What is causing the Economic crisis?

Is it that US and UK is faking real growth. Is it the integration of Emerging economies into world economy affecting the west? The emerging economies with massive labour force, capital, technology and access to markets are affecting the west.

In 1990's there were 100 Mainframe programmers to do 100 jobs; the availability and demand were matching. In 2008 the jobs remained at 100 or less, but there was a massive influx of mainframe programmers from emerging economies. This was not a problem initially, but as the programmers became more efficient and jobs decreasing there was a mismatch.

The emerging economies with new found wealth from increasing work force lent their wealth to the UK & US. This resulted in the emergence of Service economy. The lending of wealth to US and UK resulted in no productive wealth creation, but resulted in real estate inflation, consumption, consumer credit and excessive government borrowing. Oil economies recycled the money in to US and UK creating Credit and Housing Bubbles. In fact borrowing is not creating wealth, but foregoing of future wealth. So borrowing by US and UK appeared as economic growth, but much of the activity was taking place at the expense of future wealth.

The moment you buy something, it will have a multiplier effect, i.e. with your payment you are paying someone's salary, someone's building rent and so on. When you buy lighting with borrowed money, the lighting would have been manufactured in China, where there are hundreds of factories. The lighting buy will result in additional investment in these factories to service the demand, which will affect the supplier of goods to the factories and so on. The cumulative lighting buy would result in growth in UK and US, in turn will increase employment, which would have resulted in those individuals to purchase some other things and rising economic activity.

Thus huge amount of borrowed money flows through UK and US to service this credit fuelled activity. The world shapes around consumption, and we believe that wealth is being created. When lending stops, the world economy suddenly is pointing in the wrong direction.

The economy is shifting shapes. The over capacity will lead to price competition and bankruptcy will follow. This is seen as a collapse of Service economy in UK and US which will have knock on effect on suppliers. This will lead to destruction of economies. This is destruction of Savings. The empty factories with surplus workers will lead to destruction of savings.

Creditor countries like Japan and China have exchanged the goods for overseas paper called debt. They don't know what to do with this paper now. If they sell the paper, its value comes down and more paper will be issued. The US and UK don't have enough output to service the debt. The consumption in US and UK was really destruction of capital. It is like lending the money to someone who spend the whole lot on parties. Without proper investing in some kind of productive activity no one can pay back. If some one buys a TV with borrowed money, at some point he has to pay with his hard labour.

Now the lenders have realised that the money given to US & UK was spend on parties and are wary of lending to UK & US again. There has been massive erosion of saving in favour of consumption. US and UK have a massive hangover of Debt, meaning less capital. Both countries should produce more to have new base capital and surplus value to service debt.

US and UK have little capital base to transition to real wealth. But the good thing is both economies have good companies to rebuild a capital base. The government is pouring more money into the insolvent banking system. In doing so they are borrowing huge amount of future capital. By borrowing so much they are denying the availability of capital to business that might start the transition of the economy. The amount of saving both domestic and international is finite. Every $ that is put to use for government borrowing is not available for business.

The government is trying to use the stimulus money to generate employment which will increase consumption. But the problem is that we need saving and not consumption to build capital for economic restructuring. When the government try to resume consumption it actually is trying to make up the short fall in consumer borrowing and restart partying. When Bank of England reduces rates many savers have seen the money fall to nothing. The cash drain is a worrying symptom of rising unemployment. People who have lost their jobs are forced to dip into their savings to pay for their everyday expenses.

The government is thinking of Quantitative easing which means printing money. They think this as creating new capital. UK and US government should understand that wealth has moved away. The only way to return to wealth is restructure economies and meet the new challenges, else both $ and Pound will go the Zimbabwean way.