Era of Wealth Destruction Begins............

I don't want to sound too pessimistic.. but this how any free market economy works, in cycles... what goes up comes down only to go higher at some later date, I for one firmly believe that the kind of economic growth the world is going to witness, it would have never seen before but let me put this article on hold for some other day; perhaps after this little pessimistic article it would be apt to put write in that article.... so with this optimistic note let me begin............

Oil has seen a sharp pullback of around 30% from its all time high.... now this could simply be a correction in a bull market...bull markets do correct by around 30% (remember 2006 Indian markets) or finally the bear market has set caught up with oil as well.... and with this happening the final piece of puzzle in the process of wealth destruction has been put in place as wit oil falling every asset class across the world is in the process of meltdown... this is what we call 'Wealth destruction', you are loosing wealth no matter what you do....

- If you keep cash, inflation erodes your wealth....

- Similar story with bonds

- Commodities and Equities are loosing their notional values so even your principal is getting eroded in these asset classes

- The new esoteric asset classes including art and sculptures... well let's not really talk about it because they may be asset classes today, but time changes and so does tastes of people...

Now the question that comes to mind is that if asset prices are a function of liquidity then with US (the main source of global liquidity) having interest rates that low, how can every asset meltdown... after all said and done people would invest the new money somewhere... Well the idea is right however asset prices are not just a function of current liquidity but also future liquidity or what we call growth....

Let's assume an economy with just two people A & B... A has a piece of land with him while B has 100 rupees with him... A sells the land to B for 100 rupees... now A goes nerd and throws the 100 rupee note in the river.. while B turns lazy and sleeps/hibernates for 6 months on the land he bought...What happens after 6 months when B tries to sell the land back to A... A has nothing to give him back...The price crashes to zilch..... 

However wait the story is not over yet....Seeing its pupil in distress, enter our angel - 'The Central Banker' ..... and distributes 200 rupees to A... now B sells the land to A for 200 (double of what he had bought for..wow!!! or is it)...any crop A produces on that land would automatically cost almost double of it had 6 months before.....an inflation rate of 100%!!!.... so the 200 rupees B got turns to be really worth 100 and worst still the 200 rupees borrowed by A has to be given back to the bank.....how on earth would that happen when already inflation has eroded the wealth by 100%.....so again the price crashes to zilch............

Now the Central Bank accepts that there is a problem and only a structural change wherein in the A & B starts doing some productive work in the economy can bring the economy out of this hole and for that to happen the Central Bank is bold enough to take in a few periods of economic downturn...However it can do one other thing to prevent the asset prices from doing to zilch...it keeps on printing money...it will keep on inflating asset prices along with prices of consuming commodities leading to HyperInflation.....10000%, 100000%, 1000000%....just pick a number and that could be your inflation figure.....This has serious implication of eroding business confidence as with so much uncertainty no one wants to risk new capital in any business, currency looses its meaning and people switch to barter system which again ultimately means no appreciation of wealth in any asset class....

Unfortunately the Fed of US has taken on to this very last route... ofcourse structurally US economy is much more stronger than countries like Zimbabwe.. but it doesn't take long for the tide to turn... but now there are two routes in front of the Fed.... stop printing easy money and let the world take in some pain... or keep on doing what it has been doing and worse still print more money (reduce rates further) and take this world to a total disaster...... Either ways there is going to be wealth destruction for now... However in the first case there would be short term pain with long term gain... In the second yu might again see some asset classes (may be oil again) propping up.. However it just be the final spark before the total darkness that will engulf the World economy.. Hopefully good sense might prevail atleast this time........