The Economic Downturn, My Take On It

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As a student of financial education and the human mind I have developed a ‘broad strokes' overview of why the recent economic downturn occurred.

Why economic downturn?

All students of the mind; Bob Proctor, Napleon Hill, Andrew Carnegie, Dale Carnigie, Dr. Joe Vitale and others agree on one thing. The more you focus on something the more you will attract of it. It’s called the Universal Law of Attraction. There have been thousands of documented cases where this law works. They are normally in the form of success stories and show when a person truly believes (and belief is the key) something then focuses all their energies on getting it they will eventually achieve it.

However there is a negative side to this law. If everyone focuses on the ‘r’ word then guess what happens? You get a deeper and longer one. It is estimated that the advent of mass media at the end of the last Great Depression added 10 years to the recovery because so many people were collectively thinking negative thoughts about it. I shudder to think what the current coverage is doing in terms of adding years on.
We are in a normal downturn in the s-curve of economics. The problem is we ‘conned’ ourselves into believing we had invented a magic bullet to beat the s-curve.

The economic s-curve

The s-curve is best explained currently by Harvey S. Dent who has a Blog called Helping People Understand Economic Change. It relates to the market penetration of new technology and products and thus the market as a whole.

“While the S-Curve is a great tool for predicting the acceptance of new technology, it even predicts the popularity of social trends! The Green movement, for example, began with a small, marginal group of environmentalists in the 1960s. The first Earth Day in April 1970 consisted of ragtag demonstrations that selectively made the news, but environmentalism didn’t start becoming a popular phenomenon until the late 1980s. Thirty years later Time Magazine devoted an entire special edition to the Green movement, entitled Earth Day 2000 and distributed it worldwide.

“Right now we are clearly in the growth phase for personal computing. Popular use of the Internet is the accelerator.”

History suggests that once innovative products reach 50 per cent market share, they begin to have a noticeable impact on the economy in general and productivity in particular. The S-Curve pattern for personal computers is very similar to the S-Curve for phones and electricity. The widespread use of the Internet has acted as an accelerator, fundamentally changing how and where we live and work. We are in the Growth phase of the personal computer/Internet S-curve right now, and by 2008 at the latest, 90 per cent of urban and suburban households will be “wired” for the twenty-first century.” H. S Dent

So after about 90% the curve reaches maturity and starts to fall. Or to quote another Law of the Universe, what goes up must come down. The Babylonians knew this s-curve 5,000 years ago as did the Chinese 3,000 years ago, the Egyptians were also aware of it. Each of these civilizations planned and stored goods for ‘fallow’ years.
However thanks to the short-sighted policies of neo-conservatism they believed the production of the basics for a civilization should be obtained from the cheapest, not the most economically sound place. Hence when the price of a basic good you need you no longer produce fluctuates you pay the piper instead of playing the tune.

Margaret Thatcher smashed the British Coal Industry out of pure spite for one man Arthur Scargill. There was no rationale behind this she just wanted to prove she could kill off the power of the Unions in the most brutal and public way possible and in the process economically destroyed  countless communities. The government then had to step in with tax payers money to, ‘re-generate’, these areas.

The USA and the European Union don’t behave like this towards their basic manufacturing industry base however bizarrely Britain does. So when the s-curve hit, the myth you can have a purely service based economy came home to roost for what it was – a fallacy.

Why a global economic downturn?

So if each country has different economic policies why are we in a global downturn? The answer to that is even simpler; greedy Banks, financial whizz-kids, incompetent CEOs and incompetent politicians.
As Robert Peston, BBC Business Editor and author of the must read Who Runs Britain? states :
“They [the reasons] are essentially the greed of a generation of bankers and financial whizz-kids, and the jaw dropping naivety of ministers and officials”

In essence our elected officials did not have the backbone to stand up to the financial institutions and say enough is enough. The bankers were giving themselves massive payouts inversely proportional to their performance. Allowed banking products to be created the Board did not even have a slight grasp of understanding. Government believed in a ‘light touch’ regulation on the basis the market would regulate itself.

However as Dan Ariely in his brilliant, Predictably Irrational demonstrates, human beings do not make rational purchasing choices. In fact they generally do not behave rationally most of the time. Zig Ziglar has also proved this at the personal performance level. Therefore markets are not perfect, period. They need regulation because there are corrupt and self-interested people who control large sections of it.

Lastly, let’s debunk one final fallacy – the Government represents you. Sorry to burst your bubble the government’s constituency is the financial community and the generationally wealthy. You are just voting fodder to get them in. You only count when enough of you get angry enough so they have to take notice – public opinion. Those are the only two forces governments are scared of, public opinion and the financial community.

By this time you may think I am a raving ‘commie’. I am a social entrepreneur which means I hope to leave the world a better place via my entrepreneurship. My eyes were opened by Robert Kiyosaki’s latest book, The Conspiracy of The Rich. Now here is a man who is wealthy saying there is a deliberate conspiracy, and has been for over a hundred years, by the rich to keep the majority of us in the ‘rat race’. Why would a man of his stature say this? Simply because he has a passion, as do I, to raise the financial literacy of the ‘western economies’. In China the current net savings rate is +28%, that’s in an economic downturn. In America it’s  – 5%.

If every house that was foreclosed had been given just $500 per month extra to see them through the down turn there would have been no need for any foreclosures. But the financial community, like carrion birds now want to pick over the misery of others. On Twitter every day you see these institutions advertising knock down houses as investments, they were someone’s home a basic human right. The people that lost them were not lazy, victims of economic circumstances or unskilled for the new economy, they were the deliberate sacrifice of governments who chose to spend trillions propping up the financial community and not its electorate.

In a properly regulated market this is what should have happened. All the banks in trouble should have been allowed to go broke as a consequence of their irresponsible lending. Then those mortgages would have been on the market for sale. Prudent banks would have bought them for say 30 cents on the dollar. They should then have gone back to the borrower and re-negotiated a sensible value for the house and a new mortgage amount. This would probably have netted them an additional 10 cents on the dollar, a good initial return plus ongoing interest. This would have cleared out the corrupt part of the financial system and left the sensible part intact.

What precipitated the collapse?

In 2004 The Federal Reserve removed the 12 to 1 ratio. This ratio said that for every 12 dollars you lend you must have 1 physical dollar in reserves. Now they said to the banks issue as much money as you want with no reserve. So consider money is no longer a paper currency it’s just digits in a computer’s memory. You want a $1,000 loan, the clerk just types in $1,000 on top of your bank balance. Money created at the speed of light. What have we created? An economy based on ‘debt’, and bad debt at that not good debt.

If any of you have seen the film International with Clive Owen, the banking aspects of that film are not fiction they are well researched. Banks want you to be in ‘bad debt’ to them. Then when you ask for more to see you through the bad time they created, they turn round and say you are a bad credit risk. Even now the British Finance Minister is having to ‘bully’ state owned banks into lending money to SME’s to stop them going out of business. So as Robert Peston said, Who Runs Britain?


About

Andrew Peel has a background in project management; he works as a consultant - business management coach and mentor.

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