostly invested in US, in dollars.

India itself keeps its foreign assets of over $100 billion in US securities.
China has sunk over $160 billion in US securities. Japan's stakes, US
securities is in trillions.

Result:

The US has taken over $5 trillion from the world. So, as the world
saves for the US, Americans spend freely. Today, to keep the US
consumption going, that is for the US economy to work, the countries
have to remit $180 billion every quarter that is $2 billion a day to
the US ! Otherwise the US economy would go for a sick. So will the
global economy. The result will be no different if US consumers begin
consuming less. A Chinese economist asked a neat question. Who has
invested more, US in China, or China in US?

The US has invested in China less than half of what China has invested in US.
India invested in US over $50 billion. But the US has invested less
than $20 billion in India.
Why the world is after US? The secret lies in the American spending,
that they hardly save. In fact they use their credit cards to spend
their future income. That the US spends is what makes it attractive to
export to the US . So US imports more than what it exports year after
year.

Result

The world is dependent on US consumption for its growth. By its
deepening culture of consumption, the US has habituated the world to
feed on US Consumption. But as the US needs money to finance its
consumption, the world provides the money!!! It's like a shopkeeper
providing the money to a customer so that the customer keeps buying
from his shop. The customer will not buy; the shop won't have
business, unless the shopkeeper funds him. The US is like the lucky
customer. And the world is like the helpless shopkeeper financier. Who
is America's biggest shopkeeper financier?

Japan of course. Yet it's Japan which is regarded as weak.

Modern economists complain that Japanese do not spend, so they do not
grow. To force the Japanese to spend, the Japanese government exerted
itself. Reduced the savings rates, even charged the savers Even then
the Japanese did not spend (habits don't change, even with taxes, do
they?). Their traditional postal savings alone is over $1.2 trillions,
about three times the Indian GDP. Thus, savings, far from being the
strength of Japan , has become its pain.

Hence, what is the lesson?

That is, a nation cannot grow unless the people spend, not save. Not
just spend, but borrow and spend. Dr. Jagdish Bhagwati, the famous
Indian-born economist in the US, told Manmohan Singh that Indians
wastefully save. Ask them to spend, on imported cars and, seriously,
even on cosmetics! This will put India on a growth curve.

'Saving is sin, and spending is virtue.'

Before you follow this neo economics, get some fools to save so that
you can borrow from them and spend. This is what US has successfully
done in last few decades. Wow!!!! Smart guys.

Article from http://www.spiegel.de

'The World As We Know It Is Going Down'

By Marc Pitzke in New York

Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.

REUTERS

For traders, now might just be the worst of times.

The original plan actually called for humor. On Wednesday evening, actress Christy Carlson Romano was supposed to ring the closing bell on the floor of the New York Stock Exchange (NYSE) to mark her debut in the Broadway musical "Avenue Q." She plays two roles on stage -- a romantic kindergarten assistant, and a slutty nightclub singer.

After that day on the floor, the stock traders could have used a bit of comic relief. But it was not to be. Instead of Christy Carlson Romano, a NYSE employee in a joyless gray suit stood on the balcony and silently pressed a button. The bell rang and he disappeared. No waving, no clapping, none of the usual jubilation.

By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.

Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.

Panic Is the Word of the Hour

Traders abandoned the NYSE temple visually defeated and immune to the TV crews waiting. The disastrous closing prices were flickering on the ticker above the NYSE entrance: American Express -8.4 percent; Citigroup -10.9 percent; JPMorgan Chase -12.2 percent. American icons, abused like stray dogs. Even Apple took a hit.

REPRINTS

"I don't know what else to say," stammered one broker, who was consoling himself with white wine and beer along with some colleagues at an outdoor bar called Beckett's. Ties and jackets were off, but despite the evening breeze, you could still make out the thin film of sweat on his forehead. His words captured the speechlessness of an industry.

Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.

China?

"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "don't give up on this great country!"

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going down."

Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."

But what's really happening? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing financial institutions for a long time? Or did dubious short sellers manipulate stock prices -- after all, they were suspected of having caused the last stock market crisis in July.

The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."

Bush Cancels Trip

The situation appears to be so serious that George W. Bush cancelled two domestic trips he had planned for Thursday on short notice. Instead, the president will remain in Washington to discuss the "serious challenges confronting US financial markets." He said the president remained focused on "taking action to stabilize and strengthen the markets." Bush had originally planned to travel to events in Florida and Alabama.

So far, the US presidential candidates have made few helpful remarks about the crisis other than the usual slogans. Both are vaguely calling for "regulation" and "reform" -- bland catchphrases almost universally welcomed with applause.

Republican Party presidential candidate John McCain had the most to say. On Monday, he said "the foundation of our economy" was "strong," adding that he opposed a government-led bailout of US insurer AIG. But now he's promising further government steps "to prevent the kind of wild speculation that can put our markets at risk." McCain's explanation for the current crisis: "unbridled corruption and greed."

But Democratic presidential hopeful Barack Obama didn't move past superficialities, either. "We're Americans. We've met tough challenges before and we can again."

What else are they supposed to say? After all, US presidents have very little influence on stockmarkets. And Wall Street is expecting the status quo for the next president. On Wednesday an almost palpable mix of tension and melancholy filled the air above New York's Financial District. The beloved trader bar Bull Run was half empty, and many tables were free at fine-dining establishments like Cipriani, Mangia and Bobby Van's, which are normally booked days in advance.

At the side entrance to Goldman Sachs on Pearl Street, limo chauffeurs sat waiting for their customers, still above in their office towers cowering over the accounts. "If they go under," said Rashid Amal, who works as a chauffeur for a firm called Excelsior, "then I will soon be out of a job, too."