Sunday, October 31, 2010

False Prophets and False Profits

In the year 2006 one of the most celebrated economists of our times and my own once demigod, Milton Friedman said that Ben Bernanke is a very good choice for the chair of the Fed, sad that he didn't live through the period to watch the Melodrama turn to Horror, but another one of my ex- Heroes probably would "Paul Krugman".
Because what's happening is nothing short of horror and really seems unfathomable to understand as to how such smart people can make such stupid mistakes or were they really smart enough to start with. Is it really possible that I have been adulating these false prophets over the years and their prophecies are now leading this world to realise that for all this while what they have earned are really false profits. The upcoming QE-2 is not just socialism of rich, it takes the world one step closer to absolute economic disaster. Why can't they realise that if someone lives over and above his means for a prolonged period of time an economic impoverishment for some period is inevitable, it is certainly better than a complete armageddon that one is heading for.
Around 50% of US debt is owned by foreigners, by doing what fed plans has already led to another round of asset price inflation specially in the emerging economies both stock and real estate, as well as commodities have shot up. Probably after a pause this would continue to fuel further coupled with a currency devaluation of the developed world. With lots more supply of US paper coming into the market, the 30 year bull market in US treasuries is as good as over and it would not be long before countries like China, Japan and India realise that they are holding a ticking bomb in their hands and start dumping it.
China's currency is pegged to the dollar, it simply means that it would end up importing inflation either in the form of higher commodity prices or if it finally chooses to open it's currency - in form of huge capital inflows, either ways coupled with slow growth in western world it would lead to significant decline in export revenues, a severe slowdown or stagflation, which would force it to dump the US paper in the market to bring about some semblance to tame the inflation monster.
Japan already is facing the critical inflexion point wherein it's finding it hard to service it's existing debt and how can it be expected to buy the US debt. Infact even it may be compelled into forced liquidation triggered probably by China and a realisation that the US paper and currency are worth little.
The reality is that the strength of any currency is derived from the fact that a country has a sound monetary policy wherein it's Central Bank can be trusted to preserve it's value as well as the nation exhibits a constant increase in its productivity. This is what imparted the status of a reserve currency to the US Dollar. Sadly the party is over and the privileges of producing nothing and spending it all is fast going away. For last 30 year enormous wealth and Profits has been created across the World following the prophecies of some people propelled to the level of prophets, now with them falling from grace it's time for the wealth to go where the prophets have gone.................
Well it's not all gloom, this is an inevitable cycle that the world follows, following this cycle in the 1930s lead to major upheaval and Fascism was destroyed, another cycle in 1970s led to the collapse the Socialism and now this one, but the odd thing about this cycle is that the Nation that prophesies of Capitalism is going the Socialist way to save itself, unfortunately it's really engaging itself into crony capitalism or socialism for the rich..... my point is even if US economy fails, it would not be the failure of Capitalism as all it would mean is that extreme Capitalism is not good in a similar way as was true for extreme Socialism.

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