Saturday, February 28, 2009

Law of wealth

The current economic recession, probably the worst that Singapore has ever seen, may be a blessing in disguise. For too long, Singaporeans have had it too good, and expecting that the good times will roll on and on - strong economic growth, high wages, sky-high apartments (of the $$$ kind) and easy credit through very very low interest rates.

I have lived long enough to know that this happy state of affairs cannot last long. That it has done so came as a bit of a surprise to me. Of course, there was the recession in 2003 - largely caused by the SARS outbreak, so it was not representative of typical economic cycles. The same can be said of the internet boom/bust and even the Asian Financial Crisis back in 1997. All of these were largely localised. For the connected globalised economy, the real markets were still there. So it would appear that globalisation would smoothen these economic boom-bust cycles, leveling the fluctuations that are characteristic of capitalist economies.

We got drunk on globablisation, we became careless with our money, and like the US consumers, we began to go into debt thinking that we will always have that steady stream of income to cover ourselves. Debt financing, sophisticated people call them. Even the Singapore government was bullish about this, talking about the desirability of developing a debt market as if it was the next best formula for pushing the economy to ever greater heights.

Now, I am not saying that debt financing is all wrong. Most businesses depend on a careful balance of cash flows to survive and many go into debt to expand, for example, listing on the stock market. But when everyone is doing it, including the clueless sub-prime people in the US, where debt is miraculously converted into interest-baring assets, which are then resold as it they were gold, ad-nauseam no less, with no accountability and no tomorrow (because the people who sell these get their money today -why worry about accountability some time down the future?), we end up with what the world is lamenting but can't do much without - toxic assets. These 'assets' which came out of the ingenuity of the human mind - to create something out of nothing. Ironically, every banker is now holding a lot of these toxic assets and none of them dares to move on them.

The problem is, they forgot that only God can create something out of nothing. We mortal souls? They again forgot about Isaac Newton and the greatest physicists that came after. They taught that matter cannot be created nor destroyed. But I suppose those PhDs who went into Financial Engineering - they abandoned Physics and its immutable laws. They did not look at 'wealth' as matter, so you could create new wealth without limits.

When you tinker with matter, you can save mankind or blow up the whole world. Is it any surprise that when you do the same with numbers, you can end up destroying the world too?

God help us all.

Image: Author: clarita

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