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Thread: Bad Economy: A self-fulfilling prophacy?

  1. #11
    movin melodies Array kiddykat's Avatar
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    Jul 2008
    4, 7


    With gas prices rising, food overpriced, people getting laid off as a result, schools shutting down, teachers, bus drivers, those who do watch over our young precious ones, losing their jobs from left to right, among others affected in different sectors, the trickle down effect causes a huge lifestyle change people need to adapt to- no income in their pockets, food to eat. I think it's more than just a self-fulfilling prophecy- not to say that fear/paranoia doesn't help. It's just that- that is the reality for some people.

    In my family, out of 3 out of 5, who have families of 3+, all of their fathers lost jobs, and are struggling each and every day to find work. They somehow temporarily do, but they are barely scraping away.

    Sociologically- there is a wide gap between the richest rich/poorest poor, and this economy just further defines it. I personally think for those who do have the power to manipulate/influence the economy, they do enjoy the fact that some people are suffering, because it gives them more power/control- when people have limited options.

  2. #12
    Senior Member Array avolkiteshvara's Avatar
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    Apr 2009


    To OP:

    You are right. People's fear can cause their own demise. The Great Depression's famous run on the bank is a classic example.

    This is one off the reasons why wallstreet monitors consumer sentiment.

    To all you conspiracy theorists, start taking your meds.

  3. #13
    Senior Member Array SciVo's Avatar
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    Aug 2009


    I think that the OP would enjoy The General Theory by John Maynard Keyes, or at least the Cliff's notes version. Basically, in a recession, the nation's resources of industrious, ingenious people are being underutilized. Normally, it's just cyclical and will pick back up on its own. In the Great Depression, private consumer spending plus private business investment were in a self-reinforcing negative cycle of lack of demand for products and services, so lack of supply of private investment, so lack of household incomes, so lack of demand for products and services, etc. It took government spending to make up the difference and break the cycle.

    Much later, Milton Friedman posited that it was all about the money supply. Namely, he proposed that when prices are deflating, another way of looking at it is that the value of the currency is rising, so rich folks see no point in giving up the risk-free return of doing nothing for investing in some business that will be paid back in future dollars, at lower prices. His resulting hypothesis sounds reasonable: that all gov't would have to do in a similar situation in the future is create lots of dollars, deflating the value of the currency, inflating prices, and creating incentive for private investment without involving eeeeevvvvviiiiilllll :rolli: taxes on rich people. However, it was proven false when Bernanke tried it at the outset of this Great Recession and failed utterly.

    So, you ask, what caused this event so far outside the norm of the business cycle? Well, I can explain that! We have a fiat currency, which means that our currency cannot be exchanged at a fixed ratio for a physical commodity such as gold and salt; also, in what's known as fractional reserve banking, lots of dollars are created by banks loaning out more money than they keep in reserve to satisfy the day-to-day demands of their depositors. As long as the value of their loans remain stable, everything is fine.

    However! Much of the debt in this country is in the form of home mortgages. We had a property value bubble, in which the sales prices of properties became detached from their fundamental value as a source of a rental income stream. Unfortunately, although asset bubbles are a well-studied phenomenon in behavioral economics, I'm unaware of any sure-fire method of preventing them; but it would've helped if we'd had better regulation of mortgage officers, who often steered minority borrowers with prime credit ratings into sub-prime loans with cripplingly bad terms.

    Furthermore, those loans were bundled and then sliced perpendicularly into tranches of packages called collateralized debt obligations. The ratings of those derivatives were based on them being insured by poorly-regulated companies that didn't actually have to keep enough reserves on hand to account for an asset bubble, even though it's been well-known for centuries (starting at least with the Dutch tulip bubble) that such can happen. Basically, this multiplied the number of dollars created by these improperly-valued loans into the trillions (tens of trillions?) of dollars.

    As with any pyramid scheme, this was bound to collapse eventually. And it did. However, it was a slow collapse, during which the most sophisticated owners of overvalued bubbly debt-dollars attempted to flee to purchases of futures contracts in physical commodities such as oil and wheat, which at least have some kind of tangible value. This sloshing around of panicky excess dollars created the spike in gas and food prices that caused riots around the world.

    Now, we're left with trying to pick up the pieces of the aftermath, and re-explore the probability space of what business activities can find sufficient effective demand; that is, backed by people who can put their money where their desire is. Since the currency's collateral of home value is decreasing, the value of the currency itself is increasing, which means that consumer prices in general are decreasing, creating a disincentive to private investment as explained by Friedman. However, since his hypothetical theoretical prescription for how to fix it has been proven by events to not work, we must now use Keynesian gov't spending, which was proven by events in the 1930s and '40s to actually work. Otherwise, we're all up $#!@ creek without a paddle.
    INFP ~ Fi/Ne/Ni/Te ~ 9-2-4 sp/so

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