Perspectives on the global economic meltdown (Jan 26 2010)

enqyoob · Post by **enqyoob** » 29 Jul 2010 07:44

I have a question for all the Econ Whizzes here. No point in asking the fools that run the countries, as the postors here are clearly far superior in intellect, experience and vision.

Question:

Do USA and Russia need exports to sustain their wealth? Suppose they decide to close doors entirely, will their economies collapse and people starve? I mean, in, say, 10 years after the closedown.

Other nations like Japan will certainly experience drops because they don't have several critical natural resources (or will they?)

India will revert to 1960s susbsistence economy (or will it?)

UQ may have to go back to killing each other instead of exporting death and slavery.

Oirope, I don't know, I guess go back to killing and robbing each other?

Africa will be Africa.

South America will probably be South America.

Neshant · Post by **Neshant** » 29 Jul 2010 07:51

Hari Seldon wrote: And that, because it affects not just the banksters and elitemen but also aam janta via bankrupt retirements, pensions, social sekurity and health+welfare entitlements, effectively takes down the social contract between state and citizen as the west has known it for far too long now to know better.

This is a good thing for anyone who's on the hook to pay for all these astronomical promises. It allows for bankruptcy to occur and in bankruptcy all these contracts can be renegotiated - hopefully dissolved.

Everybody needs to save for their own retirement and politicians need to stop pushing ponzi schemes at other people's expense like social security, benefits, entitlement, public sector pensions..etc. These are simply means of robbing one segment of society for the benefit of another.

SwamyG · Post by **SwamyG** » 29 Jul 2010 08:04

Neshant wrote:People should buy stuff when they need to buy it. Not because some guy is destroying the value of their savings. Buying stuff when its needed reflects real demand and that is where prices stabilize at. It is the market that should be setting prices.

That is not in the interest of Corporations, and in turn is not good for investors. Neither good for folks who have "Defined Contributions" plan.

Neshant · Post by **Neshant** » 29 Jul 2010 08:09

SwamyG wrote:Neshant: Small government is nice onlee. After tasting freedom, humans would want to be minimally ruled over by others. But we live in a society and are bound by various laws and rules. The Optimal Government size which is neither too big nor too small

The optimal size is small.

That which is given to you by govt is really just the same taken away from someone else.

What's wrong with the concept of paying for what you want/use as opposed to the present concept of getting some other sucker to pay your way?

Neshant · Post by **Neshant** » 29 Jul 2010 08:14

SwamyG wrote: That is not in the interest of Corporations, and in turn is not good for investors. Neither good for folks who have "Defined Contributions" plan.

Defined contribution plans in the private sector as are as good as gone. The public sector however loves defined contribution plans as they get to milk the taxpayers and make taxpayers pay for their gambling losses in the stock market casino. But they'll keep the profits thanks.

I don't agree that its not in the interest of corporation. Certainly having bankrupt consumers is not in the interest of corporations and destroying the fruits of people's labor is not in the interest of investors.

Hari Seldon · Post by **Hari Seldon** » 29 Jul 2010 08:16

^^^
n^3 saar, nice to have your presence grace this thread only.

Let me attempt a (semi-serious) answer. What you describe is full-fledged trade war with the global trade regime having all but collapsed. I've long been waiting (and mercifully, unsuccessfully, so far) for the first serious shots to be fired in the protectionist trade war for a while now, driven primarily by jobless pressures.

Sure, "well-armed sovereign countries can do bloody well whatever they want" (to quote AEP w.r.t. US repudiating its PRC debts). But the problem is, a trade war, like we saw with Smoot-Hawley in the 30s, is a mere precursur for a physical resource grab - a.k.a a real shooting war and now with nooks thown in, who knows how that goes. The non-nook noobs would have the worst of it I guess - intimidation, expropriation, poverty.

Scary times lie ahead.

Sanjay M · Post by **Sanjay M** » 29 Jul 2010 08:24

amdavadi wrote:deflation isnt only restricted to cost of living. It will effect everything around it. When prices go down, consumers delay purchases thinking that prices will continue to fall.As a result, companies make less money, leading them to layoff employees. When unemployment increases, there is lower demand for products because unemployed consumers can’t afford more purchases. It can become a vicious cycle.

American society is so consumption-crazy that people rack up ridiculous amounts of credit card debt. Beyond a certain point, I don't think people will stop living life. Most of us know that prices on goods such as PCs, laptops, smartphones, and bigscreen TVs go down over time - a clearcut example of constant deflation. Does that mean that everybody puts off buying these items forever? No, there may be some delay to wait for the new model, but people still have to get on with their lives and use these things.

So when deflation becomes constant and ever-present, then people factor it into their lives and move on. The market as a whole, including the producers, factor it in and make innovation a requirement. No laptop producer is stupid enough to keep manufacturing the same model for 5 years in a row, and watch their sales dry up before the 5 years are up. With deflation comes increased incentive for innovation, and that gets built into the business plan. Producers plan to have some new feature upgrades available, to keep people buying.

Besides, old people can't continue to hoard as they can't take that money with them.
As Keynes said, in the end, we're all dead anyway.

SwamyG · Post by **SwamyG** » 29 Jul 2010 08:27

Neshant wrote:What's wrong with the concept of paying for what you want/use as opposed to the present concept of getting some other sucker to pay your way?

Nothing wrong, just it is not practical and not sustainable. We are dependent on each other more than we know. My family recently joined a gym; we had a "free" consultation session that was just one hour of attempting to sell paid services and products that we did not need. The personal training sessions they were selling, though useful, were not needed. Lot of "suckers" were buying them; and only because of these people was the company making enough profit to keep the regular services reasonably priced. We need suckers, that might be harsh but that is the truth.

SwamyG · Post by **SwamyG** » 29 Jul 2010 08:30

Neshant wrote:I don't agree that its not in the interest of corporation. Certainly having bankrupt consumers is not in the interest of corporations and destroying the fruits of people's labor is not in the interest of investors.

That is because a Corporation, as a person, cares about only itself. All it cares is promote its product, make an non-essential appear as an essential through enticement for its potential consumers. Imagine thousands of such Corporations.... I know several households that have more than one TV. I can understand 2 or 3, but 8 or 9 TVs in a house?

abhischekcc · Post by **abhischekcc** » 29 Jul 2010 09:25

Corporations can become blind to their long term interests if the incentive structure of the employees is skewed towards achieving short term goals. If an employee is incentivized only on the basis of number of units sold, he will do so. But if the corporation also provides the loans to buy the products, then it is essentially paying the employee to bankrupt itself (the firm) - if the customer cannot pay back.

However, no matter how careful the policies of a firm are initially, power tends to shift to the sales force - especially during a downturn.

How do you think the sub prime crisis was created?

Neshant · Post by **Neshant** » 29 Jul 2010 09:27

SwamyG wrote:The personal training sessions they were selling, though useful, were not needed. Lot of "suckers" were buying them; and only because of these people was the company making enough profit to keep the regular services reasonably priced. We need suckers, that might be harsh but that is the truth.

Be careful with gym memberships. Usual modus operandi of gyms is to get your credit card information at sign up and get you to sign a contract. In that contract they state in the ultra fine print that you have to give them written notice before you quit. Of course 1 year on most people forget and just stop going. Then 3 years later out of the blue a collection agency calls you and tells you that you owe $3000 in membership fees which are unpaid.

You will say you never went to the gym and told them verbally you were quitting. But they will say - if you look in the contract it says you have to give it in writing. Even if you did, they will claim the gym has no record of it and has been trying to contact you for 3 years (a lie).

Typically the people they pick to pull this scam on have foreign sounding names which they hope is from some uneducated third world country - easy payday.

So be careful. As with the fiat ponzi scam, the sucker you're hoping for could well be you.

ArmenT · Post by **ArmenT** » 29 Jul 2010 10:43

Gulf Sukuk Yield Premium Widens After Defaults: Islamic Finance
Islamic Banking = No workie

vina · Post by **vina** » 29 Jul 2010 10:54

enqyoob wrote: Do USA and Russia need exports to sustain their wealth? Suppose they decide to close doors entirely, will their economies collapse and people starve? I mean, in, say, 10 years after the closedown.

Good question. USA and Russia are continental sized economies, and can be largely self sufficient. USA will go back to pre WWII life style, self contained , but with probably a lower standard of living and economy.

Russia will have enough to put bread and milk on the table, lumber to build homes, raw material to make weapons and build rail roads etc. Back to soviet era days of 1970s with empty GUM stores in Moscow.

Other nations like Japan will certainly experience drops because they don't have several critical natural resources (or will they?)

Japan, SoKo, SE Asian "miracle" economies, HongKong, Taiwan, etc are all Finis. They along with China were the biggest beneficiaries of the post WWII open trading system (especially exporting to USA)

India will revert to 1960s susbsistence economy (or will it?)

Yes, it will revert to the "Hindoo rate of growth" plus probably 2% points because the socialist shackles will have been removed. Growing at 5 % to 6% pretty decent in fact, one of the most dynamic growth rates in an isolated world, but will take around 50 years longer than what it will if growing at 10% to make serious dents in poverty as a mass phenomenon.

UQ may have to go back to killing each other instead of exporting death and slavery.

UQ already sold themselves to the US in the 70s when Dame Margaret Thatcher came to power. Nothing left to sell. They will go on their knees and beg and plead and along with Puerto Rico and Ireland , will do whatever it takes to become the 51st, 52nd and 53rd states respectively.

Oirope, I don't know, I guess go back to killing and robbing each other?

Yes. German economy will crater (most export dependent economy int he world). But if Germany and France hold EU together , it can become another "island" like America, a little less rich as before, but sort of pull along, as long as they manage to dump parasites from the former Soviet Block and it is just Germany, France and BeNeLux and the Scandinavians pulled in.

Southern Europe will be as always and economic backwater, which lives off its "ruins from the past" (literally and figuratively)

Africa will be Africa.

South America will probably be South America.

Yes , both hopeless basket cases, except SA and Brazil. Australia and NZ will turn back into sheep rearing isolated rednecks with (which they essentially always were and still are) , with the veneer of "dynamism" and "prosperity" from exporting stuff dug up from the earth and sheared from sheep to China, Japan, So Ko
going kaput. Back to being Hick's ville (not Hicksville in Long Island, which is civilized) for those two I suppose.

Singha · Post by **Singha** » 29 Jul 2010 11:18

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arnab · Post by **arnab** » 29 Jul 2010 13:05

enqyoob wrote:

Do USA and Russia need exports to sustain their wealth? Suppose they decide to close doors entirely, will their economies collapse and people starve? I mean, in, say, 10 years after the closedown.

India will revert to 1960s susbsistence economy (or will it?)

Let me see if I can answer this from first principles. Theoretically
GDP = (C)onsumption + (I)nvestment + (G)overnment expense + e(X)ports – i(M)ports
So GDP growth is positive as long as growth in C, I, G and X are greater than growth in M.

Now if you remove ‘Trade’ from the equation (X and M), your GDP equation becomes:
GDP = C +I + G

So in such a scenario, In order to have economic ‘growth’, a nation (both citizens and government) will have to continue to consume (and produce) more and more of its own goods. If the consumption is greater than goods produced, the only thing that happens is that the price of goods will rise, so in other words no ‘real’ growth.
Now to apply this to US / Russia: To increase consumption – you need consumers and producers. The US and Russia both face an ageing demographic structure. In other words, more people who would be retiring and asking for health related services or social security. They have to be serviced through a younger population of workers (who will pay taxes which the government will use to provide pensions and health care). So where do they get this young labour force? Import them or over the longer term increase birth rates. So while they may be self sufficient in the ‘goods’ market they are certainly not so in the ‘labour’ market.

Similarly, what about resources? Russia needs to export oil and gas.

So on the margin open economies are useful. There might be certain protectionist measures incorporated to placate some lobby groups, but I don’t foresee the complete closure of trade because there is still an incentive to trade.
A related question – why do you need growth? Can’t we comfortably exist without having economic growth?
For developing countries - imagine trying to alleviate poverty without growth. Income would have to be redistributed from rich to poor. But this doesn't go down well with the rich. In such a scenario India might have a huge problems due to frustration and lack of opportunities. So growth can make everyone better off.
Growth is needed because of greed. Our wants are endless; and finally
growth is needed so that you can get into debt today and hope to pay it off with your higher future earnings

enqyoob · Post by **enqyoob** » 29 Jul 2010 14:11

A related question – why do you need growth? Can’t we comfortably exist without having economic growth?

That was going to be my next question, thanks. If I read the wonderful optimism of the past 5x pages in this thread, I have to ask myself what I would do if I were making economic policy for, say, Dera Amir Khan, and had the requisite dictatorial powers.

The choice is not between "Growth" and "continue in comfort" right now (again, I am basing this purely on this thread's unchallenged assumptions, not necessarily my opinion since I don't have any). The choice is between "precipitous collapse" and "slow decline", which is no choice at all. Facing an aging population requiring ever-higher medical and retirement entitlements (hard-earned, I might add) and achieving "growth" by taking jobs away from the younger population and giving them to cheap foreigners, does not help at all. If the younger population can't get jobs, how can they achieve the high productivity necessary to sustain 1.x times the working population as retirees?

So my response might be to close off the import and export spigots. Prices of handbags, clothes and most everything else would skyrocket in the short term as Chinese, Indian and South American imports are cut off and replaced by more expensive Made in USAstan goods. But in the longer term, automation and shift to other things would make up for this and more, and the US would once again create the innovation in everything including clothing choices, to adjust to the new reality.

For example, today millions of desi brats imitate Americans in clothing choices, without any thought. My nephew spent 2 hours and all his allowance and brought home this old, ragged pair of jeans from the most "posh" clothing outlet in Bangalore, Kerala, bought at a steep price. Still regretted not being able to find a pair with patches on the knees. I asked him if he knew why American kids wear (used to wear) old jeans with knee patches.

Likewise, maybe in an isolated economy, Americans will take to wearing paper clothes made from recycled paper. Green. Sustainable. Indians will pay a 500% premium to buy paper clothes, over the elegant 100% cotton stuff that is made in India. This is what happens when mindless imitation becomes culture, as it has in India.

Does Russia really need to export oil and gas? Why? "To get hard currencies". But why? "To buy food". But why? Russia has enough land to grow all the food they need, and they can use the petroleum to make plastics etc. Siberian tundra has more natural gas under the (now melting) permafrost than the rest of the planet combined - more than enough to heat and power Russia for ages.

The second part of my question is what happens when American grain and Russian oil and gas are withdrawn from the world market, to all the fancy "new superpowers" living off the proceeds of Americans buying luxuries. Can they afford to buy food or fuel any more?

So I ask, where do you think the real collapse will come - in the fundamentally self-sufficient USA and Russia, or in the fundamentally "leveraged" consumer-goods-mass-production economies such as India where innovation means copying something more recent than last year's knockoff.

The smug predictors on this thread might want to spend a few microseconds thinking through that.

vina · Post by **vina** » 29 Jul 2010 14:30

leveraged" consumer-goods-mass-production economies such as India where innovation means copying something more recent than last year's knockoff

Saar. That is the Sociarist Lepubric of Kerala's Commie's bosom pal, Cheena . They are the "leveraged" one turning trinkets (single use onree and then throw, I cant think of anything more energy intensive and useless as the junk toys and things China makes) by the gazillions and dumping them all over the world. They are the ones dependent on those supply chains and export markets.

Yindia. We are short dark, daal-chaawal , roti eating folks clad in dhotis and going topress onree. Pull the plug and we will be fine. But Cheena will come crashing down and all that "harmonious" "plospelous" society etc will come crashing down before you can say Mao Tse Tung

ldev · Post by **ldev** » 29 Jul 2010 16:10

Sanjay M wrote:Hari puttar,

The Japanese could have easily dealt with deflation by translating price drops into increased exports -

If you talk to any Japanese manufacturer with multi country manufacturing operations, they will tell you that yen denominated deflation in Japan has been vastly outpaced by the appreciation of the Japanese yen. If you dont believe me look at the relevant statistics for the last 10 years. So how can they follow your prescription?

enqyoob · Post by **enqyoob** » 29 Jul 2010 18:13

vinaji:

The (non)Capitarist Peopre's Lepubric now holds probably more Amir Khani paper money and real goods than the rest of the duniya combined, and has enough mijjiles to discourage any thought of making that paper worthless. They may simply buy Africa and Argentina, (say) and send a few Peopre's Ribelation tourists to occupy the new territories. As for the MidEast, we have already seen that if the Evil Degenerate Kuffar pull out investment, then only Abu Dhabi and Saudi current accounts can stave off starvation even in such "modern" luxury capitals such as Dubai. Who are they going to sell their oil to, if, say, AmirKhan went to war phooting and actually stopped importing oil - and Oirope, Japan and Korea can no longer afford it? (I say that is feasible to achieve within 3 years if Amir Khan really wants to do so).

Extending that thought, there goes the FDI that props up real estate values and all those jewelry/burkha stores in Dera Malloo Khan.

The Indian economy today is "growing", AFAIK, for 4 reasons:
1. Leveraged consumer economy tied to the real estate balloon
2. DOO contracts from Amir Khana, Kangaroostan and Oirope
3. Infrastructure investment driven by (1)
4. Investment in industry from FDI, again from massive institutional investors speculating on an 8-10% growth rate like what propped up Yahoo! stock above $500 circa Y2K - the same sweet folks who are (rightly) marked as causing the collapse of the Pacific Tigers in the 90s.

IOW, the Indian economy is not (yet) being driven by indigenous innovation or indigenous resources or exports of true essentials (no insult intended, but people don't really eat Oracle code and can live without Excel Utilities, as lucrative and "innovtive" as those exports are). The propellant for the economy is still cash from videshi brasht desis, or from Eph Dee Eyes hoping to make a few quick $B$.

I see many posts here from the Protectors of the Toiling Masses deploring the top-heavy wealth distribution of the Evil AmirKhana. Anyone tried plotting a histogram or wealth distribution in India? The gazillion references to

Income from Ownership of Race Horses

in the form Eye Tee Arr -2 are enough to rest my case on this point.

As I see it, the Top 0.1% in India own 80% of India's wealth. Maybe the Top 0.03%, and 97%.

But they own it for 3 reasons:
1. Astronomical appreciation of real estate prices in urban India, resulting in 10,000% margins on Flat Construction and Speculation.
2. Stock market appreciation
3. Astronomical appreciation of rural land as it gets converted to houses.

None of these are really basic producers of wealth, they are all from paper shuffling and smoke-and-mirrors and outright fraud and corruption.

So you are absolutely right about 99.9% of Indians - return to tightened dhotis and cattle-powered agriculture is still possible for them. However, 80% or more of India's appearance of "wealth" will vaporize, since it is all leveraged.

When that goes "poof", what will remain of it? The Chinese have at least gained a truly mind-boggling amount of technical knowhow. Indians have gained knowledge of how to drive their leveraged cars burning imported diesel, through roads that have seen no improvement in 1,700,000 years, to to the stores where the patched jeans hang.

This thread should be renamed the "Indian MilkMaid Story Thread" and archived. Then again, when the crash comes, there will be no internet or computers in India since the power plants run on imported petroleum as well.

SwamyG · Post by **SwamyG** » 29 Jul 2010 19:08

Neshant wrote:So be careful. As with the fiat ponzi scam, the sucker you're hoping for could well be you.

OT Ha..ha. Thanks for the warning. I hope my ebil SDRE brain stays active and thwarts all these attempts. There is no contract, we just have to give one month notice. The Western lifestyle has pushed health on to a cliff edge, exercise is essential.

Hari Seldon · Post by **Hari Seldon** » 29 Jul 2010 19:27

Anyone tried plotting a histogram or wealth distribution in India?

Good point.

Yindia's income distbn is worse than yamerika's. It was even worse back in the 50s and the 60s. It's improved since and the hope is it will continue to improve as the yrs go by, inshallah.

We in Yindia are wretched and doomed only. Agreed. But IMVVHO it does not follow that we should not discuss happenings in the rest of the world when it is amply clear that a meltdown there will hurt us pretty bad.

I see many posts here from the Protectors of the Toiling Masses deploring the top-heavy wealth distribution of the Evil AmirKhana.

Amir khan's income distbn in the 70s was better than now. That in the 40s and 50s immediately following the war, am told, was even better. Top marginal taxes around Eisenhower's time were 90%, am told.

Of course, unkil as usual holds some very good cards, has some very smart people and likely will come up trumps. More power to unkil only.

Hari Seldon · Post by **Hari Seldon** » 29 Jul 2010 19:28

Again, work pressures and shq cribs happening. time to re-enter my cave a while. Was good to be back a while. Like the terminator says, "I'll be back" - if there's still an internet around then.

SwamyG · Post by **SwamyG** » 29 Jul 2010 19:30

vina wrote:Yes, it will revert to the "Hindoo rate of growth" plus probably 2% points because the socialist shackles will have been removed. Growing at 5 % to 6% pretty decent in fact, one of the most dynamic growth rates in an isolated world, but will take around 50 years longer than what it will if growing at 10% to make serious dents in poverty as a mass phenomenon.

Very true. India has great opportunities to improve the life of millions of people, alleviating poverty, improving health care & education. There exists great domestic demand that can drive the economy. I use the word "can" because apart from the demand finance is important for domestic growth.

ShivaS · Post by **ShivaS** » 29 Jul 2010 21:10

Deflation of Assets, deflation due to, money supply being tight, commodity value deflation, price fall due to excess supply (no monopoly) or production effciencies should not be confused.

The deflation we are talking about is when the earning potential, or disposable income suddenly drops is what we are talking about.

Price drop because of productivity, or new technology or substitutes is different.
quick example
mechanical watches decline (any one remebers Henry Sandoz or Favere leuba HMT Janata HMT Sujata (made with Citizen collobration)? Become obselet with the advent of Quartz movement and the drop in price?

Why the near obslence of fax machine with Scanning PDFs and printing (in this case the same underlying technology)

Just you watch (know pun intended) the electric Car and Hydrogen car which are lurking round the corner will make petrol(fossil fuel ) obselete, in this case the irony of Electric car which died when the otto cycle sputtered to life is bound for reincarination (of peter proud good movie, Desi Milan) etc etc

enqyoob · Post by **enqyoob** » 29 Jul 2010 21:43

Thanks, Hari. So it appears to me that deflation in Dera Amir Khana may mean worse in Dera Sonia Begum. What would head this off?

IMO, as long as Amir Khana and Oirope keep outsourcing production of their innovation to the PLA, the problem just keeps getting more severe. One can easily extend the logic to say that outsourcing to desh is bad, but it is not at the same scale, except in the eye Tee field. So both PLA and desh should be scrambling to generate enough domestic demand to support innovation and new products, to replace the demand from outside which may disappear. Bottom line - if Joe 6-pack is unemployed, it hurts Hong Li and Appu. So no celebrations are inadvisable unless they are along the lines of Pak DeafnDumb celebrating 7/11 ignoring what it was going to do to their own.

OTOH, my opinion is that this is all the natural consequence of Open Markets and Globalization. Perfect demonstration of 2nd Law of Thermodynamics in operation. The artificial barriers separating different "reservoirs" at different states, leads to a "relaxation towards equilibrium" with lots of diffusion between the different reservoirs. But such a relaxation towards equilibrium generates entropy since it is an irreversible process across a finite gradient.

In a "zero sum" game, the net effect is negative. But the theory of Globalization is that when every product has access to the whole world, more wealth is created, and everybody gets the best price they really could get, on a global basis.

So I do not agree that this necessarily means a permanent reduction in standard of living anywhere, though temporarily that may (and has) occur(red).

It is not a zero sum game for the reasons Spinster Garu explained. Today's "must-have" products are tomorrow's garbage. But tomorrow's must-have products may be a heck of a lot better and offer far more value, so the standard of living has not gone down despite less money being spent on the same standard of living.

And there are always the "disruptive" ideas and products that toss all textbook Economic Theory into the garbage bin.

SwamyG · Post by **SwamyG** » 29 Jul 2010 23:40

Two important risk factors, among several, that RBI outlined, on July 27th, about global trade and recovery.
1) Slow global recovery in trade could adversely impact India as capital flow into India reduces.
2) An upside to slow global recovery is energy & commodities prices remain subdued, thereby reducing import prices and impacting import substitutes.

Link: http://rbidocs.rbi.org.in/rdocs/PressRe ... MP0710.pdf

Satya_anveshi · Post by **Satya_anveshi** » 30 Jul 2010 00:21

On a different note, I find the markets moving within a very narrow range for the last few days. Perhaps the "circuit breakers" are set too tightly. It will be interesting to see what kind of volume is being traded. If true, the market silence on this market "manipulation" by gubmint is astounding. It is also likely that my "theory" is misplaced. Let's see.

enqyoob · Post by **enqyoob** » 30 Jul 2010 06:26

Added later:

Let's try observing what has happened in Eye Tee field. Circa 1999, salaries for software engineers were running around $80K to $100K. Then the internet crash combined with the success of Y2K outsourcing really hit. Every company decided that it was "outsource or die", so they laid off most US software engineers and outsourced increasing amounts of coding to desh etc. Salaries plunged to $36K for the same level of jobs that used to pay $80K to $100K. Massive depression, to the accompaniment of massive gloating by the MilkMaids.

Today the industry is completely different. Code generation has been largely automated, so that it can be done by people with a much lower level of education and thinking-expectation. The US jobs shifted to management of EyeTee rather than writing efficient, smart code. Coding, though automated, has become monstrously inefficient - "Hello World" done with all the paraphernalia is now an 80MB package with hajaar hajaar "lines of code".

From one perspective, the industry has been ruined, and taken away from the US. The other way of looking at it is that the US industry leading edge has moved on to more sophisticated stuff, while the MilkMaids are congratulating themselves on doing what US engineers used to do 10 to 15 years back. And, ahem, starting salaries for CS BS grads is around $60K now, and the senior types are waaaay over $100K. But there may be a lot fewer of them now than in 1999.

This is poor consolation to engineers who have lost their homes etc, so don't get me wrong - I hate what has happened, and I hate the poor planning and the takeover of intelligence-based industries by reptile-brained managers. But this is life.

Now look at the desperate "US auto industry". We all hear how bad things are at GM and Chrysler and Ford. But has the US really lost the auto industry? Hardly. Honda and Toyota build a lot of their cars sold in the US, in the US. Does not make sense to ship heavy metal and finished paint-jobs by salt-water ships across the Pacific. So most "foreign" cars sold in North America are actually built in North America, while many "domestic" cars (i.e., with emblems from Ford, GM etc) are built outside the US.

Much of the engineering is done - I don't know where - may be India.

Point is that innovation will sprout up somewhere else, and hungry people will do what it takes to get in there. This is why Indians were able to do so well in Eye Tea, and it is also why new industries will come up in the US.

Textbook economics does not capture the nature of innovation and its effects, in a global economy. Without capturing that, predictions of market success or failure are not particularly useful.

My feeling is that 5 years from now, US will be in a stock market boom, fueled by something. I can say "energy!" or "genetic engineering!" or "nanotechnology!" but I have really no idea what it will be. Maybe it will be a Space based economy, or Space Solar Power industry. Probably Enqyoob Universal Empire LLC. Buy now!!!

Desh will be puffing up and gloating:

Why nano technology yaar, arre we are having even micro and milli and centi technology onlee!

Neshant · Post by **Neshant** » 30 Jul 2010 08:41

The idea of a free market economy has gone out the window and more morally hazardous market rigging is on the way.

This is an interesting rumor. The Fed and GSEs would automatically refinance homeowners to a 4.5% rate, as a way to pump the economy. Only question remains, who's going to be the sucker left holding the bag for this free handout.

http://www.zerohedge.com/article/qe-20- ... ent-494554

Neshant · Post by **Neshant** » 30 Jul 2010 08:54

ShivaS wrote:Deflation of Assets, deflation due to, money supply being tight, commodity value deflation, price fall due to excess supply (no monopoly) or production effciencies should not be confused.

I'm afraid all this text book stuff is useless.

Counterfeiting money is bad.

All attempts to justify it involve brewing up a bunch of confusing mumbo jumbo to justify why banking crooks at the top should be counterfeiting while everyone else should not. The reality is they are arguing for it because it benefits them at the expense of those down the pyramid who actually produce the wealth.

Instead of promoting one textbook scam after another based on some joker at the top fiddling around with the other people's money to the benefit of his cronies, I suggest working towards a system of honest money. Get rid of central bankers & other crooks gaming the system, step aside and let the free market operate.

Trying to create a maze of confusion full of smoke & mirrors will only make suckers out of the real producers of society.

enqyoob · Post by **enqyoob** » 30 Jul 2010 09:03

The idea of a free market economy has gone out the window and more morally hazardous market rigging is on the way.

This is an interesting rumor. The Fed and GSEs would automatically refinance homeowners to a 4.5% rate,

The Feds are probably buying out the loans at cut rate from the creditors and doing this. What's wrong with that?

The net result is that many of the loans which are now "toxic" will be salvaged, so the Feds' investment will pay back handsomely.

If the government cannot do that, refusing in the name of maintaining the Purity of the Idea of a Free Market, what is the point of having a government? Is the sanctity of the Free Market Idea more important than allowing many thousands of families to keep their homes as they try to dig out of an economy that is in the dumps? What common good is served by allowing the lenders to foreclose on these homes - and then selling them at sub-market prices to ... whom? Who has money to buy homes in these places, other than real estate speculators borrowing from, say, China? Why is that better than what the government is (far, far belatedly, IMO) doing?

I watched my neighbors of some 15 years lose their house, and could not do anything to help (they did not ask, either). The man is a retired exec of a major financial corporation, and only had a modest pension from the corporation as his steady income. He had paid for much of the house, but then he went into a business that was where his heart was - arranging loans for minority borrowers who traditionally ran into 'redlining" discrimination from the banks etc.

He set up a franchise, bought at a price from a major lender. To finance the venture, he took out another mortgage on his home, an ARM, and was doing fine. The nbd is one where home prices have been stable with a fair positive slope, no one had any reason to believe that there would be any difficulty in selling at any time.

Then credit froze up - no fault of his. There was no money to lend, regardless of how good the borrower's credit was. He considered suing the franchise seller, but they pleaded total inability to do anything about it. There was no credit available, period. He tried to keep the business going and employees paid.

The ARM kept going up - they were allowed to hike every period, so he was looking at 13% interest, well beyond his cash flow. He could not refinance - he is old. He could not sell - the real estate market was frozen because no one could get loans.

He tried selling to an investor, and in Dec. 2008 when I left for India, he told me he was safe, he could get out by selling to the investor, and he moved to an apt.

In January 2009 when I returned, my other neighbor, the nosy one, told me that the house had been auctioned off at the courthouse steps. Now we have new neighbors.

If the stupid Feds had come out with even an 8% loan any time then, instead of sitting around wringing their hands, my neighbor would have been fine, and his business would have survived, which means some other hard-working people would have kept their jobs and homes as well. Some of the nicest people I have ever been privileged to know.

Before you guys continue your 55 pages of non-stop bellyaching, consider that there are humans involved, and your "Free Market Purity" theories are not the only considerations. Then, of course, continue bellyaching by all means, the world needs the entropy.

VikramS · Post by **VikramS** » 30 Jul 2010 09:41

Neshant wrote:The idea of a free market economy has gone out the window and more morally hazardous market rigging is on the way.

This is an interesting rumor. The Fed and GSEs would automatically refinance homeowners to a 4.5% rate, as a way to pump the economy. Only question remains, who's going to be the sucker left holding the bag for this free handout.

http://www.zerohedge.com/article/qe-20- ... ent-494554

Neshant:

Did you bother to read the article and the accompanying MS research paper? This is perhaps the first thing to come out of DC which will actually help Main St. instead of Wall St. And this is free-market in action. Whenever debt goes bad, the lender tries to restructure it to get as much back as they can. This is what is being planned; pure and simple capitalism at its best.

After the GSEs were taken over by the government, it is in the government's interest to keep losses on the portfolio low. By reducing the interest rate while not reducing the principal, they are giving the home-owners an incentive and the means to stay in their home even if they owe a lot more than what the home is worth. You are not only rewarding people who have been paying their mortgages but also giving home-owners to not go into a strategic default. It will also punish those dead-beats who decided not to pay their mortgage since they can stay free for an year or two till the foreclosure occurs. And help the housing market to find a sustainable bottom.

The only people who will lose are those who bought high coupon MBS at very low yields because they are backed by the US Treasury (as good as Govt. bonds) but yield more than them. They were anticipating high returns since pre-payments would be very low since know one could refinance. Now these financial speculators will get burnt because the pre-payment rates will zoom up.

vina · Post by **vina** » 30 Jul 2010 09:42

If the stupid Feds had come out with even an 8% loan any time then, instead of sitting around wringing their hands, my neighbor would have been fine, and his business would have survived, which means some other hard-working people would have kept their jobs and homes as well. Some of the nicest people I have ever been privileged to know.

All very true. But the problem came about in the first place because the fed dropped interest rates to 0.5% to 1% in 2003!. That is the bubble that inflated real estate! Now problem is with the free market "purity" as practiced by Greenspan and Bushies and the soundrels in Wall St (who packaged it), the local mortgage banks (who originated it) and the rating agencies (which signed off as good). The pumped it up. The party was great while it lasted, and when it stopped a lot of innocent people like your neighbor got hurt and hurt bad. That is the tragedy of it.

I do agree with you that instead of bailing out the intermediaries with the $700b bailout, the govt probably could have gone straight down to the home owners and refinanced their mortgages at the rate at which the Fed lent to those middle men scoundrels in Wall St. They should have nationalized Fannie/Freddie bought out the mortgages at cents to the dollar from the banks holding them and reset the mortgages to a low base (reflecting the cents to dollar purchase from holder) and existing homes should have been refinanced at low rates. But no, the Bushis got "Cash Carry" to bail out the Wall St !. When the bailed out AIG, a good $12b or so went straight to Goldman!. Think of it. Goldman too was bankrupt technically because of counterparty risk. Why didn't they force Goldman to write down their books and share the pain of bailing out AIG, I cant imagine.

VikramS · Post by **VikramS** » 30 Jul 2010 09:57

arnab wrote:
This doesn't make sense - if their hard earned money is invested in their businesses - then it is an investment not an income. So the higher income tax does not impact them at all. Unless you are saying most small business owners actually continue to 'earn' their money somewhere else and then open a business to further augment their earnings or earn tax breaks (and hire people to run this business). I would really like to know what proportion of business do this (where running their business is not their full time occupation).

In most small businesses the profits are passed through to the owners and are taxed at regular income tax rates.

abhischekcc · Post by **abhischekcc** » 30 Jul 2010 10:32

Umm, for those who think India's is more unequal than US:

http://en.wikipedia.org/wiki/List_of_co ... e_equality

(All UN figures)
India = 8.6
US 15.9
China=21.6

(CIA figure)
EU=9

-----------

West is not trying to outsource innovation to India/China. That is the part they are trying to keep tfor themselves. But as more and more parts of the production chain move to India/China, the center of innovation will also shift - but this will be more of an unconcious decision.

------------

Indian economy had two centers of consumption - middle class and rural (agriculture) sector.

Rural income was dependant on monsoon and for sometime - on small scale industries as well. MMS government killed the SSI by removing it from the protected list - this is greatest unreported crime of UPA government - the NREGA was instituted to absorb the impact of this move.

Middle class (urban income) is dependant on many factors - IT vity, real estate, etc.

But Indian economy is in a better shape than China because percent of internal consumption is higher here - approaching developed country standards.

enqyoob · Post by **enqyoob** » 30 Jul 2010 11:35

India = 8.6
US 15.9
China=21.6

(CIA figure)
EU=9

Abhishekcc, one has to really wonder about the sense of those figures. Most people in China have something to wear, actually they look pretty decently dressed. Presumably they have something to eat too. One gets the feeling that the UN simply did not count the bottom 50% of Indians as humans at all. Many Indians simply have nothing, period.

About AIG, vinaji, there is a good reason why the Feds acted. AIG's business is writing life insurance policies, and its clients are worldwide. Letting AIG die would have caused a lot of sudden deaths all around the world and many in the US. I don't know if life insurance issued by such companies have any backing from the govt, but I suspect that there must be some such backing, so the govt would have been left holding the bag on that too. Probably a lot of Congressppl's life policies were with AIG as well.

Imagine LIC going bankrupt. (no, not the LIC babus getting kicked out

but all the millions of people suddenly losing the dominant component of their security).

Now AIG's term life business has been bought out by MetLife, I hear.

vera_k · Post by **vera_k** » 30 Jul 2010 12:01

I see too many people paying too much money over to banks for the security of fixed rates. If the GSE's are going to do a bulk refinance, they'd be best served by moving people to 1 yr ARMs with accelerated amortization. Apart from saving people money, this will bring forward the date for retiring the real estate debt overhang by up to 10 years.

No doubt the government needs to step in and allow people to refinance to current rates even if they won't qualify with conventional underwriting criteria. But wasn't that the intent of the mortgage modification programs?

vina · Post by **vina** » 30 Jul 2010 12:59

About AIG, vinaji, there is a good reason why the Feds acted. AIG's business is writing life insurance policies, and its clients are worldwide

I know why AIG needed to be bailed out, but what I dont understand was why the counterparties on the derivatives trade that AIG underwrote (the CDS were written by AIG and Goldman and other banks bought them to bet against the market) needed to be paid in full. There should have been a steep haircut there. There were not even any negotiations on a hair cut. Why? Coz Cash Carry and his boss were from Goldman ?. After all, counter party risk is a risk every risk manager watches out for. Goldman took those risks, they should have paid the price. When the US govt bailed them out without a "haircut", it basically means that it was a riskless payout for them!.

Consider your neighbor. He lost his house for things beyond his control. He paid the price for the risk he took. What about Wall St ?. They knowingly took those risks and raked it in when it was good ?. How about paying up when things go bad ?

ShivaS · Post by **ShivaS** » 30 Jul 2010 13:31

I know why AIG needed to be bailed out, but what I dont understand was why the counterparties on the derivatives trade that AIG underwrote (the CDS were written by AIG and Goldman and other banks bought them to bet against the market) needed to be paid in full.

The best way to explain this is looking at what LKg & co did to stamp scam!

Instead of declaring all the transactions registered on fake stamp paper they simply absorbed the costs and also fake stamp paper! For what reasons I leave it to gurus here to poner, and for the same reason AIG was bailed out.
{ I by no means endorse thebail out even though they paid me $185.00 per hour formy consultancy to track % billion dollars lost in Litigation management!

)

Just as the telgi and co are having fun AIG (ex and current)) executives Goldman ( the name itself spell Gold and worth the weight even now!

) are also having fun.

"Public money is like Holy water everybody help[s himself to it" 15th century Italian proverb.
Todays Head Line news says Army is also deft at making money and can do some pince movement of its own kind!

nandakumar · Post by **nandakumar** » 30 Jul 2010 15:45

quote
About AIG, vinaji, there is a good reason why the Feds acted. AIG's business is writing life insurance policies, and its clients are worldwide. Letting AIG die would have caused a lot of sudden deaths all around the world and many in the US. I don't know if life insurance issued by such companies have any backing from the govt, but I suspect that there must be some such backing, so the govt would have been left holding the bag on that too. Probably a lot of Congressppl's life policies were with AIG as well.

Imagine LIC going bankrupt. (no, not the LIC babus getting kicked out but all the millions of people suddenly losing the dominant component of their security).

Now AIG's term life business has been bought out by MetLife, I hear.

I think AIG's Life Fund (the money an insurance company must set apart from its past and current premium and investment incomes towards a statistical estimate of all future death claims) at the time when the CDS crisis broke out had adequate asset portfolio to cover the potential claim payouts. in any case the investment norms for assets representing the Life Fund are typically very stringent and are usually ring fenced from potential claims arising from an insurance company's other and riskier business operations. the fact that Metlife has taken over the insurance business would seem to bear this out. so AIG bailout was not dicated by concerns for policyholders interests.