Monday, November 30, 2009

False wealth

During the past two decades, many people thought that they were rich, as their properties and equities appreciate in value. This is false wealth on the back of an asset bubble.

They are the same assets but they were priced at inflated values due to low interest rate, financial engineering and leverage (i.e. high borrowings at low cost).

The global financial crisis of 2008 had brought the asset prices down to earth. Suddenly, many people realized that they were not so rich after all. The affluence brought about by financial innovation was an illusion.

We went through the collapse of the US housing bubble together with the associated asset backed securities, collateralized debt obligations, credit default swaps and other strange products. We will now face a second wave of problems with the default of Dubai World. What next?

Unfortunately, the people who suffer most will again be the ordinary people. They will face higher unemployment and still have to pay the heavy mortgage on their overpriced housing.

Those who think that the free market capitalism can create wealth should re-think again. Is it truth wealth or false wealth?

Tan Kin Lian

7 comments:

Anonymous said...

An economy that runs on a system of interest rates is bound to fail.

So the western economy and the nations that follow them, e.g. Dubai (supposed to be Islamic but they are so westernised will ultimately failed.

Anonymous said...

Asset bubbles are nightmarish.
If you go to the second tier cities in China, you would come across beautiful buildings that are unoccupied. Block after block of completed buildings.
China a Communist country is still a planned economy, the Govt is now facing a huge headache over the economic stimulus. It's a proceed/
withdrawal difficulty kind of decision to make. Remember the potatoes being left on the fields and warehouses to rot in Russia some years ago when potato prices plummented.
The same with stock prices and properties. This is what may happened in a planned economy.

Anonymous said...

The 1st PM of PRC made 3 set of econ reports:

One for Chairman Mao (an overstatement report)

One for PM Office (a honest report)

One for media (a drama writing!)

DO YOU BELIEVE 6 MILLION GRADUATES ABLE TO FIND A JOB THIS YEAR?

GG said...

The question is what do you do with this knowledge?

wjsim said...

Who set the interest rates and guaranteed mortgages?

Anonymous said...

Join the "elites".
Elites don't care whether true wealth or false wealth, as long as their bank accounts continue to get bigger and the risks are hedged away to the non-elites!

Ex-Con

Anonymous said...

Lots of people think they are rich because of numbers printed on a monthly statement. At least those invested in houses and business have something tangible to live in and use. The prices may go up and down but they will always have something to trade as long as they dont buy it on borrowed money.

I am fast coming to the conclusion that the only people who get rich from paper investments are the middle men, agents and salespeople.

How many people invested in Maddoff thought they were rich because they had a number on a piece of paper that increased every month ?

If you have nothing but numbers on a piece of paper are you rich anyway ?

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