Hello Friend,

If this is your first visit to SoSuave, I would advise you to START HERE.

It will be the most efficient use of your time.

And you will learn everything you need to know to become a huge success with women.

Thank you for visiting and have a great day!

The world economy

Paradox

Master Don Juan
Joined
Mar 24, 2001
Messages
2,588
Reaction score
25
Location
USA
Can someone explain to me what exactly happened to the world economy?

How did this meltdown happen?

What are the factors involved?

Where & when did it start?

Is this world economic downturn normal?

Is it part of the normal economic cycle of up & down?

Please be as detailed as possible.
 

Rovalier

Don Juan
Joined
Nov 28, 2005
Messages
150
Reaction score
2
Crash Course
http://www.informedtrades.com/trades.php?page=course3

Good video links that elaborates a lot on this. Expect a lot of global governments to vitiate the problem (despite their "intents" is mitigate it). Boom and busts happens and this bust we are in.... is going to be interesting.

Discussing realistic solutions (for the average person) might be productive as well. This is one area I am trying to study/read up on. The word on the street is Gold/Silver and Gold Mining Stocks (i.e. GoldCorp) are areas to look into.

Nice Q/A from Mish Shedlock:

Let's Play A Non-Wonkish Game Of Q&A

Q: Do we need a regulator for Fannie Mae?
A: Of course not. Fannie Mae should never have existed in the first place. Fannie Mae should be dissolved.

Q: Do we need regulation of the rating agencies?
A: Of course not. It was government sponsorship of the ratings agencies (not lack of regulation), that created the ratings game scandal. (see Time To Break Up The Credit Rating Cartel for a complete discussion of this idea).

Q: Was regulation that removed leverage restrictions on the brokerages the problem?
A: Of course not. Citigroup managed massive leverage in spite of regulation. Citigroup did it by hiding assets off the books in SIVs. Had regulation explicitly not allowed Bear Stearns and Lehman to leverage up, they would have done so just as Citigroup did.

Q: Doesn't the above argue for tighter regulation?
A: Of course not. The above proves that corporations will work hard to get around such rules. The solution is to not allow fractional reserve lending. Without fractional reserve lending, such leverage would be impossible.

Q: Wouldn't abolishing fractional reserve lending go against Libertarian ideals?
A: No. Fractional reserve lending constitutes fraud. Government should preserve and honor property rights, not perpetuate fraud. There are no inherent rights to perpetrate fraud.

Q: If fractional reserve lending is fraud, who is the victim?
A: Inflation (increase in money supply and credit) benefits those with first access to money (the government, banks, and the wealthy). Inflation is a tax on the middle class and especially the poor who are last in line to money. The housing bubble and falling lending standards are proof enough.

Q: How is fractional reserve lending fraud?
A: Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar. Rothbard condemned fractional reserve banking as a violation of contract.

"In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts — warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy...."​

From an Austrian economic point of view, as Rothbard argues above, Krugman and Mankiw are sponsoring policies that constitute fraud. Sadly, sponsorship of fraud and other socialist policies is rampant at universities.

It is stunningly ridiculous to expect regulation to solve major problems when it is regulation that caused every major problem we have!
 

SmoothTalker

Master Don Juan
Joined
Jul 22, 2003
Messages
1,022
Reaction score
12
Location
Canada
I am a bit short on time so I can't be as detailed now as you ask, but here's my take.


Can someone explain to me what exactly happened to the world economy?
What's happening is a severe recession. These happen quite often but this one is much worse than usual because a lot of things came together at once.

How did this meltdown happen?
This started long ago. Some people say decades, I think it probably only goes back to around 2000. If you remember the late 90's were a very prosperous time, mostly due to the rapid spread and advancement of information technology and cheap resources (remember oil was dirt cheap at this time).

However, as always happens with bubbles, people got carried away, and eventually the dot com bubble burst. This was bad enough on its own, but on top of that, lame duck Bush came into power. On top of that, 9/11 dealt a serious blow to the already weak economy.

As a desperate measure to stimulate the economy, then Fed Chairman Greenspan took interest rates to a very low level, and kept them there for much longer than usual.

The low interest rates, combined with a culture of instant gratification, combined with all the attention of using real estate as an investment (Remember how much attention STR8UP's thread got?) combined to create a lot of demand and kick start the economy at least with the illusion of growth. Unfortunately all that was really happening was people were living on money they didn't have, which boosts the economy with consumer spending, but obviously isn't sustainable long term. The RE bubble, caused by the factors above and also shady lending practices, helped fuel this as people began using their homes as ATMs, taking out home equity for use on consumer spending (****ING STUPID).

Because the economy wasn't actually doing that great organically, and as interest rates started coming back up, many people couldn't afford their insane mortgages and started defaulting, but while house prices were still rising, this wasn't really a problem. Banks would foreclose on the home, then resell it for a profit since it has gone up 20% from the time the person took the mortgage until they lost their house.

Then, one day the housing bubble popped, and the above no longer worked. As prices started dropping quickly, even people that could technically afford to pay the mortgage didn't want to - why pay off a loan that is more than the value of your house? This started really hurting the banks, especially since some of them had bundled mortgages together and sold them off as investment products called asset backed securities. Then banks start collapsing, people freak out, etc. After that its really just your typical panic, people spend less money because they're scared about the future, the economy tanks further because people aren't spending, and so on.

The problem is that this is worse than many previous recessions because before people and governments had savings, or at least weren't heavily in debt and could be coaxed into spending more to restore the economy. Now people and the US government were already heavily overextended going into the downturn, so there's questions about the ability to recover quickly. For example the FED has already lowered interest rates to pretty much zero. If that's not enough, they can't use that tool anymore anyway, its used up.

What are the factors involved?
To summarize, bad physical policy, way way way too much debt, and over speculation.

Where & when did it start?
Started in the USA, when is a harder question. The core of the issue started at least 8 years ago, the bubble started bursting summer 2007, and the **** really hit the fan in September this year.

Is this world economic downturn normal?
These things do happen, but this one is worse than usual because the whole world is suffering and a lot of factors came together for the perfect storm.

That was more than I was planning to write but still really just the tip of the iceberg. Do some research to find out more, too much to cover in posts.
 

Paradox

Master Don Juan
Joined
Mar 24, 2001
Messages
2,588
Reaction score
25
Location
USA
SmoothTalker said:
I am a bit short on time so I can't be as detailed now as you ask, but here's my take.



What's happening is a severe recession....
I appreciate your take on this. The "perfect storm" analogy made it easier for me to understand.

I'm well versed in Foreign and Domestic policy and I understand Domestic economic issues.

I just can't get my head around how severe this world recession and how it happened without alarms going off all over the world. I understand your "perfect storm" analogy.

So are we saying that the credit bubble burst or that the money ran out or there were too many loans that people defaulted on?

Also, I still don't get how this has so severely impacted the rest of the world. Sorry but I don't see the links with the rest of the world other than products & services.
 

speakeasy

Master Don Juan
Joined
Jun 4, 2006
Messages
2,787
Reaction score
76
Paradox said:
Also, I still don't get how this has so severely impacted the rest of the world. Sorry but I don't see the links with the rest of the world other than products & services.
Because many of these asset backed securities were sold to foreign countries so they were holding all of this bad debt as well. Plus you have a sinking dollar making their goods more expensive here which further countributes, you have recessions all across Europe. Toyota just reported it's first loss, even China's GDP has dramatically slowed. The world is so financially inter-connected now.
 

CyranoDeBergerac

Master Don Juan
Joined
Jul 8, 2002
Messages
1,148
Reaction score
5
Location
Camp Pendleton, Ca
Let's not undervalue the interconnectedness of globalization. Let's also not over look the widespead dollarization that occompanied it as the U.S. was the most significantly active country in their free trade policy, running up trade defecits with nearly every country. If we weren't trading with that country, we were issuing direct financial contributions to already struggling nations.

With so many dollars held in sovereign reserves, the weakness in the dollar would naturally affect other countries. This weakness was caused by over-speculation, yes, but also due to the 'ownership society', easy money attitudes, bad fiscal and monetary policy, the general idea that low interests rates were good for the economy, and ridiculously bad accounting practices on the parts of all involved.

I called this 6 years ago when I began to notice how ridiculously over-valued the housing market was.
 

taiyuu_otoko

Master Don Juan
Joined
Jan 10, 2008
Messages
5,242
Reaction score
3,824
Location
象外
Paradox said:
Also, I still don't get how this has so severely impacted the rest of the world. Sorry but I don't see the links with the rest of the world other than products & services.
As soon as the words "global economic crisis" become mainstream in everybody's brain (regardless that most people don't have a clue what they mean) corporations round the world have an excuse to do what you normally do when you are a company with badly managed finances:

lay people off
write off bad debt
cut services
stop giving bonuses to employees
freeze hiring
cut benefits

All because of the "global economic crisis," whatever that means.

Just like governments use natural and man made disasters to increase their power, corporations (even countries) use economic disasters to shrug off their bad fiscal management.

Just like researchers use "Global Warming effect on X" to get research funds,
corporations use "global economic crisis" to get bailout funds to cover there poor business practices.

Not saying that there aren't real problems, but sure as **** they are being exploited by all that can.

a LOT (Not all or even a majority) of it is psychological. and smart people/companies/governments exploit the psychological weakness of others. Ask PT Barnum.
 

STR8UP

Master Don Juan
Joined
Aug 10, 2002
Messages
6,937
Reaction score
125
SmoothTalker said:
The low interest rates, combined with a culture of instant gratification, combined with all the attention of using real estate as an investment (Remember how much attention STR8UP's thread got?) combined to create a lot of demand and kick start the economy at least with the illusion of growth.
As much as I feel it a fruitless endeavor to justify my words to an uninformed population of CNBC zombies....allow me to clarify this.

Real estate, as an INCOME PRODUCING ASSET, IS a solid investment.

You lump R/E investors with R/E speculators together, which is WRONG and UNFAIR.

There is no "illusion of growth" with a property that has solid fundamentals that SUPPORTS itself via rental income.

You want a catch-all blame, but it isn't that simple.

Keep in mind that you are witnessing an UNPRECEDENTED economy. A perfect storm. A combination of negative factors that has lead to an inevitable downturn. Even the 20 yr old guys reading this will likely NOT experience anything of this magnitude again for the rest of their lives.

Most of the rst of your post is solid info, but you are pointing the blame at INVESTORS when you should be blaming SPECULATORS and the banks who allowed them to do what they did. Your information is incomplete.
 

STR8UP

Master Don Juan
Joined
Aug 10, 2002
Messages
6,937
Reaction score
125
taiyuu_otoko said:
As soon as the words "global economic crisis" become mainstream in everybody's brain (regardless that most people don't have a clue what they mean) corporations round the world have an excuse to do what you normally do when you are a company with badly managed finances:

lay people off
write off bad debt
cut services
stop giving bonuses to employees
freeze hiring
cut benefits
Typical dumbass, kneejerk response to a REAL problem.

I own a retail business. We are down about 60-65% in sales. What do you do when that happens and 95% of it is beyond your control? You cut sh!t until you can at least SURVIVE a toxic economic climate.

Yea, businesses are out there making a KILLING making excuses to cut costs that affect the "little" people.

Yea, it's all psychological.

Idiot.
 

SmoothTalker

Master Don Juan
Joined
Jul 22, 2003
Messages
1,022
Reaction score
12
Location
Canada
Fair enough STR8UP, I should have been more specific. Of course a profitable rental property is a good business, and that's actually creating value and is sustainable.

Unfortunately because of the skyrocketing prices, cheap money, and things like "Rich dad poor dad" and all those house flipping shows, everybody suddenly wanted to 'invest' in real estate - even those that had no clue what they were doing, and even after the excess demand by these people removed pretty much all profitable opportunities for actual investment/ rental income.
 

Desdinova

Master Don Juan
Joined
Nov 15, 2004
Messages
11,660
Reaction score
4,712
Cyrano, nice to see you posting again!

My question is, how does the US auto industry play into all this? Or is it just generally known that all US automobiles are 5hit? (I personally hate my Ford and want my Toyota back.)
 

taiyuu_otoko

Master Don Juan
Joined
Jan 10, 2008
Messages
5,242
Reaction score
3,824
Location
象外
STR8UP said:
Typical dumbass, kneejerk response to a REAL problem.

I own a retail business. We are down about 60-65% in sales. What do you do when that happens and 95% of it is beyond your control? You cut sh!t until you can at least SURVIVE a toxic economic climate.

Yea, businesses are out there making a KILLING making excuses to cut costs that affect the "little" people.

Yea, it's all psychological.

Idiot.
Wow, my comments weren't even directed at anybody. Would you like to get into an online debate about economics? Perhaps you could teach me a thing or two.
 

Paradox

Master Don Juan
Joined
Mar 24, 2001
Messages
2,588
Reaction score
25
Location
USA
taiyuu_otoko said:
Wow, my comments weren't even directed at anybody. Would you like to get into an online debate about economics? Perhaps you could teach me a thing or two.
Wow yes I agree. Name calling is not necessary. It also shows the posters maturity level whomever they may be.

I'm sure we have alot to learn from each other. I am learning from this thread.

Many of us are college grads or in school. Some of us have degrees in fields other than economics. While I understand basic domestic and world economics I still need help here and there.
 

speakeasy

Master Don Juan
Joined
Jun 4, 2006
Messages
2,787
Reaction score
76
SmoothTalker said:
Fair enough STR8UP, I should have been more specific. Of course a profitable rental property is a good business, and that's actually creating value and is sustainable.

Unfortunately because of the skyrocketing prices, cheap money, and things like "Rich dad poor dad" and all those house flipping shows, everybody suddenly wanted to 'invest' in real estate - even those that had no clue what they were doing, and even after the excess demand by these people removed pretty much all profitable opportunities for actual investment/ rental income.
I saw the bubble coming from a mile away. I was trying to convince friends not to buy a house a few years ago because I knew this ish was going to come crashing hard. The fundamentals were glaringly obvious. I also correctly called the recent oil/commodities bubble well before we hit the peak, although the oil market has fallen well beyond what I thought it would. Nobody last spring would've thought by the new year, we could be facing $30/barrel oil, everyone was talking $200/barrel by now. Just goes to show, you just don't know.
 

SmoothTalker

Master Don Juan
Joined
Jul 22, 2003
Messages
1,022
Reaction score
12
Location
Canada
Desdinova, the issue with the US auto makers is they were losing money even during the good times due to high costs, bad reputation, bad management, difficult unions, and 50 other reasons.

When this crisis hit, car sales absolutely collapsed (50% for some companies), because while people do need cars (or at least think they do), they are finally realizing that a brand new car every 2 years is NOT needed, or that the fancy expensive new car you can only afford by leasing is NOT needed. If you aren't even sure whether you'll be working next month, you will probably decide driving your current car a while longer is a better idea than going 20k into debt for a new one.

Further, among the people that still want to buy cars, credit is now much harder to get in some situations, so some of those sales don't happen due to lack of credit.

This is hitting all the car makers really hard (I believe Toyota is either about to or already has posted their first ever operating loss, and they're shutting down the factory in my town for several weeks which is the first time that's ever happened here).

But most of the foreign companies were profitable before the crisis, and have cash reserves and good credit, and should be able to pull through, even if the short term is painful.

The "Big 3" have been losing money for a long time now, and GM's bonds are junk status I believe. They are burning through any cash they had at alarming rates and most people/banks think they're too risky to lend money to. They have nothing to fall back on except bailouts anymore, hence the problem.
 

Bible_Belt

Master Don Juan
Joined
Jul 27, 2005
Messages
17,021
Reaction score
5,605
Age
48
Location
midwestern cow field 40
I think the automakers went into the sh!tter for a number of reasons, mostly their reliance on financing as a primary income source. All buyers care about is the monthly payment, so they just kept making more and more expensive vehicles. Eventually, when the typical over-extended American family's finances started to crash, they began to cut out buying stupidly expensive new cars that they didn't need anyway.

Full-size trucks, for example, used to cost under $10,000 when I was a kid. They were simple and meant for doing work. Now bankrupt Chrysler has ads on TV for a $40,000 truck with luxury features like wi-fi. Who needs wifi in a truck? Wouldn't you rather have four trucks instead of one luxury truck? You would if the truck was bought to do work instead of be a suburban commuter vehicle. It's the same with SUV 4x4s. How many soccer moms really need those? All of these poor choices were made possible by financing and increased leverage. Then all of that became normal. Now, suddenly, people are starting to realize that they don't need to go $30-$40k in debt every few years just to have something to drive. I think that is not a crisis, but rather is common sense creeping back in.

That's why the bailout is pointless. There's no reason for taxpayers to subsidize the making of stupidly expensive products that no one can really afford. Bad businesses should fail, just like weak and sick animals in the wild should die. It's not a happy thing, but this is just how capitalism works - or at least should work without government interference.
 

speakeasy

Master Don Juan
Joined
Jun 4, 2006
Messages
2,787
Reaction score
76
My dad being a retired GM workers is scared sh*tless that GM is going to fold and his pension and healthcare benefits threatened. If somehow he no longer had a pension, I have no idea what my family would do. He has tried to find jobs, even sh*tty retail jobs and has not had any luck finding anything. If his pension goes up in smoke, my parents are royally screwed, so he's obviously all for bailout GM at any cost it takes.

If GM is restructured in a meaningful way as a condition for assistance, then maybe there's hope. But I am very disturbed by our government's willingness to print money out of thin air to hand out to irresponsible/dumb businesses that claim they are "too big to fail". We are all going to get taxed through inflation.
 

Levex

Master Don Juan
Joined
Oct 31, 2002
Messages
1,088
Reaction score
8
Location
LA
Basically:

House prices continued to go up to ridiculously high numbers. The same house that could have been bought for 60,000 10 years ago, was going for 200+.

Anyone with any common sense had to foresee that this can't go on forever, and the whole housing market will eventually crash.
Mortgage companies were loan-happy and seeing dollar signs, giving loans to people buying $150,000 houses for $300,000, with questionable credit history and income.

Basically they lent out so much money to people who can't afford to pay it back, they got stuck holding their c0ck with no cashflow coming in.
And now good ol' uncle sam is giving these companies our tax dollars to "save them". Where is that fvcker when i fall behind on my credit cards or can't afford my car payments anymore? Big corporations got "bailed out" after years and years of mismanagement, wrong decisions, and insane CEO bonuses, and we're stuck with the bill.

The rest of the world is so dependent on US economy and US flow of credit, it trickled down to almost every industrialized nation.
 
Top