Sunday, September 13, 2009

Question Time

"The stock market is too optimistic. It's very tough for companies to earn a lot of profit. That optimism will soon turn to pessimism."

-- Yasutoshi Nagai, Chief Economist, Daiwa Securities

video

yokbee said...

Boon, would appreciate your explanation:You said inflation is going to get us out of recession. But inflation has to be supported by a growing economy, right? If the economy is not in recovery path, why or how is the inflation being supported?

Tuesday, September 08, 2009 2:08:00 PM

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Without sounding like an economist, let me explain in some layman terms:

  • Your thinking and understanding of the economy had been framed and boxed in by the erroneous and misleading ideas prescribed by the mainstream economists and "experts", who didn't see it coming and said it can never be predicted. I guess you are new to my blog?
  • There are only two kinds of assets in this world: real asset (oil, gas, copper, zinc, gold, silver, etc) and paper asset (stock, bond, mortgage-back security, currency, etc).
  • In order to distribute resources rationally in an economy, you need a price mechanism to co-ordinate supply and investment decisions efficiently.
  • Since all currencies in our world now are all fiat currencies that are backed by virtually no real asset at all, governments can always print them out of thin air through their electronic printing presses.
  • Co-ordination of supply and investment decision can, therefore, be distorted at will by governments and through the fractional reserve banking system.
  • Governments can *always* create and support inflation, no matter how the underlying economy is performing. It must be created and supported deliberately to allow for their overspending.
  • The present global financial credit crisis is the result of an extended period of artificial boom led and created by the US through loose credit and government policy. There was no free market at work when asset prices were inflated (house prices, stock prices, etc). It's crony capitalism. You had Fannie Mae and Freddie Mac been given special privileges and federal backing, which allowed them to distort the housing market and to attract capital they could not under a pure free market system. Like all artificially created bubbles, the boom was not sustainable. When it popped, mortgage debt holders will subsequently suffer losses greater than they would have otherwise been had government policy not actively encouraged overinvestment in housing and there not been so easy to get credit to finance the boom at the first place.
  • Instead of letting the capitalists or the cronies who made bad and irresponsible, leveraged investment decisions to take a hit, the US government is bailing them out.
  • Where can they get this bailout money from? Well, YOU!
  • They will print it. The newly printed money will be given to the evil capitalists who will enjoy a windfall. There's no free market at work, is up to the Treasury and the Fed to decide who will be the winners (Goldman Sachs, Morgan Stanley, etc) and losers (Lehman Brothers, homeowners, YOU, etc). Is an outright distortion of the price mechanism again.
  • As there's no real asset backing the fiat money they printed, the new money will trickle down the system and gradually causing a rise in consumer prices.
  • In a very real sense, the bailout money is money confiscated from YOU and me through the hidden forces of monetary inflation, which allow them to move losses from private to public accounts.
  • This creates a terrible morale hazard, and is not solving the root of the problem at all.
  • The debt is still there within the system. And it will impede recovery without a new productive capacity that can absorb it. There simply isn't any on the horizon!

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© Boon @ 7:37:00 AM

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