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Who Will Benefit Most?

Some of the great articles are written in the recent months, proclaiming fall of world financial markets at the same time some articles claiming bullish period ahead. However as it turns out markets are going to get everyone wrong.

For the last 40 years, the world has undergone unprecedented changes mostly driven by technology. One of the factors which do find mention in most of the articles is fiat currency. It is quite interesting to see the effects of fiat currency in the last 40 years. As world started using US Dollar to price commodities, dollar became world reserve currency. All organisations collecting statistics on world trades, transactions are based in the USA. Taking advantage of such status, the USA took lead in developing technologies for the mankind. It also used it to its advantage in establishing its military power. If USSR was broken into pieces the credit goes to the success of fiat currency. Fiat currency brought riches to the people in the western countries. But that is where western countries started going wrong.

Leaders in the western countries were busy showing growth to the people. "Availability of credit" was the theme. Credit was made available to masses. Using this credit people in the western world bought goods for themselves. These purchases resulted in consumption. To maintain balance, consumption must be supported by income. Since there was LESSER income as compared to consumption, leaders had to rely on credit to fuel growth. Credit was easily made available as the currency was reserve. For every central banker who took over, the theme was "availability of credit".

Poor boys from emerging economies did not exactly understand the implications. Whoever understood was not taken seriously. The credit that was made available to American was also made available outside of America. This is one of the reason why dollar strengthens when markets crash.

What next?

The stimulus started by FED is in vogue. Central bankers of Emerging economies who are simply followers Federal Reserve do something which Federal Reserve does. For some economies, stimulus was not essential. Central bankers in emerging economies failed to understand why the money was sucked out of the system. Basically, the money that was flowing in emerging economies was all dollar money. Emerging economies are still unable to stand on their own and it will take another decade for them to stand on their. Till that time, decoupling theory will not hold.

Developed economies in west are at a stage where they will receive "Diminishing return" on capitalist model. Capitalist model followed by western countries was not followed by most of the countries in Asia and USSR until last decade. Socialist model failed and that benefitted western countries. Once you are in capitalist model it is difficult to go back as people of the country will only oppose. A Basic of capitalist model says that "PERSON WHO DESERVES MOST WILL GET IT". This is what is happening now. Emerging economies have entered capitalist model. The people from emerging economies are seeing riches and they are working hard to get those riches. However, people from western world have no motivation to work hard. The people from western countries see no need to work hard or no need to study as inside they know their needs will be taken care of by government. That is where immigration plays role. Immigrants coming from poor countries work hard and earn their living. This is a social phenomenon. But unfortunately, people from western countries are in capitalist model which rewards only those who deserves. The question is why people from western countries are rewarded even when they do not deserve? This population can be compared to son of a billionaire. Son of billionaire do not have to work. But, when money gets exhausted the next generation have to work and work very hard.

So, we are a stage where money is finished and sons of billionaire are using their reputation to fund their lavishness. "How long does reputation lasts" is quite complex, depends on many factors and is not covered here.

There are two important things to remember;

Point 1- Such changes happen once in generations and are painful to everyone.

The day, oil will be priced in currency other than dollar, world will not need dollars. But the USA will use all its force to stop that from happening, so go to point 1.

Watch out for US bond market. When yield reached 4% last week, the demand was 4 times. These are usually last stages of reputation.


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