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The Future

UNFINISHED CONTENT

The Free Market

  1. The free market is like a rough sea (prices go up and down) driven by the mechanisms of the auction. The price is driven by rumour but also by material necessity in varying degrees in many markets.
  2. Belief about how the markets behave combined with virtual trading leads to many self fulfilling prophecies.
  3. Speculators profit by the roughness of that sea and so do there best to roughen it with the creation of plausible rumours that will cause the maximum disturbance.
  4. Productive businesses profit by the smoothness of that sea and so do there best to smooth it.

Globalisation

  1. Globalisation has lead to countries with more exploitative labour policies like china supplying all labour.
  2. Lending/borrowing politely termed investing has lulled the west into a false sense of security as it invests heavily in unproductive assets.
  3. The labourer in the west has been kept employed by dragging out education and by creating of unnecessary administrative roles.
  4. This will come to an end due to limits on energy and as cheap labourers fight for better conditions in China. When they get better conditions they will begin to supply the home market and export will not be an issue, in particular to countries that have nothing to sell back to China. This will lead to inflation in the prices of Chinese goods.

Economic Turmoil

In economic turmoil, as the economic temperature rises those industries that have the most complex and fragile trade chains are likely to have their trade chains broken up. Fragility in a trade chain means transactions in the chain that are highly price sensitive and so can easily be broken in unstable conditions.

As sensitive trade rings and trade chains break up, trade rings become smaller and so the economy may become less sophisticated, in the worst scenario returning to subsistence agriculture.

When economies break up there is inevitable hardship as people struggle to adapt and find a part in a changing economic structure. i.e. I used to work at the car factory but now I sell vegetables I grow myself.

This is not to say that all sophisticated trade will fail. Currently information technology has good profit margins and ever lower production costs for the same performance. Although the "dotcom" bubble should be noted. IT is full of bright ideas that are not as bright as they look.

The car industry in the USA has certainly suffered.

Debt has enabled trade chains that have little hope of forming rings to have extended lifetimes, and also malinvestment in housing which ultimately brings no product or service to the market and the enthusiasm for which has lead to a massive housing price bubble both have made their contribution to economic failure. Where as the investor should be the one responsible for establishing and maintaining a productive economy through investment in things that bring products and services to market, instead they have lent money to people who have put that money into homes which do not bring any product or service to market. The availability of this money has created a bubble in house prices and the building industry.

All this is only sustained by the wages of the home-owners. These wages must be sustained through the productivity of the home-owner as an employee in the open market but because the home-owner must pay for a massive debt these wages are necessarily inflated and the home owner is likely to be severely effected by a job loss.

Ultimately productive businesses are left without investment while having the responsibility for paying wages to meet excessive interest payments and while providing unprecedented job security. Businesses are left with the responsibility to provide alternative employment for staff they actually could do without.

Governments, like home-owners have also indulged in reckless borrowing but where as people expect their employers to take responsibility, governments expect taxpayers to take responsibility.

However it must never be forgotten that for every reckless borrower there is a reckless lender that leant to them.

Given the extent of debt one can only look at the ability of the indebted body to pay and ask will inflation be needed in order to devalue our way out of debt and if so how can the government implement it. Clearly over debt in foreign currencies they have no control however they may have control over their own currencies.

The objective is likely to be to inflate to the extent necessary to make the debt manageable. One cannot of course ignore the huge personal interest that the people controlling inflation will have dependent on their own personal level of debt!

  1. Reducing the interest rate is one way of making the debt manageable but it encourages more debt.
  2. Central bank buys junk loans from banks to recapitalise them against any possible bank runs.
  3. Central bank may give money to government but it hasn't happened yet.
  4. Inflation may result as money is lent into the economy but this defeats the objective. As when that money is returned deflation will result. Unless it is lost to bankruptcy.
  5. Money should be coming from central bank to invest in enterprises that will provide the products and services of a future economy not being given to banks to sustain further lending.
Which ever approach is taken  The EU has limited QE.

Notes

Debt to the central bank is different to debt to anyone else because debt paid to the central bank takes money out of circulation where as borrowing from central bank puts money into circulation.

As cash is replaced with assets as a store of value.....

Most people are in debt and most love to tell you just how much more their house is worth than it was last year. The house prices are a reflection of a market gone horribly wrong as the price is based on limits of borrowing not the limits of available cash. The result of this borrowing is an unhappy one as the majority of the population become enslaved to there mortgages.

Governments cannot afford to burst the house owners egos by allowing the house price figures to drop, and also many government people are house owners themselves. So to try and maintain house price figures they use every means at there disposal and cause inflation.

Initially house money was borrowed from people and that meant the resulting amount of money on the market stayed the same. However once money comes from central bank that inflates the money supply. Thus QE has inflated the money supply.

This effects pension funds and lenders badly. That is what the central bank does, subsidise lending.



 




© Tom de Havas 2011. The information under this section is my own work it may be reproduced without modification but must include this notice.







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