Dummy’s View of the Global Crisis

Given the string of problems created by hedge funds, derivatives, investment funds, insurance companies, pension funds, mortgage securities and hairy bank loans over these few years, it is becoming increasingly apparent that high flying investment managers and financial whiz kids are not as great as they seem in spite of their insistence in paying themselves billion dollar bonuses.

As if these were not enough, Gordon Brown the architect of the British economic miracle of the Blair years is now thinking of printing money – ₤150 billion worth. This sort of makes him roughly equivalent in competence to the whole Japanese Occupation Government in Malaya from 1942 – 1945.

It seems that there is a limit to how much money can grow on its own without real production catching up. The creation of paper wealth has reached its limits.

The western world is suffering from inflation – of stocks and shares, prices of luxury goods, spending other people’s money but valuing it as their own, hedge funds, derivatives, other financial instruments where valuation, rules and laws are used to inflate value rather than honest physical production, where money makes money but has no avenue for real physical productivity, where money or wealth exist only in the mind and in computerised banks accounts and legal deeds of ownership such as ownership in Enron’s assets.

Let us imagine that $50 trillion (say) may be good enough to push productivity and global physical production to its very limits – exhausting natural resources and emptying world’s oceans, deforesting world’s jungles, population explosion, pushing the limits of scientific research (e.g. $10 investment can only bring back $1 return over the long term). Yet the assets of the world now exceed $100 trillion (say) – obviously the extra $50 trillion is inflated – money that has no avenue for productive investment. It is paper money – existing only in computer accounts and in the minds of people. It is real if people believe it is real and willing to commit their lives to attaining some of it. It has no value if people realize that it is just trapped hot air waiting to burst like a balloon.

This inflated value is even incorporated into the economy of western nations which price themselves way above the economies of “underdeveloped nations”. A sweat shop worker in an underdeveloped country does not earn enough to feed himself let alone his family, yet if he manages to get himself across the border into a rich country, his comparative wages automatically increase by 10 times or more – but he is the same person with the same skills. What has changed is that the rich country has a society and infrastructure (more efficient no doubt) that costs 10 times (say) more to maintain, but not necessarily 10 times more productive or efficient. The difference is inflated. The difference is rich countries spending the money of poor countries and valuing such spending as their own and hence all their assets as well as labour take on inflated value.

Even quality of luxury goods contains a fair bit of inflated value. In terms of price it is at least 10 times more than a reasonably good quality equivalent. If comparing 2 similar goods one which costs 10 times more than the other, but 2 of the cheaper one can do the job and still outlast the expensive one, the expensive one is over-inflated in value. Its value exists only in the stuck up mind of rich patrons as status symbols.

This however is not the same for military equipment which is a different class altogether. Because military equipment can destroy each other, a piece of military hardware such as a hi-tech warplane that has an edge over its competitors can destroy its competitors over and over again without being in serious danger. When used in this destructive capacity, it is infinitely worth more than quite a few more of its competitors. This is why the US concentrates so heavily on military superiority. Whereas there is usually a choice about whether one wants to buy a commercial product or not, there is not much of a choice in war when one is driving an obsolete warplane and faced with an enemy that is vastly more modern.

But to a large extent, people can offset superiority in military hardware as can be seen many times in history. If people are dead set against an oppressive invading power and willing to die for their cause, even if 10 patriots are willing to die to eliminate 1 oppressor, the oppressed people will win in the end through natural intelligence, making full use of conditions on the ground to offset hardware superiority and painful sacrifices.

This does not mean that stupid generals can use patriotic people wastefully in pitched conventional battles where 100 or more of the patriotic soldiers die against 1 of the oppressors killed or use them in human waves to gain a few inches of useless territory.

So it is that countries such a China can become rich – by skillfully making use of the desperate investments that have no where to go except as paper wealth. But even China, Vietnam, Taiwan, South Korea, Hungary, Poland, etc (through turning money into production) cannot absorb such great amounts of paper wealth which are inherent in stock markets, hedge funds, derivatives, spending power of other people’s money and inflated assets of the western countries. So it is that the balloon must burst.

To correct any misunderstanding, the inflation of value of assets is not the same as monetary inflation. Such inflation (of value of assets) is locked into the assets as well as people’s minds and cannot be turned into cash on a big scale without very serious problems developing.

What of the future? If the US can continue to convince people that its development and its wealth is real, then it is possible that the crisis can be overcome …. until the next one, and the next… and so on. However, it is still locked into the mode of money making money without an avenue for real investment in real productive capacity. Its industries (except for military industries) cannot compete against the industrial productivity of other countries (forget the statistics on productivity – these are just as inflated as its economy). It labour cannot compete against the productive labour of other countries. It is a country that has only learnt how to spend money well.

As an example – it is difficult to imagine that the housing mortgages of the US can cause such a serious global crisis as the investment analysts want us to believe. Don’t tell me all the new houses mortgaged over the last few years in the US is worth a few trillions of dollars and it is not as if these houses have all been destroyed by a hurricane bigger than Katrina and is now completely valueless. The only way for a global crisis to occur is for the mortgages to be securitized many times over their original value. This is called inflation of value and the inflation is so huge that it has burst the bubble.  This is the only way, banks and mortgage companies all over the world can get hit.

Yet there is something that looks like a cover-up. Nobody wants to talk about such a serious over-inflation of value that looks like a crime to me. People still consider derivatives valid financial instruments and it was only abuse by a few people that was to blame.

So as I see it, the economic structure of the world as it is now is not sustainable. We would do well to concentrate on economic activities that can assure us of our basic survival and to struggle against war – not chase after the accounting wealth of the US.

How does that affect us? It may be that the vast majority of Malaysians may not see a single sen of the “stimulus packages” and that most of the money will probably go to UMNO cronies. We should hope in humble humility that even among the cronies, the ones who have domestically oriented businesses benefit more – that agriculture and local SMI’s catering to the domestic economy get the bulk of the “stimulus” instead of crony comprador businesses that suck benefits from local natural and human resources for the benefit of foreign partners as well as their own minority benefits only.

Here, Dari Jelebu’s idea of our economy growing enough food to ward off the global economic crisis is starting to make a lot of sense.

– By batsman