03-19-2009, 04:06 AM
Dear CFANerd
Please accept my apologies if I could not explain in required detail, the various concepts which are being mixed-up here, due to shortage of personal resources.
We have to distinguish between consumption (spending from public) and unwise credit creation and lending (to public and businesses). Due to consumption, public demand goods and services, due to this demand factories and business produce goods and generate services. So we have a consensus here that this phenomena is healthy for economy. Now, come to un-wise credit creation and lending. This is lenders job to ensure sound lending. I ask you a personal question here, would you give your money to someone from whom you donât expect return of loan. Off-course not. So why these lenders issued those loans un-wisely. Therefore, it is not Joe the plumberâs (who is an ordinary person from masses) to apply all concepts of economics and finance before consumption, lets say before purchasing a house. It is financial institutions job to ensure Joe the plumber is not overly leveraged before lending credit. If Joe the plumber is leveraged in ratio of 1 10 then whose fault is this. It is human nature to use whatever resources he/she has for betterment of personal life. We may say that unwise lending is a demerit of credit creation process, but it has nothing to do with phenomena of consumption itself. Same is the case in Pakistan. Even after experiencing unsecured bad debts in past, if again financial institutions in Pakistan are lending un-wise highly leveraged credit to urban dwellers, then again those financial institutions would have bad debts/ losses on their financial statements in future. Now, how those ordinary intellect people should be responsible for likely bank failure, instead of bank management who took un-wise decision or likely regulators/ auditors.
Similarly, phenomena of âSavingsâ in highly industrialized consumption based economies where credit is available to public is different than low income third world economies where credit in not easily available to general public. At nation's level, taxes are mandatory form of savings in economies of first group, while at individual level, investments in non-depreciable assets like houses are form of savings which becomes easy through availability of credit.
In pure economic terms, this availability of credit boost economic activity which over the period of time provide access to large number of goods and services, expand size of the economy, cause growth and development, increases wealth of a nation, and improves employment opportunities etc. Therefore, all over the world, central banks and governments, through financial and non-financial sectors, provide credit. Though this credit creation has benefits but at the same time it has some demerits also. Some of which we are experiencing these days. If it remains controlled, it is good and healthy for economy, otherwise not.
Comparing spending pattern of PUBLIC in one country (i.e. US public) with objectives of another GOVERNMENT (i.e. Chinese government) may not be a reasonable attempt. Either compare government to government or public to public. Even functioning of two economies is different. One is free market economy where government is reluctant to intervene, the other is controlled economy (by government). Even you say, China would take another 50 years to catch up with US and investing in infrastructure development. So, do you expect from US government to break already available infrastructure which it has already build up in last 50 years to follow Chinese example. Simply, they have already done it, so they are 50 years ahead. Then you further say, âWhat was all the income of US household spent on? Cars, LCD tvs, big homes? now there is no safety net. If all this income was spent on rather creating jobs and improving life of the people, all this mess wouldn't happen.â Come-on, what are you saying here, why are you mixing-up things, dear. I have already written enough about consumption spending on depreciable and non-depreciable products in above para. We will have to distinguish between priorities/ objectives of general public with priorities/ objectives of governments. Is it publicâs objective to spend money on job creation or governmentâs objective? Or do you wanna say US govt. should make such policies that US public would have to stop spending on consumables, save more and then divert resources for job creation? Make sure you are talking about free market economy. By the way what is wrong if public wanna spend their income on whatever good or service they need?
Then you say, âAll the wealth has evaporated, closely $11 trillion. The biggest investors in US markets were individual retirees. That money is gone. Govt is running a record deficit but surprisingly still spending. Where is all the money coming from? In-fact I am concerned about myself because if the taxes are raised beyond this point, it will the something like that saying "the straw that broke the camel's back." Dear, real wealth of a nation does not evaporate, because actually it is tangible assets and human capital which a nation has developed over a period of time (i.e. in long run). Recession is a time of restatement on financial statements, a fresh start, it may be $11 trillion, or could be $111 trillion. Real wealth of a nation would be destroyed due to depletion of natural resources, outflow of human capital (which is a case in Dubai), destruction of infrastructure (like in Afghanistan in last 30 years or after 2nd world war etc.) due to wars or floods etc. Deficits are financed through increased taxes and/ or credit creation by governments through Central Banks (and printing notes). As far as increased taxes is concerned, you should not be worry about, as it is not a policy measure in recession time, in-fact tax cuts are policy measure in recession. If US government is printing notes, rest of the countries and their public would pay for US recovery from recession and for betterment of American public, simply because almost all the countries are linked to US$ through international financial system and trade. You see, how interesting it is, conceptually speaking all humans on this earth including Muslims themselves are financing this war on terror, because we all are pegged with US$ somehow. Imagine, US govt. has printing machine (or credit creation means) of US$ and buys goods and services (for payments of all type of equipments and to NATO/Allied forces) from all over the world. What rest of the world gets in return, simply a piece of papers (i.e. US$ note), though it is generally acceptable as medium of exchange for further transactions. But the question is, what is the real cost to US govt. to do first transaction with rest of the world. Simply, cost of printing a piece of paper. You see how and why USA became super power since establishment of Bretton Woods System. This was one of the reasons of cold war to divert world resources toward one (i.e. USA) or the other country (i.e. USSR) by linking each currency with US$ or not. Oopsâ¦I am steered away. So, back to the topic.
So, donât worry about retireesâ money, it was in the books. It would remain there through another credit creation with bailout program.
Restoration of consumersâ confidence and identification of responsibility of un-wise lending are two main issues at this time. Governmentsâ efforts to boost economic activity would not bring fruits if consumersâ confidence is not restored, as consumers would be holding money back rather than start spending again till they perceive uncertainties about future.
To understand the whole scenario and to handle it, we have to see it from economists view point in little deep, rather than anchorsâ views.
I would talk about Dubai in another post, InshaAllah.
Dear Sumairalam; Donât worry about your think tanks. They already know all this stuff. Probably, my posts and assumptions would not have much value for them.
Regards
Please accept my apologies if I could not explain in required detail, the various concepts which are being mixed-up here, due to shortage of personal resources.
We have to distinguish between consumption (spending from public) and unwise credit creation and lending (to public and businesses). Due to consumption, public demand goods and services, due to this demand factories and business produce goods and generate services. So we have a consensus here that this phenomena is healthy for economy. Now, come to un-wise credit creation and lending. This is lenders job to ensure sound lending. I ask you a personal question here, would you give your money to someone from whom you donât expect return of loan. Off-course not. So why these lenders issued those loans un-wisely. Therefore, it is not Joe the plumberâs (who is an ordinary person from masses) to apply all concepts of economics and finance before consumption, lets say before purchasing a house. It is financial institutions job to ensure Joe the plumber is not overly leveraged before lending credit. If Joe the plumber is leveraged in ratio of 1 10 then whose fault is this. It is human nature to use whatever resources he/she has for betterment of personal life. We may say that unwise lending is a demerit of credit creation process, but it has nothing to do with phenomena of consumption itself. Same is the case in Pakistan. Even after experiencing unsecured bad debts in past, if again financial institutions in Pakistan are lending un-wise highly leveraged credit to urban dwellers, then again those financial institutions would have bad debts/ losses on their financial statements in future. Now, how those ordinary intellect people should be responsible for likely bank failure, instead of bank management who took un-wise decision or likely regulators/ auditors.
Similarly, phenomena of âSavingsâ in highly industrialized consumption based economies where credit is available to public is different than low income third world economies where credit in not easily available to general public. At nation's level, taxes are mandatory form of savings in economies of first group, while at individual level, investments in non-depreciable assets like houses are form of savings which becomes easy through availability of credit.
In pure economic terms, this availability of credit boost economic activity which over the period of time provide access to large number of goods and services, expand size of the economy, cause growth and development, increases wealth of a nation, and improves employment opportunities etc. Therefore, all over the world, central banks and governments, through financial and non-financial sectors, provide credit. Though this credit creation has benefits but at the same time it has some demerits also. Some of which we are experiencing these days. If it remains controlled, it is good and healthy for economy, otherwise not.
Comparing spending pattern of PUBLIC in one country (i.e. US public) with objectives of another GOVERNMENT (i.e. Chinese government) may not be a reasonable attempt. Either compare government to government or public to public. Even functioning of two economies is different. One is free market economy where government is reluctant to intervene, the other is controlled economy (by government). Even you say, China would take another 50 years to catch up with US and investing in infrastructure development. So, do you expect from US government to break already available infrastructure which it has already build up in last 50 years to follow Chinese example. Simply, they have already done it, so they are 50 years ahead. Then you further say, âWhat was all the income of US household spent on? Cars, LCD tvs, big homes? now there is no safety net. If all this income was spent on rather creating jobs and improving life of the people, all this mess wouldn't happen.â Come-on, what are you saying here, why are you mixing-up things, dear. I have already written enough about consumption spending on depreciable and non-depreciable products in above para. We will have to distinguish between priorities/ objectives of general public with priorities/ objectives of governments. Is it publicâs objective to spend money on job creation or governmentâs objective? Or do you wanna say US govt. should make such policies that US public would have to stop spending on consumables, save more and then divert resources for job creation? Make sure you are talking about free market economy. By the way what is wrong if public wanna spend their income on whatever good or service they need?
Then you say, âAll the wealth has evaporated, closely $11 trillion. The biggest investors in US markets were individual retirees. That money is gone. Govt is running a record deficit but surprisingly still spending. Where is all the money coming from? In-fact I am concerned about myself because if the taxes are raised beyond this point, it will the something like that saying "the straw that broke the camel's back." Dear, real wealth of a nation does not evaporate, because actually it is tangible assets and human capital which a nation has developed over a period of time (i.e. in long run). Recession is a time of restatement on financial statements, a fresh start, it may be $11 trillion, or could be $111 trillion. Real wealth of a nation would be destroyed due to depletion of natural resources, outflow of human capital (which is a case in Dubai), destruction of infrastructure (like in Afghanistan in last 30 years or after 2nd world war etc.) due to wars or floods etc. Deficits are financed through increased taxes and/ or credit creation by governments through Central Banks (and printing notes). As far as increased taxes is concerned, you should not be worry about, as it is not a policy measure in recession time, in-fact tax cuts are policy measure in recession. If US government is printing notes, rest of the countries and their public would pay for US recovery from recession and for betterment of American public, simply because almost all the countries are linked to US$ through international financial system and trade. You see, how interesting it is, conceptually speaking all humans on this earth including Muslims themselves are financing this war on terror, because we all are pegged with US$ somehow. Imagine, US govt. has printing machine (or credit creation means) of US$ and buys goods and services (for payments of all type of equipments and to NATO/Allied forces) from all over the world. What rest of the world gets in return, simply a piece of papers (i.e. US$ note), though it is generally acceptable as medium of exchange for further transactions. But the question is, what is the real cost to US govt. to do first transaction with rest of the world. Simply, cost of printing a piece of paper. You see how and why USA became super power since establishment of Bretton Woods System. This was one of the reasons of cold war to divert world resources toward one (i.e. USA) or the other country (i.e. USSR) by linking each currency with US$ or not. Oopsâ¦I am steered away. So, back to the topic.
So, donât worry about retireesâ money, it was in the books. It would remain there through another credit creation with bailout program.
Restoration of consumersâ confidence and identification of responsibility of un-wise lending are two main issues at this time. Governmentsâ efforts to boost economic activity would not bring fruits if consumersâ confidence is not restored, as consumers would be holding money back rather than start spending again till they perceive uncertainties about future.
To understand the whole scenario and to handle it, we have to see it from economists view point in little deep, rather than anchorsâ views.
I would talk about Dubai in another post, InshaAllah.
Dear Sumairalam; Donât worry about your think tanks. They already know all this stuff. Probably, my posts and assumptions would not have much value for them.
Regards