Friday, October 10, 2008

worst case scenario of the day

I've already talked about the death spiral of dwindling confidence in the markets, but not here. Brief summation: People are fearful of an economic downturn and are preparing for it by cutting spending. The cuts in spending result in less commerce, which causes pushes down profits even more. Repeat... over... and over... and over.

Going another level deeper, as people hold on to their dollars, the reduces the "multiplier" effect of how many times a dollar is spent. In fat times, people spend. When it's spent, the next guy spends it... repeat... over... and over... Each time this happens, people have income. Things look good. Get one dollar and cycle it through a million hands a million times and everyone is making a million bucks! If someone holds on to that buck, everyone makes less. Right now everyone is holding on to that buck.

So the worst case scenario... WAR:
When people are doing well, people like to make money. When things go down the shitter, people get PISSED. I doubt this would directly affect us in the US that much since despite our dependence on foreign oil, we do have a solid base of agriculture, manufacturing, resources, services, and we also have a ways to fall before people really start suffering. (Then again, most Americans have no idea what it's like in the "real world," so who knows) I'm more concerned about places like China. China relies on the world economy to consume all the goods it produces. China has a huge population, all of whom directly or indirectly rely on exports to the rest of the world for their wages. So what happens when the factories start to shut down? Potentially hundreds of millions of people will be without jobs, and they will be PISSED. Continued joblessness and poverty generally leads to unrest. When this happens, well... it'll suck. How it will unfold is unclear.

If the government steps in with social welfare programs early, things will be fine. If they engage in job creation New Deal style, things would probably be fine. If they pull a Fourth Reich/Hitler type deal, things will be pretty ugly. If the country implodes, then the rest of the world would experience a boom when they help China rebuild. Or maybe they'll go back to more traditional communism?

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