An Inconvenient Truth About The Economy

[ music | Nine Inch Nails – Somewhat Damaged ]

A friend linked me to this article and he asked for my opinion. I’m flattered he think my view matters, and he asked me to blog it. In short, I think this guy’s way off base.

First, remember this. When it comes to investments, you haven’t lost, or gained a penny until you cash out. You paid a certain price to buy in, and until you sell, your losses and gains are theoretical because you don’t have the money on the board, you have slips of paper in the company that are worth that much but only if you sell. So unless you sell those slips when they’re worth less than you paid, you haven’t lost anything. That’s why investing is for the long term, and not for the faint of heart.

Also, what the writer there fails to acknowledge is that while the Euro may be a “stronger currency”, it’s very bad for Europe’s economy if people start flooding it with investment cash because that’ll inflate the value of the Euro, making their exports more expensive, and hurting their economy. A little investment at once, or a lot over the long term is good, but a big influx at once causes instability. Additionally, just a few years ago the European economy was stagnant. It took the Euro to bring some balance to the continental economy. And now that all those countries are using one currency, one bank, economic issues in individual countries are harder to address because each country can no longer adjust their own money supply as needed. The US can because the dollar supply is managed by the Fed via interest rates. It can make credit more or less expensive, making it harder or easier to get loans and managing how people use their own capital. The US economy is more flexible for this, and more stable because exactly one country controls the dollar, while dozens of countries are all in cooperation with the Euro. History says European countries don’t tend to agree on any one thing for extended periods of time.

China has SO much invested in the US they can’t AFFORD to pull out. We’re China’s biggest customer, they can’t afford for us to go under either. Note how he values China’s “$1.4 trillion reserves.” Not Yuan, not Euros, but Dollars. The dollar is still the international standard. China has a lot of US debt. There are very few countries who can afford to buy that much debt, so China’s diversification options are limited by who can afford it, and who wants to buy it. If we’re that bad an investment, no one will want it. If they have no shortage of buyers, then we’re not that bad off.

The building boom didn’t start in 2002, it really started back in the early 80s, maybe a little earlier. The real estate market has been in a bubble for 20 years. Donald Trump got bitten by a correction in the early 90s, but even he knows that even in a declining real estate market, there’s money to be made if you invest wisely. The bubble is bursting because people’s bad investments are finally no longer able to ride the coattails of cheap loans and blind faith that everything always appreciates without fail.

Further, it’s not the Fed, it’s Bush’s terrible economic policies finally catching up with us. Huge tax cuts, even bigger spending increases, a bad war… The deficit is more than double what it was when Clinton took office, and Bush’s spending exceeds even Reagan’s excessive deficit-laden budgets. At least Reagan knew that eventually all that debt had to be paid off. Bush doesn’t seem to know that, or maybe he just doesn’t care.

And it was Greenspan’s fault that the real estate market didn’t correct several years ago, during the dot com crash he dropped rates too much to keep people from feeling too much pain. That was a correction, too many people buying into thin business plans based on selling a $5 of dog food via the internet but forgetting people won’t pay $20 to ship that dog food when they can get the bag for the same price at the grocery store. He kept dropping rates too far too fast. That just allowed people to take their bad dotcom investments and shift them into bad real estate investments on borrowed money.

This is another correction. The entire world economy is an interdependent system. The system is very complex. No single player makes all the decisions, no single player can go down the tubes without causing a world of pain for the other players. Everyone feels some pain sometimes. Right now, this is out time to feel the pain. Ten years ago it was Japan. Ten years from now it might be China or India or Europe. It happens. The only way to survive it is to remain calm. We’re all in this together.


There was a comment here that was nothing but antisemitism thinly veiled as an economics comment. I have deleted it because he’s a moron for his statements, and I pretty clearly tell people right here to not be a jerk. Want to comment? Leave hatred at the door.

Your rebuttal basically comes to the same conclusion as the original article.

Did you even have a point to make?

OK here is the comment with one word deleted.

The reality is we are nearing the end of gold/fiat currency era. Use of gold and fiat currency as medium of exchange is major fraud equivalent to slavery perpetrated by elites on rest of the people of the world.

For a currency to be "valid medium of exchange" it should be defined in terms of food/fuel or energy and the issuer should have redemption obligation. Redemption obligation is necessary because currency is a token, for tokens to be valid it need to be redeemed with what it represents eg. food/fuel/energy – something which humans can really use, we can eat food, we can use fuel to produce food. Gold cannot be used as a natural currency since it does not have any inherent energy essential for human survival. Gold can become a valid currency only when someone guaranties redemption against food/fuel otherwise it is an absolute fake token/currency.

"Free Markets" can exist only when a "valid currency" is used for transactions!

The "the sky is falling" tone doesn’t help taking it very seriously, but I don’t see much that you actually refute from this article.

One thing about investments. Saying you don’t lose as long you don’t sell is not correct. Sometimes even if you don’t want to sell, you are forced to, for pennies. Early next year, the TNU Eurotunnel bonds will be removed from the market. The last hope to get back their investment for the owners will be lost.

China can’t afford to pull out, that’s for sure, but the recent moves they are making seem like they don’t either want to take the risk of going down together with the US. They are in a sort of zugzwang, whatever they do, it will be a bad choice, probably trying to find some sort of middleway out of it, definitively wanting to stop putting all of their eggs in the US basket, which might be enough to make it crumble.

There has been a lot of crises since thirty years, but it seems now that the way out of every crises without too much hurting has been each time to create what would become the next crise instead of solving anything (for exemple Greenspan going out of the dot com crises by creating a real estate bubble). As a result, the tension in the system have always heightened, and this time it might be about to crack, at least if nothing again is done to solve the real issues.

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