11 replies to this topic

[alisayyed]

This topic is to inform people and decode the economic crisis especially for those whose background is not from the field of commerce and economics .

time line :
1980-1990 :
The soviet union and the NAM ( thrid world countries ) nations lagged behind the world in technology and productivity . Their export market stagnated and their gdp mostly comprised of domestic consumption ( except China ) .
In the meanwhile : the western countries enjoyed a high growth rate and high advances in technology .


1991-2000 -
Soviet union collapses , so do many countries dependent on it , including India .
IMF and other institutions force the third world countries , esp. in asia to open ( liberalize ) their markets ,
The products from developed countries flood these markets adversely affecting domestic production in the short run .

2000-2003
The tech crash occurs in us , at the same time , indian IT talent is recognised as being cheap and fairly effective in combating y2k , thus attracting teh western companies towrds outsourcing , thus transporting jobs to india and eventually to other destinations ,

2002-2003
Iraq and afghan wars take toll on finances of western world , resources are diverted towards wars , thus impeding growth and productivity ,
Indian , chinese and other third world companies acquire technology and with the help of cheap labour , start exporting their low priced goods in the western market .
Many western companies close down due to competition from these companies .


2003-2008 ,
Western countries avoid ill effects of excessive imports by borrowing huge amounts of money to increase consumption ,

2008-2009
People fail to pay their debts leading to banks failing and govts taking over banks in the western world .
meanwhile , india , china and other countries grow at fast rates , transferring waelth from west to east .
the scarce resources are facing huge demand pressures as the people in developing countries also demand their share of prosperity and the developed world is unwilling to reduce consumption .
Thus, increasing prices of such resources .

2010-2011
Banks and other companies have been bailed out by govts and now govts are in debt .
Now govts should either default or reduce consumption .
Exports by Developing countries to these countries are affected negatively in varying degrees , but not very significantly .

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Western Govts' dilemma (eg. Greece ) :

if they default , no one will trust them anymore and their currencies lose value .

if they reduce spending and consumption , the gdp contracts and their reducing their bargaining power and clout in the world .

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Countries like Germany were saved as they maintained their high level of competition through use of high tech to maintain better quality and lower costs .

Huge exports of expensive high tech products ( especially to developing countries ) kept their cash counters ticking unlike the other losers .



This is not very comprehensive and people are invited to add more to it ,

Edited by alisayyed, 11 November 2011 - 01:50 PM.

[abbask]

Surely imports weren't as big a problem as the housing bubble, although I agree that we were undergoing consumer led growth

[alisayyed]

Surely imports weren't as big a problem as the housing bubble, although I agree that we were undergoing consumer led growth

Agreed ,
Also increasing levels of imports closed down businesses and aggravated the housing collapse as they were instrumental in people losing jobs and ,thus ,losing homes .( cant pay installments ) .
The collapse of housing prices was the trigger to start the failure of banks and later the possible failure of governments .
Housing prices collapsed as there was a small level of growth in the western economies and people kept buying houses at very high prices on loans hoping that the prices will increase later .
But the Wars sucked the money out of the economy and so did imports and outsourcing by companies , thus, reducing growth levels leading to panic selling .
the situation was aggravated by non payment of installments by sub prime debtors .

[abbask]

I think your idea of war is debatable though. Sure they sucked money out, but that also led to an increase in investment and economic growth in the long run due to the fact that infrastructure had to be rebuild, leading to improvements in transport links for businesses.
Sure the fault was the banks due to the fact that they were giving out absolutely ridiculous loans, but some blame also lies to consumers. If everybody hadn't rushed to the banks to withdraw their money, banks wouldn't have collapsed and we wouldn't be in as bad a situation as we are in right now. A prime example is Northern Rock in the UK. If people hadn't rushed to take their money out and deposit it in 'safer' banks and building societies, then the government wouldn't have had to save the bank. The problem now is that banks are wary of lending to each other like they used to and the flow of money isn't smooth anymore.

[alisayyed]

I think your idea of war is debatable though. Sure they sucked money out, but that also led to an increase in investment and economic growth in the long run.

Did they ? i was not aware of this fact .
but then are you informing about the increase in investment in iraq and Afghanistan or in us ,
i mean , was infrastructure rebuilt in the us? i dont know .
If it was in the us then it will help it the US in the long run .


in future , in the long run , as per my analysis : things will be normalized as i am assuming the exploitation of resources increase , thus increasing their supply and the high growth rate of the developing countries and the transfer of wealth from the developed countries to the developing countries will ease out .

A the same time the gap between the gdp and the per capita income in the developed and developing countries will narrow down , but it will be more for the gdp than for percapita income due to continued high rate of growth of population in the developing countries .


Edit : that is if every thing is normal . but i doubt that would be the case as , for example , i feel oil prices will increase if the west asian nations become more independent and powerful ( read Islamic Awakening ), thus trying to increase their major source of income .

Edited by alisayyed, 13 November 2011 - 09:55 AM.

[abbask]

Did they ? i was not aware of this fact .
but then are you informing about the increase in investment in iraq and Afghanistan or in us ,
i mean , was infrastructure rebuilt in the us? i dont know .
If it was in the us then it will help it the US in the long run .

Well not referring to Afghanistan or Iraq but rather WWI or WWII. If we look at those two wars, infrastructure in the UK and France etc had to be rebuilt which led to the improvement of services and transport links, leading to improved efficiency. However, using Iraq and Afghanistan as examples, then your comment about wars sucking money out of the economy is in a way valid (although the money was spent on buying weapons, and as a result, paid to manufacturers, who then went and spent the money on personal things, completing the flow of income diagram, in which cause your argument is invalid ).

Developing countries aren't experiencing a high growth rate (apart from the BRIC states) though. this in my opinion is due to corruption, political instability, inefficient tax structures, poorly funded civil services, wars, land trapping, and a bad/weak banking sector

Until those problems are solved, many developing countries will never reach the level which they have the potential for.

I mean you're probably right, I'm only 18 so i have a lot less knowledge than you I'm just arguing for the sake of argument

[titumir]

Well not referring to Afghanistan or Iraq but rather WWI or WWII. If we look at those two wars, infrastructure in the UK and France etc had to be rebuilt which led to the improvement of services and transport links, leading to improved efficiency.

Oh my god what a ridiculous logic. They could have improved their transport links WITHOUT going to war. And they would have extra money left over.

[xstatik2]

Agreed ,
Also increasing levels of imports closed down businesses and aggravated the housing collapse as they were instrumental in people losing jobs and ,thus ,losing homes .( cant pay installments ) .

I beg to differ. The Balance of Payment or Deficit (Imports vs. Exports) is always a cause for concern for all the countries. For example, here in India Import Duty from China for a LOT of goods have been increased to decrease their Imports into the country as the deficit of Import vs. Export was getting too vast.

Similarly, almost all Governments and Financial Governing Bodies ensure that the deficit does not get too large.

There are various causes which have been attributed to Greece's downfall and the main reason is BAD CREDIT RATING. Which has gone down further therefore bonds have lost their values, Undertaking companies and financial organizations have written them off.

The only way i see them coming out of this Trap is to plough back it's own resources, get Greek taxpayers to pay their taxes, try to boost tourism and salvage a deal for a convenient payback schedule.

[alisayyed]

let me clarify :

Huge imports- export gap ( living beyond their means ) was the underlying reason for the economic problems in the west and the housing crisis was the 'trigger' to the economic/debt crisis .
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its simple : a family spends more than it earns .
initially they borrow , but with time their debt increases at unsustainable levels . their savings are not enough to pay off their debts , unless their lenders allow them to return the money little by little over a long period of time .

but nevertheless , they will need to cut expenses ( read GDP ) and lower their standard of living .

If they have a house loan and cannot pay the installments , then their house will be foreclosed ( housing crisis ) .

Edited by alisayyed, 17 November 2011 - 04:15 AM.

[abba]

I think using the term "west" is vague, there is a wide range between western countries. On one extreme we have countries like Greece, Portugal, Iceland and on the other Germany.

These countries differ in terms of balance of payments, fiscal responsibilities as well as how to handle crisis.

As a result, Greece Portugal and Germany can not possibly share one Euro and it has to split into possibly two Euros. One for the PIGS (Portugal, Ireland, Greece and Spain) and other for Germany and possibly France and some other smaller countries. If you want to read more about it, pick up Michael Lewis' latest book "Boomerang". He has an uncanny ability to explain complex financial ideas in simple terms.

When it comes to the US the problems are much more complex because inspite of our shortcomings the entire world looks at the USD as a reserve currency. Longer term, they will realize that US Govt has borrowed beyond its means to pay back and that will most likely trigger further decline in USD, decline of US standard of living, etc. In my humble opinion that point of no return, when the rest of the world realizes that US is not that much different from Greece or Portugal is still 8-10 years out.

[alisayyed]

Good point ,
While advanced nations ( not all ) are suffering from not being able to pay off their loans and reduce their expenses in line with their income , the US is busy printing dollars to buy stuff by simply printing more dollars .

Oil transactions being traded in dollars are a big reason ( but not the only reason ) why it is relevant today .
Oil transactions take place in dollars because oil exports are mainly from US backed puppet so called Islamic regimes who toe the US line and chose to accept dollars .
Once they are ousted, the dollar and the US economy is in trouble .

Why if they are ousted this year , we wont have to wait for the next 8 to 10 years .(i.e. as long as the new govts are independent and recognize the need to reduce the power of non Islamic nations on the oppressed )

[abbask]

Oh my god what a ridiculous logic. They could have improved their transport links WITHOUT going to war. And they would have extra money left over.

actually i think you'll find that the increase in economic growth due to the massive increase in secondary services (e.g. gun production) in the world wars created huge amounts of money for the country due to the fact that we apparently sold off tanks etc to other countries. Also, the wars resulted in the Marshall Plan which gave huge amounts of money to countries in europe which was then used to boost economic production. savings rates were not high enough in these countries at this time, and so, to get the same amount of money through the saving and investment cycle would have taken many more years, if the wars had not taken place.

Not such 'ridiculous logic' after all.

I would appreciate it if you didn't insult me, but rather prove me wrong.