expecting solution to the european crisis?

dear venkat, solving the european crisis is like treating a chronic drinker.

if u abruptly take him off the alcohol (easy money supply, poor fiscal discipline, weak economy)
he is likely to show symptoms of alcohol withdrawal
which can be silent or life-threatening!

some of these symptoms are

increased pulse rate
increased blood pressure
increased temperature
restlessness
disturbed sleep
anxiety
nausea and vomiting
headache
irritability
tremor
hallucinations
seizures
and coma.

many of these symptoms are already there in the european union.

withdrawal symptoms last longer in older persons (economies)

withdrawal can complicate other illnesses (political, social, geogrpahical)

--

patients (like india) who are infrequent or moderate drinkers are less likely to suffer withdrawal symptoms.

--

gradually reducing alcohol consumption results in lesser withdrawal effects.

and such a course needs time, will power and luck!

--

if the world is a family
some countries in the european union
are not the only ones needing this daredevil de-addiction rescue.

there is a chronic patient on the other side of the atlantic.

as a member of such a family of chronic alcoholics
india has to bear with sleepless nights!

is this the start of the end of the US dominance?

“There is no means
of avoiding
the final collapse
of a boom
brought about
by credit expansion.

The alternative is only
whether the crisis should come sooner
as a result of
a voluntary abandonment
of further credit expansion,

or later
as a final total catastrophe
of the currency involved.”

Ludwig Von Mises,
Human Action,
Yale University Press, 1949






(thanks to jatin for sharing this and much more with me)

fed-up with inflation! (fedup II)

(this is sequel to "fedup but happy!")


one month had passed...

alpha, beta, gamma and delta had settled in their routine

on their 'fedup' island!

more importantly

they were

finally

happy!

one evening

they were sitting around bonfire

and partying!!!

alpha looked at the hut and said

"i am proud of my creation!"

--

beta looked at the bonfire he had created

took a bite of the kebabs he had cooked

and poudly said

"what food, what bonfire! cheers!!!"

--

gamma picked up his rifle he had used to provide security to his teammates from wildlife on the island

kissed it

and said

"no fear

till i am near!"

--

delta

silently listened to the pride-anthems of his buddies

and wanted to present his also...

but he realised that he had nothing to present proudly!

--

so he silently stood up

slipped into the hut

printed 4 "thankyou" (currency notes)

came out

and handed one to each

while keeping one in his wallet!

--

"hip, hip, hurrey!!!"

everyone got happier on receiving the grand "gift"

"we are proud of the finance minister of this island! our dear delta!"

everyone said in a chorus!

--

the grand party ended on a high note!

--

on monday

alpha gave his extra "thankyou" note to beta for extra fruits!

gamma saw alpha enjoying extra fruit and ordered for the same to beta

"here's my thankyou!" he said to beta, extending his note!

just then delta entered the hut

and saw alpha and gamma enjoying their "purchased extra"!

he too took out his extra buck and ordered for "more" fruit.

"its finished!" replied beta, making delta sad!

"have a heart, dear delta. none is left for me too! sold it all to alpha and gamma."

delta consoled himself.

--

but that evening

while alone

beta realised

that his supply for fruit was limited

but money supply in the camp had increased by 33% (4 notes to the 12 existing!)

he knew he couldn't produce more fruits overnight

he also knew more "thankyou's" were chasing his existing supply.

he realised that he couldn't disappoint anyone as well.

he had to do something!

--

by morning

he came out with a "unique" solution to the situation

he increased the price of the fruit platter

(rather every food item)

by 33%!

--

tuesday's newspaper

(printed by delta from his colour printer)

announced

"INFLATION REACHES FED-UP! SOARS BY 33%"

--

by afternoon

delta, the finance minister

decreased his cash-reserve ratio

snatched back extra 4 bucks from everyone (including himself)

tore them apart

to reduce money-supply

and tame inflation.

fed-up but happy!

dejected by the hit they got from the stock market

four friends

α(alpha), ß(beta), γ(gamma) and δ (delta)

left everything behind

and settled on a far off island

undiscovered and untouched by humans so far!

they named the island 'fedup'

why this name?

well they were obviously fed-up with the abnormal "normal" life,

but they wanted never ever to forget the "fed"

the federal bank which made the policies

that made them come to this island!

--

on reaching 'fedup'

they decided to make their own civilisation.

first of all,

they divided work among themselves.

α was given the task of making and maintaing the hut

ß took the responsibility for arranging for the fire, food and water

γ agreed to provide security cover from the wildlife, and

δ accepted the role of keeping accounts and managing the money supply from the colour printer they had brought along.

--

δ printed 12 currency notes

(they called it "thankyou")

δ distributed 3 thankyous to everyone included himself.

everyone gave 1 thankyou to the other 3 for their respective services!

this way

everyone provided one service

everyone consumed every service

everyone spent all three thankyous in his pocket

and was still left with 3 thankyous!!!

this cycle kept repeating beautifully

perfect money supply!

perfect economy!

everyone contributing

everyone consuming

no tension!

all inhabitants of "fedup" became happy!

--

till one day............





(continued in part 2)

remembering russia's pain

before disintegration

of the mighty USSR

in 1991

russians had huge money in circulation

all of which

couldn't be spent in russia itself

simply because the money supply was too huge

for the russian markets

to absorb!

so, russians spent it

in buying from other USSR states!

--

but when USSR disintegrated

other fellow states

became independent countries

with separate currencies!

rouble was no longer

worth anything there!

--

huge money supply resulted into

huge inflation!

products and services became very costly.

simultaneous external liberalisation

(as a precondition to getting huge dollar loans

for buying raw materials and essential commodities)

ensured that costly russian goods

got crushed under cheap imports

small corporates went bust

bigger ones barely clung on.

--

rouble suddenly became very very weak in front of dollar

crushing for inevitable imports

superb for nearly impossible exports

--

with the collapse of businesses

ability to pay taxes went down.

without taxes, government couldn't pay salaries

(most russians were in government jobs)

government couldn't undertake infrastructure development

or social welfare.

--

all this while

government couldn't opt for

deficit financing

as the money supply was already very very high

deficit financing would have driven it to suicidal levels!

so, those who had roubles without salaries

could still manage for some time

while others were on street.

--

all that the government could do was

1) either wait till even the rich russians were penniless

and then release more roubles, or

2) wait till inflation had hit peak (and trade had touch its bottom)

hopefully without serious casualties

and then gradually release fresh roubles.

none of these were good options

despite being nothing more than temporary hopes!

--

best options available were

- default on debt repayment saving precious foreign currency

- stop imports except most crucial

- export whatever was possible

- let russian industry stand up on its feet in the absence of imports

- reduce taxes, tax the rich

- not to stop paying salaries, but reduce them

- reduce ineffciency

- reduce payrolls, give others indirect employment

- let corporations and industries make profit

- let equilibrium come over a period of time

------

almost overnight

the communist

closed-economy

superpower

was reduced to a developing

capitalist

open-economy

struggling to remain afloat!

--

this was to be

one of the most painful economic transitions

in the world history

with no short-cut solution!

--

it was 1991 then

today is 2011

...20 years have past

the giant

has silently recovered

from the nightmare!

--

russia

has been forgotten

on the world economic stage

and it is a big mistake!

--

pray nothing ever happens to dollar

otherwise the results will be

hundred times more painful

for 3/4th of the world!

life inside a pyramid

a person's ability to live a good life

depends upon

his or her ability to spend money

which in-turn depends on

his or her ability to earn money

which further depends on

his or her ability to sell something (product or service)

which depends on

his or her entrepreneurial abilities.

--

everyone doesn't have those.

majority want

a plain good job.

--

allow one entrepreneur to be a billionaire

10 millionaires will be born

supported by

100 high networth individuals

supported by

1000 middle income individuals

serviced by

10000 salaried group

besides indirectly

giving passing opportunities

to 100000!

--

without entrepreneurs economies collapse!

and for entrepreneurship to be lucrative

we need entrepreneur-friendly business environment.

--

but one thing is clear

today's economies are fundamentally

pyramid shaped!

divided, inevitably, into vertical classes.

pyramid economies

result into

pyramid social set-ups!

--

also,

those not trained or able

to add any significant value to this pyramid

are likely to be left out

especially in the absence of a social security network!