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Yep, and they are all mainly caused by credit expansion. Blame the FED

The consumer is essential for Capitalism. The US economy is driven all most entirely by consumption. Not only must consumers buy, they must buy more every year, and still more the year after that. Without perpetual consumption, the economy would either decline or collapse.
80% of America’s $14 trillion economy is service based. Wholesale trade, the manufacturing of consumer goods and retail comprise 65% of the services sector. The US over the last 30 years has become reliant on consumption and today is the world’s largest consumer of many items.

Dr. Lorrin Koran, a professor of psychiatry at Stanford University and expert in
behavioural Science said “Its not just individuals who are addicted to shopping, our economy is too. Personal spending now plays a bigger and bigger role in keeping the modern economy going. And when things start going wrong, there is no magic pill. Governments rely on consumers to bail them out. There was a very real fear that September 11 would cause spenders to lose confidence and plunge the world into recession. Keeping people spending has become the top economic priority.”

The importance of the consumer to consume to the US economy was outlined by Richard Robbins expert in anthropology in his award wining book ‘global problem and the culture of capitalism,’
‘a couple of days after the al Qaeda operatives crashed two planes into the world trade centre on September 11th US congress members met to plan a message to the stunned public. “We’ve got to give people confidence to go back outside and go to work, buy things, go back to the stores, get ready for thanksgiving, get ready for Christmas,” said one member of congress, echoing the message of the president ‘get out’ he said “and be active members of our society.” (CNN 2001). ‘The fact that after one of the most shocking events in US history government officials were urging citizens above all to shop and work is ample testimony the significance of consumption in the effective working of our economy and indeed for the whole society.”

The events of 9/11 and with the prospects of a recession in the US, the federal reserve in cahoots with the white house reduced interest rates to virtually 0%. This made debt an attractive way to fund spending with little interest to be repaid, this also meant monthly mortgage repayments had little interest added to them.

This housing bubble is what drove the US economy since 9/11 as a large chunk of consumer spending went on the purchase of homes. Housing in turn fuelled appliance sales, home furnishings and construction. In 1940 44% of US citizens owned their own homes, by 1960 62% of Americans owned their homes. Currently nearly 70% of all housing is owned by its constituents. The increase in home ownership resulted in more and more US citizens becoming indebted, US household debt stood at $11.4 trillion in 2006.

When the housing bubble burst due to the huge increase in defaults, this essentially brought to an end the engine that drove the US economy for the last decade. This spread to the rest of the world as the US is the main engine for economic activity for the world economy. Its huge level of consumption is responsible for most of the growth being experienced by China and India. With only 5% of the world’s population the US consumes 25% of the world’s oil and imports 9% of all goods manufactured outside its borders.

With consumption playing such a key role in the functioning of Capitalism, people havecome to be symbolised by what they wear, eat and drive. Hence sensual gratification has become life’s aim and with the dwindling world resources and ever increasing numbers competing for sensual gratification greed has come to characterise Capitalist societies. Capitalism believes if individuals in society pursue their self‐interests then the right resources are produced for those who want them and this is the best way to allocate resources.

Today self interest (greed) is considered a necessary trait for the 21st century individual; its
corruption can now be seen across society. Greed is the motivation that led to predatory
mortgage brokers selling mortgages to people that have no way in paying it back, and then
increasing the rates of interest until the buyer defaults. Greed was also the motivation that led
the credit ratings agencies to rate the investments less risky than they really were, and also to
conceal that the risk was based on sub‐prime mortgage debt. Hedge funds demonstrated
greed in the way they seek to provide astonishing returns to their customers, and greed is the
motivation even for individual shareholders that want to capitalise on the falling share prices
across the economy, even though it can lead to problems for thousands of people. The effect of
this is devastating; since each element within society puts their benefit before ethics and
morals, this is why we have a situation where even if the effect of an investment decisions can
lead to a downturn in the economy, companies are prepared to make those decisions anyway.

Right. Start with implementing the rule of law first.

I'm not convinced in the model that Shafique presented

The sharia compliant loans (which are higher than interest bearing loans) contributed alot in the speculative nature of those property assets.

Coercive taxation is out of the order for people (like me) who's values are grounded in personal liberty and ownership rights. Coercion easily ramps up to tiranny and you probably know more about that than me.

The Dubai property scenario keeps hanging in my view. The sharia compliant loans (which are higher than interest bearing loans) contributed alot in the speculative nature of those property assets. Absent the premium, I don't see those banks attract the capital they need for mini venture capital.

Dubai's Bubble Economy

The driving engine for Dubai was never sustainable. Dubai’s growth was initially through its oil wealth. This wealth was used to develop Dubai to attract foreign investment and soon enough, foreign companies and foreign workers arrived looking for an opportunity in Dubai. Its position as a trading hub meant many companies relocated its staff to work from Dubai which is fundamentally what brought Dubai its wealth.

This was never sustainable. The skilled workers that were developing the service sector were mostly from overseas, with only a small percentage of Dubai’s population today considered to be native Arabs. It's growth has been a direct result of it becoming an essentially tax-free zone for foreign nationals and companies. These companies, whilst providing jobs and income to people in the country, are not transferring any technical skills to the people. Its property market boom was due in large part to speculation that the prices would continue to rise.

Dubai has merely exploited limited natural resources and has been importing talent from abroad with little skills and knowledge-transfer to drive its economy. Dubai was always nothing more than a mirage in the desert; it's growth and survival was dependent upon the talent and expertise of foreign entities. It could only offer specialist services such as banking and finance as a means to guarantee it's future, along with tourism. As these sectors rely heavily on the goodwill and confidence of foreigners, if in any way this sentiment was affected, Dubai’s desert empire would crumble.

This is exactly what happened with the Global credit crunch. In order for financial companies to shore up their losses they have withdrawn their money from expensive and lavish projects. Service companies which relied on loans are now seeing this dry up as one bank after another either collapses or requires government bailouts. One expert from Nomura investment Bank encapsulated the situation in Dubai: “Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance.” As Dubai was built upon foreign money, it now awakes to find that this has dried up, so in essence Dubai’s source of growth has been cut, causing the breakneck building-boom to come to a crashing halt. The lending bonanza has evaporated and the government continues to ponder wider steps to rescue banks, including asking it's neighbouring emirate, Abu Dhabi, for financial assistance.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE Finance Ministry announced in January 2009 that it would inject 70 billion Dirhams ($19 billion) into the banking system, and is already looking at printing even more money.

Dubai does not produce any manufactured products that the people in the city buy. It is a city that is not self-sufficient, as it neither has the infrastructure nor the natural resources in place to develop the products it consumes. Dubai was, by all means, a bubble waiting to burst.

The suggestion that Dubai offered a new model for economic development and an Islamic approach could not be further from the truth. Building an economy upon foreign wealth, external expertise and personnel is a tried-and-tested model which has a substantial track record of failure. Latin America, South East Asia and the Baltic states have all attempted this approach with catastrophic results.

The claim that Dubai offered Islamic banking does not make its development Islamic; Britain was one of the first nations in the world to offer Islamic bonds yet nobody would argue that Britain pursues an Islamic economic system. To attract foreign industry, labour and money, Dubai has had to compromise on many Islamic values to do with the mixing of the sexes and alcohol in the name of necessity. The imposition of some Islamic rules in reality is a charade.

Without industrialisation, development and defence of the country cannot be achieved.An economy geared around services, but needs one, geared around manufacturing and agriculture. This allows a nation to produce all that it needs and export any surplus. Relying and depending on imports and foreign money is not an assured path for development and survival.

Berrin wrote:Well for the obvious reasons of capitalist regime I can't blame FED for credit expansion.
Credit expansion has to happen to keep perpetual growth year after year without ever decreasing....

Red Chief wrote:

Berrin wrote:Well for the obvious reasons of capitalist regime I can't blame FED for credit expansion.
Credit expansion has to happen to keep perpetual growth year after year without ever decreasing....

Why is it so clear for everyone except Rob? The excess unemployed money, which was the cause of the cheap credits, pumped bubles, not only in the real estate but almost everywhere. Aproximately 20 million new cars per year were too many for the country with inhabitance of 280 millions.

I heard information that after 1970 average Americans didn't get earn more. They got spend more due to life in credit. It was the main cause of the artificial demand and so artificial growth.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

Red Chief wrote:Rob, why do you remember Bernanke like Shafique the Bible each time someone drives you into a corner ? I took 35 !!! years period before current crisis. I'm sure that "financial geniuses" tried all remedies during that time.

So say it straight whether you agree or disagree that Capitalism is bankrupt as a social system. Constant decline of standard of living during last 35 years does not look like a business cycle.

shafique wrote:^Perhaps Bernake is as eminently quotable as the Bible?

BTW - have you guy's read Stiglitz? I've just finished his 'Making Globalization Work' - he shows what was wrong with the IMF/World Bank and Capitalism (as practiced) from the inside. However, his argument is that we shouldn't blame Capitalism for the failures of the 'Washington Consensus' - but rather look to the countries where capitialism is working (eg Malaysia, Singapore).

What's your view RC?

Cheers,
Shafique

RobbyG wrote: I tell you, it aint capitalism. Its the boom that causes the problem, the bust is just the correction. Forget bibles, learn Austrian Economics.

You'll get there one day, good ol Commie of mine

Bernanke only knows how the print money. It is obvious to me, that Keynesians scholars had it wrong for multiple decades. They don't have a clue about debt saturation.

Berrin wrote:

Bernanke only knows how the print money. It is obvious to me, that Keynesians scholars had it wrong for multiple decades. They don't have a clue about debt saturation.

well, could that be couse Americans have prefered cheap labour of China for the last 2-3 decades. That explains why china is in boom while America in bust buying and spending relentlessly..
China is also the major holder of American bonds. In this case, I guess some people have to spend continuely to repay interests on the bonds, as well speculate to make the best of all earnings.

RC I hear Mrs.Merkel fulminates to American based speculative attacks on Euro zone..

Red Chief wrote:

RobbyG wrote: I tell you, it aint capitalism. Its the boom that causes the problem, the bust is just the correction. Forget bibles, learn Austrian Economics.

You'll get there one day, good ol Commie of mine

He-he. As I said current situation in US reminds me the last years of Soviet Union. At that time professors of Marxism/Leninism teached me that Communism is good as an idea, but implementaition was a problem.

As for the Bible it seems that I hit someone's nerve.

To be frank I'm tired of arm-chair professors with miracle recepes in monetary system. I don't know how it could help to prevent from transfering jobs and whole industries abroud. I tend to rather agree with Shafique that that trend helped people from Malaysia and another Asia and bosses and shareholders of international corporations of cause.

Well, from your reply I understood that the problem is that 35 years is not enough for business cycle.

How long could it be? if 100 years it's very close to full construction of Communism. Are you sure that folks could wait so long?

As for Commie, don't mix up Harlem with Haarlem.

RobbyG wrote:LoL, evasive he says.

Capitalism is a system. A model of capital formation based on savings and investments with a profit motive. It worked for hundreds of years now. Just look around you what it brought us in material wealth. No wait, take the difference between you being born and current modern days.

RobbyG wrote:If he doesn't understand the capitalistic system, we will never come to agreement.

He still thinks Communism was viable. I'll better stop here.

RobbyG wrote:I agree that Communism has some benefits, but it doesn't increase the overall standard of living.

Your politics is also a weird mix of capitalism and autocratic governance like in China. True or not? Please confirm.

The capitalistic mindset is aimed at creating prosperity and lifting the individual's standard of living.

The capitalistic mindset is aimed at creating prosperity and lifting the individual's standard of living.

Capitalism is an economic system in which the means of production are privately owned; supply, demand and price are mostly set by market forces rather than economic planning; and profit is distributed to owners who invest in businesses. Capitalism also refers to the process of capital accumulation.

There is however no consensus on the definition of capitalism, nor how it should be used as an analytical category.[1] There are a variety of historical cases over which it is applied, varying in time, geography, politics and culture.[2] Economists, political economists and historians have taken different perspectives on the analysis of capitalism. Scholars in the social sciences, including historians, economic sociologists, economists, anthropologists and philosophers have debated over how to define capitalism, however there is little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism[3]; although these fundamental elements, such as private property, often have various different meanings in different disciplines and in different theories.

Economists usually put emphasis on the degree that government does not have control over markets (laissez faire), and on property rights,[4][5] while most political economists emphasize private property, power relations, wage labor and class.[6] There is a general agreement that capitalism encourages economic growth.[7] The extent to which different markets are "free", as well as the rules determining what may and may not be private property, is a matter of politics and policy and many states have what are termed "mixed economies."[6]

Capitalism as a system developed incrementally from the 16th century in Europe,[8] although capitalist-like organizations existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages.[9][10][11] Capitalism became dominant in the Western world following the demise of feudalism.[11] Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.[2]

Variants on capitalism may include, depending on the theorist, such concepts as anarcho-capitalism, corporate capitalism, crony capitalism, finance capitalism, laissez-faire capitalism, technocapitalism, Neo-Capitalism, late capitalism, post-capitalism, state capitalism and state monopoly capitalism. There are also anti-capitalist movements and ideologies including Anti-capitalism and negative associations with the system such as tragedy of the commons, corporatism and wage slavery.

Red Chief wrote:Well I'll be as persistent as Sir Shafique.
Once more.

The capitalistic mindset is aimed at creating prosperity and lifting the individual's standard of living.

Why is it comming from Capitalism? It could be a side effect of Capitalism for some period but not the goal. Moreover stat for decades does not give any evidence of that.