One
of the cardinal principles of economics is how changing supply and
demand affect price. Ordinarily, decreased supply in relation to demand
leads to increased price and reversed supply demand relationship leads
to decreasing price. A decreased price by itself can on occasions
increase demand just as price increases can decrease demand by making
things less affordable to greater numbers of people. Supermarkets and
retail stores advertise reduced price sales to attract buyers and get
rid of inventories. Another gimmick they use is to reduce the price of
one common item (potatoes) to lure buyers and jack up the prices of
other essential items (onions) even more, which the shopper is likely to
purchase at the same time to avoid two separate shopping trips.
Stock markets, collectibles dealers, trendy merchandise retailers
(including housing bubbles and tulip manias) use reverse psychology.
They raise the price of an asset and this increases demand due to the
greed of investors and speculators who pile on to the bandwagon. Prices
go to irrational and unsustainable heights like 5000 Dutch Florins for a
single tulip bulb during the tulip mania in the seventeenth century
Holland, and presently millions of dollars for a small condo in
Manhattan, Los Angeles, Shanghai, New Delhi or Mumbai or the
astronomical values of Chinese, Indian and American stock markets. The
mania leads to the greater fool price escalation until the greatest fool
is left holding the house, stock or collectible, now with a much reduced
market price. Greed and delusions of grandeur overcome caution,
rationality and deliberation, and individuals, corporations and nations
plunge in to face future disaster as in stocks and houses for the first,
mergers and acquisitions for the second and wars like Iraq for nations.
US Congress and presidents have abandoned fiscal responsibility for the
last 60+ years mostly to satisfy their lust for power and wealth and the
Federal Reserve Chairmen and Governors have been their partners in crime
at least since Arthur Burns (with the sole exception of Paul Volcker).
The latter have run the printing presses to create excess money and
slept on the job as regulators by permitting private financial
institutions to create even more money and increase the money supply by
means of leverage with Structured Investment Vehicles (CLOs, CDOs, CDOs
squared, VIEs etc.). The sloshing flood of dollars inundated not only
America, but became a proverbial Biblical flood the world over, and led
to real estate bubbles in the UK, Ireland, Spain, US, Canada, China and
even Australia.
China was willing to take a depreciating dollar to provide employment
for its teeming displaced rural masses and laid off state employees.
China also locked its currency and that of Hong Kong to a fixed parity
with the dollar. This assured Chinese employment no matter how low the
dollar fell, but has led to the current galloping inflation in China and
resulting unrest. China intends to use it dollar reserves to blackmail
America over Taiwan. It succeeded by causing the defeat of the
separatist independence faction in the recent Taiwan elections. The
newly wealthy Taiwanese have huge investments in the mainland and wish
to avoid confrontation (like the Indians and few Chinese who stayed on
in apartheid South Africa). Sooner or later China will now use its
financial clout to force the US to abandon Taiwan. China has paid a
hefty financial price as its 1.5 trillion dollar reserves have lost over
a third of their purchasing power but Chinese leaders are not answerable
to their population and though crooked and corrupt like those of India
or America, they are not stupid or idiots like those of the last two.
The US claims to be the locomotive pulling the world economy at the cost
of personal sacrifice of running huge trade deficits. It does so to numb
its predominantly naive and ignorant population, to distract it while
the thieving leaders and elite raid the national treasury. It set up the
middle tier developing countries to be patsies holding depreciating
dollars. During the Russian and Asian crises, it had brainwashed the
Asian developing countries about the perils of not having adequately
high dollar reserves to counter the wild gyrations of fleeing private
capital in search of a quick profit. The US had used its Trojan horses,
the World Bank and IMF to force developing countries to permit free
capital flows while limiting the flow of people and labor itself to
cause the financial catastrophe and now used it to impose the draconian
measures of currency devaluation, elimination of subsidies to the poor
and slashing of social spending on Thailand, Malaysia, South Korea,
Indonesia and even Russia. This allowed US financial institutions to buy
Asian assets for a pittance (Thai real estate, Korean banks, Indonesian
mines etc.). Now that it is in a similar mess, it continues to run
increasing deficits, asks other nations to revalue their currencies and
puts obstacles to prevent them from buying US companies (China and
Unocal, Dubai Ports and US ports management). Thus the Asian Central
Banks buy dollars from their exporters and give them local currency
which they have to sterilize by selling local currency bonds increasing
the domestic national debt on which they pay a higher interest rate than
they receive on their increasing dollar reserves rapidly depreciating in
value and purchasing power. This stokes the fires of domestic inflation
while the dollar reserves are invested in US treasuries keeping US
interest rates and inflation lower than what they should be.
The asset bubbles created by sloshing liquidity have pushed house prices
the world over higher than affordable income and they have begun
crashing in Ireland, Spain, UK, Australia and America. There is a glut
of housing in America and no shortage of land. Just like in Japan in the
nineties, house prices will fall by 25% or more. Japan at that time had
a trade and current account surplus and no inflation so it could run
huge budget deficits and keep interest rates at half a percent for a
decade and is still not fully out of a deflationary quagmire. The US
with its current account, trade and budget deficits, a high inflation
and drastic cuts of rates by the Fed has no ammunition left to counter a
recession or economic meltdown. The huge losses of capital by financial
institutions reduce their lending ability by twice or thrice their
losses. The secretive lack of transparency leads to mistrust and fear
reducing lending and transactions due to counter-party risk. This clogs
up the credit markets and increases credit default swap prices, which
the Fed printing money cannot remedy.
Sovereign Wealth Funds like those of Abu Dhabi, China, Singapore have
already seen their first foolish investments in Western Banks lose a
third or more in value in six weeks and are presently reluctant to throw
good money after bad. Thus America faces a decade or more of privation,
stagnation, inflation in commodities and deflation in assets if it does
nothing, a marked reduction in status and hegemony if it can
successfully beg the Sovereign Wealth Funds to recapitalize its banks
(unlikely because China will need over a trillion dollars to
recapitalize its own bankrupt state banks with corrupt lending and
humongous non-performing assets or demand Taiwan, and oil rich Gulf
States may ask for a pound of flesh from the Israelis). The last
alternative is a Federal bailout like what the RTC did for Savings and
Loan Banks in the Reagan era. This may save the domestic economy
somewhat, but will increase inflation and pressure the dollar further. A
final alternative more in keeping with the temperament of the nation is
to use its military might to capture new wealth and resources and compel
creditors to wipe out the debt of America. All choices like those for
Iraq are bad.
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One
of the cardinal principles of economics is how changing supply and
demand affect price. Ordinarily, decreased supply in relation to demand
leads to increased price and reversed supply demand relationship leads
to decreasing price. A decreased price by itself can on occasions
increase demand just as price increases can decrease demand by making
things less affordable to greater numbers of people. Supermarkets and
retail stores advertise reduced price sales to attract buyers and get
rid of inventories. Another gimmick they use is to reduce the price of
one common item (potatoes) to lure buyers and jack up the prices of
other essential items (onions) even more, which the shopper is likely to
purchase at the same time to avoid two separate shopping trips.