I am tired, the whole world is tired; When is the next economic crisis?

27 02 2010

In the name of Allah, The Most Gracious, The Most Merciful.

For the last 30 years we have went through the roller coaster of the world economy; 1973-1974 stock market crash combined with the oil crisis resulted from the Yum Kippur War; 1980s economic crisis because of the loan and savings institutions failures in the US; 1997 Asian financial crisis that crippled the growth of  most of the “Asian Tiger” countries; 2000 dot-com bubble and I am sure not the last one neither the least one is the sub-prime crisis which affected the economic growth of every country in the world. The question is what’s next in store?

The answer to the question above can be answered if we look carefully at the US economy. With its deficit of $1.42 trillion and a soaring national debt of  $12.4 trillion (an approximation; too many digits to put all), I think an American citizen can look at this number the same way he look at the Empire State building; with utter astonishment. The recent stimulus and bail-out to various investment banks and insurance companies added up to this mountainous debt. I see this as irreversible. Because of this enormous debt which mostly incurred from borrowing from other countries for example China,  the bulk of US dollars are outside the US, making the country vulnerable to its own currency if the dollar collapse (decline severely in value). But how is this possible?

To someone who never had an economic course, get ready for Economics 101 (smiley). As we all know, the price of anything in this world is affected by its demand and supply. If demand is static, an increase in supply will lower the price of a certain product and vice versa. The same goes if the supply is static, the increase in demand will increase the price of a certain product and vice versa. To sound more academic, we say that demand and supply have an inverse relationship.

Before I go on, another thing you need to know is about bond. A bond is a debt instrument, in which the issuer (in this case the US govt) owes the bond holder (countries which buy the bonds) the amount of money stated on the bond, and is obliged to pay interest to the bond holder and pay the full amount owed at the end of the bond’s term. Currently, China is the highest holder of the US bonds, a total of $727 billion, making the country as the top creditor to the US.  The value of bonds that has been issued by the US is about $3 trillion, as at Dec 2009. So what?

Imagine China dumping (selling) half of its bond holding and its US dollar bills (the real US dollar,not bonds) to the world market. This will create an influx of US dollars and hence increase the supply of it. As we learned in the previous two paragraphs, when the demand of the US dollar remained relatively static and the supply increase, this will lower the value of the US dollar. Other countries which are holding the US bonds and dollars as their reserves will also dump their dollars that they have, being afraid that their holding value will fall if they don’t dump as quickly as possible. The result will be the vertical fall of the US dollar in a day or two and hence another crisis for the world to suffer. Arrggh..not again. What will happen then?

The world stock market and foreign exchange market will crash severely. People (Americans) will be panic knowing that their money that they saved as well as in their wallet can’t even buy a dozen of eggs. People will loot supermarkets and there will be civil disturbances and the state of emergency. God knows what will happen. All world trades in the US dollar will put to a halt and the leaders of the world will meet to resolve the issue. This is the time for the New World Order propagandists to put forward their idea of one world currency. When there is no apparent choice, the world will succumb to this proposal.

Most economists does not question will or will not the US dollar will collapse, but when will it collapse. US will not be able to sustain its current spending, and sooner or later has to admit that it can no longer service its debt. It can result to printing money but printing money will result in the increase in the money supply without the backing of production. When will this happen? Soon I guess. Will it happen? Absolutely. Be prepared of this unthinkable  crisis.

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