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GDP of a country gives some idea about how well it is doing in terms of production. In the last two centuries, Western economies overwhelmed others by far.

In the 1950s, US and Europe combined made up 60% of world economy. That’s not counting Canada, Mexico and Australia.

If we look at the fractional share of US+major European countries over the last four decades:

GDP of the US and Europe as fraction of world GDP

We see that their share has been falling over the years. From 62% in the early ’70s, to about 47% now.

So who’s gaining?

There’s a lot of talk about the so-called BRIC (Brazil, Russia, India and China) countries. These countries are supposedly rising stars in the world economy- and have seen unprecedented economic rise. Let’s see if that’s true.

Here is BRIC’s share of world economy over the years:

Fraction of world GDP controlled by the BRIC countries

So it did indeed go up from about 8% of world economy to about 16% now. Impressive.

However, it’s not the whole picture. Let’s examine each of the countries separately. First, Brazil-

Brazil’s GDP divided by the GDP of the world

Brazil has seen a steady rise in the last decade in it’s share of world economy. It now commands about 2.7% of world economy, not very unlike it’s share in 1996 (2.9%), 1982 (2.7%), and 1976 (2.6%). So its position now is by no means “unprecedented.”

Next, Russia:

Russia’s share of world GDP

Russia saw a steady decline in it’s share of world economy through the ’90s. It has recovered it’s strength of the early ’90s now. It had 2.5% of world economy in 1990, now it has about 2.7% too.

What about India?

Indian economy as a Fraction of world GDP

We can see that India has seen a steady rise in it’s share of world economy from the ’90s from about 1% to 2.2% now. But it’s nowhere near it’s best days in the early ’60s share of 3.5%. (Note that we fought two major wars right around that time- with China and Pakistan, and focus shifted from development to armament.)

So, as you’ve guessed, among the BRIC countries only one that has seen real unprecedented rise is China. Here is how it’s share of world economy have changed over the years from a mere 2% to about 7% over the last two decades. It is interesting to note that it had a share of world economy similar to India in the ’60s. Now China’s economy is four times that of India’s.

China’s GDP/world GDP.

But that’s not all. Here is the total share of the major Muslim economies in the world (Turkey + Indonesia + Malaysia + Saudi Arabia + UAE + Qatar + Pakistan + Bangladesh + Libya + Algeria + Kazakhstan).

Fractional share of Muslim economies in the world (total gdp of Muslim countries/world gdp)

That goes up from a baseline of approximately 2.7% in the ’90s to 5% (and rising) now.

This list includes Kazakhstan (became free only in 1991) and Bangladesh (created in 1971). Excluding Kazakhstan, and Bangladesh we see the following:

Fractional share of Muslim economies in the world (Excl. Kazakhstan and Bangladesh)

Therefore, Muslim economies have yet to reach the share they had in the ’80s, in spite of their rise in the last decade. I can only hope and pray that their growth will not be stifled this time. Ameen.

It would be good to know the causes and be able to make some predictions.

Data is from Wolfram Alpha.

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Oil is now selling at $126 a barrel (at London Brent.) If it keeps going too high, leaving moving average (average price of a barrel for the past few days) too far behind, then people will expect price to fall, sooner or later. Sale will slow down, market will be oversupplied- leading to a precipitous fall in prices.

In that light, it is my sincere hope that oil price does not spike upwards, but keeps rising at a steady rate.

Now here is why I am cheering high prices of oil-

1. Oil is undervalued. Like gold, we have only a finite supply of it. Unlike gold, we are using it up at an ever accelerating rate. The price must go up for the consumption to slow down.

2. Burning fossil fuel is one of the leading causes for global warming. High prices of oil will force leading emitters to change their habit. Mere preaching has had no effect so far.

3. High price of oil will level the playing field for developed and developing countries. Developing countries are much more fuel efficient (Widespread public transport etc.) and are much more frugal about spending energy.

The rich countries, on the other hand, have built their system on cheap/stolen oil. As all oversupplied economies do, they are horribly inefficient in terms of energy usage. A high price of oil will  force them to become more energy efficient- something the poor countries have already got.

4. After trillions of new dollars (printed out of thin air as bailout money), the value of the dollar ought to be on the decline.

Etc. etc.

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Manipulating price?

Is someone forcibly keeping WTI (West Texas Intermediate) low? Given the trouble in Libya, why is it only up by  only 10%?

If they are, then year end price will be around 120, and not 150. Nevertheless, oil prices are irreversibly on an upwards trajectory. We may see short term falls, but no long term decrease in price. No turning back from here.

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As oil prices increase (somewhat irreversibly) the price of food in the West are going to go up- for the very simple reason that their farms and delivery system is so oil dependent.

If the food prices rise in the West, there will be more food exports to the West from the countries that produce food for cheaper. Because the Western countries typically have more purchasing power (for the moment), the prices of food are going to go up globally.

It is critical then that the countries that are import-dependent just because imports are cheap must focus on food production in their own countries. They are in for big trouble if they don’t manage that within next one-two years.

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The West is too used to getting oil for cheap (sometimes at a gunpoint.) The true price of oil is not reflected in the price an average user pays at a petrol pump. At around $3/gallon (less than $1/liter), oil is cheaper than coke in the US. No doubt US is intoxicated with oil.

The price is paid by people in oil producing countries. From the Iranians to Egyptians to Venezuelans to Ecuadorians.

The pressure for cheap oil has global implications too. The economy in the US is so transport dependent, that four/five major food producers provide meat for the entire country. Food at any store has on average traveled more than 500 miles. To grow 1 calorie worth of food, US spends more than 10 calories in burnt oil. There is no public transport to speak of. All that add up to make close to one fifth of world’s carbon emissions. Yes- the US alone produces about 20% of world’s carbon emissions. (China  22%/1.4billion, US 19%/.3billion, EU 14%/0.5billion.)

That can not be true forever. It has to change.

I am happy that oil prices are rising because of the ongoing revolutions.

Our economies are far more energy efficient. Food typically comes from the neighboring regions, unless there is a justification for brining them from afar. Eastern economies are much more robust with regards to high oil prices. Europeans are comparatively well off too.

Let us welcome the new era of expensive oil. I hope and wish to see $150/barrel by the year end, and $200-300/barrel in three years (adjusted for inflation.)

Let me also take the opportunity to express my best wishes for my struggling brothers and sisters.

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Crunch comes to Washington

Can I feel happy that I predicted the crunch in the US six months ago? It happened sooner than I expected. 🙂

By the way, protectionism is not going to save US economy in the long term because of some systemic faults. The crisis in Europe is going to go back to the US in two years time, while Asian economies will continue to grow.

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This was first published as part of a separate post, but it should be it’s own post.

There is a lot of talk about the “subprime mortgage crisis,” but there is not much talk about the underlying systemic reasons that led to the crisis.

The main problem was that property values in the US were overinflated. Average house prices in the US hovers around $200,000. Compare that with the average household income of around $46,000, which means that the average house is more than four years worth of income of an entire family. If the cost of financing is factored in (because most Americans buy house that way), then the cost become in excess of $400,000. Nine years worth of income of an entire family-  twenty to thirty years worth of saving of an entire family. It makes no sense.

As early as mid 2000s there was an indication that prices will start to adjust (i.e. reduce) due to a saturated market. However, US consumer spending is closely tied to property value due to ubiquity of mortgage. As a result of price adjustment, then, the total size of US economy would have shrunk, and would have cause significant short term uncertainties.

It meant there will be major upheaval if the establishment allowed markets to adjust itself (which means “let prices fall” in this case.) So they panicked.  They decided to pump up property values by stimulating demand by encouraging mortgage lending. The banks played along because it cost them very little to lend, and they earned big. Banks started giving out loans without verifying ability of the person to pay back. For a while.

But then it came to the brink of collapsing.

As people (so called subprime) failed to pay their monthly instalments, their houses were seized (foreclosed) and banks were left holding property. (It is transfer of “real wealth” from “market” to “bankers” because the banks got these properties for free- the money the lent out to the mortgage holders were created out of thin air. It’s not an anomaly- that’s how US economy works.) However, the banks don’t know what do with this wealth. First of all, they don’t trade in houses, moreover, if they start selling these- prices will plummet.

What happened at this stage is unclear, but Robert Scheer of truthdig.org claims that the banks threatened to bring down the economy unless they were bailed out. Maybe they were threatening to sell these properties which would have brought property prices down thus bringing US economy down. Who knows what happened behind closed doors. Anyhow, the government saw potential for trouble there, and decided to bail the banks out- so that the banks can hold on to these properties until they can sell them at current market values. It’s ended up working well for the banks, although they are not entirely responsible for what happened.

Even after bailout, the main problems remain. Unemployment remains high. Production is low. Wages are stagnant. It seems, therefore, that property values still are inflated. Manifestation of that imbalance has only been delayed but sooner or later markets will have to “adjust.” Something has to give.

The establishment is not done yet. Fed is going to print 600 billion in order to “stimulate the economy.” Not sure if it’ll help the US economy- likely the money will flow out of the country as investments/purchases into surplus (exporting) economies. But more importantly it’ll hurt anybody who holds US dollars. It’s a involuntary transfer of real wealth of sorts. A stick-up.

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