Inflation is the source for financing a war. The world governments have always supported ongoing wars at the expense of their own citizens and those of other countries. In the case of poorer nations, the internal markets collapse and the country’s economy practically becomes nationalized. Similar situation was experienced in Russia in 1917 (see: http://simon31.narod.ru/syndrome_of_socialism.html).

The today’s fall of the US currency by 30% and the rise of the global prices for resources, fuel, and food by more than 30% are the results of the inflation launched by the US government to finance the military campaign in Iraq. The war is financed at the expense of the American people and to even greater extend, the people of other world nations since the US dollar is the most commonly used currency for global trade and reserve currency. Because the war has lasted so long, the costs of conducting the operation have ballooned and surpassed the originally budgeted resources leaving the US government with the only option – starting the money press. The shortfall has already reached hundreds of billions of dollars and can only be covered by printing more and more money.

The current rise in the global prices is not a result of shrinking supply of recourses (food, oil, etc) or a growing world population. The production volumes as well as the labour component have not changed dramatically and neither did the global consumption. The rise in the global prices is caused exclusively by the inflation of the US dollar. Since the personal incomes in the countries where currencies are tied to the dollar have not changed, the market basket has shrunk by the level of the inflation. As the result, while the people in the industrialized nations are limiting their expenditures on luxury products, the people in the third world are not able to afford the necessities such as food leaving them malnourished or even starving. The discussions whether these processes are the results of structural economic crisis are only partially correct. Such processes normally take decades to develop; current situation is changing in a course of few months to a few years and seems to have started at the same time as the military operation in Iraq.

When the inflation started to rapidly rise resulting in higher real estate prices, people rushed to buy houses and apartments since shelter is the most important human priority. Some people bought properties as investment hoping to make money on rising prices. Both types of the buyers used borrowed money to buy the real estate. Now, monthly payment on the loans amount to a considerable sum which warrants re-balancing of households’ budgets and postponing purchases of big ticket items such as cars, furniture, travel, etc. The falling demand for goods and services has lead to job losses for many borrowers who could no longer make payments on their loans. In turn, the banks started to foreclose on the properties but were not able to re-sell them due to the same reason. This was a chain reaction. Further, excess supply of real estate has lead to dramatic reduction in housing construction and supporting industries. One example is forestry since majority of houses in North America are build with wood. All these have started a ‘snow ball’ effecting more and more industries and businesses. Since many companies had also borrowed capital from banks, now they too were failing to make payments on their loans. The result – Financial Credit Crisis.
The war in Iraq is not the kind of war that deserves such sacrifices. One tenth of the money spent would have “bought” whole Iraq and ensured a rise of pro-western government in the country. It would be understandable if the war was fought for territories or new markets, but presently there is nothing to fight over since after the collapse of USSR all the eastern block countries became the domain of the west.

Sue – that’s a fantastic question and actually ties into a revelation I had earlier this week.

From what I’ve seen – and keep in mind i’m not an economist – they will be effected. Depending on the strength of world currencies gold and diamonds may, however, behave differently than the rest of the commodity market. I’m just not familiar enough with them to say. In general however, I suspect that decrease in demand corresponding with the massive, global, economic slowdown will have a pretty serious impact. It’s hard to say how long and drawn out that will be.

Several recent articles I’ve read talk about a second impending credit crisis hitting/about to hit Europe tied to investments in emerging markets/economies. My personal hunch is we’re looking at about 6 months-1 and a half years before things start to really turn around on an international scale.

On a separate note however, it recently occurred to me that with China and India’s economies industrializing even an artificially deflated currency will not be sufficient to keep their goods low enough. As they transition to middle economies another region will need to move in to take their place. While that may be South America, I’m beginning to think that central/southern Africa may be ideal.

With extreme poverty, issues with government stability, a lack of strict economic, environmental, and humanitarian laws and an abundance of natural resources it’s very possible that the world returns to Africa in a very big way – especially the west coast.

Map of natural resources:
http://static.howstuffworks.com/gif/maps/swf/AFR_THEM_LandUse.swf

The distance between the west coast of Africa and Europe, the Eastern Seaboard and India/China is less than the distance between China and the US’s western seaboard/the complex rail trip to Europe, etc.

What are your thoughts as someone in the heart of it all?

Sue – that’s a fantastic question and actually ties into a revelation I had earlier this week.

From what I’ve seen – and keep in mind i’m not an economist – they will be effected. Depending on the strength of world currencies gold and diamonds may, however, behave differently than the rest of the commodity market. I’m just not familiar enough with them to say. In general however, I suspect that decrease in demand corresponding with the massive, global, economic slowdown will have a pretty serious impact. It’s hard to say how long and drawn out that will be.

Several recent articles I’ve read talk about a second impending credit crisis hitting/about to hit Europe tied to investments in emerging markets/economies. My personal hunch is we’re looking at about 6 months-1 and a half years before things start to really turn around on an international scale.

On a separate note however, it recently occurred to me that with China and India’s economies industrializing even an artificially deflated currency will not be sufficient to keep their goods low enough. As they transition to middle economies another region will need to move in to take their place. While that may be South America, I’m beginning to think that central/southern Africa may be ideal.

With extreme poverty, issues with government stability, a lack of strict economic, environmental, and humanitarian laws and an abundance of natural resources it’s very possible that the world returns to Africa in a very big way – especially the west coast.

Map of natural resources:
http://static.howstuffworks.com/gif/maps/swf/AFR_THEM_LandUse.swf

The distance between the west coast of Africa and Europe, the Eastern Seaboard and India/China is less than the distance between China and the US’s western seaboard/the complex rail trip to Europe, etc.

What are your thoughts as someone in the heart of it all?

Chaos is not beholden for a single element in its creation, no a plethora of events have unfolded – some cascading from others, some unintended, some deliberate. The deregulation of financial markets has destabilized these markets. At the same time the practice of letting the banks acquire each other until they reach behemoth status – a relatively new system – until recently banks weren’t allowed to cross state lines – means when a large bank collapses the crater is much larger and the financial fallout larger and more toxic.

Leveraging of assets by banks was increased until now it is something like 30:1 – meaning for every one dollar they have, they can bet thirty on transactions – great profits on the upside, great losses on the downside – amplifying every swing in the market, every twitch. The whole thing was allowed to get out of hand, was not sufficently regulated, and when regulated, the regulations were either poorly or non-existently enforced. Its a wonder it didn’t collapse sooner, is been apparent that behind the scenes manipulations have been occurring for some time now, I’d say at least 10 years if not longer.

The bubbles grew too large, and time ran out.

Chaos is not beholden for a single element in its creation, no a plethora of events have unfolded – some cascading from others, some unintended, some deliberate. The deregulation of financial markets has destabilized these markets. At the same time the practice of letting the banks acquire each other until they reach behemoth status – a relatively new system – until recently banks weren’t allowed to cross state lines – means when a large bank collapses the crater is much larger and the financial fallout larger and more toxic.

Leveraging of assets by banks was increased until now it is something like 30:1 – meaning for every one dollar they have, they can bet thirty on transactions – great profits on the upside, great losses on the downside – amplifying every swing in the market, every twitch. The whole thing was allowed to get out of hand, was not sufficently regulated, and when regulated, the regulations were either poorly or non-existently enforced. Its a wonder it didn’t collapse sooner, is been apparent that behind the scenes manipulations have been occurring for some time now, I’d say at least 10 years if not longer.

The bubbles grew too large, and time ran out.