Friday, October 29, 2010

Food supply will remain short----Crisis coming up----By Shan Saeed

5 Dangers To Global Crops That Could Dramatically Reduce The World Food Supply-----By Shan Saeed

The world food situation is starting to get very, very tight. Unprecedented heat and wildfires this summer in Russia and horrific flooding in Pakistan and China have been some of the primary reasons for the rapidly rising food prices we are now seeing around the globe. In places such as Australia and the African nation of Guinea-Bissau, the big problem for crops has been locusts. In a world that already does not grow enough food for everyone (thanks to the greed of the elite), any disruption in food production can cause a major, major problem. Tonight, thousands of people around the world will starve to death. So what happens if things get even worse? Many agricultural scientists are now warning that global food production is facing dangers that are absolutely unprecedented. Crop diseases such as UG99 wheat rust and the "unintended effects" of genetic modification pose challenges that previous generations simply did not have to face. The outbreak of a real, live global famine looks increasingly possible with each passing year. So are you and your family prepared if a global famine does strike?

Already, there are huge warning signs on the horizon. Just check out what agricultural commodities have been doing. They have been absolutely soaring.

A recent article on the Forbes website noted a few of the agricultural commodities that have skyrocketed during this year....

Here’s what’s happened to some key farm commodities so far in 2010…

•Corn: Up 63% Cotton 53%
•Wheat: Up 84%
•Soybeans: Up 24%
•Sugar: Up 55%


Are you ready to pay 84 percent more for a loaf of bread? So what is going to happen if the world food situation gets even tighter?

Don't think that it can't happen.

The following are 5 potential dangers to global crops that could dramatically reduce the world food supply....

UG99 Wheat Rust

UG99 is commonly known as "wheat rust" or "stem rust" because it produces reddish-brown flakes on wheat stalks. The International Maize and Wheat Improvement Center in Mexico believes that approximately 19 percent of the global wheat crop is in imminent danger of being infected with UG99.

Ultimately, it is estimated that about 80 percent of the wheat on the globe is capable of catching the disease.

There is no known cure.

This current strain of wheat rust was discovered in Uganda in 1999 and has spread into areas of Kenya, Sudan, Ethiopia, Yemen and Iran. It is feared that this crippling disease will spread even farther into south Asia, devastating the fertile growing regions of Afghanistan, Pakistan, India and Bangladesh.

If that happens, you might as well kiss world food stability goodbye.

A recent article in the Financial Times contained an absolutely stunning quote from one prominent agricultural scientist....

“You can talk about crying wolf,” says Ronnie Coffman, director of the Durable Rust Resistance in Wheat project at the University of Cornell in the US, “but it is a wolf”, he asserts, driving across the corn fields of Kansas.

Later on in the same article, Coffman warns that this disease could cause a devastating famine in which literally millions of people would die....

“It can be absolutely devastating if environmental conditions are right,“ he says. “You can count the number of people who could die from this in the millions.”

Mad Soy Disease

Mad Soy disease is spreading at an alarming rate among soy farms down in Brazil. Previously the disease had been confined to the north part of the country, but now it has been increasingly spreading south. This disease retards the maturation of infected plants, and it has been causing yield losses of up to 40 percent. The USDA says that "there are no known effective treatments."

Verticillium Wilt

Verticillium Wilt is a fungus that prevents lettuce from absorbing water, causing it to quickly grow yellow and eventually wilt. This dangerous fungus is very hard to get rid of totally because it can stay in the soil for up to seven years.

Today, Verticillium Wilt is spreading all over Monterey County, California. Considering the fact that Monterey County produces more than 60 percent of the lettuce in the United States, that is very bad news.

Late Blight

In 2009, a disease known as "late blight" attacked potato and tomato plants in the United States with a ferocity never seen before. According to a press release from Cornell University, late blight had "never occurred this early and this widespread in the U.S." when it started showing up all over the place early last year.

Late blight begins as ugly brown spots on the stems of potato and tomato plants, and as the spots increase in size, white fungal growth develops until finally a soft rot completely collapses the stem.

This was the disease that was responsible for the Irish potato famine in the 1850s. A major new outbreak could occur without warning.

Genetic Modification

While it may or may not technically be a disease (depending on how you look at it), genetic modification is having a very serious affect on crops around the globe.

For example, about 10 years ago Chinese farmers began to widely adopt Monsanto's genetically modified Bt cotton. Well, researchers have found that since that time, mirid bugs that are resistant to the Bt pesticide have experienced a complete and total population boom.

Today, six provinces in Northern China are experiencing what can only be described as a "mirid bug plague". Mirid bugs eat more than 200 different kinds of fruit, vegetables and grains. Chinese farmers in the region are completely frustrated.

In the United States, a different problem is developing. The complete and total reliance of so many U.S. farmers on Monsanto’s Roundup herbicide has resulted in several varieties of glyphosate-resistant "superweeds" developing in many areas of the United States.

The most feared of these "superweeds", Pigweed, can grow to be seven feet tall and it can literally wreck a combine. Pigweed has been known to produce up to 10,000 seeds at a time, it is resistant to drought, and it has very diverse genetics.

Superweeds were first spotted in Georgia in 2004, and since then they have spread to South Carolina, North Carolina, Arkansas, Tennessee, Kentucky and Missouri.

In some areas, superweeds have become so bad that literally tens of thousands of acres of U.S. farmland have actually been abandoned.

But that is what we get for trying to "play God".

We think that we can just do whatever we want with nature and there will not be any consequences.

One of the most frightening things about genetic modification is that it actually reduces that amount of crop diversity in the world.

For example, if nearly all farmers start using the same "brand" of genetically modified plants that are all virtually identical, it sets up a situation where crop diseases and crop failures can cascade across the planet very easily.

Genetic variety is a very desirable thing, but today our scientists are just doing pretty much whatever they want without really considering the consequences.

It has been said many times that genetic engineering is similar to "performing heart surgery with a shovel".

The truth is that we just do not know enough about how our ecosystems work to be messing around with them so dramatically.

Perhaps even more frightening is that once these genetically engineered monstrosities have been released into our environment, it is absolutely impossible to recall them. They essentially become a permanent part of our ecosystem.

But can we afford to make any serious mistakes at this point?

The truth is that we already live in a world that is not able to feed itself.

Tonight, approximately 1 billion people across the globe will go to bed hungry. Every 3.6 seconds someone in the world starves to death, and three-fourths of those who starve to death are children under the age of five.

It is currently being projected that global demand for food will more than double over the next 50 years.

So what is going to happen if we start seeing widespread crop failures in the coming years? The global food supply is not nearly as stable as most people believe. At some point, it is going to be tested severely. Simple caveat.. Prepare yourself.

Monday, October 25, 2010

Faster productivity growth is required in the rich economies--Shared by Shan Saeed

From ECONOMIST Magazine

PRODUCTIVITY growth is the closest economics gets to a magic elixir, especially for ageing advanced economies. When workers produce more for every hour they toil, living standards rise and governments have more resources to service their debts and support those who cannot work. As the rich world emerges from the financial crisis, faster productivity growth could counteract the drag from adverse demography. But slower productivity growth could make matters worse.

Workers’ productivity depends on their skills, the amount of capital invested in helping them to do their jobs and the pace of “innovation”—the process of generating ideas that lead to new products and more efficient business practices. Financial crises and deep recessions can affect these variables in several ways. As this special report has argued, workers’ skills may erode if long-term unemployment rises. The disruption to the financial sector and the reluctance of businesses to invest in the face of uncertain demand may also reduce the rate of capital formation, delaying the factory upgrades and IT purchases that would boost workers’ efficiency.

Financial crises can affect the pace of innovation, too, though it is hard to predict which way. Deep recessions can slow it down as firms slash their spending on research and development. But they can also boost the pace of efficiency gains as weak demand forces firms to rethink their products and cost structures and the weakest companies are winnowed out. According to Alexander Field of Santa Clara University, the 1930s saw the fastest efficiency improvements in America’s history amid large-scale restructuring.
Almost every government in the rich world has a spanking new “innovation strategy”. Industrial policy—out of fashion since its most credible champion, Japan, lost its way in the 1990s—is staging a comeback. But mostly such policies end up subsidising well-connected industries and products. “Green technology” is a favourite receptacle for such subsidies.

In 2008 France created a sovereign-wealth fund as part of its response to the financial crisis; it promises to promote biotechnology ventures, though it has also sunk capital into conventional manufacturers that happened to need money. In 2009 Britain followed suit with a “strategic investment fund”. The Japanese too are back in the game. In June the newly invigorated Ministry of Economy, Trade and Industry (METI) unveiled a plan to promote five strategic sectors, ranging from environmental products to robotics. However, past experiments with industrial policy, from France’s Minitel, an attempt to create a government-run national communications network, to Spain’s expensive subsidies to jump-start solar power, suggest that governments are not much good at picking promising sectors or products.

More important, the politicians’ current focus on fostering productivity growth via exciting high-tech breakthroughs misses a big part of what really drives innovation: the diffusion of better business processes and management methods. This sort of innovation is generally the result of competitive pressure. The best thing that governments can do to foster new ideas is to get out of the way. This is especially true in the most regulated and least competitive parts of the economy, notably services.

To see why competition matters so much, consider the recent history of productivity in the rich world. On the eve of the recession the rate of growth in workers’ output per hour was slowing. So, too, was the pace of improvement in “total factor productivity” (a measure of the overall efficiency with which capital and workers are used which is economists’ best gauge of the speed of innovation). But that broad trend masks considerable differences.

Over the past 15 years America’s underlying productivity growth—adjusted for the ups and downs of the business cycle—has outperformed most other rich economies’ by a wide margin (see chart 12). Workers’ output per hour soared in the late 1990s, thanks largely to investment in computers and software. At first this advance was powered by productivity gains within the technology sector. From 2000 onwards efficiency gains spread through the wider economy, especially in services such as retailing and wholesaling, helped by the deregulated and competitive nature of America’s economy. The improvements were extraordinary, though they slowed after the middle of the decade.

The recent history of productivity in Europe is almost the mirror image of America’s. Up to the mid-1990s the continent’s output per hour grew faster than America’s , helped by imports of tried and tested ideas from across the water. Thanks to this process of catch-up, by 1995 Europe’s output per hour reached over 90% of the American level. But then Europe slowed, and by 2008 the figure was back down to 83%. This partly reflected Europe’s labour-market reforms, which brought more low-skilled workers into the workforce. That seemed a price well worth paying for higher employment. But the main reason for Europe’s disappointing productivity performance was that it failed to squeeze productivity gains from its service sector.

A forthcoming history of European growth by Marcel Timmer and Robert Inklaar of the University of Groningen, Mary O’Mahony of Birmingham University and Bart Van Ark of the Conference Board, a business-research organisation, carefully dissects the statistics for individual countries and industries and finds considerable variation within Europe. Finland and Sweden improved their productivity growth whereas Italy and Spain were particularly sluggish. Europe also did better in some sectors than in others; for example, telecommunications was a bright spot. But overall, compared with America, European firms invested relatively little in services and innovative business practices. A new McKinsey study suggests that around two-thirds of the differential in productivity growth between America and Europe between 1995 and 2005 can be explained by the gap in “local services”, such as retail and wholesale services.

Europe’s service markets are smaller than America’s, fragmented along national lines and heavily regulated. The OECD has tracked regulation of product and services markets across countries since 1998. It measures the degree of state control, barriers to competition and obstacles to starting a new company, assigning a score to each market of between 0 and 6 (where 0 is the least restrictive). Overall the absolute level of product regulation fell between 1998 and 2008, and the variation between countries lessened. America and Britain score joint best, with 0.84. The EU average is 1.4. But when it comes to services, the variation is larger and Europe has made much less progress.

In professional services, the OECD’s score for Europe is fully twice as high as for America (meaning it is twice as restrictive). As the McKinsey report notes, many European countries are rife with anti-competitive rules. Architects’ and lawyers’ fees in Italy and Germany are subject to price floors and ceilings. Notaries in France, Spain and Greece and pharmacies in Greece are banned from advertising their services. Such restrictions limit the ability of efficient newcomers to compete for market share, cosseting incumbents and raising costs across the economy.

In Japan productivity growth slumped after the country’s asset bubble burst at the start of the 1990s. One reason, as an earlier section of this report has described, was the failure to deal decisively with the bad loans clogging its banks, which propped up inefficient “zombie” companies rather than forcing them into liquidation. That meant less capital was available to lend to upstart firms. Another problem was the lack of competition. Japan’s service sector, unlike its world-class manufacturers, is fragmented, protected from foreign competition and heavily regulated, so it failed to capture the gains of the IT revolution.

Over the years Japan made various efforts at regulatory reform, from freeing up the energy market and mobile telephony in the mid-1990s to liberalising the financial sector in the late 1990s. These have borne some fruit. Japan’s total factor productivity growth, unlike Europe’s, began to improve after 2000. But coupled with the continuing weakness of investment, the reforms were too modest to bring about a decisive change in the country’s overall productivity prospects.


Learn Swedish

Sweden offers a more encouraging lesson. In the aftermath of its banking bust in the early 1990s it not only cleaned up its banks quickly but also embarked on a radical programme of microeconomic deregulation. The government reformed its tax and pension systems and freed up whole swaths of the economy, from aviation, telecommunications and electricity to banking and retailing. Thanks to these reforms, Swedish productivity growth, which had averaged 1.2% a year from 1980 to 1990, accelerated to a remarkable 2.2% a year from 1991 to 1998 and 2.5% from 1999 to 2005, according to the McKinsey Global Institute.

Sweden’s retailers put in a particularly impressive performance. In 1990, McKinsey found, they were 5% less productive than America’s, mainly because a thicket of regulations ensured that stores were much smaller and competition less intense. Local laws restricted access to land for large stores, existing retailers colluded on prices and incumbent chains pressed suppliers to boycott cheaper competitors. But in 1992 the laws were changed to weaken municipal land-use restrictions, and Swedish entry into the EU and the creation of a new competition authority raised competitive pressures. Large stores and vertically integrated chains rapidly gained market share. By 2005 Sweden’s retail productivity was 14% higher than America’s.

The restructuring of retail banking services was another success story. Consolidation driven by the financial crisis and by EU entry increased competition. New niche players introduced innovative products like telephone and internet banking that later spread to larger banks. Many branches were closed, and by 2006 Sweden had one of the lowest branch densities in Europe. Between 1995 and 2002 banking productivity grew by 4.6% a year, much faster than in other European countries. Swedish banks’ productivity went from slightly behind to slightly ahead of American levels.

All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector. A recent study by the Bank of France and the OECD looked at 20 sectors in 15 OECD countries between 1984 and 2007. It found that reducing regulation on “upstream” services would have a marked effect not just on productivity in those sectors but also on other parts of the economy. The logic is simple: more efficient lawyers, distributors or banks enable firms across the economy to become more productive. The size of the potential gains calculated by the Bank of France is stunning. Getting rid of all price, market-entry and other competition-restricting regulations would boost annual total factor productivity growth by one percentage point in a typical country in their sample, enough to more than double its pace.

Getting rid of all anti-competitive regulation may be impossible, but even the more modest goal of embracing “best practice” would yield large benefits. The IMF has calculated that if countries could reduce regulation to the average of the least restrictive three OECD countries, annual productivity growth would rise by some 0.2 percentage points in America, 0.3 percentage points in the euro area and 0.6 percentage points in Japan. The larger gains for Europe and Japan reflect the amount of deregulation left to be done. In both cases the productivity gains to be achieved from moving to best practice would all but counter the drag on growth from unfavourable demography.

Even in America there would be benefits. But, alas, the regulatory pendulum is moving in the opposite direction as the Obama administration pushes through new rules on industries from health care to finance. So far the damage may be limited. Many of Mr Obama’s regulatory changes, from tougher fuel-efficiency requirements to curbs on deep-water drilling, were meant to benefit consumers and the environment, not to curb competition and protect incumbents. Some of the White House’s ideas, such as the overhaul of broadband internet access, would in fact increase competition. The biggest risk lies in finance, where America’s new rules could easily hold back innovation.


An unlikely role model

The country that is grasping the challenge of deregulation most energetically is Greece, whose debt crisis has earned it a reputation for macroeconomic mismanagement. Under pressure from the IMF and its European partners, the Greek government has embarked on one of the most radical reforms in modern history to boost its productive potential.

Again, this involves freeing up an historically cushioned service sector. So far the main battleground has been trucking. Before Greece descended into crisis, its lorry drivers required special licences, and none had been granted for several decades. So a licence changed hands in the secondary market for about €300,000, driving up the costs of everything that travelled by road in Greece. But under a reform recently passed by the Greek government, the number of licences is due to double. Greek lorry drivers went on strike in protest, but the government did not budge. Lawyers and pharmacists too are slated for deregulation.

If Greece can stick to its plans, it will, like Sweden, show that crises can offer valuable opportunities. Without the country’s brush with default and the conditions attached to the resulting bail-out, its leaders would have been unlikely to muster the necessary political will.

The sluggish progress of reform elsewhere underlines this point. Germany, which ranks 25th out of 30 OECD countries on the complications of its licence and permit system, approaches deregulation on tiptoes: it recently reduced restrictions on price-setting by architects and allowed chimney-sweeps easier market access.

Two French economists, Jacques Delpla and Charles Wyplosz, have argued that incumbent service providers should be paid off in exchange for accepting competition. They reckon that compensating French taxi drivers for deregulation would cost €4.5 billion. But buying off the losers from reforms may not hold much appeal.

Boosting European integration could be another way to cut through national resistance to deregulation. As Mario Monti, a former EU competition commissioner, pointed out in a recent call for action, 70% of the EU’s GDP is in services but only 20% of those services cross borders. The EU’s Services Directive, which is supposed to boost cross-country competition in services, has proved fairly toothless.


How governments can help

Activism on the part of governments is not always misguided. Their investment in basic research is important. The grants doled out by America’s National Institutes of Health, for example, generate the raw ideas that pharmaceutical firms turn into profitable medicines. America’s Defence Department created the beginnings of the internet. Public spending on building and maintaining infrastructure also matters, though economists argue about how much. Governments can encourage private R&D spending with tax credits and subsidies, and the evidence suggests that more R&D spending overall boosts growth. Other research shows that firms which spend more on R&D are also often quicker to adopt other innovations.

But these traditional ways of encouraging innovation may be less relevant now that research has become more global and more concentrated on software than on hardware. Since the mid-1990s China alone has accounted for a third of the increase in global spending on research and development. Big firms maintain research facilities in many countries. Dreaming up new products and services, as well as better ways of producing old ones, increasingly involves collaboration across borders and companies. As Mr Jorgenson of Harvard University puts it: “Think Google, not lab coats.”

In this more fluid world the old kind of government incentives, such as tax credits and subsidies, may do less to boost innovation than more imaginative inducements, such as offering firms prizes for breakthrough innovations. Bigger efforts to remove remaining barriers to collaboration, from limitations on high-skilled immigration to excessively rigid land-use rules, should also help.

A smart innovation agenda, in short, would be quite different from the one that most rich governments seem to favour. It would be more about freeing markets and less about picking winners; more about creating the right conditions for bright ideas to emerge and less about promises of things like green jobs. But pursuing that kind of policy requires courage and vision—and most of the rich economies are not displaying enough of either.

Friday, October 22, 2010

Britain Spending cut lessons for others--But will it work---By Shan Saeed

Spending cut will get the UK economy further into stagnation----By Shan Saeed

Whats the solution? We need to look at economic history to get the answers.

The prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.

It has today been completely forgotten, even among economists, that the Misesian explanation and analysis of the depression gained great headway precisely during the Great Depression of the 1930s – the very depression that is always held up to advocates of the free market economy as the greatest single and catastrophic failure of laissez-faire capitalism. It was no such thing. 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and most importantly by the Federal Reserve System in the United States. It was made possible by the failure of the Western world to return to a genuine gold standard after World War I, and thus allowing more room for inflationary policies by government. Everyone now thinks of President Coolidge as a believer in laissez-faire and an unhampered market economy; he was not, and tragically, nowhere less so than in the field of money and credit. Unfortunately, the sins and errors of the Coolidge intervention were laid to the door of a non-existent free market economy.

If Coolidge made 1929 inevitable, it was President Hoover who prolonged and deepened the depression, transforming it from a typically sharp but swiftly-disappearing depression into a lingering and near-fatal malady, a malady "cured" only by the holocaust of World War II. Hoover, not Franklin Roosevelt, was the founder of the policy of the "New Deal": essentially the massive use of the State to do exactly what Misesian theory would most warn against – to prop up wage rates above their free-market levels, prop up prices, inflate credit, and lend money to shaky business positions. Roosevelt only advanced, to a greater degree, what Hoover had pioneered. The result for the first time in American history, was a nearly perpetual depression and nearly permanent mass unemployment. The Coolidge crisis had become the unprecedentedly prolonged Hoover-Roosevelt depression.


THE speeches have been made, the sums calculated, the columnists have opined. Britain's plan to cut its budget deficit has been through the 24-hour news cycle. I don't want to go though the minutiae but to think about what lessons [good and bad] the British plans might have for other countries.

The first concerns the ability of politicians to decide. Having made his proposals, the prime minister and finance minister can be sure they will pass Parliament. This is not the same as being implemented in full, but it is a good start. The American system, with its division of power, seems wholly incapable of dealing with the issue. In times of war, the President, as commander-in-chief, has the ability to govern. But any finance proposals must be passed through Congress, with all the difficulties this involves, including the bribing of individual congressmen with pork barrel projects. The ideological divide, well illustrated by my colleague's post, means there is no incentive for Republicans to favour increased taxes or for Democrats to cut spending.

The second lesson concerns the division between spending cuts and tax rises. Economic history suggests that it is better to concentrate on the former if you want the plan to succeed. But there is no getting away from the fact that this will affect the poor most; since they are the chief recipients of benefit payments. The current government argues that the total package hits the rich more but that is largely because of a tax rise introduced by the last government. Inevitably, this will have a bigger impact on consumption since the poor have a higher marginal propensity to consume. then there is the politicial/moral issue. The package creates the understandable impression that the poor are paying the price for the folly of the bankers. That is why the government is introducing a further bank levy today and why it cut back on child benefit for high earners. Spreading the pain is essential.

The third lesson concerns the importance of a medium-term plan. Raising the retirement age to 66 by 2020 (not 62, as the French propose) will not save money in this parliament but shows the government is tackling the long-term problem of the imbalance between the working and dependent populations. The clear path toward structural balance over five years will also reassure markets. Again, given the two-year cycle of US elections, it is hard to see how any medium-term plan can have credibility.

None of the above means that the UK plan will turn into a roaring success. Aside from the danger of tightening fiscal policy when the economy is already weak (retail sales have fallen for two consecutive months), there is the danger that planned cuts may not turn into actual cuts. Efficiency savings may turn out to be illusory; welfare payments may rise, not fall, if unemploment rises or if people drift from one benefit to another, as happened when the unemployed switched to incapacity benefit. So the final lesson is that announcing a plan is only a start; even more attention has to be paid to following it through. UK economy needs more spending and tax cut in the short to medium term to bring the confidence back. Will this spending cut boost the economy remains to be seen.

According to Josepg Stiglitz --Nobel Laureate Professor at Columbia University

A wave of fiscal austerity is rushing over Europe and America. The magnitude of budget deficits – like the magnitude of the downturn – has taken many by surprise. But despite protests by yesterday's proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.

Most economists also agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets. This should help answer those financial sector hawks who are raising alarms about government spending. After all, even deficit hawks acknowledge that we should be focusing not on today's deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks' short-sightedness helped create the crisis; we cannot let government short-sightedness – prodded by the financial sector – prolong it.

Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6% return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.

Finally, most economists agree that, apart from these considerations, the appropriate size of a deficit depends in part on the state of the economy. A weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances.

It is here that economists disagree. Forecasting is always difficult, but especially so in troubled times. What has happened is (fortunately) not an everyday occurrence; it would be foolish to look at past recoveries to predict this one.

So, what is the strategic intent of this spending cut? We need to look at macro-perspective..

There is a shortage of aggregate demand – the demand for goods and services that generates jobs. Cutbacks in government spending will mean lower output and higher unemployment, unless something else fills the gap. Monetary policy won't. Short-term interest rates can't go any lower, and quantitative easing is not likely to substantially reduce the long-term interest rates government pays – and is even less likely to lead to substantial increases either in consumption or investment. If only one country does it, it might hope to gain an advantage through the weakening of its currency; but if anything the US is more likely to succeed in weakening its currency against sterling through its aggressive quantitative easing, worsening Britain's trade position.

Of course if Britain succeeds in getting the world to believe that its economic policies are among the worst – an admittedly fierce contest at the moment – its currency may decline, but this is hardly the road to a recovery. Besides, in the malaise into which the global economy is sinking, the challenge will be to maintain exports; they can't be relied on as a substitute for domestic demand. The few instances where small countries managed to grow in the face of austerity were those where their trading partners were experiencing a boom.

Lower aggregate demand will mean lower tax revenues. But cutbacks in investments in education, technology and infrastructure will be even more costly in future. For they will spell lower growth – and lower revenues. Indeed, higher unemployment itself, especially if it is persistent, will result in a deterioration of skills, in effect the destruction of human capital, a phenomena which Europe experienced in the eighties and which is called hysteresis. Lower tax revenues now and in the future combined with lower growth imply a higher national debt, and an even higher debt-to-GDP ratio.

Matters may be even worse if consumers and investors realise this. Advocates of austerity believe that mystically, as the deficits come down, confidence in the economy will be restored and investment will boom. For 75 years there has been a contest between this theory and Keynesian theory, which argued that spending more now, especially on public investments (or tax cuts designed to encourage private investment) was more likely to restore growth, even though it increased the deficit.

The two prescriptions could not have been more different. Thanks to the IMF, multiple experiments have been conducted – for instance, in east Asia in 1997-98 and a little later in Argentina – and almost all come to the same conclusion: the Keynesian prescription works. Austerity converts downturns into recessions, recessions into depressions. The confidence fairy that the austerity advocates claim will appear never does, partly perhaps because the downturns mean that the deficit reductions are always smaller than was hoped.

Consumers and investors, knowing this and seeing the deteriorating competitive position, the depreciation of human capital and infrastructure, the country's worsening balance sheet, increasing social tensions, and recognising the inevitability of future tax increases to make up for losses as the economy stagnates, may even cut back on their consumption and investment, worsening the downward spiral.

No business with a potential for making investments yielding high returns would pass up the opportunity to make these investments if it could get access to capital at very low interest rates. But this is what austerity means for the UK.

Critics say government won't spend the money well. To be sure, there will be waste – though not on the scale that the private sector in the US and Europe wasted money in the years before 2008. But even if money is not spent perfectly, if experience of the past is a guide to the future, the returns on government investments in education, technology and infrastructure are far higher than the government's cost of capital. Besides, the choices facing the country are bleak. If the government doesn't spend this money there will be massive waste of resources as its capital and human resources are under-utilised.

Britain is embarking on a highly risky experiment. More likely than not, it will add one more data point to the well- established result that austerity in the midst of a downturn lowers GDP and increases unemployment, and excessive austerity can have long-lasting effects.

If Britain were wealthier, or if the prospects of success were greater, it might be a risk worth taking. But it is a gamble with almost no potential upside. Austerity is a gamble which Britain can ill afford.

Thursday, October 21, 2010

Three reasons to Buy Silver-------By Shan Saeed

Three new reasons to buy silver that many investors aren't aware of: Read the strategic insight before you miss the investment opportunity in Silver.....

Long-time readers will recall I have calling reasons to buy Gold. The idea was that there were so many valid reasons to own the metal that I wanted to track and report on them. If you've been invested in the precious metals arena, you know there have been a myriad of bullish indicators for silver this year as well.

Here's a couple new reasons to own silver that a lot of mainstream investors probably aren't aware of…

Due to increased demand from industry and investors, silver exports from China are expected to drop about 40% this year. And that's actually an improvement; customs data show exports plunged almost 60% through the first eight months. China exported about 3,500 metric tons of silver in 2009, but has exported only 970 tons through August of this year.

What a lot of Westerners don't know is that China ended export "rebates" two years ago in March-2008 to stem the shipment of natural resources leaving the country. As a result of the regulation, silver exports decreased in 2009 but are nothing like what they're experiencing this year. In other words, the large drop in exports is a direct result of a huge increase in demand within China itself. According to one Chinese banker, the spike in demand is coming from all areas – jewelry, investment, and industrial. In his words, it's led to a "physical market shortage in the Far East." Rare Metals exports will be dropped soon. China controls 93% of the market share globally....

How important is this? China is the world's third largest producer of silver [fter Peru and Mexico], so the amount of silver coming to the global marketplace this year will drop by more than 74 million ounces. This represents roughly 8.3% of total annual global supply from 2009. If worldwide demand continues at its current pace, where is the extra metal going to come from? This alone tells us the price of silver will move higher.

The next item I sleuthed out was that the U.S. Mint is expected to release a new five-ounce silver bullion coin this year, the first ever. The coin will be three inches in diameter and have a composition of .999 fine silver.

I've read the five-ounce bullion coins will be near-exact replicas of the America the Beautiful quarters. There will reportedly be five different designs, and the mint plans to produce 100,000 of each. I can't wait to see them.

The coins will be classified as bullion, meaning they should be available to the same dealers already authorized by the mint. This will likely create excitement in the silver market, especially when you consider its affordability. At $23 silver, the five-ounce bullion coin will cost $115, plus premium. One ounce of gold runs $1,337 per ounce as I write on 21st October-2010, while five ounces will cost you $6,700 plus commission. Silver will touch $27/ounce in 2-years time...You can catch me after 2-years.....

Perhaps most bullish is the fact that silver is vastly underpriced when compared to gold. Look at it this way: gold is currently priced 57% above its 1980 nominal high of $850; silver would have to more than double to reach its 1980 nominal high of $48.70. And that's excluding any inflation-adjusted calculation. Yes, silver's spike was partly a direct result of hoarding by the Hunt Brothers, but my question to the skeptics is this: what's keeping us from seeing similar stockpiling today? What if there are several Hunt Brothers out there?

It's true that central banks don't buy and store physical silver, so one source of demand that's common for gold isn't present for silver. But let's keep things in perspective: demand for all forms of silver is rising, and we see no reason the trend won't continue. And with indicators like decreasing supply from China and increased attention from a new bullion coin, I say the big picture on the silver price is extremely bullish.

This silver sleuth says, buy some silver on the next dip. There's lots of reasons you won't regret it. Remember? Silver's Industrial utilization is very high...

Disclaimer: This is just a research piece and not an investment advice..Please execute your own due diligence and research before making an investment decision or strategy....

Sunday, October 17, 2010

Guru of Real Estate Markets --Joseph Barnes shares his insight on my blog

Joseph Barnes is an internationally famed guru on Real Estate Market.

I am delighted that Joseph Barnes has shared his global insights about current Real Estate markets on my blog...


Joseph Barnes President of JSB International Consulting Corp.based in USA
www.jsbicinc.com

As we begin to move forward in the unstable financial market we are
finding it to be tough to find new ideas and safe havens for our
investment capital...with the depreciation of the US dollar and talks
of another recession dip it has and the deprecation of the Euro and
the pound we have know idea when there will be an out . But on the
other hand we are seeing an increase in real estate values in
countries like Brazil because of the anticipation of the Olympics and
the World Cup and have already begin to transform the country in order
to support the amount of people that will be traveling to witness the
future event the government’s tourism expenditure program, Brazil’s
infrastructure is improving, new bridges and roads are being laid,
more and more flights are being scheduled, and as a result tourism is
booming. Immense tour operator demand for high standard resorts has
put pressure on developers, squeezing market supply and forcing
property values upwards and sending resort rack rates higher and
higher. Prices and rentals are certain to continue to soar over the
coming decade http://esporte.uol.com.br/album/090127natal_album.jhtm.
Brazil’s economy itself, outside tourism, is thriving (For instance,
cell phones, aircraft and vehicle manufacturing industries.) and as a
part/member of the BRIC (India, the country of Brazil, the Russian
areas, the Chinese areas) nations, Brazil is predicted to be one of
the global economic power-houses of the future for the following
reasons:
1)The Brazilian Government is spending $1. 8 billion in total on
infrastructure for the benefit of tourism.
2)Tourism is rocketing, figures show that the numbers of visitors have
quadrupled over the past 5 years.
3)The present inexpensive land and building prices coupled with
proliferating tourism are generating an environment of rampant capital
appreciation.
Natal especially will grow and blossom. Natal resides in Rio do Grande
Norte which as previously explained, is at the forefront of being an
up and coming tourism hot spot in the coming years. Natal is much
nearer to mainland Europe and America than other regions and is thus a
very attractive investment for British and American markets in terms
of tourism and investments, unlike other Brazilian cities and regions.
The area has abundant supply of number of food items, restaurants,
culture and flights and they are quite cheap too.
Natal has large sandy beaches and temperatures that soar into the
100s, with the nearby development of the future third largest airport
in the world, also being planned and the government’s aim to bring in
nearly 6 million tourists a year, it’s easy to see why the airlines
are riding the bandwagon and offering package holidays and direct
flights to this hotspot, with the following advantages:
1)The southern area is the most expensive, being three times as costly as Natal.
2)Natal is a great choice for Europe and US holiday makers as it is
nearer to them in terms of location.
3)Natal is well known for its coconut palm trees, which are seen
everywhere in the city and also line up the cost of blue water sea
with soft sea breezes.
4)Less than 30 minutes of journey time is expected because of the
bridge that has now been constructed that connects Natal City and the
beach resorts to the north.

How to stop currency war---Shared by Shan Saeed

The global economy
How to stop a currency war
Keep calm, don’t expect quick fixes and above all don’t unleash a trade fight with China

Taken from Economist

Oct 14th 2010

IN RECENT weeks the world economy has been on a war footing, at least rhetorically. Ever since Brazil’s finance minister, Guido Mantega, declared on September 27th that an “international currency war” had broken out, the global economic debate has been recast in battlefield terms, not just by excitable headline-writers, but by officials themselves. Gone is the fuzzy rhetoric about co-operation to boost global growth. A more combative tone has taken hold (see article). Countries blame each other for distorting global demand, with weapons that range from quantitative easing (printing money to buy bonds) to currency intervention and capital controls.

Behind all the smoke and fury, there are in fact three battles. The biggest one is over China’s unwillingness to allow the yuan to rise more quickly. American and European officials have sounded tougher about the “damaging dynamic” caused by China’s undervalued currency. Last month the House of Representatives passed a law allowing firms to seek tariff protection against countries with undervalued currencies, with a huge bipartisan majority. China’s “unfair” trade practices have become a hot topic in the mid-term elections.

A second flashpoint is the rich world’s monetary policy, particularly the prospect that central banks may soon restart printing money to buy government bonds. The dollar has fallen as financial markets expect the Federal Reserve to act fastest and most boldly. The euro has soared as officials at the European Central Bank show least enthusiasm for such a shift. In China’s eyes (and, sotto voce, those of many other emerging-market governments), quantitative easing creates a gross distortion in the world economy as investors rush elsewhere, especially into emerging economies, in search of higher yields.
Related items

* Currency wars: Fumbling towards a truceOct 14th 2010
* China's reserves: In need of a bigger boatOct 14th 2010

A third area of contention comes from how the developing countries respond to these capital flows. Rather than let their exchange rates soar, many governments have intervened to buy foreign currency, or imposed taxes on foreign capital inflows. Brazil recently doubled a tax on foreign purchases of its domestic debt. This week Thailand announced a new 15% withholding tax for foreign investors in its bonds.


Jaw-jaw, please

For now, these skirmishes fall far short of a real currency war. Many of the “weapons” look less menacing on closer inspection. The capital-inflow controls are modest. In the rich world only Japan has recently resorted to currency intervention, and so far only once. Nor is there much risk of an imminent descent into trade retaliation. Even in America, tariffs against China are still, with luck, a long way off—both because the currency bill is milder than it sounds and because it has yet to be passed by the Senate or signed by Barack Obama.

Still, there is no room for complacency. Today’s phoney war could quickly turn into a real dogfight. The conditions driving the divergence of economic policies—in particular, sluggish growth in the rich world—are likely to last for years. As fiscal austerity kicks in, the appeal of using a cheaper currency as a source of demand will increase, and the pressure on politicians to treat China as a scapegoat will rise. And if the flood of foreign capital intensifies, developing countries may be forced to choose between losing competitiveness, truly draconian capital controls or allowing their economies to overheat.

What needs to happen is fairly clear. Global demand needs rebalancing, away from indebted rich economies and towards more spending in the emerging world. Structural reforms to boost spending in those surplus economies will help, but their real exchange rates also need to appreciate. And, yes, the Chinese yuan is too low (see article). That is hurting not just the West but also other emerging countries (especially those with floating exchange rates) and indeed China itself, which needs to get more of its growth from domestic consumption.

It is also clear that this will not be a painless process. China is right to worry about instability if workers in exporting companies lose their jobs. And even reasonable choices—such as the rich world’s mix of fiscal austerity and loose monetary policy—will have an uncomfortable impact on small, open emerging economies, in the form of unwelcome capital inflows. This flood of capital will be less devastating to them than the harm they would suffer if the West descended into deflation and stagnation, but it can still cause problems.


Collective Seoul-searching

All this cries out for a multilateral approach, in which institutions such as the IMF and the G20 forge consensus among the big economies. The hitch is that the multilateral route has, so far, achieved little. Hence the chorus calling for a different line of attack—one that focuses on getting tough with China, through either retaliatory capital controls (such as not allowing China to buy American Treasury bonds) or trade sanctions. And it is not just the usual protectionist suspects: even some free-traders reckon that economic violence is the only way to shock China out of its self-harming obstinacy (and to stop a more widespread protectionist reaction later).

This newspaper is not convinced. The threats look like either unworkable bluffs (how can China be stopped from buying Treasuries, the most widely traded asset in the world’s financial markets?) or dangerous provocations. Confronted with a trade ultimatum, the Beijing regime, puffed up in its G2 hubris, may well reckon it is cheaper politically to retaliate to the United States in kind. That is how trade wars start.

Anyway, to focus on America and China is to misunderstand the nature of the problem. The currency wars are about more than one villain and one victim. Rather, redouble multilateral efforts behind the scenes, especially by bringing in the emerging countries hurt by China’s policy. Brazil and others have only just begun to speak out. South Korea is hosting the G20 next month. Use the Seoul summit as a prompt, not to create some new Plaza Accord (today’s tensions are too complex to settle in a grand peace treaty of the sort hammered out by just five countries in New York in 1985) but as a way to clarify the debate and keep up the pressure. It will get fewer headlines; but this is a war that is best averted, not fought.

Quest for growth----Shared by Shan Saeed

This article has been taken from Economist Magazine...

The quest for growth
It may depend on structural reforms as much as prudent macroeconomic policy. Oct 7th 2010

LOOK at the world economy as a whole, and you could be forgiven for thinking that the recovery is in pretty decent shape. This week the IMF predicted that global GDP should expand by 4.8% this year—slower than in the boom before the financial crisis, but well above the world’s underlying speed limit of around 4%. Growth above trend is exactly what you would expect in a rebound from recession.

Yet this respectable average hides a series of problems. Most obviously, there is the gap between the vitality of the big emerging economies, some of which have been sprinting along at close to 10%, and the sluggishness of many rich ones. Macroeconomic policy is also weirdly skewed: many emerging economies are loth to let their currencies rise to reflect their vigour, even as fragile rich ones are embarking on austerity programmes. And finally there is a crucial missing ingredient just about everywhere: “micro” structural reform, without which current growth rates are unlikely to last.


A world out of balance
Our interactive "Global Debt Clock" calculates and compares all governments' debt
Related items

* A special report on the world economy: How to growOct 7th 2010
* Economics focus: Flood barriersOct 7th 2010

In the emerging world the macroeconomic errors come from politicians behaving as if growth there were more fragile than it is. The pace has slowed a bit, but from breakneck speed to merely very fast. Most vital signs, from productivity to government debt, are healthy. Yet many policymakers are buying boatloads of dollars to stop their currencies rising as foreign capital pours in from Western investors seeking better returns (see article). And emerging economies, as a group, still save more than they invest, which explains why global imbalances—notably the controversial surplus in China and deficit in America—remain so big. That makes little sense. Poor countries, especially young ones, ought in theory to invest more than they save, and so be a net source of demand for richer, older ones, all the more so when the latter are in bad shape.

In the rich world the danger is the reverse: politicians cutting back on the basis that growth is assured. Big asset busts are usually followed by years of weakness as the over-borrowed repair their balance-sheets. Experience suggests that several years of slow growth lie ahead. Rich countries are planning tax rises and spending cuts worth 1.25% of their collective GDP in 2011, the biggest synchronised fiscal tightening on record. In many places a budgetary squeeze is necessary, but not all; and, taken as a whole, cutting this much this early is a risk.

Even if demand remains strong enough to cope with this onslaught, the rich world’s longer-term growth prospects are darkening—as our special report this week makes clear. Europe’s working-age population is about to start declining; Japan’s is already doing so. Even in America the ageing of the baby-boomers points to a slower-growing workforce. In theory, faster productivity growth could offset this, but in most rich economies that was waning before the crisis hit—and the crash has clobbered productive potential. A feeble recovery could make matters worse, as the unemployed lose their skills, public debt builds up and firms put off investment.

A gaping growth gap between the emerging and rich worlds will, of course, shift economic heft more quickly towards emerging economies. A fast-growing emerging world is fine, but a stagnating rich one serves nobody—especially if trade tensions start to rise. Western voters may find it intolerable that the likes of China still run big surpluses, thanks in part to those weak currencies. Protectionist rhetoric is already rising in the United States.


All policies great and small

The world would be better served by policies that both improve rich countries’ prospects and reorient growth in emerging economies. These should come in two parts. First, as this newspaper has often argued, macroeconomic policies must be recalibrated. Emerging economies need to allow their currencies to rise more. The rich should tread carefully with fiscal consolidation: sensible budget repairs should be less about short-term deficit-slashing and more about lasting fiscal reforms, from raising pension ages to trimming health-care costs.

Second, and just as important, is microeconomic reform. No matter what Congress threatens about the yuan, China’s trade surplus will not disappear until it boosts investment in services, removes distortions that depress workers’ share of income and encourages households to save less. From telecoms to insurance, China is full of service oligopolies that need to be broken up.

Similar growth tonics need to be applied in much of the rich world, both to boost domestic spending in surplus economies, such as Germany and Japan, and to raise productivity. America is more productive than the euro zone and Japan largely because the latter both have a lousy record in services (too many rules and not enough competition). Many labour markets also need an overhaul, especially in southern Europe, where it is still far too difficult to adjust wages or fire permanent workers. One advantage of the crisis for Spain and Greece is that they have been forced to make a start on this.

The United States also has its own microeconomic to-do list, albeit of a different sort. The most urgent item is the festering mass of underwater mortgages. Almost 25% of homeowners with mortgages owe more than their houses are worth. Faster, more thorough debt restructuring is needed, to make it easier for workers to move to where jobs are more plentiful and to hasten financial recovery. Schemes for unemployment insurance and training also need attention, so that high joblessness does not become entrenched.

None of these structural reforms is easy. Peer pressure could help. Rather than being fixated on harsher budget-deficit rules, the European Union’s members should pledge to complete the single market in services, to open up cosy national markets to greater competition. The members of the G20 big economies could commit themselves to specific structural goals, from raising retirement ages to deregulating things like transport. A bold microeconomic agenda will not yield instant rewards. Nor is it a substitute for getting the macroeconomics right. But without it global growth will eventually falter.

How to grow the global economy----Shared by Shan Saeed

This piece has been taken from Economist Magazine..Some pictures and images are not visible.....

How to grow
Without faster growth the rich world’s economies will be stuck. But what can be done to achieve it? Our economics team sets out the options. Oct 7th 2010

WHAT will tomorrow’s historians see as the defining economic trend of the early 21st century? There are plenty of potential candidates, from the remaking of finance in the wake of the crash of 2008 to the explosion of sovereign debt. But the list will almost certainly be topped by the dramatic shift in global economic heft.

Ten years ago rich countries dominated the world economy, contributing around two-thirds of global GDP after allowing for differences in purchasing power. Since then that share has fallen to just over half. In another decade it could be down to 40%. The bulk of global output will be produced in the emerging world.

The pace of the shift testifies to these countries’ success. Thanks to globalisation and good policies, virtually all developing countries are catching up with their richer peers. In 2002-08 more than 85% of developing economies grew faster than America’s, compared with less than a third between 1960 and 2000, and virtually none in the century before that.
In this special report

* » How to grow «
* Withdrawal symptoms
* The cost of repair
* From hoarding to hiring
* Pass and move
* Smart work
* A better way
* Sources and acknowledgments
* Offer to readers

This “rise of the rest” is a remarkable achievement, bringing with it unprecedented improvements in living standards for the majority of people on the planet. But there is another, less happy, explanation for the rapid shift in the global centre of economic gravity: the lack of growth in the big rich economies of America, western Europe and Japan. That will be the focus of this special report.

The next few years could be defined as much by the stagnation of the West as by the emergence of the rest, for three main reasons. The first is the sheer scale of the recession of 2008-09 and the weakness of the subsequent recovery. For the advanced economies as a whole, the slump that followed the global financial crisis was by far the deepest since the 1930s. It has left an unprecedented degree of unemployed workers and underused factories in its wake. Although output stopped shrinking in most countries a year ago, the recovery is proving too weak to put that idle capacity back to work quickly (see chart 1). The OECD, the Paris-based organisation that tracks advanced economies, does not expect this “output gap” to close until 2015.

The second reason to worry about stagnation has to do with slowing supply. The level of demand determines whether economies run above or below their “trend” rate of growth, but that trend rate itself depends on the supply of workers and their productivity. That productivity in turn depends on the rate of capital investment and the pace of innovation. Across the rich world the supply of workers is about to slow as the number of pensioners rises. In western Europe the change will be especially marked. Over the coming decade the region’s working-age population, which until now has been rising slowly, will shrink by some 0.3% a year. In Japan, where the pool of potential workers is already shrinking, the pace of decline will more than double, to around 0.7% a year. America’s demography is far more favourable, but the growth in its working-age population, at some 0.3% a year over the coming two decades, will be less than a third of the post-war average.
Our interactive "Global Debt Clock" calculates and compares all governments' debt

With millions of workers unemployed, an impending slowdown in the labour supply might not seem much of a problem. But these demographic shifts set the boundaries for rich countries’ medium-term future, including their ability to service their public debt. Unless more immigrants are allowed in, or a larger proportion of the working-age population joins the labour force, or people retire later, or their productivity accelerates, the ageing population will translate into permanently slower potential growth.

Calculations by Dale Jorgenson of Harvard University and Khuong Vu of the National University of Singapore make the point starkly. They show that the average underlying annual growth rate of the G7 group of big rich economies between 1998 and 2008 was 2.1%. On current demographic trends, and assuming that productivity improves at the same rate as in the past ten years, that potential rate of growth will come down to 1.45% a year over the next ten years, its slowest pace since the second world war.

Faster productivity growth could help to mitigate the slowdown, but it does not seem to be forthcoming. Before the financial crisis hit, the trend in productivity growth was flat or slowing in many rich countries even as it soared in the emerging world. Growth in output per worker in America, which had risen sharply in the late 1990s thanks to increased output of information technology, and again in the early part of this decade as the gains from IT spread throughout the economy, began to flag after 2004. It revived during the recession as firms slashed their labour force, but that boost may not last. Japan’s productivity slumped after its bubble burst in the early 1990s. Western Europe’s, overall, has also weakened since the mid-1990s.

The third reason to fret about the rich world’s stagnation is that the hangover from the financial crisis and the feebleness of the recovery could themselves dent economies’ potential. Long periods of high unemployment tend to reduce rather than augment the pool of potential workers. The unemployed lose their skills, and disillusioned workers drop out of the workforce. The shrinking of banks’ balance-sheets that follows a financial bust makes credit more costly and harder to come by.

Optimists point to America’s experience over the past century as evidence that recessions, even severe ones, need not do lasting damage. After every downturn the economy eventually bounced back so that for the period as a whole America’s underlying growth rate per person remained remarkably stable (see chart 2). Despite a lack of demand, America’s underlying productivity grew faster in the 1930s than in any other decade of the 20th century. Today’s high unemployment may also be preparing the ground for more efficient processes.

Most economists, however, reckon that rich economies’ capacity has already sustained some damage, especially in countries where much of the growth came from bubble industries like construction, as in Spain, and finance, as in Britain. The OECD now reckons that the fallout from the financial crisis will, on average, knock some 3% off rich countries’ potential output. Most of that decline has already occurred.

The longer that demand remains weak, the greater the damage is likely to be. Japan’s experience over the past two decades is a cautionary example, especially to fast-ageing European economies. The country’s financial crash in the early 1990s contributed to a slump in productivity growth. Soon afterwards the working-age population began to shrink. A series of policy mistakes caused the hangover from the financial crisis to linger. The economy failed to recover and deflation set in. The result was a persistent combination of weak demand and slowing supply.

To avoid Japan’s fate, rich countries need to foster growth in two ways, by supporting short-term demand and by boosting long-term supply. Unfortunately, today’s policymakers often see these two strategies as alternatives rather than complements. Many of the Keynesian economists who fret about the lack of private demand think that concerns about economies’ medium-term potential are beside the point at the moment. They include Paul Krugman, a Nobel laureate and commentator in the New York Times, and many of President Barack Obama’s economic team.


Stimulus v austerity

European economists put more emphasis on boosting medium-term growth, favouring reforms such as making labour markets more flexible. They tend to reject further fiscal stimulus to prop up demand. Jean-Claude Trichet, the president of the European Central Bank, is a strong advocate of structural reforms in Europe. But he is also one of the most ardent champions of the idea that cutting budget deficits will itself boost growth. All this has led to a passionate but narrow debate about fiscal stimulus versus austerity.

This special report will argue that both sides are blinkered. Governments should think more coherently about how to support demand and boost supply at the same time. The exact priorities will differ from country to country, but there are several common themes. First, the Keynesians are right to observe that, for the rich world as a whole, there is a danger of overdoing the short-term budget austerity. Excessive budget-cutting poses a risk to the recovery, not least because it cannot easily be offset by looser monetary policy. Improvements to the structure of taxation and spending matter as much as the short-term deficits.

Second, there is an equally big risk of ignoring threats to economies’ potential growth and of missing the opportunity for growth-enhancing microeconomic reforms. Most rich-country governments have learned one important lesson from previous financial crises: they have cleaned up their banking sectors reasonably quickly. But more competition and deregulation deserve higher billing, especially in services, which in all rich countries are likely to be the source of most future employment and productivity growth.

Instead, too many governments are determined to boost innovation by reinventing industrial policy. Making the jobless more employable should be higher on the list, especially in America, where record levels of long-term unemployment suggest that labour markets may not be as flexible as many people believe.

Faster growth is not a silver bullet. It will not eliminate the need to trim back unrealistic promises to pensioners; no rich country can simply grow its way out of looming pension and health-care commitments. Nor will it stop the relentless shift of economic gravity to the emerging world. Since developing economies are more populous than rich ones, they will inevitably come to dominate the world economy. But whether that shift takes place against a background of prosperity or stagnation depends on the pace of growth in the rich countries. For the moment, worryingly, too many of them seem to be headed for stagnation.

Friday, October 15, 2010

Gold correction is buying opportunity for investors------Shan Saeed

GOLD CORRECTION COULD BE BUYING OPPORTUNITY FOR SMART, SHARP AND SAVVY INVESTORS---BY Shan Saeed

I firmly believe that equities are ready to drop into October-November and then rally again towards the end of the year. Historically speaking

The scenario is very much on the wall. The Fed will start printing money again and that would create a negative sentiment driving markets down. They don’t however see a threat to the March 2009 lows.

"Maybe the stock market won’t be very happy about additional stimulus, more interventions into the free market. Though anything could happen, but let’s put it this way that I do not think that we will go and breakdown below the March 2009 level".

I could see a downside target of no more than 950 on the S&P on the pullback. Any break below 1,000 will rattle the Fed. Ben bernanke is under pressure from all quarters......, But Chairman Ben Bernanke will allow further market declines once 1,000 is reached. US is so full of debt, stuck in a period of slow growth and high unemployment, that the Federal Reserve will soon have to revert to crisis era policies.

I am absolutely convinced the Fed will aggressively market the importance of QE and massively so". The US economy is not robust". Not buying into the good news brigade of commentators who believe the worst is behind us and the US economy is on the mend. We have mixed signals, but in general the economy is still weak".


GOLD CORRECTION IS POSSIBLE

There could be a significant correction in gold and other commodities as the dollar changes course. However any large decline would represent a buying opportunity.

The governments of every developed economy, including the US, the UK and Western Europe, will eventually default on their sovereign debts, so the one thing he will never do in his life is 'sell my gold.

The reason is very simple. Gold is not a liability of someone else, you really own it, you keep it in a safe deposit box, its quantity can not be increased at the same rate as you can print money which will eventually again weaken the US dollar. I am not saying that the dollar will go straight down, but eventually the purchasing power of money will lose."


DOLLAR OVERSOLD.

The US dollar is extremely oversold and investor sentiment is very bearish. As a contrarian, I would not be short the dollar right now. This is buying opportunity for some smart, sharp and savvy investors.


Treasuries may become worthless

Mark my word. US Treasuries may become worthless as central banks, led by the Federal Reserve, print money in an effort to boost economies.

“Over the next 10 years, we won’t see any restrictive monetary policy anymore and no real interest rates above zero. Accommodative interest rates ambiance will continue.
Bond yields will “rise massively going forward..........



Disclaimer: This is just a research piece and not an investment advice...Every investment carries risk and return..Please execute your own due diligence before making any investment strategy or decision...

Tuesday, October 12, 2010

Its not Chinese Yuan but weak US Dollar which is the problem----By Shan Saeed

Chinese Yuan is not the problem but the US dollar which is the hurting the confidence level of the global economy------By Shan Saeed

Lets share some facts and let you decide….Some people who cant even say china have now become gurus in the Chinese economy...

Chinese Yuan is not the problem, it is the weak US dollar which is hurting the global confidence level of the decision makers and investors...Why, the reasons are given below.....

Lets analyze the Chinese economy and its strategic actions

- Chinese are already consuming more.
- Chinese people are spending more on luxury good, investments and Real Estate
- Chinese is the largest auto sales market in the world right now
- Chinese economy is the driving the global economy otherwise we are all doomed
- Chinese is the 2nd largest consumer of the oil industry
- Chinese government is making strategic investment in oil with 60 deals in 19 countries from africa to asia to south america amounting to $117 billion deals.

I fully respect the Chinese leadership for their strategic insight...

Every country has the right to protect industry and her people. Its the right for chinese leadership to appreciate yuan when the global economy stabilizes. Yuan would appreciate to 4% this year.....since 19th June yuan has been appreciated 2% ...

The Chinese yuan has appreciated and I think will continue... the problem is that if the government let's it appreciate consistently there will be tons of hot money so I expect them to increase 2-3% then decrease 2-3% in order to stave off hot money and make it not worth it for speculators. Yuan appreciation would allow the Chinese people to buy more American exports. But what American exports? Everything is already made in China. America exported its manufacturing jobs years ago. Even if China's currency were to appreciate, production would just move to cheaper countries like Vietnam, not back to America.


According to my Harvard educated friend Shaun Rein---Expert on Chinese economy


Unless there are structural reforms to America's economy, a stronger renminbi will not lower the trade surplus in any meaningful way. However, net-net after a year or so expect a total of a 4-5% appreciation, especially once the Christmas ordering season is done and exports back to long-term stability. with the holiday season coming, the last thing American retailers like Wal-Mart (WMT) and Target (TGT) can afford is costlier products on their shelves. Costco (COST) is refusing to sell Coca-Cola (KO) products because Coke wants to charge too much. If customers are balking at price increases for sodas, what do you think will happen if iPhones (AAPL), Dell (DELL) computers and Mattel (MAT) toys--all made in China--rise in price?
Some analysts have observed that if Wal-Mart were a country it would be China's eighth-largest trading partner. Some 70% of the products sold in Wal-Mart have Chinese components. Billions of dollars of purchasing power would be taken from American consumers if the renminbi were to appreciate. The holidays would not be such a merry time.
With unemployment already at 10 %, American consumers are already stretching their shopping dollars farther than they have in a long time. The last thing they need is more expensive goods. Price increases would stop any thaw in consumer spending.


Analyze the American Economy.....

- Household debt to GDP is 122%..It would require $5-6 trillion to bring to 100% level of GDP..Deleveraging will be a huge drag on the economy creating a sub-par growth..
- US consumers are not spending in USA due to lack of confidence in the economy
- Fed is already debasing the US dollar due to QE..Government action cant boost the confidence of the American consumers....
- US dollar is deliberating kept weak to boost exports and support the industry
- Consumers have to save more to bolster the economy....
- Most of the corporations are sitting on Cash which is like a negative debt...

- The US should drop some export bans to China in the tech sector [there is a lot]. For Boeing, China is 2nd largest market outside US.

Shaun Rein adds on futher who is MD--China Market Research Group..

The problem is not a undervalued RMB/ Yuan but a weak USD and faltering confidence which is causing volatile swings in currency markets, oil barrel pricing, and gold. As nations rebalance their holdings towards euros, Australian dollars, Brazilian real and Japanese yen, the dollar continues to weaken. Even retail investors are jumping on the bandwagon. This flight will not end until the dollar reverses course or, at the very least, remains stable, and it's dangerous because it means countries will be less likely to buy Treasury bills and finance America's recovery.
A weaker dollar won't help create more exports. It will just make things more expensive for Americans. Foreign companies will produce elsewhere, because it is still cheaper to produce in low-cost labor markets like Vietnam.
Rather than wasting time pushing China to strengthen the yuan President Obama and his economic team should focus and figure out how to strengthen the dollar by paying down Chinese debts. A strong dollar, not a strong yuan, is what's important for America's future.

Saturday, October 9, 2010

US economy is in doldrums,-----By Shan Saeed

No Way Out for the US economy..Where are we heading for? This is the billion dollars question. Get ready for worse....

I really dislike sounding inflammatory. Saying that things are going to go terribly wrong runs a risk of being classed with those who think the world will end in December 2012 because of something Nostradamus or the Bible says, or because that’s what the Mayan calendar predicts.

This is different. In the real world, cause has effect. Nobody has a crystal ball, but a good economist (there are some, though very few, in existence) can definitely pinpoint causes and estimate not only what their immediate and direct effects are likely to be (that’s not hard; a smart kid can usually do that) but the indirect and delayed effects.


In the first half of this year, people were looking at the U.S. economy and seeing that some things were better. Auto sales were up – because of the wasteful Cash for Clunkers program. Home sales were up – because of the $8,000 credit and distressed pricing. Employment was up – partly because of Census hiring, and partly because hundreds of billions have been thrown at the economy. The recovery impresses me as a charade. But figures were questionable and not real.........


Let’s get beyond what the popular media parrots are telling us and attempt to derive some reasonable assumptions about how things really are and where they’re headed.

A Brief Economic History/Summary:

Before we get to where things stand at the moment, let’s briefly look at where we‘ve come from.


That a depression was in the cards has been foreseeable for decades. The distortions cranked into the system in the ‘60s – the era of “guns and butter” spending by the government – resulted in the tumult of the ‘70s. Things could, and one could argue should, have come unglued then. But they didn’t, for a number of reasons that have only become clear in retrospect:


* Interest rates were allowed to rise to curative levels;
* The markets were non-manipulated and so, as they became quite depressed, were left to send out real distress signals;
* The U.S. was still running a trade surplus;
* The dollar had only come off the gold standard in 1971 and was still relatively sound.


Then, starting with Reagan and Thatcher, the world’s governments started cutting taxes and deregulating. The USSR collapsed peaceably. China, then India, made a shift toward free markets. And on top of it all, the computer revolution got seriously underway. All told, a good formula for recovery and a sound foundation for a boom.


But sadly, taxes, government spending, and deficits soon started heading much higher. Despite the collapse of its only conceivable enemy, U.S. military spending continued to skyrocket. Monetary policy encouraged everyone to take on huge amounts of debt, much more than ever in the past, and everyone soon found they could live way above their means. The stock, real estate, and bond markets got pumped up to ridiculous levels. The main U.S. export became trillions of paper dollars. Worst of all, the U.S. devolved into just another country, undistinguished by anything other than a legacy of a high standard of living.


The standard of living in the U.S. is now going down for these reasons, and others. But most disturbing to the average American is the falling position of the U.S. relative to the rest of the world. In brief, Americans won’t take kindly to the notion that they can’t continue earning, say, $10-40 an hour, for doing exactly the same thing a Chinese will do for $1-4 an hour.


What’s going to happen is that the Americans’ earnings are going to drop, while those of the Chinese are going to rise, meeting someplace in the middle. Especially when the Chinese works harder, longer, saves his money, and doesn’t burden his employer with all kinds of legacy benefits, topped off with lawsuits. This is a new threat, one that can’t be countered with B-2 bombers. It’s also something as big and as inevitable as a glacier coming down a valley during an Ice Age.


This, along with other problems presented by the business cycle have ushered in the Greater Depression. Depression and recession are consumer cycles.....

How Long Will the Greater Depression Last?


Let’s briefly recap two definitions of a depression, along with a couple of examples, with an eye to seeing how things may evolve from here.


One definition is that a depression is a period of time when most people’s standard of living drops significantly. Russia had this kind of depression from roughly 1917 to 1990, so more than 70 years. A second definition is that it is a period of time when economic distortions and mis-allocations of capital are liquidated. Russia had this kind of depression from 1990 up to about 2000. It was very sharp but relatively brief.

The difference between these two examples is that, during the first, the state was in total – or even increasing – control. By the time of the second, the country had greatly liberalized. As a result, the depression was a period of necessary and tumultuous change, rather than drawn-out agony. A depression can be a bad thing or a good thing, partly depending on which definition applies.


Today, things are problematic in Russia for a number of reasons that aren’t germane to this article. But people can own property, entrepreneurs can start businesses, and the top tax rate is 11%. The depression of 1990-2000 resulted in greatly improved conditions in Russia.


Let’s look at a couple of other examples: Haiti and Mozambique.


Haiti has been a disaster since Day One and has no current prospect of improvement. The billions of dollars Obama is idiotically about to send them will evaporate like a quart of water poured into the Sahara – just like the billions of aid and charity that have gone before it. Worse, it will eliminate the necessity of Haiti making meaningful reforms. Additional aid actually precludes the possibility of liquidating distortions, mis-allocations of capital, and unsustainable patterns of life. It’s counterproductive.


Mozambique went through a long and nasty civil war from about 1970 to the early ‘90s. The war made conditions worse than anything even Haiti has seen. But when it came to an end, the Mozambicans changed things simply in order to survive. The place is hardly a beacon of the free market today, but duties and taxes have been reduced, most parastatals have been privatized, and entrepreneurs can operate. It’s a good sign that the country is drawing foreign investment but very little foreign aid, which always just cements people in their bad habits while ensuring government officials stay in office.


Why do I bring up these examples? Because it’s clear to me the U.S. is heading in the direction of Russia before 1990, or Haiti today. Not in absolute terms, of course. These examples are illutrative of the fact, what USA should be avoiding and doing in the right direction for the betterment of american people and businesses. But everything the U.S. government is doing – raising taxes, increasing regulations, and inflating the currency – is not only the wrong thing to do, but also exactly the opposite of the right thing.


This is really serious, because the government is the 800-pound gorilla in the room. What governments do makes all the difference – actually the only difference – in how countries perform. How else to explain that Haiti and Singapore were on pretty much the same level after World War 2, and look where they are now.


To my thinking, the U.S. is now clearly on the path Argentina started down with the Peron regime. Cause has effect. Actions have consequences, and the result will be much the same. Except I believe the descent of the U.S. will be much faster, much scarier, and will end in a much harder landing than that experienced by Argentina.


I say this because there’s no realistic possibility the Obama regime is going to change course. To the contrary, they’re likely to accelerate in the present direction. They believe the government should direct society – as do most Americans at this point. They feel government is a magic cure-all and not only can but should “do something” in response to any problem. Most complaints aren’t that they’re doing too much, but that they’re doing too little. Everything on the political front, therefore, is a disaster. There’s absolutely no prospect I can see that it will get better, and every indication it will get worse.


I’m not going to try to predict what will happen in the 2012 elections, but it’s fair to say the last several elections are indicators of the degraded state of the average American. What are the chances they’ll make a 180-degree turn, in the direction of someone like Ron Paul? I’d say close to zero, and libertarianism will remain a fringe movement, at best. Will Boobus americanus vote for someone who says the government should actually do less – much less – in the middle of a crisis? Especially if the current wars expand, which is quite likely in this kind of environment? No way.


Simply, the chances of a reversal in what passes for the philosophical attitude of this country are slim and none. And Slim’s left town. While there are some who hope for an improvement on the political front, I think that’s very na├»ve.


The Tea Party movement? Its ruling ethos appears to be a kind of inchoate rage. I sympathize with the fact that many seem to be honest middle to lower middle-class Americans who see their standards of living slipping away and don’t know why, or how to stop it. They feel bad that it’s no longer the America portrayed in Jimmy Stewart and John Wayne movies, but many are quick to blame the changes on swarthy immigrants. They’re desperately looking for a political solution. These folks tend to be highly nationalistic and atavistic, with a tendency to worship their preachers and the military. I just hope some popular general doesn’t get political ambitions…


The only bright spots – but these are very major bright spots – are in the areas of individual savings and technology.


As things get worse, the productive members of society will redouble their efforts to save themselves by producing more while consuming less; the excess will be savings. Those savings create a pool of capital that can be used to fund new businesses and technologies.
The problem here is that with the dollar losing value quickly---thanks to Quantitative easing, the savers will be punished for doing the only thing that can really improve the situation. And they’ll be discouraged by wrongheaded propaganda telling people to consume more, not to save. Funding new business and technologies will be harder with more regulations. But still, people will find a way to set aside a surplus. And that is a factor of overwhelming importance.


As are breakthroughs in science and technology. Don’t forget that there are more scientists and engineers alive today than have lived, altogether, in all of previous human history. These are the people that will wind the main stem of human progress. And their numbers are going to grow. So there’s real cause for optimism.


The problem is that most young Americans now go in for things like sociology and gender studies, whereas the up-and-coming scientists and engineers are primarily Chinese, Korean, Japanese and Indians who, even if they get advanced training in the U.S., tend to go back home afterwards. Partly because the U.S. discourages hiring non-Americans for “good” jobs, but mostly because they can see more opportunity abroad.


So, how long will the Greater Depression last? Quite a while, at least for the U.S.


But wait. Aren’t there other bright spots? How about the dollar?



The Dollar


Over the years I’ve been agnostic as to whether this depression would be inflationary or deflationary. Or both in sequence, with inflation first, followed by a credit collapse deflation; or a deflation followed by a runaway inflation. Or perhaps both at the same time, just in different sectors of the economy – e.g., prices of McMansions collapse because people can’t afford to live in them, while the prices of rice and beans skyrocket because that’s all people can afford.


At the moment I’m leaning towards a deflation in most areas. Why? Because the purchasing media in the U.S. is primarily credit based. If a mortgage defaults, what happens to the dollars it represents? They literally disappear, which is deflationary. If a bond defaults, the same thing happens. If stocks and property prices crash, the dollars they represent vanish. If people or businesses don’t borrow, the money supply fails to expand; in fact, many are trying to pay back loans, which is deflationary. Even so, contrary to popular opinion, deflation is much better than inflation. Deflation is pernicious....Deleveraging is happening in the US which will be huge drag on the economy for the next 4-5 years...


Because today’s dollar is just paper and credit, and because deflationary conditions will create a clamor for many more of them, the government will eventually succeed in its inflationary efforts. It’s true, as Bernanke has said in a moment of wry wit, that they can dump $100 bills from helicopters to prevent deflation. But it’s not likely since, in our fractional reserve banking system, the primary way the money supply is expanded is through the granting of loans, not the printing of paper, the way it was done in Weimar Germany and Zimbabwe.
One problem with credit-based inflation is that at some point, banks become afraid to lend, and people afraid to borrow – a time like right now. In fact, people may even become too afraid to leave their dollars in banks. They’re coming to realize the FDIC is thoroughly bankrupt.


Here’s a speculative scenario. To solve these deflationary problems and resolve Ben’s helicopter conundrum, maybe the Fed will go into the retail banking business by directly taking over the hundreds of institutions that are now failing. The average American would feel safe depositing directly with the Federal Reserve. And the Fed could lend as much as they want, without the restrictions imposed by actual capital or pesky shareholders.


Ridiculous? I think not, certainly not after GM, Fannie, and the rest. Certainly not when you consider that this depression is still in only the second inning. It would be one way to head off deflation.


Be that as it may, or may not, at some point after the deflationary waters have receded as far as possible, an inflationary tsunami is going to wash ashore, to the surprise of all.


Everybody knows how bad things were in Weimar Germany, and what a catastrophe hyperinflation has been in Zimbabwe. But those were agrarian economies, with people still quite close to the land. If it hits in the U.S., as highly specialized and urbanized as it is, it will be an unparalleled disaster. And not just for the U.S., because the reserves of almost all governments are mostly U.S. dollars. And dollars are used as the de facto currency by the average man in about 50 countries. All told, there may be as many as seven trillion of the things held outside of the U.S., and, at some point, everybody will be trying to unload them at once. At which time they’ll lose value very, very quickly.


So, far from being something to rely on, and very far from being as good as gold, the dollar is going to be a lead player in the catastrophe called the Greater Depression. And all the other paper currencies are going down with it. Pity the fool who doesn’t see this coming.
Or, for that matter, what’s going to happen to interest rates.

Interest Rates


The government is doing everything in its power to keep interest rates as low as possible. Asset bubbles will be created soon.....There are many reasons for this. Low rates make it easier for people to support their debt burdens and borrow more. Low rates inflate the value of stocks, bonds, and real estate – and the last thing the government wants to see is a meltdown of the markets. But, perhaps even more important, it’s a lot easier for the government to service $12 trillion of official debt at 2% than at 12%. That much of a rise in rates alone will add over a trillion to what they need to borrow to keep the giant Ponzi scheme going.

Of course it’s a fool’s game. Eventually (I’ll guess between six and 24 months), when their creation of dollars eventually overcomes the credit markets’ destruction of dollars, consumer prices will go up. That evidence of inflation will cause interest rates to rise, with all the short-term negative effects the government so fears. But higher rates are absolutely necessary to get out of the depression. Remember, it was the high rates of the early ‘80s that set the stage for the boom that followed.


Rates – the price of money – shouldn’t be controlled by the state, up or down, any more than the state should control the price of oil, or bread, or toothpaste. One of the major reasons the USSR collapsed was an inability to make correct economic calculations, and much of that was due to their arbitrarily fixed interest rates. One reason why Japan has been fading into the economic background over the last two decades is that the government has artificially suppressed rates, in the vain hope of stimulating the economy. All they’ve gotten is excessive levels of government debt, which will result in the destruction of the yen. And what will be tens of millions of impoverished, and very angry, Japanese savers.


The same thing is in process of happening in the West due to suppressed interest rates. The Next Steps Down in the Markets

With interest rates depressed to near zero, stocks, bonds, and property in the Western countries are as good as they’re going to get – especially after a very long boom in all three. When rates inevitably go higher, stocks, property – absolutely bonds – are likely to head much lower. That’s entirely apart from the fundamentals under them, which are truly ugly. In turn, that will bankrupt pension funds across the economy, many of which are already severely underfunded.


These pension funds are likely to be the centerpieces of the next leg down of the evolving crisis. Will the government bail them out? Perhaps, although after the misadventure of poor taxpayers throwing money at rich traders at Goldman and AIG, the public doesn’t like the ring of that term. More likely it will nationalize them, assuming their assets in exchange for a special class of its paper. In the interest of “fairness,” that will happen to small and solvent funds as well as large and bankrupt ones.


After that, the next problem area will be insurance companies. And not necessarily because they’ll suffer from the same problems, like derivative trading, that sunk AIG. Even the well-managed ones have their assets invested primarily in commercial loans, commercial property, bonds, and stocks.


How This Will End

Nassim Taleb has popularized the concept of the Black Swan: an event that no one thought was possible, actually happening. Naturally, it takes everyone by surprise. To that lesson from zoology, let me suggest one from astronomy. Let’s call it the Financial Asteroid Strike theory.


It’s well known that there are millions of pieces of sizable space debris floating around the solar system. It’s just a matter of time before something crosses our path at an inopportune moment, as has happened so many times in the past. Unlike the Black Swan, it’s well known that Financial Asteroids exist. It’s just that really serious ones appear so rarely that people conduct their lives as if they never will. It’s been such a long time since the last depression that people see it as something distant and academic – like the Chicxulub or Tunguska asteroid strikes. Until the actual moment it hits, everything is completely normal. Then everything changes radically.


I’d sum it up by saying that a Financial Asteroid Strike takes much longer to happen than you might expect, but once it actually gets underway, it happens much more quickly than you could have imagined. We had a strike in 2008. But they tend to come in clusters. I expect more to enter the atmosphere fairly soon.


The question is whether the next one is going to wipe out all the economic and financial dinosaurs or just flatten the trees for some miles around. Either way, it’s far from being all gloom and doom.

How This Could Be a Good Thing

Everyone, certainly including myself, prefers good times to bad times. But much of the good times of the last two decades were a result of an entire civilization living above its means. It was great fun while it lasted, but the party is over. The result will be massive unemployment, lots of business failures, and huge investment losses. These things are most unpleasant, but inevitable. That said, I always like to look at the bright side.


And what might that be?


Let’s restrict ourselves to just one of the lead actors in this drama: the United States of America.

The bankruptcy of the U.S. government will, at least at some point, lead to a big drop in the number of government employees. This is a good thing, since little of what they do serves a useful purpose; most are an actual impediment to production.


With some luck it could result in the sale of agencies that have some value, e.g., NASA, the Smithsonian, and the National Parks – to private enterprise. It will also force a vast retrenchment of the military, although only after more costly wars make that necessity very obvious. It will force a decentralization of power, with more devolving to the states and municipalities. It will mean much less regulation, since there won’t be the personnel or money to enforce it. It will also mean much less taxation for the same reasons, even though the state will try desperately to collect more, and will absolutely succeed in the near term.

Internationally, it seems to me a sure thing that organizations like the UN, the IMF, the OECD, and so many more, will be totally hollowed out or even disappear. At a time when governments are straining to maintain themselves, they’re unlikely to ship scarce capital abroad. So the people who are worried about the UN taking over the U.S., One World Government and such, will have to find something different to fret about.


As domestic currencies the world over are inflated away, some medium of exchange and store of value will have to be agreed on. I don’t see any realistic alternative to gold. China is going to be a focus of change in this regard (among many others). The stupidity of the Chinese government buying U.S. government paper in order to enable Americans to continue consuming the things Chinese factories produce will come to an end. That will be an impetus to demands for an alternative medium of exchange.


But if the U.S. and governments of other advanced countries lose power, governments in places like Africa (in particular) will collapse; Somalia is a model of things to come there. That may sound like a horrible thing, but – notwithstanding teething pains – it’s a big step forward. Deprived of free money, free weapons, and lots of free bad advice that have entrenched kleptocracies, the Africans are likely to make real progress after the Greater Depression plays itself out.


The transition period, however, is likely to be messy almost everywhere.


Can we prevent the status quo from falling apart, and preclude these messy changes? Further, should we, if we could?


Entirely apart from the fact that change is an essential part of life – and I think the status quo is in dire need of some real change (although absolutely not the kind Obama and his posse might have in mind) – I actually don’t think there’s a realistic solution to the problems the world is facing in this decade.


Yes, there are solutions that the government could proactively bring about – almost entirely by doing less, rather than more. But the odds of the U.S. voluntarily defaulting on its debt, abolishing the Fed, using gold as money, abolishing all agencies not specifically designated in the Constitution, eliminating the income tax, and cutting back on military expenditures by about 90% -- among other things – are so small as to be considered a fantasy.


In fact, the concept of invoking changes of that scale are too scary for most to even contemplate. But they’ll happen anyway. Which means these things aren’t going to happen voluntarily, under some kind of control, and in a more or less orderly manner. Even so, because anything that must happen will happen – all these things and more will actually happen and, in the happening, will be most unpleasant and dangerous.


It seems to me that the upset we’re looking at could be the biggest thing since the Industrial Revolution. Or perhaps the French Revolution is a better analogy, although I expect it’s going to be a bit of both. It seems entirely possible to me that we could have another American Revolution, as unlikely as that seems among a nation of commuters and suburbs-dwelling reality TV watchers.


But it’s hard to see how it could be anything like the first one, which was led by thoughtful, rich, free market-oriented farmers and merchants. More likely this one will center on people like Sarah Palin and Sean Hannity on the one side, and Michael Moore and Nancy Pelosi on the other – strident, antagonistic, and bent, but also full of charisma and certainty. I don’t see much chance of collegial and reasonable compromise.


The best advice is not to be around the watering hole when two antagonistic groups of chimpanzees are hooting and panting at each other, getting ready to fight for control of it.


I’m afraid the current state of affairs is corrupt through and through. From the top of the financial world in New York, to the top of the political world in DC, right down to the average man on the street, 50% of whom aren’t obligated to pay income taxes but feel entitled to be net recipients of government largesse at the expense of others. Even among those that have assets, there’s no feeling of shame in gaming the system any way possible. There’s no longer any onus to being one of the 40 million people on electronic food stamps, or defaulting on one’s mortgage and continuing to live in the house, and collecting indefinitely extended unemployment benefits. Bankruptcy is just something you do when needed.


Frankly, it’s a mystery to me how the U.S. in particular, but most of the developed world, is going to escape from the very unpleasant consequences of its very stupid past – and current – actions.


I’ve just scratched the surface of the possibilities for the next ten years here. What’s clear is that some patterns of production and consumption are unsustainable; they will stop. What’s not clear is what new patterns will replace them. But that’s not so worrisome; what’s a matter of more concern is what forms of political and social organization will appear.


But let me leave you with a final bit of good news. Most of the real wealth – science, technologies, capital and consumer goods – will still be here. There’s just going to be a change in ownership. And it’s possible to position yourself to get more than your share.
Based on the above, what looks good to me – on a long-term basis – over the years to come? In general, stocks, bonds, and property are dead ducks, and headed much lower. But when a real bottom arrives, perhaps even in this decade, fortunes will be made buying back into them. Gold and silver, even though they’re no longer cheap, are going much higher; they’ll be what you’ll trade for things that are cheap. Agricultural commodities are going to do well. The trillions of currency units being printed all over the world will definitely ignite more bubbles, which should present fantastic speculative opportunities. And because the political situation will be hairy, diversify your assets outside of your home country.


Discalimer: This is just a research piece and not an investment advice..Please execute your own due diligence before making any investment strategy or decision.