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View Full Version : World Economy (If Debt free) - What happens else where



karim0028
01-14-09, 09:56 AM
Hi Guys,

Some thoughts have been running through my head for a while and i would like some input from the smart guys at iTulip..... Now, as mentioned in my prior posts ive been reading itulip for ~1.5 years and find the analysis amazing and for the most part spot on with regard to US, Europe, UK, the West, etc....

One recurring theme, i did notice though is that the hinging factor in all of the analysis is debt... High Debt always collapses and collapses fast....

There are parts of the world that don't operate on debt, im curious what happens to their economies in this whole debacle as the world is now so interconnected now (through trade, finance etc) that one country sneezes everyone else catches a cold.. Its really unfathomable to me that EVEN if you are debt free that you will come out unscathed from this crisis, simply bc the US was/is the biggest customer/consumer.... I may not have debt, but i no longer have the town drunk frequenting my bar and handing me his weekly salary for the booze i sell....

Im positive the impacts for these non debtor citizens in (yet, non FIRE countries) will be felt every where if through nothing more than the trade connections and cash flowing into the economies from the US and Europe.... In the countries i'm talking about the cash that makes the local economy go round may come from trade, finance, whatever... But, at the individual micro level very few people carry debt at all...

Case in point, im visiting Cairo, Egypt now on vacation and its absolutely mind boggling here.... As an example, I walked into a local branch of HSBC and i shit you not..... Two middle aged men limped into the bank carrying a black garbage bag full of cash to deposit... After over an hour of counting I overheard the teller hand them their deposit slip and tell them how much it was; 1.25 Million Egyptian pounds ($1USD = 5.5 EGP) thats close to a quarter million dollar cash deposit (try doing that in cash in the US and i bet you'd be in handcuffs before you walked out the building) ... Houses, cars, food,everything is paid for in cash here...

As in all over the world there has been a HUGE boom here; i believe, a spillover from the last 10 years or so of FIRE economy influence the world over.. As an example an apartment in Cairo that sold for 61K EGP 15 years ago now has an asking price of 1MM EGP (thats almost the same price for a house in the US if not more).... I honestly can't imagine why in the world anyone is willing to pay that much for a 1000SFT apartment.... The local economy here is not that rich of its own right, but i believe the money flowing into the economy here comes from expats overseas, whether in the gulf or the states or Europe who bid up land/realty prices to these levels with the money they send home as savings... Here land really is viewed as wealth.. AGAIN, all cash, minimal to no debt financing....

Now, i keep trying to run the numbers in my head and i cant find a way to fit the itulip thesis to non debt based economies..... As an example, I keep trying to assess house prices in cairo, but the thesis comes to lower prices bc of tightening money and job losses for the expats sending money home and international companies here laying off locals as well as drastically lower bulding material costs.....

But, people here keep saying Egypt wont be affected as much bc there is no personal debt to speak of, its all cash and carry here..... The line i keep hearing here is; If i own my own home or rentals, i dont sell unless i get the price i want But, im positive trade will be impacted bc the US is Egypt's biggest trading partner (i've already heard insider stories from accountants of large local companies, affiliates of companies like IBM reporting sales down by 25-35% in Q4)....

Quite honestly, im torn.... Some itulipers (or iTulip admins) care to shed their opinions on something like this? Essentially, what happens to non debtors in a highly inflated debt based world? East vs West or whatever way you would like to look at; as even the huge saver China is hurting now bc someone took away the punch bowl from their biggest customer... At a micro and macro level what happens to the non debt based economies?

GRG55
01-14-09, 11:39 AM
Hi Guys,

Some thoughts have been running through my head for a while and i would like some input from the smart guys at iTulip..... Now, as mentioned in my prior posts ive been reading itulip for ~1.5 years and find the analysis amazing and for the most part spot on with regard to US, Europe, UK, the West, etc....

One recurring theme, i did notice though is that the hinging factor in all of the analysis is debt... High Debt always collapses and collapses fast....

There are parts of the world that don't operate on debt, im curious what happens to their economies in this whole debacle as the world is now so interconnected now (through trade, finance etc) that one country sneezes everyone else catches a cold.. Its really unfathomable to me that EVEN if you are debt free that you will come out unscathed from this crisis, simply bc the US was/is the biggest customer/consumer.... I may not have debt, but i no longer have the town drunk frequenting my bar and handing me his weekly salary for the booze i sell....

Im positive the impacts for these non debtor citizens in (yet, non FIRE countries) will be felt every where if through nothing more than the trade connections and cash flowing into the economies from the US and Europe.... In the countries i'm talking about the cash that makes the local economy go round may come from trade, finance, whatever... But, at the individual micro level very few people carry debt at all...

Case in point, im visiting Cairo, Egypt now on vacation and its absolutely mind boggling here.... As an example, I walked into a local branch of HSBC and i shit you not..... Two middle aged men limped into the bank carrying a black garbage bag full of cash to deposit... After over an hour of counting I overheard the teller hand them their deposit slip and tell them how much it was; 1.25 Million Egyptian pounds ($1USD = 5.5 EGP) thats close to a quarter million dollar cash deposit (try doing that in cash in the US and i bet you'd be in handcuffs before you walked out the building) ... Houses, cars, food,everything is paid for in cash here...

As in all over the world there has been a HUGE boom here; i believe, a spillover from the last 10 years or so of FIRE economy influence the world over.. As an example an apartment in Cairo that sold for 61K EGP 15 years ago now has an asking price of 1MM EGP (thats almost the same price for a house in the US if not more).... I honestly can't imagine why in the world anyone is willing to pay that much for a 1000SFT apartment.... The local economy here is not that rich of its own right, but i believe the money flowing into the economy here comes from expats overseas, whether in the gulf or the states or Europe who bid up land/realty prices to these levels with the money they send home as savings... Here land really is viewed as wealth.. AGAIN, all cash, minimal to no debt financing....

Now, i keep trying to run the numbers in my head and i cant find a way to fit the itulip thesis to non debt based economies..... As an example, I keep trying to assess house prices in cairo, but the thesis comes to lower prices bc of tightening money and job losses for the expats sending money home and international companies here laying off locals as well as drastically lower bulding material costs.....

But, people here keep saying Egypt wont be affected as much bc there is no personal debt to speak of, its all cash and carry here..... The line i keep hearing here is; If i own my own home or rentals, i dont sell unless i get the price i want But, im positive trade will be impacted bc the US is Egypt's biggest trading partner (i've already heard insider stories from accountants of large local companies, affiliates of companies like IBM reporting sales down by 25-35% in Q4)....

Quite honestly, im torn.... Some itulipers (or iTulip admins) care to shed their opinions on something like this? Essentially, what happens to non debtors in a highly inflated debt based world? East vs West or whatever way you would like to look at; as even the huge saver China is hurting now bc someone took away the punch bowl from their biggest customer... At a micro and macro level what happens to the non debt based economies?

The national situation may overide the working of the local, private economy. In Egypt's case it benefited from a great deal of foreign direct investment this decade, particularly in petroleum, construction, and "free-zone" industrial manufacturing [for export], in addition to a phenomenal increase in Suez Canal revenues as global trade volumes exploded [the canal had been running at capacity for several years prior to the current downturn]. Finally, Egypt is the recipient of very substantial direct aid payments from the USA. Despite all this the national debt is quite large in comparison with GDP [about 100% the last time I looked at the stats].

The global downturn looks like it is going to hammer countries with outsized debt, so Egypt could turn quickly from apparent boom to bust, and find its subsidies for food and fuel are unsustainable. Layer over that the politics of Islam, and it could make for an explosive situation. Just as in the developed countries, those who have cash will benefit.

btw, Cairo is one of my favourite cities; I spent considerable time there in the first 7 years of this decade as my firm made investments in that country. I do not think that anyone has truly lived until one has visited each of the great cities on the planet, and Cairo is certainly one of those.

pksubs
01-14-09, 11:42 AM
I think what you're describing is an economy where _consumer_ debt is small. However what about corporate and government debt, if that's a large enough part of the overall economy, there will still be an impact of the general economic malaise on Egypt's economy.

jtabeb
01-17-09, 02:26 AM
At a micro and macro level what happens to the non debt based economies?

It all depends.

It all depends on the level of external influence on the country. For example, egypt gets a billion or three in foreign aid yearly from the us. The citizenry may operate on a cash basis, but does the government? (I know exactly the phenonomon you describe. I saw my aunt's brother by a house in Amman with a plastic sack worth of cash (JD).)

I think the biggest player in all economies is the goverment so unless you have a full understanding of the operational economics that the goverment employs, you can not say how they will be affected with certainty because the unknown variables are too numerous.

I would think that a cash economy would be better for sure, because the debt servicing burden does not extract purchasing power from the economy. Another advantage is that a cash economy is closer to a "barter economy" so that if a currency crisis ensues, a simpler transition can take place vs the type of transition that would have to take place in a financialized economy like the us.

Additionally, a cash economy is more resilient due to the types of transactions that take place. By definition people are buying things that they need and have the money for vs things that they want and have the CREDIT for in a financialized economy.

Does this make sense?