The Economy: US and the World

"Madness is rare in individuals - but in groups, political parties, nations, and eras it's the rule." (Friedrich Wilhelm Nietzsche)

	The Economy: US and the World
	BREAKING NEWS Earth temperatures reach highest point in 12,000 years Happy Birthday, America! Russia vs. USA: Who wins the space exploration race?
	Top 5 abstract satellite photos of rivers More...

And no madness is worst than greed. Every so often people assume that somehow they can make money out of the thin air. The most famous one was the Tulip mania of 1636-1637 in Netherland and the most recent one was the “dotcom” bubble of 1995-2001 (on March 10th, 2000 the NASDAQ peaked at 5132.52). Today we are witnessing the beginning of the end of the real estate bubble.

In every case, the madness begins with those who have high tolerance for financial risk. That is to say they are rich and can afford greater financial loss than others. They speculate and make money, lots of money. Soon the less wealthy see this and join the crowd and before you know it the whole country is involved.

When President Bush entered office he gave one trillion dollars (tax cut) to the wealthy. In effect he increased the tolerance for financial risk of the wealthy individuals and companies even further. Later, he started the Iraq war, pouring billions of dollars into the economy. One should not forget that when the US government spends about $2 billion a week in Iraq, most of that money finds its way back into the US economy (salaries, armament, etc). But all these monies were borrowed money (deficit spending), and all the growth and feeling of well being was illusory.

The money pumped into the economy had to find some channel for investment. So banks and financial institutions began to push money in hope of getting incredible returns. Easy credit was the solution. You want to buy a house? No problem, we finance 90% of it. You want to have a new car? No problem, we give you a loan. This push suddenly made it possible for millions of people to buy houses, putting pressure on the housing market. House prices sky-rocketed, increasing the illusion of increasing wealth, which in turn allowed people to borrow more money. All the time, banks and credit institutions were jubilant at the sight of extraordinary returns on their investments. A normal credit company charges around 18% to 23% on the dollar while they borrow the same money for 8% to 9%. It is a great business. The banks also had a good time. Cheap money was lent to people backed by assets that were appreciating in value. The risks were spread by selling mortgages to other banks and institutions. Before you knew it every bank, insurance company and god knows who else were rushing in to take their piece of the action.

Become a member of Pravda.ru online community