Rise and Fall of US

When boom continues and runs in its full pace, everybody thinks smart, intelligent and hard-working people of America created America in its present form.
I will show you how an upward spiral created America in its present form, at the cost of growth in Japan.

Imagine, a two-people economy. Adam and Eve live alone in an island. Both use gold coins, as a currency between them, both have 5-5 gold coins each. The score board, or the number of coins with each of them is also written along with the trade.

Eve wants an apple. Adam gets it an get a gold coin for it. Adam/6, Eve/4
Adam wants sex, a gold coin changes hands again. Adam/5 Eve/5

Now, Adam decides to keep all his earned gold coins with Eve. He will take it from Eve whenever he needs them.

Now Adam want sex, takes a gold coin from Eve and give it back to him. Adam/4, Eve/6.
But Eve this time demands 10 Apples. He gives 10 gold coins to Adam, Adam gets 10 apples, and leaves his 10 gold coins with Eve. Adam/14 Eve/(-4)

Adam wants sex. Adam/13 Eve/(-3)
Eve 10 Apples. Adam/23 Eve/(-13)
Adam wants sex. Adam/22 Eve/(-12)
Eve 10 Apples. Adam/32 Eve/(-22)
Adam wants his money back. The boom busts. Adam/10 Eve/0.
Adam kills Eve, because the fucking bitch gobbled up his 22 gold coins.

Eve consumed a lot. She was like America, consuming on borrowed money.
This is precisely what happened to America and was a reason for its growth. All countries, all petrol exporting nations, Japan, China, India kept there hard earned money in US dollar denominated treasury bonds. All developing countries are very happy to have dollar denominated huge forex reserves, and US felt even happier to spend it.
This faith in dollar as a currency and United States as a nation. For Japan it made sense, because they were getting better interest rate then there own country. But how stupid was this act for all other nations, they could have got better interest rates in any other nation. India could have spent that on improving its own infrastructure, which was its biggest bottleneck.
An economy which is alive because of consumption. Consumption is the biggest contributer to their GDP. Obviously, everybody will consume like Eve, if they always get the 100% money back on that consumption.

No doubt, US showed potential of becoming the best economy till 80's i admire US for its growth. Then investments happen, they consumed and actually became the best economy. Every country was happy to produce more than it consumed and look at their swelling forex reserves. America was happy to consume more than it produced and look at their swelling deficits.

This led to formation of a big massive credit bubble in US economy. Warren Buffet lived through it and made fortunes. But you must respect the rule 2, of The Basics. To judge on Warren Buffet brains, you must wait till the bust.

What has changed, which led to bust of this boom. Obviously, some countries like Adam, asked for their money back. It all started with IT crash, after IT crash, US reduced interest rates to avoid a recession. Then WTC attack occurred, the economy went down again. Further interest rates cuts, and interest rates reached 1%, and were left like that because election were just an year away and people were happy buying dream houses for 1/6 of the EMI as rates came down from 6% to 1% in less than 1.5 years . This started a mortgage boom which busted in 2007. Countries for better interest rate started moving there forex reserves into Euro. Some even made their own Sovereign Wealth fund to buy equity in other countries.
When will other countries ask for their money back ? Or pull there money from dollar denominated US treasury. This will happen if US continues to be in a longer recession.
US is all set to be in a long recession, because last time interest rate cuts started a mortgage boom. Now there is no other boom left which could show growth for the US. In the time of recession, if US cuts on its consumption, it will have to suffer even more. And since it is a recession, US cannot consume at the same rate as it did earlier. Only option to boost its economy is using a war, which it cannot afford to do with such mounting deficits. Other option is it develops some groundbreaking revolutionary technology, like transmitting human beings or getting oil from moon.

I hope i convinced you to move all your assets away from US dollar. Stay away from all stocks which get their earnings from US. Stay away from outsourced US jobs for a long-term career. Stop thinking of moving to US. I also want to bet with Warren Buffet, that he will not be in list of top 10 richest persons within next 5 years.

This fall of US, also means rise of India. I will write about it in my next post.