Rays of hope
While political issues grab our attention, but Kam U Tee says the economic turmoil offers an opportunity to develop a multi-pronged energy strategy, which would include renewable energy.
Over the past decade, we have experienced increasing financial turbulence. Currently, the sub-prime collapse seems to have sucked in sound housing loans, insurance companies and finally banks, leading to a full blown world financial crisis.
It appears that a credit bubble had been growing for the past 25 years. In the late 80s, Ravi Batra, an economist, wrote a book, “The Great Depression of 1990”, predicting that the world was heading toward economic disaster. For over 15 years, this seemed an over-pessimistic evaluation of the situation. There are many and complex reasons for bubbles, but Batra’s simple answer was that bubbles were fundamentally caused by growing inequalities in incomes in the population. Those well endowed with savings would want quick returns and were drawn to risky investments. He evoked the 60-year Kondratief cycle, during which growing contradictions would reach a limit and boil over.
My view is that the 60-year cycle was disrupted by a new factor not envisaged by him; namely the recent escalating price of oil, in particular over the last decade, from US$20 per barrel in 1995 to over US$140 just before the present collapse.
All goods and services can be eventually equated to their energy inputs, so that if energy costs go up, so too would goods and services. This results in a virtual reduction of purchasing power that contracts the economy. It would seem, from this distance, the US Federal Reserve’s response each time was to increase liquidity by lowering interest rates and/or taxes; in the process, we appear to have been lurching from one bubble to another larger bubble.
Concurrently, oil-exporting countries accumulate huge surpluses, and after spending on luxury goods, are driven by the declining value of money to re-invest their accumulated funds in US financial institutions, who then must find commensurate returns for their clients. In a saturated market, the sub-prime crisis was the result of people who could ill afford to buy quality homes, being enticed to make purchases on expectation that increasing prosperity or increasing inflation would enable them to sell their purchases after expiry of the initial grace period of low interest charges.
Those who made the loans understood the risks, and packaged them into Collateralized Debt Obligations (CDO’s) and these were given AAA ratings by rating agencies and sold to unsuspecting investors all over the global landscape, thus completing the chicanery of using other peoples money to gamble on expected inflationary increase of prices, meantime earning fat bonuses for themselves.
