Monday, October 6, 2008

The psychological dimension of Economics!

As one who majored in economics, besides having a keen interest in quite a few other subjects – astrology one among them- I have my own opinions about the way ‘economic sense’ evolves at micro level in particular.

As I guessed, the present American nightmare is not all that fearsome.

I clearly don’t agree with the view that the present time is similar to or comparable with the America of the war-ravaged 40s.

The conditions now are different from the conditions then.

The most important condition being – America is just part of the Global village of which everyone of us also are a part!

What hurts the Americans may not at all hurt the rest of the world.

Or others may even a find a fortune in what hurts the Americans.

The world has come a long way since the 40s.

The entire world was in a state of wounded ness then.

And the Americans had none but themselves to take care of their economy.

The Keynesian model worked then for a turn around.

But today the conditions have changed.

The state bail-out may be necessary just as a starter.

Rest will take of itself.

For, the American economy is not entirely based on what its peoples do.

It is largely based what the rest of the world do to them.

America still continues to impress the rest of the world as the land of honey and milk.

Not that the U.S. gives lucrative jobs.

But it still has the potential to give what the rest of the world wants or can afford to.

The falling dollar means better affordability of American goods by the rest of the world,

and this makes the ball of demand – production rolling for the better.

Thus the psychology of different segments working at cross purposes

may indeed turn to be a route for Recovery.

The following article by Thomas L. Friedman hints at this probability.

This is based on the simple logic of any investor.

When the share prices come down ,

you buy more shares and increase the volume of shares you have with you,

hoping to reap a good harvest when the prices rise.

American dollars and American goods and services are more affordable today

attracting many customers.

And this will pave the way for recovery.

It only depends on how the U.S. policy makers exploit this psychology

of the rest of the world.


But today Save US economy, go shop on 5th Avenue

Thomas L. Friedman

I WAS talking to a friend in New York City the other day about the current financial crisis, and she told me about a scene she had just witnessed in the lobby of the Warwick Hotel. Four Swedish tourists, who clearly had been on a shopping spree in Manhattan, fuelled by the still cheap dollar, were trying to cram all their purchases into four suitcases. They had bought a handheld scale — one of those you just grip onto the suitcase and lift — to make sure all their American goodies were not overweight for the flight home.

Another friend of mine in the ship-supply business in Baltimore, Alan Kotz, told me about a German customer who recently put in double his normal order. When Alan asked him if he was aware of how much he had ordered, the German brushed his question away and laughed: “Alan, never mind, everything for us is half price.” And a good thing it is. Even though the dollar has strengthened a bit lately, we are going to need foreigners and sovereign wealth funds from China, Asia, Europe and West Asia more than ever to survive this crisis — and they are going to need us to be healthy as well. In the process, we are going to become even more intertwined and dependent on the rest of the world.

Sarah Palin won’t have to worry that she doesn’t know what the Bush doctrine is. No one really knew what it meant. But it had something to do with the unilateral exercise of American power, and the next President’s ability to act unilaterally on anything other than vital national security issues is going to be reduced. As the old saying goes: He who has the gold makes the rules. Well, we no longer have as much gold, and until we get some, we will have to pay more heed to the rules of those who lend us theirs.

At a time when the US government gets half its borrowings from abroad, at a time when the US household savings rate is hovering around zero and China alone is already holding around $1 trillion in US Treasury notes and Fannie Mae and Freddie Mac bonds — yes, that’s how you got that cheap subprime mortgage — it can’t be any other way.

Somebody better tell John McCain: We are all Swedes now. Forget about “Live Free or Die.” Until we get our financial act together, our motto is going to be: “Swedish spoken here — or Arabic or Chinese or German...” I would also bet that more and more of the foreign investors who come our way are going to want to buy hard, tangible assets — skyscrapers, real estate and real companies — not just mutual funds, T-bills, bank stocks or other equities. No problem. Americans own assets all over the world; foreigners have long owned substantial positions in US companies. That’s globali sation — and now you are going to see globalisation and financial integration on steroids. It should help us, but also change us.

“The next round of capital that comes in from abroad is going to be much more demanding and move into real assets,” argued Jeffrey Garten, professor of trade and finance at the Yale School of Management. “Being a bigger debtor nation means losing even more of our sovereignty. It means conducting our economic policies with an eye toward whether others approve. It means bearing the advice and criticism that we have dispensed ad nauseam to other countries for over half a century. It means far more intensive consultations with other capitals on our fiscal policies and our monetary policies.” At the same time, added Garten, “Corporate decisions will become more sensitive to international factors, in part because more non-Americans will be on the governing boards.” Ultimately, this could make American industry even more globally competitive — but for those who can’t pass global muster or enlist global collaborators, the consequences could be harsh.

Of course, neither Barack Obama nor John McCain dare talk about this now. They want to pretend noth ing has really changed. The minute one of them steps into the Oval Office, they will tell us otherwise. That will be the January surprise.

There was a lot of talk after Russia invaded Georgia that globalisation was over and we were seeing the return of “history” and the primacy of politics over economics. I think not. Politics and economics are always inextricably intertwined. History-making is rarely free. The Russian stock market has been hammered as a result of its invasion of Georgia, and the global slowdown has sunk Russian oil and gas earnings. No country is an island today.

Making history is not simply about the will to do so. It’s also about the way — the resources you have to achieve your ends. Whatever wills the next American President comes to office with, he is going to find that his ways have been diminished and restricted — until we roll up our sleeves and work our way out of this mess.

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