Argument of After Shock - Essay Example

Economics and finance 11 March Aftershock The book Aftershock is a manual that illustrates the declining of US economy, its consequences and after effects although the authors justly verify the purpose pf the book as stated in the text, “It ’s only bad news for your personal economy if you don ’ t do anything about it” (9). Hence this book suggests methods and remedies through which personal economic damage can be minimized even when the economy on the whole is falling apart. As the authors say in the book, “All we can offer is realism, based on facts and logical analysis” (10) and the rest depends on the reader and his interest in benefiting from the writers’ perspective. Every fact that is stated in the book is based on, “a reliable theory of economic evolution, backed up by cold, hard facts, and not random guesses” (11). So such an analysis helps in providing the readers an in depth and logical account of the current situation. The writers use the concept of a ‘Bubble’ as a metaphor to illustrate the unpredictability and the temporariness of the economic conditions of the United States. As stated in the text, “…economic bubbles, by nature, do not stay afloat forever. Sooner or later, economic reality, like gravity, eventually kicks in, and bubbles do fall. After they burst, they never are able to re - inflate and lift off again…” (4). In their point of view the US economy comprises of six bubbles, “These bubbles included: the real estate bubble, stock market bubble, discretionary spending bubble, dollar bubble, and government debt bubble” (5). However the dependability of one bubble on another is one of the most harmful and damaging factor in the whole infrastructure of the economic system because one bubble or sector of economy has the tendency to destroy all the other bubbles with it. As it is also mentioned in the book, “We saw six big economic bubbles linked together and holding one another up, all supporting a seemingly prosperous U.S. economy. And we also saw that each conjoined bubble was leaning heavily on the others, each poised to potentially pull the others down if any one of these economic bubbles were to someday pop” (5). The book discusses in detail the circumstances and the sequence of events that led to the popping or destruction of the six economic bubbles. The fundamental advantage of this bubble economic system was that, “…these six linked economic bubbles helped co – create America ’ s booming bubble economy… these bubbles helped us ignore slowing productivity growth, boost our prosperity, disregard some fundamental problems, and keep the party going” (31). However once the decline started there was no possible solution to stop the decline and this decline is explained in the following words in the text, “First, we had the fall of the U.S. housing bubble and its downward impact on the stock market bubble, the private debt bubble, and the discretionary spending bubble… Next, in the Aftershock, the dollar bubble and the U.S. government debt bubbles will begin their unavoidable descents… And as the final bubbles in America’s bubble economy begin to burst, so will the world’s bubble economy” (33). The real estate or the housing bubble was the first pillar of the economic system that collapsed because the price and expenditures of making a new house increased greatly and outpaced the increase in an individual’s salary and eventually its decline started in 2006 and hence resulted in the rest of the downfall of the economic system. The private debt bubble involves the bank loans and the mortgage payments. When the stock market and the housing economic system crumpled the private debt sector also suffered a severe shock that ultimately led to its decline. The discretionary spending bubble is concerned with the total sum of money spent by the consumer. However due to recession when people started losing their jobs and the rate of unemployment increased consequently people started cutting their expenditures and hence another economic bubble popped. The dollar bubble dealt with the international money exchange in the form of import and export however the level of international investments and other business ventures also decreased when the US economy was hit by the financial recession. Hence the internal economic conditions of the country had an adverse affect on the international trade market. The book states that in the current situation the economic system still has the dollar bubble and the government debt bubble intact. However, “the real impact of these four bursting bubbles is the terrible downward pressure they are now exerting on the two remaining bubbles…” (60). Hence this reiterates the fact that the four bubbles that have already popped are now a threat to the remaining two bubbles and hence remedies should be taken to avoid such a disaster. However as the progress of improvement is slow the stake is high that the other two bubbles will also pop. The possible remedy that can be taken to curb the approaching disaster includes international trade and investments. However the declining economic state of America has caused the investors to be become more cautious in taking big risks. Hence they are observed to be using the strategy of ‘wait and see’ which involves restraining ones self from taking big risks and investing large sums of money. However this approach of the foreign investors is having disastrous affects on the US economy because it is unable to use sufficient aid to get back on track. As it is also stated in the book, “Unfortunately, there’s nothing like a very reasonable wait - and see investment approach to really kill a falling bubble economy that is so deeply dependent on foreign investors” (64). A misconception of the American investors that the authors’ point out is that they believe that foreign investors such as China are in dire need of US economic stability and they will not leave and invest their money elsewhere. However these American analysts and investors do not realize that foreign investors have already started investing their money in other parts of the world as their only concern is progress and fruitful outcome regardless of slow production of profits as is the case in investments made in Euros. Another interesting fact that is explored in this manual is that a country’s economic condition is very unpredictable. There is no rule that the economic boom or recession follows however the resultant circumstances are very drastic in either case of profit or loss. Although every economic bubble is ultimately going to pop because the extent to which these bubbles can expand has its limits as the authors also state that, “Eventually, all the stocks in the infrastructure play collapse even wishful thinking can’t grow a bubble forever” (21). It is observed that the decrease in the foreign investments ultimately results in bursting of the dollar bubble which further leads to popping of the government debt bubble. The fundamental reasons that cause the collapse of the sixth bubble includes the outflow of the massive capital from the United States and resultantly the lack of availability of capital cause the collapse of the whole economic system (87). The writers blame the actions of the US government of 1981 which in their point of view first sowed the seeds of the infrastructural collapse of the US economy. It is also mentioned in the book, “That critical moment came back in 1981 when the U.S. government decided to start running large federal budget deficits this big deficit spending sowed the early seeds for the coming asset bubbles in real estate and stocks” (91). Although this venture also brought a boom of economic prosperity yet since proper measures were not taken to maintain this prosperity at a controllable level in the end it led to the current economic declining state of the country and the world. Apparently when the recession of world economy is reviewed it is observed that America will suffer least damage as it has the most diverse, flexible and stable economy of the world (99) however the decline of American economy will bring a decline in both the sectors of the world economy i.e. manufacturing and resource extraction because US economy is a fundamental part of the international economic infrastructure. The book recommends the readers the best way to avoid big losses when one invests his money at a time when the bubbles of economics are bursting. This advice comprises of two simple but not easy rules. The first is to stay away from stock and real estate until the dollar pops and the second is that one should stay away from long-term bonds and all fixed rate investments (115). An interesting fact that is depicted in the book is that the economic recession or the bursting of the six economic bubbles also brings with it an opportunity to make a lot of profit in the bubblequake although it will be in lesser amount as compared to the times when the world economics was at its peak. The best method is to make the right decision at the right time i.e. the investor should have the quality of being a trend setter rather than a trend follower. However it is necessary that before an investment is made the investor should carry out a thorough research about his new investment as there is always a possibility that the new investment might turn out to be a disaster. For this the three requirements include correct judgment of macroeconomics environment, a long term investment and the investor should have the tendency to play against all odds and defy the conventions (128-129). Two such best investments are taking advantage of falling stock market and dollar rate. Investing money in minerals and natural fuels is also a good choice as their prices are immensely affected by fluctuating condition of dollar or the world economy. Economy is an on going and continuous aspect of human life that is always evolving regardless of the hindrances and the destructions it faces. In every era or time economy suffers in its own individual manner and deals with its specific set of problems. However all the problems faced by the world economics in different eras bind together and hence form a continuous process of the evolution of economy. This evolution is extremely complex because it involves various social as well as political aspects of human life that cause its evolution in every era. As observed in the case of the changed trends from bartering to barcodes. The authors also talk about post-Dollar-Bubble World. Some of the problems that are stated with reference to this changed situation of the world economy include, “the government will not be able to refinance its debt and instead the government will have to resort to inflation, tax increases, and budget cuts to deal with the situation” (209). Unemployment is another aspect of this post dollar bubble world that will have to be dealt with although the nation will be rich but over all there will be a lack of job opportunities (213). However there is hope that ultimately the world will be dragged out of third economic recession as also stated in the manual, “…ultimately will, transform the economy by increasing real productivity this massive potential increase in productivity can bring us out of the Bubblequake as fast as we will make the changes to increase productivity” (221). This book explores very pertinent and interesting aspects of the world economy. Although the writers have a direct method of stating bitter facts and situations of the world economy yet it helps the readers in understanding the facts very well. The explicit writing style of the authors is commendable because the book does not keep the readers in any illusions in fact it helps in dealing with the real circumstances and problems. It is observed that American economy is fundamentally the backbone of the world’s economy as it played a vital role in expansion of the over all economy both on a domestic and international level. Hence the whole infrastructure of economy is based on the mechanism of a full circle in which one action results in the formation of another. This mechanism of chain reaction aptly explains the mechanics of world economy. Moreover the whole economic infrastructure that is based on the economic bubbles, business ventures and the financial profit or loss amalgamate and result in the success or decline of the economy of a country. It is like a gamble that can pay off but the stake of losing is high. Consequently the result is also unpredictable as one can never be sure about success or downfall. Reference: Weidemer, David, Weidemer, A., Robert, and Spitzer, Cindy. Aftershock. New Jersey: John Wiley & Sons, Inc., 2010. Print. Read More