Sunday, November 17, 2013

Globalization and The Economy Bubble and The Cenozoic Era.

The web that breaks

Globalization - the great equalizer of nations, or is it the hole that sinks the whole ship, our world?
Let as see the good things about globalization and let as take three countries, America, China, and Brazil(for convenience, instead of saying country A, B, and C, you can choose any name for your convenience).
Let as examine how globalization helps first. Say America produces computers and mobiles, and they produce more computers(cheaply). Now assume China produces mobiles(phones) and computers and assume they produce more mobiles(cheaply) compared to America. Now here comes globalization. Since America produces more computers and produce it cheaply Americans will sell their computers to China and the Chinese sell their mobiles to America as mobiles are cheaper in China. Now as Americans are selling more and more computers the companies that produce computers will expand and will need more and more staff and will recruit more employees. A similar thing will happen to the mobile industry in china.
Now what will happen to mobile phone industry in America? As cheap phones are coming to America, the demand for the local mobile industry reduces and finally the mobile industry is crowded out by computer industry in America and the reverse will occur in China. As cheaper products are available customers are happy. And as there is no net loss of jobs occurs nation as a whole is happy.
Now look at the factories. Suppose there are two firms that produce computers, then they have to equally share the market. The moment one gain more market share the other will loose. To maintain competitiveness the other has to come with a superior product or reduce the cost. The betterment of product has a limit. So the alternative is to reduce the cost and the only way, all else being equal is to reduce the wages. As gradually the product quality will be comparable to the competitive company, the competitor also will be forced to do the same. A similar situation will occur in china regarding the mobile phone industry.
Now imagine China has cheap labor compared America one company will find it easier to start a factory in china to produce computer there to sell it to Chinese people. Or it may be the third country Brazil they find cheaper. Let us say labor cost is cheaper in Brazil, compared to both America and China, so the company will start branches there and might gradually shift production to Brazil. Gradually the labor cost will rise in Brazil too. The companies will lose the incentive to continue working in Brazil, or can work only to sell products in Brazil. But the major markets will remain America and China. So the companies may even be forced to stop the branches in Brazil. Now Brazil will be forced to reduce taxes to maintain the companies there, otherwise, It will have to find a job for its citizens who will be unemployed by layoffs. These will prompt other countries to do the same to maintain or start new companies. Gradually the nations will lose the tax income and to compensate they will have to increases the tax on the laborers. This will reduce the quality of life of the workforce. This may force the companies to increase the salary which they may not be able to do as it will reduce their profit(they cannot increase the product cost as that will reduce their competitiveness).
By continuing their factories in Brazil they can operate in a low-cost environment, but their major consumer base will be in America. If they take the factory back to America, they will lose the competitive edge. Americans will be facing another situation. If they do not reduce the labor cost or tax, the companies will be shifting to either Brazil(where both labor cost and tax are low) or to China where tax is law. So the wages will decrease and the tax will increase. But that will force the consumers to spent less on computers and mobiles.
Now imagine the situation where both America and China are saturated. The number of mobiles and computers that are in demand decreases. No problem the companies will start to sell in Brazil. But in Brazil, the labor cost is low and do to heavy taxing the public is not able to afford computers or mobiles.
Now the situation becomes dire. The companies have products but nobody to buy it. So gradually they have to reduce the working staff. More people in Brazil first lose jobs. It will further reduce the sale of the companies. They will reduce the workforce in their home countries. These will cause unemployment in the home countries which also will reduce the mobile and computer demand which will set off the vicious circle.
Now imagine, though the example was for three countries, it is applicable to the whole world. The only advantage is that we will have more time before this cycle start.
Then suppose imagine a new technology comes which need only 5 humans to produce a given product instead of the usual 10, then we won't have as much as time as we imagine we have.
So it is time, think of some solution. For now, we know for sure a housing bubble in America can affect the whole world or a tiny Greece can affect our well being. If something can be done, do it immediately or we all are doomed.
So this is the new bubble, the 'Economy bubble'. When the housing bubble burst it affected the world severely.Now is it really a bubble? No really. It is sudden deflation with no irrational exuberance preceding. So yo have no way of predicting but the effects are similar to a bubble, only this will be worse.
Now if the Economy bubble is burst, there won't be any more bubble, for it will take the world along with the bubble. For along with the economy, law and order to will collapse because of the ensuing hunger that consumes the majority. There will be war, not between nations but between individual humans. The war will end by as killing each other and the survivors die of hunger. In the end, there won't be any survivors.
Is this the end of The Cenozoic Era, where humans are dominant? Or will some humans survive in the remote jungles of Amazon and Africa, to carry on with the species? Only time can tell, but we may not be there to know it or to see the beginning of the new era.

Matthew 25:13. Therefore, keep watch, because you do not know the day or the hour.

The Beginning of the End, Deflation and Deficit.

Can you eat gold?

The Austrian says their theory is the only correct economic theory, they say the Great depression as the proof of the soundness of their theory and they say that the present "recession" is to be treated by their prescription - austerity and them advise you to keep gold as a hedge against the coming depression. So are they right? Is keeping gold as a bet helps? It will if you can eat gold!!
So then why their method worked in the great depression and it does not work now? Because they do not see the short term and are blind to the changes that occurred in the world. They do not know that the world, along with the economic system has changed drastically.
So, are the Keynesians correct? Shall we follow their prescription, shall we call for more debt and spending. Yes, that should help, but the higher we go, the more terrible will be our fall. We will fail eventually and if there is any chance for an escape that will be lost by the eventual fall.

So what is Austrian economics? In a nutshell, Austrians say that all the cause of inflation and bad business is money printing. They say that the money printing can change the economic climate and give a false hope to entrepreneurs who in turn will invest in a business where there is no chance of a win lured by easy money. And when the money availability is tightened the business will fail.
They say the great depression was because the low-interest rates and lavish printing of money(hereafter, inflation) and the eventual failing of all the business that started because of the easy availability of money. So they say the depression was good that they eliminated all the bad businesses and helped the promotion of good businesses. They further say that today the Keynesians are not allowing for the dissolution of the bad business hence the world is not recovering as happened after the great depression.
The Keynesians, on the other hand, does not accept that theory. They say depression is a part of the economy and it cannot be prevented and to get over it, one has to create inflation. They say second world war created such a situation helped by FDR's welfare programs and govt spending that ended the great depression.
So, who is right and who is wrong?
The irony is that they both are right and wrong at the same time. How come?
We will discuss. What actually happened after the great depression?
Was FDR the first one to start Govt spending? No Wilson started it before FDR.
So what actually happened? World war preparation started. The Austrians wanted to ignore this. They say war only causes destruction and war have nothing to do with the end of the depression. I agree war is not good, but I do not agree that war didn't help at all.
So what did war do?
1) It created jobs. Jobs are the primary driving factor of any economy. Without jobs, people will not have money to spent. Without money no economics work.
2) It created technology. Research works increased for war preparation. Though the technologies are primarily directed towards war after the war the same technologies were used for civilian purposes which boosted production and jobs. Production increased very much which increased general well being which further fueled an increase in research and a further increase in technology. So when people came back from the war they had money to spend and jobs to find, both together ended the great depression.
Along with these, there was a further boost by FDR in public works, which increased jobs.
So as technology progressed and as spending increased more jobs were created and the population too increased as there were more jobs and money and leisure.
So as the Keynesians say, the govt spending helped and as Austrians say the bad business were dissolved that paved the way for further good business. But Keynesians were wrong that it was govt spending alone that ended the depression and Austrian's were wrong to say govt spending and war has no role.
But is it applicable to today's world?
The govt spending increased, but from where did they get the money? Yes from the future. It was no problem then, every time a new bond was issued then, as is now, there are people to buy it. So what changed?
The technology.
People got everything they wanted. There is no further increase in technology. The earlier technologies created robots that increased jobs, but now the technology is creating machines that take over work and hence decrease jobs.
But something drastic happened. As machination increased, urbanization increased. Population density increased, the population started to stop growing. As population growth decreased, demand and hence the need for products decreased and hence the need for jobs.
And computers became ubiquitous and a new type of economy was created and the older 'industrial economy' gave way to "service economy".
As service economy progressed and as computers became more powerful, jobs decreased. As jobs decreased, the population growth is further decreasing.
So because of the new technology, nothing can stimulate job growth. And because of urbanization, nothing can stimulate population growth.
So next time when the government issues a bond, there may not be enough people to buy it - deficit cannot be covered.
When there are no jobs, people cannot spend, and hence demand decreasing and prices will come down - deflation.
From there, there will be a downward spiral. Neither Austrians nor Keynesian has anything to propose and neither of their medications is effective. Austrians propose a total abstinence from governmental spending. That will be like removing life support from a terminally ill patient. Keynesians say government spending as a miracle drug, but that will not produce more jobs or after a time will not even keep the existing jobs. Then the burgeoning problem of government debt too will rise and there will be an eventual collapse. What we are witnessing is the beginning of the end of human civilization as we know it.
So what will happen to the gold you stored. Everyone has lost their jobs together. Everyone want food and is not will to exchange whatever food they got with any amount of gold in the world. What will you do?