Wise pays for profligacy of sinners

Engineers View I

Economics itself is a esoteric science, and for an engineer to understand the same, is a herculean task. Lets understand how an economy, typically works. Government prints money, in various denomination. A commodity price is fixed in the terms of that currency value. For example: A loaf of bread would cost Rs.10/. Now how doest the bread becomes costlier despite the Rs.10. remaining the same. It can be due to various reasons, the cost of wheat or flour used for bread could have increased which is the obvious assumption. On the other hand, consider a case, where Government prints 10 notes of Rs.10/-. Now 10-A person possess 1 note each of Rs.10 denomination. Considering the bread maker also makes only 10 loaf of bread which is bought be these 10 people for Rs.10/- each. Everything is balanced. Everything is hunky-dory. Now there are 10-B people who think they are smarter lot. What they do is since they don't possess any money they plan to borrow or get a deal from either the government or the 10-A person. In this deal they commit to lender (govt. or 10-A person) that they will give Re.1/- for every Rs.10/- given to them and end of a stipulated term commit to pay the Rs.10/-. The group that qualifies as lender thinks this a lucrative offer. They start lending, not understanding the quality of borrowers. Now, how does it impact the economy when borrowers turn sinners. Borrowers pay the Re.1 for three to four months anticipating that bread prices will move in such a fashion that even after paying Re.1 on Rs.10/- they can make handsome profits. But, they forget that bread produced is limited and 10-A or govt. would also need bread to eat. Even they are striving in the market for their share of bread. previously only 10 were striving for bread, but when 10-B came to make money on bread. Now there are 20 striving for bread. Obviously, there would be a shortage of bread. And bread maker, being no angel, takes this opportunity and further increases the price. The world comes down. Now the margins at which borrowers were borrowing and making money on bread has squeezed due to tight supply and more demand. They start to default. Lenders who were organized, sophisticated, honest 10-A people had no money to save for catastrophic times like these. slowly, since there is lack of money supply, demand for bread goes down, people prefer to starve then to borrow money. Govt is in distress. They print more money. But forgets that doing so, it is losing its value of currency.

Do you think this is what happened in Sub prime loans??

Do you think this is what happened to dollar??

Do you think this what happened to pensioners or depositors in US??

Do you think interest rates moves because of this??

Do you think there is a thin line between Needs and Wants ??

Please think where you belong in this chain of events.