Sunday, November 30, 2008


The Paradox Of Plenty

If we all managed economic wealth responsibly we would never, ever have to go through periods of recessions in North America.

There has never been the shadow of a doubt in my mind that if one of those little green aliens flying UFO’s way up there in the sky were to add all the brainpower our North-American societies are so very plentiful of, he or she would definitely think twice before considering Homo Sapiens an undeveloped, undereducated, undercivilized, underachieving and overall somewhat primitive creature. If this little alien were to take into account all the intelligence that our Presidents, Prime Ministers, Congressmen, Members of Parliament, Senators, Chairmen of the Boards of a plethora of Corporations large and small, luminaries of all sorts and walks of life and indeed each and everyone of us put in behind the economic and business decision-making processes we make on a daily basis, he or she would crank up the engine of the UFO (possibly fuelled not by oil or other fossil derivative) and shoot away in the Universe all the way back to Alpha Centauri or wherever he or she came from in the first place.

But then, if in fact in this great continent of ours we are all so smart and capable at figuring out the overall economic picture, why is it that every so often we have to go through periods of economic downturns? For one thing, monetary policies reflect valuations of what we have in terms of economic resources and how we use them and, to a certain extent, they are also a reflection of who we are. They are Capitalism way of dealing with national wealth in an all-encompassing fashion, which in turn determines our economic stability or instability for years to come.

Take for instance the situation wherein windfalls flow in from exports fuelled by excessively low interest rates, which ultimately push up the value of currencies and in turn decimate other areas of the economy, most notably manufacturing. Overall growth suffers as the “easy money” resource sector crowds out more productive sectors, thereby tending to bring in economic stagnation and, in the limit, de-industrialization. Or, more perniciously, the other situation wherein wealth is increasingly bestowed rather than earned, as it has been the case in recent times with speculative trends in both the Stock Market and in Real Estate, where winners came to dominate losers, at least in financial terms or, by way of another example, with excessive access to credit on the part of consumers that has resulted in the spread of debt, as opposed to distribution of wealth, to endemic proportions.

In fact, it can be safely stated that lack of an even distribution of wealth through sectors of society is a main underlying cause of recessions. When resources are harnessed in such a manner so as not to promote general economic vigour, this is the time when economic expansion sooner or later will come to a halt. What economists define as the “polarization of wealth” may come in different forms, but it is more typically present when governments’ ability or otherwise willingness to resist short term grab–and-run tendencies and temptations is impaired. This particular economic concept, it must be noted, is a far cry from the parallel but dissimilar political doctrine of “redistribution of wealth” first enunciated by Karl Marx and Friederich Engels in their Communist Manifesto of 1848, and most recently and so successfully re-enunciated by President-elect Obama during the 2008 electoral campaign, hopefully with a different nuance. With the difference consisting mainly in the fact that the economic concept of polarization of wealth lacks the reference to struggles between the ruling class (capitalist bourgeoisie) that owns the means of production and the working class (proletariat) that labours for a wage, which is present in the political doctrine. In fact, in capitalist economic theory capital and wages complement and are intertwined with each others.

Wealth dependence on speculation, as opposed to production and investment, creates the illusion of prosperity which is, in ultimate analysis, destabilizing for the economy. Speculators, more often than not, reduce liquidity by inflating prices. This has the deleterious effect of reducing the pool of buyers, thus hampering demand and reducing prices even further. By comparison, instead, investors buy and hold capital assets, which are not consumed instantaneously but rather are to be used at a later date. Thus, for example, the purchase of a house to be used as one’s primary domicile and place of residence is an investment and much more beneficial for the economy than, say, the purchase of a second or third house with the intent of flipping it or otherwise re-selling it for a hefty profit in the short term.

Capitalism, of course, does not condemn making a profit – and neither do I. But it is the speculative excesses that we have witnessed in both the stock markets and real estate these past few years that have altered and skewed the relation between personal income and capital appreciation in favour of a few to the detriment of the many, particularly when fuelled by easy access to credit. And all this has resulted ultimately in a gross mismanagement of national wealth for which we now have to pay the cost.

Greed, like just about everything else, has a price.

Luigi Frascati

Real Estate Chronicle


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