Advisor Says We Face a Worldwide Banking Meltdown
Dr. Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World’s banking system starting with Sovereign debt in the Eurozone, affecting the UK then finally bringing down the global banking system.
Watch the video to the end since Shapiro has the final word against the others who are saying it can all be prevented. He points out that there is no credible plan to avert the sovereign debt crisis in Italy and Spain.
The important part was the premise that they started the interview with ie what will happen if nothing is done. Then the experts say esentualy that if you dont get out of the path of a speeding car it will run you over. At least Shapiro nominated a period of 2 to 3 weeks before Capitalism as we know it colapses. See you in 3 weeks.
If Capitalism does end in three weeks shouldn’t someone tell the markets?
http://markets.ft.com/research/Markets/Tearsheets/Summary?s=FTSE:FSI
Certainly they are likely to do “whatever it takes” to avoid a financial collapse in 3 weeks. The point is that having to do that is itself a very different situation from the allegedly crisis free post-war capitalism – and “whatever it takes” tends to produce greater difficulties a bit down the track.
One thing we can be sure of is that Steve will retain his confidence in capitalism, and especially Chinese capitalism, until the bitter end.
Arthur Capitalism may well end in three weeks I don’t know.
What I object to is absolute fear mongering bullshit being pedaled as relevant insights.
Maybe Im at the wrong blog.
Arthur I also agree that “they” will try everything to keep “their” system afloat, however it is Capitalism and by definition it will boom and bust. As to banks I agree with Adam Smith who argued that banks should be regulated in the same way that properties should comply with fire regulations.
One more go.
The people that run the economy are constantly making changes.
At this time these people are making frantic changes.
Now we watch a BBC programme hoping to get more understanding and they start the discussion off with What do you think will happen if those in charge do nothing.
Doesnt this crap bother anyone else?
Are we all prepared just to take it all on no matter what drivel the BBC serves up?
Protesilaos Stavrou (October 3rd):
I don’t “get” this:
http://protes-stavrou.blogspot.com/2011/09/dissordely-default-early-elections-and.html
Do they imagine that after default they will NOT face draconian austerity?
I suspect so, but I haven’t seen any explanation for why they would imagine that, let alone an argument in support of it.
It seems from the above panic conversation of connected insiders that the internationally connected banks are already freezing up on lending to each other and therefore this crisis is now moving on to yet another level. This reminds me of what happened in 2008 and so government bailouts are clearly required again but the real problem is that the bailout drawer is now empty for some of the former members of the bailout squad. This is the very squad that are now economically imploding, so the scale of the debts continues to grow, feeding the cause of the defaulting and further driving the implosion…
Because governments are now defaulting on the math of their debts, capital flight must be in progress and thus the ratings agencies are dragging along behind the first movers. The funds placement workers must send more of the stream to the safety of (you guessed it) investing in the world’s largest debtor country’s currency! The very liquid and ever reliable mighty U.S. dollar.
That sounds bonkers to me. But the money always flows and has to be placed somewhere, minute by minute 24/7 so that’s where it will flow to. That doesn’t look good for the ‘responsible’ Germans to me and they can’t carry what is unfolding for their own banks I bet, let alone others.
The figures apparently now show Italy on the rocks in the manner that the PIGS unwound, so I say that concludes some level of whatever this game is. The Euro sounds over to me, and the retreat to propping up one’s own country looks like the next and all but useless panic move in this the global age.
It looks like a system now throwing the working classes overboard and why the hell would it not look like this. That’s what they do. Unemployment is bound to skyrocket in this situation and it may well be that ‘capitalism can recover from any crisis if we let it’ but why ought working people let it take the next ten years to ‘recover’?
2 or 3 weeks may be panic talk, as could 2 or three months, but 2 or 3 years would not be, and given the state of social unrest in Greece to name just the first cab off the rank there ought to be planning on more problems not less.
Step back and recall that the GFC mk1 was 3 years ago and some people were warning then that the whole scheme would eventually come unstuck, because it didn’t really add up so they seem to have been slow to be on the money. So it’s possible that 2 or 3 months, is now more realistic for GFC mk II but that will be on another scale altogether. This has got the feel of ruling-class panic stamped all over it as the ruling-elites thrash about without direction.
The movement of the 99% against the 1% seems well timed to me.
I agree that if people with money believed the senario in the BBC programme then they would be removing their money from European stock markets and buying US treasuries or gold. So what is happening on a European stock market since we were told that Capitalism has three weeks left in Europe?
http://uk.finance.yahoo.com/q?s=^FTSE
OK so that link doesnt work. The point of it was that every day since Shapiro made his assessment the Finacial Times 100 companies index has risen. People with money are buying European stocks not selling them.
Counties are still lining up to join the Euro, Estonia joined this year. Are the leaders of Estonia mad?
The Europeans will print much more money rather than let a bank fall over and they are much more likely to let a bank fall over than they are to give up on the Euro.
As Patricks mum used to tell me the BBC is just the propaganda arm of the British government pay it no heed.
Arthur I think that you misrepresent me when you say that Steve has confidence in Chinese capitalism, until the bitter end.
China has boomed for thiry years. That is unusual and all booms end with a bust. I thought that it might bust during the Asian melt down and the GFC but it didnt.
Currently many trigger points in the Chinese economy have been identfied that may spark a collapse these being in the areas of corruption, imbalances, inflation, totalitarianism, and ecological problems. Added to these are the “hot money ” outflows, the weak consumer sector, the looming currency war, wage inflation, a slow down in manufacturing, the shadow banking system, a property price collapse and a too high level of fixed assets as a proportion of GDP.
Having said that, China still finds willing markets for its products and has a high level of savings which can be used to combat slow downs when they happen.
Im no economist and I cant tell you what will happen I can only tell you what I hope will happen. I hope that wages rise in the industrialised east and that industrialisation spreads west until the whole of China emerges as a modern society.
I support the development of Capitalism in China. You have always opposed the development of Capitalism in China because you would prefer a return to its socialist past. I used to believe this too but changed my mind as the evidence dictated.
Italy instability is escalating with Berlusconi in trouble owing to both the economic situation and corruption charges.
Berlusconi survived for now.
I don’t see how the contradiction b/w the nationalism of the more powerful countries that make up the Eurozone, esp Germany, on the one hand and what needs to be done to stave off the economic crisis in the next few weeks /months is going to be resolved. As Shapiro said in his final word of the video above: “there is no credible plan to avert the sovereign debt crisis in Italy and Spain”.
This analysis is supported by the following extracts:
Bill just a note of caution, you cite Otto Fricke of the Free Democrats. This party was humiliated in the recent Berlin State elections and Im not sure if they represent much current oppinion inside Germany.
I think that the current banking crisis is a political crisis that can be resolved and will be resolved because the alternative would be to dismantle the EU.
The crisis that is economic rather than political is the crisis of growth for which the EU does not have an answer and may well end up looking like Japan.
would seem there is not much confidence in the euro bailout just more kicking the can down the road but the frustration is starting show. This link has no confidence but does seem to imply the world should have a bank not the limited institutions such as the IMF and world bank.
http://www.chathamhouse.org/sites/default/files/public/Research/International%20Economics/1011bp_pickford.pdf
It does seem that Europe is moving rapidly towards fiscal union, so a world central bank may not be all that far fetch.
Unfortunately I still don’t “get” the concept of stabilizing while permitting floating exchange rates. Seems self-contradictory.
My guess is that they will do everything they can to avoid an unecessary financial crash, but that won’t prevent the “real” economy going into a major depression at some point after kicking it down the road.
But we simply don’t have any basis for forecasting.
Agree can’t forecast however Merkel and other european leaders committed to survival of Union and Euro and they seem to realise that this means stronger political and fiscal union so this looks a strong possibility in the near future.
The fear of contagion has seen input from a wide variety of sources and world governments and the need for international standards in almost everything is becoming apparent. Would see this getting more legs as the crisis unfolds but not sure where it ends up but assume protectionists and nationalists lose out.
Although it seems logical that a fiscal union is required in the eurozone it is debatable whether this is now happening or that there is a coherent plan to save Italy and Spain
Some further reading:
http://protes-stavrou.blogspot.com/2011/10/full-analysis-aftermath-of-october-26.html
http://protes-stavrou.blogspot.com/2011/10/european-bank-recapitalizations.html
http://blogs.telegraph.co.uk/finance/jeremywarner/100012842/why-the-summit-to-end-all-summits-solves-nothing/
http://blogs.telegraph.co.uk/finance/jeremywarner/100012880/europe-kowtows-to-the-chinese-dragon/
http://www.ceps.be/book/only-more-active-ecb-can-solve-euro-crisis
I haven’t followed the links yet (due to occupy Melbourne stuff).
But my feeling is that articles bewailing the fact that this still isn’t fiscal union are examples of the tendency towards fiscal union.
The constitutional obstacles are less important than the existence of a ruling class consensus on its necessity. If there were various national ruling classes that had not learned from the 1930s and wanted to follow separate policies then that would happen. My feeling is that “nationalist” outlook is populist rather than the views of people who actually count in the cosmopolitan bourgeoisie of the EU.
Both the US and Australian constitutions specify very different federal arrangements from the highly centralized national states that actually exist. The same could become true in Europe, long before it is expressed in constitutional documents.
Already it is being made utterly clear to Italy as well as Greece that the opinions of their national governments are irrelevant when faced with necessities spelled out by European financial institutions.
That was also made pretty vivid in the USA a couple of years ago when Bush called for the first bailout saying “This sucker could go down”.
Oh shit! I was just about to go har, har, har, look no banking melt down after three weeks and then Papandreou goes and says Greece will vote on the bailout/austerity program. No not the government or the financial wizards voting but the people get to vote about going to hell in a handbag or just crashing the whole EU party.
Then the European Central Bank states that it wont act as a creditor of last resort.(they only see their role as one of maintaining price stability! Jesus you don’t need anyone looking after prices with this level of deflationary pressure. Those Central Bankers are getting paid under false pretenses!) They may as well vote with the Greeks to disband the EU.
Im now with Shapiro but just cant understand why the whole structure stands when everyone inside seems to be trying to tear the place apart.
PS Barry a lot of people thought that Dylan had answers but when pressed on this he replied that he had no answers for he was just a song and dance man.
Yes Steve the Euro appears more and more unstable and these interesting times get more interesting as the months roll on. For example where is the plan to stabilize the sovereign debt of Italy and Spain. This world wide drama in the stock markets today is all happening over the pip squeak Greece default on 50% of their debt where a ‘settled’ hair cut for lenders holding that debt goes along with (I gather) a promise to bailout those TBTF lenders as they fail! ‘and then Papandreou…’ A large amount of money stumped up only months ago by the Germans etc has to be increased not by 30 or 40 % but by more than 4 times the amount and still the markets aren’t buying the notion that the politicians can see the way through all this and all the owning class get back to the good times of growth. Where is the capacity to re-capitalize the entire banking system that is self evidently interconnected as country after country fail under their debt load? Everyone knows this is just one of the PIIGS. The GFC2 may well be over more than just un-payable government debts but the 1st GFC ensured that these sovereign debts were big enough to now scare most governments into dealing with their debts rather than indulge in more supposed pump priming spending when each round of that sees no actual new private sector pumping after the government priming anyway. The ongoing market collapses and the wonderful and totally unknowable outcome via the normal workings of financial property rights instruments such as the credit default swap instruments – means that most banks are probably now trading while insolvent but because who can or could tell until they all know that ‘it’ is happening, they all carry on. The big worry is all about derivative exposure isn’t it?
This round of capitalist problems has had the smell of the Titanic about it for a long time. The initial problem (the 1st GFC) ripped a gash in far too many compartments so the little one up the front is going to go under first. Once the first bulkhead goes under the process speeds up as the flood spills over the top to the next and eventually even the undamaged and fully functioning engine room gets pulled under because it is connected to the damaged front of the ship. If you line the countries up Greece seems to be the little one up the front but the fact is a lot more have a debt gash that can’t be fixed and it is is dragging both them down and collectively the whole capitalist ship.
The financial instruments (that apparently nobody can understand) WILL go somewhere and that is when everyone works out who is solvent and who gets a place in the life boat because they are TBTF and so on. Working people inevitably get caught without access to any lifeboat so we now see the 99% movement get going and people start to think about the problems of this capitalist system again. IMV this ship is going down and so our newly emerging bourgeois democracies with all their Islamic cultural specifics are in something of uncharted waters.
Why do you think Papandreou did what he has done? What do you think of the Italian bond rate being almost at the same level that forced Ireland and Portugal to go cap in hand for their bailouts?
Thanks Patrickm, you raise some interesting points.
I dont know why Papandreou has called for the voice of the people to rule but that I do know that I support the people being the decisison makers in this crisis. The Greek people should have 2 choices, 1 to remain in the EU and spend forever paying money to German and French banks or 2 repudiate the debts and reinstate their own currency. If I was a citizen of Greece I would vote for option 2 and hope to follow the Argentinian model. Option 1 seems to offer no real hope of breaking the debt cycle. If I was a German banker I would want the greeks to choose option 1 and keep paying me money.
I think a lot of Greeks have an eye on Iceland. Popular revolt there against debt repayment doesnt seem to have done them much harm.
European Capitalism has a banking crisis, like thats never happened before.
Every banking crisis can and has been managed well or poorly.
Jeremiah Harman gave us the template for handling them well. After the British Canal Boom went bust and we had the banking crisis of 1825 -1826. Im sure that you are up to scratch on the Bank of Englands hanling of this crisis but just enough to say that in any banking crisis some bank needs to act as the lender of last resort. Backed by the government that has unlimited access to money because it can both tax and print.
Will this current crisis be handled well or will the European Central bank refuse to act as lender of last resort. Well hold on we are in for a rough ride.
I have some thoughts on the Italy Ireland comparison but dont know enough to have a serious opinion.
Boo Hoo ratings agencies dont like Iceland,let them eat fish
http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/9550667.stm
I saw an item recently suggesting that the “contagion” concept of much discussion is based on an analogy of falling dominoes spreading failure from one institution to anothter. They hope to prevent the first domino falling to prevent them all falling.
Suggested a better analogy was popcorn being heated. Eventually they will all pop, whether or not you prevent the first ones from popping.
My mental picture is a sort of combination. Dominoes on a plate being jiggled more and more. They will eventually fall because of the jiggling, whether or not any of them are prevented from tipping over. But when the first one does go, they will then all follow quickly like dominoes.
PS the article from Iceland is a lot less optimistic than the headline.
a clear rundown of likely scenario if greece leaves euro.
http://www.ft.com/intl/cms/s/0/33a77448-0611-11e1-a079-00144feabdc0.html#axzz1d3GfJoox
arthur (Oct 30):
Well, we should consider arthur’s hypothesis seriously. Here are a couple of articles that suggest it could happen the way he suggests. The first one suggests that panic over Italy is exaggerated. The second one outlines a strategy for saving the euro.
Italy is neither insolvent nor illiquid by Andrew Lilico
Only a more active ECB can solve the euro crisis by Paul De Grauwe
Italy has one more card up its sleeve and thats a wealth tax. Wealth tax I hear you say Italy has no wealth tax. But in 1992 Prime Minister Giuliano Amato introduced a one off emergency wealth tax. Rammed it through the parliament in 24 hours and in one blow confiscated 0.6% of bank deposits. Now who said that taxation was theft.
I think the crash in europe is inevitable and Italy is in trouble. This of course is a separate argument to fiscal union. Do they break up and crash or do they strengthen and crash but crash they will.
My understanding is they will do what is required to save the Euro and the Union and deal with the crash as the United States of Europe. Every cloud………….
Tomb, I would panic yes seriously panic but for the fact that we have been here before. This current European crisis looks remarkably similar to the Exchange Rate Mechanism Crisis of 1992. It was all doom and gloom then as well.
Its an irony of history that the Athenian empire was an alliance that states could not remove themselves from and had a system of payments that all ended up in the treasury at Athens.
not sure where you were before Steve but I haven’t been here before or seen anything like it. This is not 1992 and just the fact that you could say that means you don’t get it. This 2007-? there isn’t a parallel except 1929 The isolated instances since 1965 are derived from the same crisis but the planets have lined up this time and while I am not and will not panic I am not in denial either. The Japanese stock market was 39000 in the nineties or late eighties so you could say that every stock market can crash and there will be no problem just look at Japan but we this would be stupid and plucking random dates and events would strike me the same but prefer the Japanese example as it is more relevant
tomb what I mean is that from history we can observe similar situations.
What we have is a currency crisis brought about by a weak economy having its currency pegged to that of a strong economy. This has happened before ie when Germany unified, when Argentina pegged its currency to the $US and when the UK entered the Exchange rate mechanism.
Clearly these are crisis of the way capitalism is run rather than of capitalism itself.
I see that the crisis can be resolved by
1 the weak economy reverting to its pre existing currency arrangement ie UK and Argentina or
2 the weak economy restructuring (austerity) in a way that it reduces debt or
3 that the stronger economy accepts the soveriegn debt obligations of the weaker economy ie West and East Germany
Another ace up Italy’s sleeve is gold.
Yes Italy sits on the worlds 4th biggest stockpile of gold.
Estimated to be 2451.8 tonnes.
That could come in handy if people ever loose confidence in this paper currency.
I don’t think any of us have a capability to make economic forecasts.
If anyone else does they will make a fortune from accurate speculation.
What seems indisputable is that we are no longer in a period of stable growth with occasional “moderate” fluctuations (the “great moderation”) but in a period when crisis is a very real and current concern that does not look like going away any time soon and could produce another Great Depression.
No IMF advisors were talking about the possibility of a worldwide banking meltdown a few years ago. Now its a hot topic.
Crises used to be a regularly recurring feature of capitalism. They were largely forgotton about during the past half-century and people are still looking for explanations based on very special circumstances rather than seeing crisis as a normal phenomena that has inevitably reappeared.
Theories of “final crisis” or “collapse” are simply wrong. Transition from capitalism will involve revolution, not a collapse.
There is clearly now again some underlying systemic instability which was expressed a couple of years ago in the U.S. sub-prime mortgages market and currently in Eurozone sovereign debt. There is simply no way to tell whether any particular manifestation will be successfully resolved and where problems will break out next. It could have been Eastern Europe rather than Greece, it could be China soon.
A focus on the particular manifestation distracts attention from trying to understand the reappearance of underlying systemic instability. A useful question might be why was such instability apparantly absent for so long? What changes avoided regular cycles for many decades and what further change is ending that period of stability?
Arthur I will try and give your questions a go.
Firstly Ill make some points and then try to pull it all together.
Point one, I think people of the 19C who thought that Capitalism would collapse were correct.
Production was anarchic and the state was too weak to play a co ordination role. The states of the 19C were mere instruments that collected taxes and fought wars. However by fighting wars the state became increasingly central to what Capitalism was becoming. Modern warfare needs a lot of co ordination.
After WW1 it became clear that the state could play a regulatory role and after WW2 it became clear that the state could be a central player. In Post WW2 Australia the government ran airlines, banks, housing developments,elecricity, education, health, water as well as organising nation making projects like the Snowy Mountains Hydro Scheme. Plus the state regulated everyone from how much rat dropping beer could contain to how much money banks had to keep in reserve.
After WW1 there was a bit of a slump and Marxists generally thought that after WW2 economics would return to depression levels but the reverse happened, governments using borrowed money turned tank factories into car factories, bomber plane factories into commercial airline factories ect ect. So we had a stimuls initiated boom.
Economic wave theorists say that the booms are due to the introduction of inovative technology. Again the war was a crucial element to both theories. The war had created a massive productive capacity and inovations in commodities like cars, radios and TVs lead to the massive consumer boom.
So we have a boom based on government stimulus, combining with large industrial capacity, mass production and cheap resource inputs.
After about 20 years the boom starts to wane and as a result we see a rise in unemployment during the early 1970s
One pont I want to make is the difference in stimulatory spending. Theres a lot of difference between a hospital which will give benifit for years to come and a war which is an immediate cost whatever its secondary benifit.
Now in the late 60s early 70s the US government wanted to pay for a war and some ambitious social programs. Theres nothing economically wrong with either but the method of payment was not sensible taxes but non sensible money printing.
This printing money lead to inflation. Organised labour was still quite strong. Rising prices were met by demands for rising wages.
Then there were the oil shocks, oil being the most important resource input to the industrial process.
Thats why I think we had a boom and why the bust included high unemployment and high inflation.
The bust was broken by three things, class struggle as organised labour suffered defeat after defeat, by de regulation as Capital was given a free hand in very many areas, privitization, outsourcing, floating currencies, free trade, bank deregulation ect ect and the third pleased the Economic wave theorists with the IT revoution
I think that Marx believed that Capitalism would collapse because its internal processes were anarchic. An updated version should read that unregulated Capitalism will collapse because its internal processes are anarchic.
Capitalism creates wealth and poverty. I cant see why a strong state could not re invigorate Capitalism by taking money from the rich who have a low propensity to spend and give it to the poor who have a high propensity to spend. This doesnt have to be in cash it could also be through the provision of public goods.
I dont think that governments will act sensibly because a) the USA is in the grip of government is bad hysteria and b) Europe hasnt worked out how to run a currency Union
Conclussion the boom lasted because key factors, government stimulation, new mass production, cheap inputs and new inovations all lined up.
The current period is marked with ideological wrong headedness, no recent technological innovation (yet) and lack of class struggle victories for those at the coal face.
Although I dont think Capitalism will collapse in Europe and the USA I think that they could look a lot like Japans lost decade.
I cant leave this stuff alone. Germany is in control of the whole Euro crisis or as Im sure the Germans call it the Euro opportunity.
Who has the biggest trade surplus in the world? Answer Germany
If the Euro fell apart and the old currencies were re established how much would the Deustchmark appreciate? Answer between 30-40%
The German strategy is very clear, squeeze the smaller economies with higher interest rates so that they reform their economies (read cut wages and social spending)
The Germans want their trade surplus, they want to keep their currency low and they want their European friends to pull their weight. Brilliant strategy well played.
http://velcrose.blogspot.com/
Bill if you havent already seen this I think you would like to see it.
http://news.bbc.co.uk/2/hi/programmes/hardtalk/9641873.stm
I just finished(hardcopy of) a 1950 work authored as well as published by the Economics Department of McGraw-Hill Making Capitalism Work: a program for preserving freedom and stabilizing prosperity by Dexter, Merriam, Keezer & Associates
Seems to have been an influential manifesto on how to stabilize American capitalism after the Great Depression and War Against Fascism based on a fear that high military expenditures for Cold War plus meeting popular demands for social security etc could raise the proportion of Government dominated economic activity to European/British levels which it regards as “socialist”.
Stresses encouragement of accumulation of profits into more productive technology as key.
Chapter V is “On General Economic Stabilization” (pp133-183). I think it sets out the basic approach that ensured capitalism would be basically crisis free for many decades but has led to the present situation where that no longer works.
Starts by saying they HAVE to avoid another crisis like the Great Depression as capitalism would not survive it.
Takes full1 employment, with a broad range of between 3% and 10% as the target, providing basic security while allowing necessary fluctuations that preserve flexibility and dynamism while dislodging deadwood, but avoiding another great depression.
Social security on insurance principles to compensate for the remaining insecurity.
Supports a wide range of basically Social Democratic government interventions to achieve this, including the usual “Keynesian” monetary, fiscal and public works counter cyclical policies plus counter cyclical foreign aid policy and more advertizing to increase consumer sales during downturn (!).
Emphasizes that most important element is ironing out fluctuations in capital investment, especially private business investment in plant and equipment and inventories and housing. Requires steady flow of funds from both internal profits and new stockholders and (steady?) adequate incentive to use it and better forecasting so that businesses can adjust their plans in a counter cyclical way.
Wages should be tightly tied to (overall) productivity with rate of surplus value (“labours share”) near constant.
Seems to have basically worked for quite a while – building up an increasing overcapacity in means of production and housing from the measures taken to ensure both steady flow of profits to accumulation and adequate “incentives” including a continuous “inflation” producing an increasing distortion in relative as well as absolute prices. These measures themselves would make it impossible to stabilize “labour share”.
Just impressions above. No time to do proper analysis.
Now back to Marshall’s Principles before tackling Keynes and the rest of my list. Also started Zizek “First as Tragedy…” for relevance to occupy movement.
The sky is falling, the sky is falling, well maybe not the entire sky
http://www.nytimes.com/2011/11/25/business/global/german-bond-windfall-may-be-ending-with-euro-crisis.html
This seems about right to me, with Germany stepping in at the last moment to “save” Europe but only succeeding in kicking the can down the road. So, my prediction or kiss of death is:
1) the ECB will be allowed by Germany to “save” Europe by becoming lender of last resort
2) in the longer term it won’t work
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. end game?
http://www.ft.com/cms/s/0/b5f3af76-2712-11e1-b9ec-00144feabdc0.html#ixzz1h0ghJ5lG
Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.
http://www.ft.com/cms/s/0/b5f3af76-2712-11e1-b9ec-00144feabdc0.html#ixzz1h0ghJ5lG
Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.
Tomb, the link requires “free” registration at Financial Times, which I don’t want to do.
Could you cut and paste the article?
Gresham’s law needs a corollary. Not only does “bad money drive out good,” but “cheap” money may as well. Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy. Just as Newtonian physics breaks down and Einsteinian concepts prevail at the speed of light, so too might easy money policies fail to stimulate at the zero bound.
Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the US, Europe, and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.
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Why banking works one big confidence trick
Importantly, Gresham’s corollary is not another name for “pushing on a string” or a “liquidity trap”. Both of these concepts depend significantly on perception of increasing risk in credit markets which in turn reduce the incentive of lenders to expand credit. Rates at the zero bound do something more. Zero-bound money – credit quality aside – creates no incentive to expand it. Will Rogers once fondly said in the Depression that he was more concerned about the return of his money than the return on his money. But from a system wide perspective, when the return on money becomes close to zero in nominal terms and substantially negative in real terms, then normal functionality may breakdown.
A good example would be the reversal of the money market fund business model where operating expenses make it perpetually unprofitable at current yields. As money market assets then decline, system wide leverage is reduced even if clients transfer holdings to banks, which themselves reinvest proceeds in Fed reserves as opposed to private market commercial paper. Additionally, at the zero bound, banks no longer aggressively pursue deposits because of the difficulty in profiting from their deployment. It is one thing to pursue deposits that can be reinvested risk free at a term premium spread – two/three/even five year Treasuries being good examples. But when those front end Treasuries yield only 20 to 90 basis points, a bank’s expensive infrastructure reduces profit potential. It is no coincidence that tens of thousands of layoffs are occurring in the banking industry, and that branch expansion is reversing industry wide.
In the case of low yielding Treasuries the Gresham’s corollary at first blush seems illogical. If a bank can borrow at near 0 per cent then theoretically it should have no problem making a profit. What is important, however, is the flatness of the yield curve and its effect on lending across all credit markets. Capitalism would not work well if Fed funds and 30-year Treasuries co-existed at the same yield, nor if commercial paper and 30-year corporates did as well. It is not only excessive debt levels, insolvency and liquidity trap considerations that delever both financial and real economic growth; it is the zero-bound nominal yield, the assumption that it will stay there for an “extended period of time” and the resultant flatness of yield curves which are the culprits.
Conceptually, when the financial system can no longer find outlets for the credit it creates, then it de-levers. The point should be understood from a yield as well as a credit risk point of view. When both yield and credit are at risk from the standpoint of “Gresham’s law,” the mix can be toxic. The recent example of MF Global emphasises the concept, as does the behaviour of depositors in some struggling European economies. If an investor has money on deposit with an investment bank/broker that not only appears to be at risk but returns nothing, then why maintain the deposit? Perhaps an investor would be more comfortable with a $100 bill at home in a mattress than a $100 bill on deposit with a broker – Securities Investor Protection Corporation notwithstanding. If so, system wide delevering takes place as opposed to the credit extension historically necessary for an expanding economy.
Historical examples and central bank staff models will likely not validate this new Gresham’s corollary. Fed chairman Ben Bernanke blames policy rate increases in the midst of the 1930s for an economic relapse, and a lack of credit expansion for Japan’s lost decades 60 years later. But all central banks should commonsensically question whether ultra-cheap money continually creates expansions as opposed to destroying liquidity, delevering and obstructing recovery. Gresham as opposed to Keynes may become the applicable economist of this new day.
Thanks for the article.
Basis seems to be that QE and zero interest rates isn’t working. Not sure if I understand the explanation given for it not working.
I get the impression there is a huge shift from equities to bonds and cash yet bond yields going towards zero. Corporations would be snapping up those cheap funds to expand investments at higher leverage if (but only if) there was some prospect of profit from the investment. Instead those funds are sitting as swollen bank deposits.
This points to the underlying crisis of production. Turnover slowing with stuff unsold and capacity unused results in greater demand for investment credit as opposed to circulation credit. Meeting that demand from central bank credit expansion successfully postpones an actual monetary crisis but merges into the banks actually trying to buy up the unsellable goods or capacity with their credit (eg central banks now loosening credit controls so they are buying corporate commercial paper with less and less quality collateral at the same time as they rave hypocritically about tightening regulation as “excessive” credit previously used to postpone the crisis is now seen as having caused the more intense problems now).
To the extent that they are successful they are maintaining the existing price levels and price distortions and therefore encouraging the disproportions and overproduction to grow.
A classic example would be Australia where there are billions of investment in both mines and related infrastructure in the pipeline, scheduled to bring a vastly increased mass of export commodities to market after a gestation period of several years to actually build the required mines and ports. Since the commodity prices haven’t actually collapsed yet, the investment still goes ahead. Result will be a huge oversupply AFTER demand and prices have already collapsed in a few years time (and/or interrutped investment projects that have to be abandoned and cannot return any revenue at all, let alone the contracted interest and principle on bonds).
I’ll repeat the reference to long quote from Maksakovsky on this stuff:
http://strangetimes.lastsuperpower.net/?p=1862#comment-10674
The details he provides in support need to be thoroughly understood. The inability of Financial Times to see underneath the surface monetary phenomena seems to be nearly universal with widespread assumption that monetary issues are cause and have to become cure.
I thought the article assumed that there was an underlying problem that the policy of low interest and QE was in response to. I agree while this is an obvious assumption they don’t make it. I was posting on the basis that the stimulus package is running out of steam and they don’t have any plan B so assume the decline is nigh.
Chinese savings accounts don’t pay interest and never have as do many in the USA, while Japan has had incredibly low interest for 60 years. Relativities may have assisted here but imagine that would not be significant.
On banks fudging the Italian government has sold government property such as army bases government buildings etc to the banks and leased them back. The banks paid with government bonds and use the properties to borrow against for asset backed securities.
Will be nice if they can do it but not sure if they can. Nice of them to point out the contradiction of profit.
http://www.ft.com/intl/cms/s/0/414571ee-2679-11e1-91cd-00144feabdc0.html#axzz1hrjUOn00
Many officials at the Fed believe that such a role may not be appropriate for private institutions and that a public sector body may be more appropriate.
“The incentives are different for a private sector institution when under pressure,” said one senior Fed official. “There are conflicting objectives and when stresses rise, the banks may behave badly. The desire for security or collateral can be debilitating.”
The task force – made up of leading banks, including JPMorgan and BNY Mellon, and investors – met last week to discuss additional reforms to prevent a repeat of the turmoil that characterised the repo market in 2008.
A final report by the task force is expected to be published early next year.
Its focus is the reduction of the role of the two clearing banks, which extend temporary credit late in the day to Wall Street dealers when repo trades are unwound and reconstituted.
Policymakers worry that market volatility could increase significantly if a repo-market borrower ran into funding problems and were unable to obtain credit from either clearing bank.
That would raise the spectre of repo securities being liquidated en masse, potentially harming other investors.
The regulators are pushing for a real-time settlement process for new and maturing repos, which would alleviate the need for intraday credit from JPMorgan and BNY Mellon.
With the Fed pushing for fundamental reform, creating a real-time system is a potentially costly and difficult technology project, said bankers.
It will also result in higher charges for dealers using repo as a financing tool.
The industry had hoped to shift 90 per cent of intraday credit from the two clearing banks by August using existing systems, but the deadline was missed as the industry belatedly realised the huge scale of the undertaking.
“A road map to real-time auto confirmation would be a huge step, but achieving that is problematic as there are differences in the operational capacities of dealers and cash investors,” said Peter Nerby, senior vice-president at Moody’s.
Any delay in resolving the issue of intraday credit potentially runs into the heavy hand of regulators who want this potential source of systemic risk eliminated and are waiting for results.
“Experience suggests that it is not easy for market participants to agree on measures that enhance financial stability when this goal conflicts with commercial and business interests,” said William Dudley, president of the New York Fed, earlier this year. “If the private sector falls short in this instance, public authorities may need to intervene and impose more forceful regulatory solutions.”
The most likely outcome, should the tri-party market fail to satisfy regulators, might take the form of a centralised clearing house, which would oversee the lending process without the pressure of making profits.
“Reducing the vulnerability of the tri-party system entails either increasing the number of clearing banks beyond BNY Mellon and JPMorgan or replacing them with a centralised counterparty that is a utility and thus has fewer conflicting incentives than a clearing bank,” said Anshuman Jaswal, senior analyst at Celent.
I don’t really understand what the technical issues are but assume that “whatever it takes” will be done to avoid liquidity crisis by “whoever has to do it”.
eg In the Panic of 1907 J.P. Morgan had to take the initiative, and lock up other plutocrats in a room until they agreed to chip in. Clearinghouses also developed emergency cash substitutes.
Federal Reserve was established as a result and presumably its up to various (inter-) governmental institutions now rather than private individuals like Morgan.
But if the underlying problem is solvency rather than liquidity attempting to buy up the overproduced commodities with credit can’t solve the problem so ultimately the crisis has to break out.
http://en.wikipedia.org/wiki/Panic_of_1907
assumed the underlying problem was insolvency. Was more interested in the crisis sorting out a few problems for the transitional stage. Think two things from the crisis may be possible. Complete overthrow of capitalism and if this is not possible at least a more centralised and complete global economy that is closer to what we would think is required of a world economy. Not sure how to word this but think anything to do with the crisis has to be linked to the transitional phase. We are on the verge of victory here!!!!!!! We don’t want to occupy Wall st we want to occupy the world!!!
Not sure yet what to make of this other than they are aware of lags etc but now realise that something else might be in play. Could be survey data is unreliable but seems to be a consistent trend which belies that.
http://www.bea.gov/scb/pdf/2012/02%20February/0212_statisticaldiscrepancy.pdf
I’ve only skimmed the article without understanding properly. Not sure what point was being made about it.
Wish I did have a grasp of the concrete economic statistics!
But even with “perfect” stats it seems to me that sudden changes in prices, including interest and exchange rates necessarily result in sudden revaluations of fixed assets etc etc so that it is inherently impossible to observe, let alone control the state of an economy, except with hindsight or impressionistically.
Re previous post, I am less optimistic about “verge of victory”.
But certainly we need to understand what transitions (presumably including intensified globalism) must necessarily follow from the crisis. Understanding that better than the ruling class is a precondition for victory.
Seems that Europe is still “teetering” between disintegration and tighter integration. Tighter integration is ultimately essential.
I don’t have any clear picture regarding economic integration at global level and in particular we can deal with the vast gaps between levels of economic development with support of large majority in the better off countries like Australia, who the right will mobilize against “cheap foreign labor” etc.
yes there is a push in the US against foreign labour now but that has always been there re micheal moore etc, just gaining more mileage now. Happy to push people to make a conscious stand for globalisation
Think we have to do better at understanding what is happening to an economy in order to guide it.
Assume Europe will tighten or at least shrink before later expanding again but do not know this.
“verge” I suppose doesn’t mean inevitable but think the window is open and will get wider but can we sieze the time? Agree don’t know but hope!!!
If we don’t win then we should at least be on top of what is happening economically and be in a position to challenge economic directions.
Again think transparency is the key
Back to the article just a few asides they accept that accounting principles are not adhered to or enforced and reported profits are not to be believed. (the move to an international accounting regime is necessary) Not sure about the costings either but will look at it a bit more in detail later if I get a chance.
limited internet at the minute
Capitaism likely to end sooner that I thought
http://www.thedailymash.co.uk/news/society/uk-will-return-to-stone-age-by-2014-2012051727347
from financiasl times
It is sometimes possible to believe that suffering is worthwhile, a way of paying for past sins. In this light, the age of austerity in which we supposedly live has a sort of redemptive quality. Grit our teeth and we’ll come out the other side, purified and ready for robust economic recovery.
However, after five years, we are in a worse place than when we started. One would have thought that the recent deleveraging caused debt ratios to collapse. Yet, after the financial maelstrom of the past five years, debt ballooned to a weighted average of 417 per cent of gross domestic product from 381 per cent in June 2007 in the 11 economies most under the market microscope.
Strikingly, in each of Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the UK and the US, the ratio of total (public and private) debt to gross domestic product is now higher than it was in 2007.
There are variations, and it is notable that debt in the US has increased the least, from 332 per cent of GDP five years ago to 340 per cent today – although we shouldn’t draw too much consolation from that, as the statistics do not include social entitlements such as Medicare or Social Security. Add in these off-balance sheet items and the ratios would look much worse.
Deleveraging is proving impossible to execute. The world is still staggering under a mountain of debt, the costs of which extinguish the “animal spirits” which ought by now to be coming to the rescue. Based on this analysis, we can make five predictions.
First, as deleveraging has not even started yet, the crisis of the world economy has not begun either. All the perceived unpleasantness of the past few years is merely a warm-up act for the greater crisis still to come. The need to get debt levels down is as pronounced as ever in the eurozone, particularly in southern Europe, but also in the US and Japan.
Second, it will take a minimum of 15 years or so for the economy to reach escape velocity and attain a level consistent with healthy growth scenarios. This is because debt levels need to come down by at least 150 per cent of GDP in most countries. History suggests you cannot reduce debt by more than 10 percentage points a year without unleashing major social and political dislocation.
Third, when we do finally start cutting our debt, the economic impact will be massive. Countries such as Japan and the US need to increase their primary balance by more than 10 points of GDP, in order to stabilise the ratio of public debt to GDP to 2007 levels: considering negative feedback loops between deficit cuts and growth, each stands to lose more than 20 per cent of GDP against trend.
And this does not account for the required private deleveraging. The precise level of economic devastation is a function of the so-called multiplier, which measures the impact of spending reduction on economic growth. The International Monetary Fund has calculated that, under current circumstances, the multiplier can be as high as two: every dollar cut from the deficit will lead to a two dollar reduction in GDP. The multiplier is as much as four times higher than in pre-2008 conditions.
Fourth, risky assets are set to perform badly for a long period. Corporate profitability is highly correlated with changes in leverage: reduce debt to meaningful levels and profitability will fall. The equity risk premium on indices such as the S&P 500 is at historically low levels and needs to rise dramatically in order to compensate investors for multiple market risks, ranging from sovereign default to inflation, deflation and geopolitics.
The fifth point is that there is no magic bullet. In the past, policy makers had various instruments to cushion the impact of measures taken to stabilise debt levels: they could cut interest rates, for example, or allow their exchange rates to fall, leading to export-driven recovery. But in an era of low or zero interest rates, with most countries competing to devalue their currencies, such policy tools have lost effectiveness, hence the high multiplier.
Even inflation, long touted as a backdoor solution to debt reduction, will not help. It would send bond yields sky high, compounding the costs of servicing debt and killing off any recovery. And off-balance sheet entitlements, the biggest item that needs trimming, are inflation-adjusted.
How do asset classes rank on the totem pole if this scenario plays out? Bonds of solvent governments and corporates should do well in a deflationary environment where rates are kept lower for longer; stocks should revert to new lows; and currencies of highly leveraged, growth-sensitive markets should be sold.
In the words of an old Austrian adage, the situation is hopeless, but not serious. It is not serious, as politicians simply fail to acknowledge the elephant in the room, namely leverage, introducing instead a succession of policy gimmicks. It is hopeless, in that virtue is not likely to be rewarded for a generation.
Crises are always going to happen, but they are less stressful when sound institutional processes are in place. The most positive takeaway of the recent eurozone summit was the announcement of an integrated supervisory mechanism as a precondition to any bank bailout. A European guarantee of Spanish bank deposits without a corresponding handover of banking supervision would only perpetuate bad habits.
It should not be too much to ask for a process. Using European Central Bank president Mario Draghi’s words, policy makers in the eurozone must “define roles, deadlines and conditions to be satisfied.” Yet, since last summer, the modus operandi in managing the crisis has generally been to take two steps back with each step forward.
We may have broken out of this downward spiral with the latest summit. But too many questions remain: for example, will the new bank regulator have a strong resolution authority, and be able to seize and liquidate insolvent Spanish banks? Will the influence of national bank regulators be reduced, in part to disallow banks to treat the debt of their own governments as risk-free? Banks are in the business of managing risk and indeed lend to risky customers all the time by unbiasedly pricing in that risk. But when their own regulators indicate that something is risk-free when it is not, risky assets are not properly priced and the banking system malfunctions.
And while Spain is in the limelight, it would be helpful if regulators of strong countries, such as Germany’s BaFin, also ceded control to help root out bad habits. Last summer, when the European Banking Authority (EBA) demanded the publication of sovereign debt holdings, BaFin balked. It was market pressure that “encouraged” German banks to be more transparent. Simply put, national regulators have proven inept at managing their conflicts of interests.
In depth
Eurozone in crisis
Eurozone
As the debt storm spreads Europe’s leaders battle to save the eurozone
Well-defined processes help markets to function, as buyers and sellers negotiate market-based values of assets. In contrast, guarantees ultimately increase volatility as asset prices become more correlated: everything will be safe until the guarantor is deemed unsafe, crashing the whole system.
A credible strategy must be in place for investors to regain confidence. Spain is particularly disappointing to investors. Here is a case where a government enjoying an absolute majority at times appears to put more emphasis on negotiating lower borrowing costs than on structural reform that would lower the amounts that need to be borrowed in the first place. This crisis will not end as long as debt is merely shuffled around.
Having said that, a lot has been achieved already. In some ways, we already have a United States of Europe: when a weak country asks for help, it receives aid in return for ceding sovereign control over budgeting. The main difference to the emerging vision of Europe is that budgets ought to be reviewed before a crisis erupts. We are inching towards the vision in a typically European piecemeal fashion, with weak countries taking the lead, incentivised by market pressures.
Tomb I agree that we are inching towards intergration in Europe.
The whole thing could be rapped up quickly if all the nations were on the same page but they arnt.
The current situation is favourable to Germany, it benifits from low currency. Stand alone German currency would be 30-40% more expensive plus German Banks borrow at about 1% and then lend into say Spain at 7%. The “right” thing to do is immediate intergration and therefor removing sovereign risk from Spain and Italy ect but the Germans dont want this yet they want countries to undergo major internal devaluation by reducing wages and particularly the social wage.
Once the Germans think internal devaluation has gone far enough then they can intergrate and face the real problem which is low growth.
(excuse my short hand when I say a country I really mean that countries ruling class. Its what the ruling class of Germany want Germany is just an area on a map, it wants for nothing)
So what does Mr Hendry believe?
At the Milken Institute conference in May, he told the audience that France was just a year away from nationalising its banks and that politicians had still not faced up to the scale of the global debt bubble that was now imploding.
“We have reached a profound point in economic history where the truth is unpalatable to the political class – and that truth is that the scale and magnitude of the problem is larger than their ability to respond – and it terrifies them.”
Three years after Mr Hendry posted videos on YouTube of his visits to Chinese ‘ghost’ towns, he remains pessimistic about the Middle Kingdom. He is shorting the equity of Chinese state-owned enterprises, balanced by a long position in a basket of Asian non-discretionary consumer stocks.
He believes that financial markets are single-digit years away from a crash that will present investors with opportunities of a lifetime. “Bad things are going to happen and I still think the closest analogy is the 1930s.”
Hi tomb Michael Milken is a anti hero of mine. What a great guy, father of junk bonds, imprisoned for insider trading and now a philanthropist. He epitomises the fighting spirit of capitalism.
Back on topic I think that there are 2 views. One is that capitalism has taken a hit in prelude to taking a bigger hit. The other is that capitalism has taken a hit and now the mess needs to be cleaned up.
I am of the second opinion but why, because Im some capitalist toady or because I think that the working class does best when confident rather than when its been bashed by economic disaster.
No the answer is that I think that if you examine each problem that faces capitalism they are all solvable.
Take China, 30 years of stand out growth should be followed by a hard landing. But I think that if world demand for Chinese goods holds up and if the Chinese government stimulates the internal economy with the savings at hand China could experience a soft landing before resuming stand out growth.
Europe suffers from soveriegn debt problems but the problem is not the debt but the interest rate on that debt. It is entirely within the control of the EU to reduce the rate of interest paid by those countries that have the poor debt spread. What is lacking is not economics but political will.
The US has a debt problem but when you consider that they are financing that debt at 1% you may well ask, what problem. Any how the US government debt can be hauled in by a simple return to Clinton era tax rates.
Now you may say that all these problems are but superficial manifestations of an underlying unprofitability problem and I would say that you are correct but capitalism has been solving this problem way before Marx and Engles thought that it was unsolvable. What they will do is destroy capital, reduce the amount of value that is returned to labour, open new markets and revolutionise production.
no doubt after the depression all those things will happen. As for holding hands and developing the political will to heal the financial crisis well I’m not religious so am not holding my breath.
One thing we can be sure of is that Steve will retain his confidence in capitalism, and especially Chinese capitalism, until the bitter end.
Here’s Roubini putting a bit of meat onto the bones of Tomb’s argument
http://www.bloomberg.com/video/roubini-says-2013-storm-may-surpass-2008-crisis-HCAjTp9VTD~gm6Ux8jnQvQ.html
tomb I would have more sympathy for those like yourself who argue that Capitalism is headed for a major fall if it wasn’t for the great amount of slack in the system, which and when the crisis becomes “serious” can be roped in.
Take a few fairly random examples.
1 Spain. Spain last year spent 301 million Euros subsidising unprofitable coal mines. Why should good German bankers prop up Spain while the Spanish government wastes money at this rate?
The Spanish royal family costs $10 million per year its small beer but I say off with their heads and save that money.
2. The European Union spent 39 Billion Euros last year on direct subsidies to farmers plus a whole lot more in indirect subsidies. What, so France can maintain its peasantry? These are ineficient farms that distort the market and hold back development in places like africa because subsidised farmers overproduce because they are farming the subsidy rather than the farm.
3 The US paid $20 Billion in direct subsidies to farmers last year. Again the argument holds that these policies are a disaster to unsubsidised African farmers and a drain on growth potential within the USA
Just while Im on this
4 Australia. John Howard slashed the capital gains tax by 50% on trasactions such as shares. When Gena Deadheart makes a billion through some share deal she pays 1/2 what a worker pays on their PAYE tax. Yeah thats the official tax rate Billionaires pay 1/2 what Joyce public pays. I bet its really a lot less than 1/2
and dont get me started on negative gearing and first home buyers grants. Market distorting subsidies that only help landlords and vendors despite being dressed up as helps to the little guy.
peter to paul!!!! these amounts of money are not trillions and unless you are talking trillions then it is just trivia and irrelevant. I am not sick capitalism is so your sympathy should be for capitalism.
Ok I you want to talk Trillions Ive got Trillions.
Example 1
The USA. When you look at the US tax system and examine the gamit of taxes income, sales, payrole ect it turns out that the US runs a flat tax system. If the US went to a progressive tax system it would put Trillions into the hands of the government. Peter to Paul? Well only if you ignore the propensity to save v the propensity to spend argument.
Example 2 In 2007 the US spent 16% of GDP on health a total of $2.26 Trillion while Canada in 2006 spent 10% of GDP on health. The US and Canada used to run very similar health systems until Canada “socialised” medicine. If the US made the same move we would be talking Trillions. Peter to Paul ? Well Capitalism is full of Peter to Paul where Capital belonging to low return Peter is transfered to high return Paul usually by Paul taking on debt. (In this case with Paul being the government Paul could engage in the infrastructure projects identifide by Joe Stiglitz)
Example 3. The US government could engineer a burst of inflation. Inflation destroys Capital that is lying idle. Trillions in idle Capital could be taken out of the system by a short burst of inflation 1970’s style
Example 4 Ending the Bush tax cuts to the rich would in 2013 earn the US government $80 Billion. I know that its not Trillions but 80 Billion is hardly chicken feed.
Now I dont think that the US government will do any of the above my point is that these strategies are available if necesary.
What I think the US will do is to wait for Capitalism to grind out a solution, to allow poverty to put downward pressure on wages and wait for innovations like coal seam gas to introduce a game changer that reorders costs in a significant way
inflation destroys capital that is lying idle!!!!!!! so a factory at 70% capacity is 70% destroyed?
Inflation has many repercussions and they are not pretty. Unfortunately there are no quick fixes. Raising taxes is what they are doing in Europe, printing money is what they are doing in the USA so this is not new it is just useless and is only kicking the can down the driveway
80billion is chicken feed
tomb inflation destroys Capital that is existing in its monetarised form. It does not destroy capital in its fixed asset form.
Currently in the USA and Europe we face a capital strike. Capitalists are refusing to invest on the quite sensible Capitalist notion that return on investment is too small.
My argument is that governments can take money from the Capitalists through tax or loans and invest that money in projects that are socially necessary but not necessarily profitable. (Stiglitz covers this in his argument to stop deskilling of the workforce) Krugman covers this in his argument for economic stimulus.
I know that people will roll their eyes at the thought of the US government taking on more debt so you could always use Nth Korea as your model they only have 0.4% of GDP as debt.
tomb 80 Billion is not chicken feed because thats 80 Billion in extra tax every year not a one off collectable.
80 Billion of extra tax will get to your magic Trillion in the 13th year of collecting. Seeing that the tax cuts have been in effect since 2001 and 2003 then just in the high end of tax payers the US government has already lost almost your magic Trillion
inflation does a lot of things and the old argument used to be have a war to destroy capital and we know that didn’t work. It is about value not just destroying capital.
80 billion is chicken feed and 13 years is a long time and trillions are trillions and they need them now.
It may indeed be the case that the only way to get things going after the crash will be infrastructure spending but it won’t stop the crash.
Just correcting my error. The US government debt would not be hauled in by a simple return to Clinton era tax rates. Not collecting the taxes has cost the US government $1.6 Trillion in extra debt. Reintroduction of these taxes would substancialy reduce the interest bill but it wouldnt haul in the debt.
The debt can be hauled in when economic activity returns to the pre 2008 levels. The GFC has added $3.5 Trillion in lower tax take and increased social security spending.
if raising taxes is to haul in debt then it will most likely move money from wherever it is and into china. This could not be a stimulus!!!
For inflation to have any impact on the current crisis you would need hyperinflation and of course that in itself would be a crisis.
The interesting outcome of the crisis is that it appears that Europe is moving closer to becoming the united states of Europe and not closer to solving the crisis. Every cloud………….
Pessimism now competes with uncertainty as the prevailing sentiment on Wall Street. Not only are forecasters lowering US growth prospects, but Ben Bernanke sounded almost fatalistic last week on whether the Federal Reserve could do anything to reverse things. With interest rates this low – just 3.7 per cent on a 30-year mortgage – another few basis points would not make much difference. Since Congress has forsworn further stimulus, and export growth is tapering off, it is unclear where the next phase of America’s recovery will come from. When they peer through their glass darkly, the experts only see paralysis.
Which is why the two bankrupt Californian cities of Fontana and Ontario in San Bernardino County offer such a bracing jolt to Washington’s passivity. Where the Obama administration has largely failed to ease the foreclosure crisis, the two cities recently announced plans to seize loans on “underwater” homes (those valued at less than the mortgages). The two were driven to bankruptcy largely by mass foreclosures, which shut down communities and killed economic activity. In despair at banks’ reluctance to renegotiate mortgages, they plan forcibly to buy and restructure them.
To put it mildly, such a step would be radical. Eminent domain, or compulsory purchase, is usually invoked for the acquisition of private lands for public use, such as roads and airports. It has never been used for private loans. Given how easily it crushed far milder efforts by President Barack Obama, Wall Street is unlikely to take kindly to a challenge from two Californian backwaters. It is already playing hardball. Last week the Securities Industry and Financial Markets Association, one of the largest lobby groups, said it would fight this “unquantifiable new risk” in the courts. It also threatened an industry boycott – a strike on new mortgages – of anyone living in cities that went ahead. Several non-Californian cities are reportedly looking at it.
Forcible restructuring may be a red line for Wall Street. Yet there is little new thinking to be found in Washington. US growth is slowing sharply and there is a now a material risk America could tip back into recession next year. In spite of talk of the US housing market having bottomed out, home prices are still a third below their peak and more than 11m remain underwater. Even if the housing sector has stopped its descent, it is unlikely to be a large boost to US growth until the foreclosure crisis has worked out.
At some abstract level America’s opinion formers grasp that balance-sheet recessions take time to work off – an average of five to seven years, according to the economists Kenneth Rogoff and Carmen Reinhart. Yet they still leap on anything that suggests otherwise. Any sign of revival, such as the housing market, is emphasised. Anything pointing the other way, such as retail sales, which have fallen for three straight months, or job creation, which has stalled, are aberrations. The Pollyannas may know America is grappling with a different kind of recession. But they clearly do not feel it.
It is not for lack of data. According to a paper just published by Richard Vague and Steven Clemons, the US outlook is likely to be dismal for several more years. Combined public and private debt is almost 250 per cent of gross domestic product – above any other developed country except for Japan. The US has been quicker than other economies to push through deleveraging. But private debt, which offers a better predictor of growth than public, is still higher as a share of America’s GDP than anywhere in Europe. In their study of the only two comparable recessions in the last century – America in the 1930s and Japan since 1990 – the authors find scant evidence the US is about to turn the corner.
All of which gives the California rebels real significance. They may succeed in taking on Wall Street where Mr Obama has failed. Back in 2009, Chris Dodd, the then Democratic chairman of the Senate banking committee, complained about White House “ambivalence” on a bill that would have allowed judges to “cram down” residential mortgages. Mr Obama allowed it to die. His administration has been equally halfhearted in support of initiatives to incentivise the banks to renegotiate mortgages. Whether it is the White House, the banks, or the borrowers themselves, a spirit of inertia has stymied efforts to tackle a big obstacle to US recovery. No one should be surprised the recovery is still inert.
The California rebellion also has the potential to shake up politics. Most people think the Obama administration bailed out Wall Street and left Main Street to its fate. Yet Wall Street has done little to thank Mr Obama for his largesse. Bizarrely, some Wall Street executives think Mr Obama has betrayed them. By a ratio of three to one, Mitt Romney is outraising Mr Obama among financial donors. As the saying goes, no good deed goes unpunished.
Yet nothing concentrates the mind like a bankruptcy. Last week Brad Miller, a North Carolina congressman, said Wall Street’s influence may not work so well in bankrupt cities. “Wall Street’s power in Washington may be as useless in defeating a proposal in San Bernardino as strategic nuclear weapons are in fighting an insurgency,” he said. In an age of stagnation, it is good that politicians somewhere are still trying to shake things up.
edward.luce@ft.com
Always correcting errors. I earlier mentioned revolutionising production as a way forward for Capitalism. In that I cited the advances in coal seam gas extraction. My error was to confuse coal seam gas with shale oil and gas extraction. The USA has developed technology to unlock previously trapped oceans of energy with the prospect of the USA pushing out Saudi Arabia as the worlds number one energy producer.
Tomb was it Hugh Hendry that you quoted at the Milkien Institute talk. Well he descibes the new technology as “momentous”
http://articles.businessinsider.com/2012-04-30/markets/31483253_1_gas-extraction-fracking-marcellus-shale
Tomb I think that the US response to the crisis is aweful. They did the absolute minimum by saving the banks without a thorough restructuring.
My argument is that the people running the system have lots of choices, unfortunately they may choose austerity the worst of all possible worlds.
They could choose massive government intervention but due to the balance of forces in the class struggle this is unlikely. There will be no bank nationalisation with criminal banking elements finding their way to jail.
One of the Aces still up their sleeve is revolutionising production and this is what we see as the US becomes a net energy exporter.
tomb I know that theres a link inside my other linked article but I didnt want you to miss this quote by Hendry who says words to the effect that this may be the year that we look back on that changed the notion that China would surpass the USA. Thats pretty momentous
http://www.businessinsider.com/gundlach-corrigan-and-hendry-bullish-on-us-energy-2012-4
interesting to see the fed has run out of options but they may yet introduce another QE3. There is a lot of pressure against this as the fed is already the largest buyer of treasuries and foreign buying has dropped from 83% to 28%.
One of the consequences of inflation is that it can look like the USA is growing when in fact it is just stagnant. 80% of growth in the US GDP was an increase in prices. This has also held corporate earnings and margins but this not sustainable and fiat money will come under real pressure if there is a QE3. This can be seen by china india etc moving out of dollars (ditching treasuries) and into commodities. Gold and oil also seen as safe havens not US treasuries.
Stephanie Pomboy has some interesting insights into the current conditions. Unfortunately couldn’t find the link in Barron’s where she is interviewed.
Is this the link you wanted?
http://online.barrons.com/article/SB50001424053111904346504577531052271788084.html?mod=BOL_hpp_mag#articleTabs_article%3D1
tomb Stephanie Pomboy is arguing that the US dollar is dead meat and that foreign investors are heading towards the door to get into real commodities and into equities that have commodities in particular gold.
She has to cover the fact that the US $ has recently appreciated against the Euro and the yuan rather than fall due to Europe.
But really are people swapping US dollars for commodities?
If so why in the last year have we seen the price of gold drop from $1900 to under $1600
OK maybe people arnt buying gold but are buying companies that have gold in the ground.
Lets look at a couple, Gryphon recources a year ago selling for $2 now about 60c, Robust Resources a year ago selling for $2 now 70c both these companies have declaired within the last year that their JORC compliant resource estimate is larger than it was when their price was $2
They are companies with gold in the ground but what about the big producers like Newcrest well a year ago their shares sold for $40 today just $20.
tomb we aint going back to the gold standard. No matter what the loopy Austrians say.
Apparently the really savvy now buy silver which is apparently better/more long term security than gold.
WTF
http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
Try again WTF?
http://silverprice.org/silver-price-history.html/
Thanks Steve. Both down. I guess my quick comment sounded like i thought it was advisable to buy silver that there really was some long term viability which there isn’t. Lots believe it/maybe its false hope that gold and silver offer some protection still.e528
while she has some insights she has no answers and the least interesting thing in the article is a recommendation to buy gold companies. The chance of going back to the gold standard is real but perhaps unlikely however this isn’t the interesting thoughts on current conditions rather her meanderings about what to do and if she has done this then of course it is more successful if others do it (vested interest). What is more interesting is why she has done it!!!!!!
The Austrians do think that they have answers.
Their answers are that government should get out of economic management. That the currency should be backed by gold.
They want a system of unregulated free market capitalism.
When the GFC hit they wanted the banks to fold because they think that capitalism is so dynamic that new better banks will fill the void.
This was the type of Capitalism that Marx was totally correct in pointing out as being doomed by its internal contradictions.
My point is that we dont face the unregulated, free market capitalism that Marx was looking at. We face a highly regulated Capitalism that can avoid its internal contradictions.
The problem we are facing is not management of the economy but really poor management of the economy.
Just one example, faced with a housing bubble the US government lowered taxes, lowered interest rates, abolished regulations that seperated the functions of investment banks from those of retail banks, ie they completely mismanaged the housing bubble.
China has recently faced a housing bubble but instead of stimulating they took reasonable measures to deal wih it
“Between 2010 and 2011, policies were enacted to stop the bubble from worsening or prevent it from occurring. The Chinese cabinet announced in 2010 it would monitor capital flows to “stop overseas speculative funds from jeopardizing China’s property market” and also begin requiring families purchasing a second home to make at least a 40% down-payment.[33]
In early 2011, Beijing banned the sale of homes to those who have not lived in Beijing for five years. Beijing also limited the number of homes a native Beijing family could own to two, and allowed only one home for non-native Beijing families.[34] By July 2011, the Chinese Government raised interest rates for the third time that year [35] A new nationwide real estate sales tax was introduced in China in late 2009 as a measure to curb speculative investing.[36] A mortgage discount for first-time property buyers – which had offered fixed, 5% 20-year mortgages at just above 4% – was also eliminated.[26]
The deflation of the bubble began in the summer of 2011, when home prices began to slow or fall in Chinese cities.[37] The end of the property bubble is seen as one of the primary causes for China’s declining economic growth in 2012.[2]” (Quote comes from wikipedia)
My point is that socialism will be nothing more that highly managed capitalism. Marx thought that this would happen under working class leadership and I hope that this may still happen.
In the interim I think that progressives should support the sound management of the economy ie a high level of government intervention and argue against those who want to strip away the role of the state.
socialism is not highly managed capitalism, that is state capitalism. Socialism is capitalism in transition!!!!!
the housing bubble has not stopped in China. Those methods you mention were a waste of time. It doesn’t take a rocket scientist to work their way around those sanctions. People have apartments in friends and relatives names not to mention that the place is full of corruption. The PMI has been less than 50% for the last 9 months and this has a bearing on prices but the crash is still to come.
Progressives should oppose government intervention and fight to strip away the state. They should not support state capitalism. The running of socialism is a political event not a bureaucratic one. Socialism is the transition to no government.
Socialism is highly managed capitalism under working class leadership. I dont see any evidence of it happening soon.
Wide spread reductions in real estate prices across China all this year indicate the governments aim of reducing real estate prices across China has been successful.
It may not take a rocket scientist to circumvent the new restrictions but the evidence may point to Chinas lack of rocket scientits or that they are all building rockets not high rise.
The government has engineered a slow down and low and behold the PMI indicates that the economy has slowed. That may well be temporary if you believe the latest flash HSBC PMI
http://online.wsj.com/article/BT-CO-20120723-716748.html
“Progressives should oppose government intervention….” So the hospital the government is building, I should oppose that?
Snowy Mountains scheme, oppose?
Fast Speed Broadband Network, oppose?
Legislated health and safety regulations, oppose?
Medicare,oppose?
Now just to be straight there are plenty of government interventions that I oppose but I take them on a case by case basis.
People in our society that are leading the strip away the state argument are extreme reactionaries who would clearly like a more dog eat dog world for those of us who earn a wage.
No socialism is not highly managed capitalism, why would anyone want that? Who cares who manages it it is redundant. Socialism is capitalism in transition and this is what Marx thought was the most significant aspect the crux of the matter. Those that miss this point are reactionaries wanting to join china and other highly managed capitalist states.
30% of china’s GDP is directly associated with construction and 30% of local government revenue is reliant on land sales. The latest figures show that those policies failed but the PMI falling meant housing prices fell but local governments are once again offering incentives to first home buyers and ignoring beijings policies. The price of housing in 30 major cities rose in the last 1/4.
tomb my reading of socialism under Lenin was that highly managed capitalism under working class control was exactly what he was trying to pull off. This quote is about the soviet government trying to maintain joint enterprises in 1918
“According to Victor Serge, even in April 1918 the government was still envisaging the formation of mixed companies, which would have been floated jointly by the state and by Russian and foreign capital. Serge is candid on the reasons for nationalisation: the collapse of production and the acute food crisis, the sabotage by employers and managers but also “the backward attitude of various sections of workers” (Serge 1992).”
The move away from co operation with capitalists was an initiative of capital it was not Lenins idea.
In China there is a contradiction between local governments that get a lot of income from development and the central government that wants to address the real estate bubble. I think that this will be resolved in favour of the central government.
In your response you forgot to mention whether your anti state attitude extended to opposing the state providing health care.
Clearly health care is a big state beaurocracy and if our main job is to strip away the state ….well
The problems Lenin had we don’t have if you haven’t noticed capitalism is far more developed and wanting to just take the lazy approach of using Russia as a blueprint would lead to disaster.
Anyway we are not talking about those issues we are talking about socialism as Marx envisioned it. Again Socialism is the transition to no government!!!!!!! The more developed capitalism is the less the time socialism will take as a transition so this has implications for everything especially government.
Local governments will not lose to the central government. They have already defied it by offering incentives and beijing is forced to turn a blind eye. China is not that far away from the warlords. The real issue is how is the central government going to be able to keep the provinces financially viable when the bubble bursts?
tomb you must understand my problem
I supported the state, through the use of military force help the Libyan revolutionaries. By implication I must see that the state can be useful and that to be useful it must be powerful.
Having taken this position I find it impossible to call for the powers of the state to be stripped away without contradicting myself.
To be consistent I must make these calls as the question arises rather than be stuck with a formula that says that progressives should argue that the powers of the state be stripped away.
no idea what you are talking about. Thought the Syrian revolutionaries were fighting your highly managed state capitalism. The revolutionaries are not a state and are not even a government. I was talking about transition but have to concede now you clearly have a mechanical understanding of socialism and even less understanding of the role of the state.
OK tomb Ill try again.
Did you support the war against Iraq?
This war was conducted by the state. ( mainly US state but also Australian state)
You cant call for the state to be stripped of its power and at the same time call for the state to conduct revolutionary war. Well at least you cant if you want to make sense.
ok lets make sense. Why did the iraqi’s need a revolution? To get rid of your highly managed fascist state!!!!!!
tomb your argument has degenerated into babble
You now insinuate that I have been and or am a supporter of the Baathist regimens
This is just a fabrication to cover the fact that your argument lacks coherence.
But look who did support a baathist dictatorship
1969 China supplies Syria with weapons. Look it up you will find the Syrian army Cheif of staff Mustapha Tlass close friend of Hafez Assad
closing the deal and waving a certain little red book in the air.
well going to stop now think everyone knows china supports dictators everywhere, why wouldn’t they they are dictators!!!!!! Steve you drop the discussion on china because you only have a superficial understanding, you drop the discussion on socialism for the same reason which leads you to support state capitalism.
I am on this post because it is about economics which clearly you don’t have much of a background in so try to move the discussion to to other areas. You want to discuss Iraq go to that post. Unless you come up with something that makes sense about economics I will not respond
Dr Robert J Shapiro you remember the guy that said we were all stuffed in 2 weeks. Well I didnt like that prediction but I find his blog to be OK
http://www.sonecon.com/blog/
I like it when he said
The Eurozone could have followed the basic rule of monetary unions, and used the European Central Bank (ECB) to guarantee those bonds in some way. That\’s what the Federal Reserve has done for a century here (and the Treasury did it for 50 years before the Fed was created). Yes, it would be harder for the Eurozone to pull that off, since it has no single national government. But it does have a single central bank.
Its nice that one of Obama’s inner circle of 5 economists agrees with me although I have been making this point for some time oh well better late than never. BTW check out the other 4 Obama certainly is getting advice from a variety of views.
Poor old Robert Schapiro not on Obamas council of economic advisors.
The correct person is Carl Schapiro. Oh well.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the
The struggle for funding has become tougher this year, leading Wang Tao, an analyst with UBS to describe local stimulus plans such as Changsha’s as “wishful thinking”. A downturn in the property market has eroded revenue from land sales, a major cash source for local governments. And Chinese banks, worried about bad loans, have been reluctant to open the credit taps as they did at the height of the global financial crisis in 2009.
Just like the non-barking dog in the Sherlock Holmes story, the gold price has become strangely insensitive to the usual stimuli.
The eurozone remains locked in an existential crisis. Growth is fading in the US and China, and policy makers appear conflicted or just plain clueless about how to respond. Meanwhile, losses and scandals at major banks are coming to light on a weekly basis.
Unsurprisingly, investors are running scared. The global flight to safety has seen capital flood into “core” sovereign bond markets, driving yields down almost to vanishing point. Yet, despite this perfect storm of financial instability, the gold price remains becalmed, write Peter Tasker.
Tomb policy makers are less than clueless this guy arges that at virtually every critical moment the Presidents of the USA have done the wrong thing. Are these guys really secret communists trying to bring down the system from within? But more seriously if the guys at the top are doing everything wrong doesnt that speak well of the underlying strength of Capitalism.
http://www.voxeu.org/article/procyclicalists-fiscal-austerity-vs-stimulus?utm_source=exact&utm_medium=email&utm_content=89146&utm_campaign=Saturday&modapt=
You just don’t get it steve!!!! Who said anyone was doing it right? there is no answer and so they are all wrong. This shows the obvious weakness of capitalism. I am amazed the ship is going down no one has an answer everyone is blaming each other and you see this as a strength just because the ship hasn’t sunk yet because everyone has their fingers in a hole but quickly running out of fingers
.
tomb my point is that the Capitalist system is very resilient. Keynes argued that in booms governments should be frugal and in recessions governments should be expansionary. The article that I linked to argues that the world leaders have done the exact opposite of what Keynes suggested yet 5 years into this crisis what do we see. Well nothing that is system threatening. We may experience a lost decade but that looks like the worst. The projected growth of the worlds productive capacity will not happen, sad yes but system threatening, no.
Pundits like Keen and Schiff who argued that the current crisis would lead to serious social anarchy or even to an Australian housing crash have been left looking a bit silly.
You can still hope for the worst, the German banking crisis didnt occur untill the Great Depression was several years old maybe something will turn up that reduces us to pauperism.
A crisis isn’t system threatening it is inherent and has always been and capitalism goes on. This crisis of course will be much bigger because they have stimulated and last longer what threatens it is how people respond.
shows you don’t understand what is happening. People in Greece and Spain are already pauperised. A system fault is not looking for something but recognising that there is already something wrong and what are the consequences of a system fault? Still amazed you haven’t noticed the problem and assume you think the stimulus was just for the hell of it and worked like a charm so it’s all over and we can go back to sleep. Think earthquakes!!!!
good to see you have no problem with a lost decade. The fact that you are terming it as looking for something that reduces us to pauperism
As for not following keynes line what do you think stuffed them? The USA Japan and Europe have massive debt because they have stimulated for decades to keep it going but you seem to think increasing the debt is frugal!!! didn’t read the article as anyone saying that printing money to keep things going runs counter to keynes philosophy is not worth reading.
Plenty of people including Obama are suggesting printing money is an easy fix and the US has no problem just needs to settle and then it will back to boom times. The fact that the stimulus has failed to get the economy to grow would seem to say the it may have stalled the crash but hasn’t been able to get the economy operating as normal. As the stimulus runs out the economy slows and they have to stimulate again and while you and some others seem to think you can just keep printing money without consequences the rest of us know the consequences are dire. Even if they continue to stimulate and they are running out of tricks as interest rates are negative or zero so printing is the only option, it only keeps things stagnating. They clearly have failed to stimulate there way out of it but they continue to do it as they have no other strategy. This would seem to be an issue in the US election as the Tea Party and sections of the GOP including romney’s running mate are opposed to printing more money and want to deal with debt. There is no understanding from them or you as to how the crisis came about so no chance they have any chance to solve it as they don’t even know the problem just like keynes. Keynes believed in the long run we would all be dead so the short term quick fix was the go. Well reagan is dead but we are still here in the long run for which keynes had no policy. We are stuck with the fact that advanced capitalist countries with minor exceptions have stimulated themselves into debt which they cant finance without printing money and even that won’t suffice so they can all hold hands and look to the sky and print more money and hope it all goes away or they can give it up and try to get something out of the wreck and start balancing budgets and getting the debt down and back to normal capitalism with booms and busts.
The fact that they were able to stimulate for 4 decades before it caught up with them is impressive and this is not running counter to keynes but exactly what he ordered. It worked which is pretty amazing but of course at what cost, well we are about to find out and it isn’t a matter of cheering on the inevitable disaster that capitalism creates but making people aware that it is an inherent system fault and they should not have faith in it and should prepare for the worst and deal with it.
I agree with Paul Krugman in his book “End this depression now”
He writes that we face 2 problems one is a depressed economy and the other is debt.
Of the two the depressed economy is the greater and more immediate problem.
The economy is depressed due to a withdrawl of private investment. The government could and should replace this missing demand with a stimulus package that is of an appropriate size, the Obama stimulus he sees as way too small.
Once the depressed economy is dealt with he thinks that we can address the debt due to the fact that the US has dealt with bigger debt to GDP ratios before.
The alternative is to nominate the debt as the number one problem and condemn millions to unemployment as we wait for the private sector to recover.
Now before you throw your hands up about the government borrowing Trillions to get America back to work ask yourself well why not they spent 3 Trillion US$ to give tax cuts and fight the wars in Iraq and Afghanistan.
giving tax cuts is your stimulus at work and the point you and Krugman are missing is the stimulus didn’t work and the debt has to be dealt with at some point. They are not borrowing they are printing money!!!!! They can’t borrow as no one in their right mind would lend to them. The chinese are trying to offload their treasuries but having difficulty as are other entities that thought it might be safe haven until the printing started to devalue the currency. The FED is buying treasuries.
There are consequences to trashing your currency. You might be more competitive with exports in the short term but the value of GDP drops, the value of everything in the country drops hence Australians holidaying overseas and buying overseas properties.
Claiming the stimulus didn’t work because it wasn’t big enough is baseless and typical Keynesian crap of short term quick fixes and the consequences be buggered but humanity is here for the long term and we are not interested in hedonistic Keynesian denial.
The discussion is capitalism has an inherent flaw and not about how to save it and which policy works best as there is no solution but trashing currencies is certainly crazy. You are so imbedded in capitalism you can only argue about which capitalist policy will save the day. If there is massive unemployment it will be because capitalism had the inevitable depression and not because people flagged it or because the wrong policy was implemented but am sure you and all other apologists will try to push those lines to defend capitalism as you are already doing it.
All power to Estonia
tomb if you would only read the procyclical article that I linked to you would see that tax cuts at the top of a business cycle are not stimulatory but are the sort of stupidity that promotes bubbles but as you point out, you refuse to read it.
The Fed buying Treasuries is exactly what Krugman wants and some debasement of the currency has an upside when one of the problems is debt. Inflationary policies are correct when the main pressure is deflation. Thats one of the benifits of a fiat currency, its flexabilty gives some policy options. If the danger is deflation then you can expand the money supply to alieviate this. If the danger is debt you can allieviate this somewhat with Krugmans 5% inflation target. Who looses the most in this senario? Its the creditors. (Creditors are part of the Capitalits class last time I looked.) Thats why creditor capitalists are so against this idea.
The stimlus didnt work because for every Federal dollar that was put in a State or Municipal dollar was withdrawn. Clearly the stimulus must be as big as the missing investment.
Short term, long term, you can only address the problems that are in front of you. Depressed economy, you can argue for stimulus, you can argue for austerity or you can wait for a revolution to fix it.
Mass unemployment, you can argue for stimulus, you can argue for austerity, you can wait for a revolution to fix it.
As to being in bed with Capitalism well yes and no Im trying to support what makes sense and oppose stupidity. If tommorow you make sense I will surely support you.
All hail Estonia
tomb some simple questions.
When Bush printed about $US 1.5 Trillion to pay for tax cuts for the rich did you complain?
When Bush printed about $US 1.5 Trillion to pay for his wars did you complain?
Now that Krugman suggests printing $US2 Trillion to return the unemployed to work you express outrage.
OK the question. Are the unemployed unworthy. Have they failed you in some way that they now need special punishment?
(Long live the Republic of Estonia.)
August 13 2012 @ 11.29 tomb wrote “The fact is that they were able to stimulate for 4 decades before it caught up with them is impressive and this is not running counter to Keynes but exactly what he ordered.”
Well how can I argue with “The fact”
Except its not. During the eight years of the Clinton presidency the USA reduced the debt to GDP ratio.
Once Clinton started to reduce the debt as a proportion of GDP (which is the relevant measure) did the US economy stall without an ever increasing stimuli?
Clinton ran :record high surpluses
:record low poverty rates
:The longest economic expansion in history
:The lowest unemployment rate since the 1970’s
So we havent seen 4 decades of stimulus and stimulus is not synonymous with Keynes. In 1937 he said “The boom, not the slump, is the right time for austerity…”
Only idiots think that any time is the right time for stimulus and only idiots think that deficits dont matter.
In 2002 Vice President Dick Cheney stated “Reagan proved that deficits don’t matter” oh dear!
you are supporting capitalism as you think that stimulus can work even though it has clearly failed. you think that capitalism can continue without a depression even though you don’t know what was the cause of the economic crisis.
You and people like you are responsible for the mass unemployment because instead of pointing out this is inevitable under capitalism you like to pretend there is an alternative and then when it fails you just mouth about how it wasn’t enough and try to accuse those who did point out the obvious that they are to blame because they told the truth!!
Not interested steve in your need to pick a winner or loser because there isn’t a revolution. Assume you would have voted for himler as he was better than hitler as no point supporting anyone else they couldn’t win.
Again don’t care what Bush does or did and unlike yourself agree with majority of Americans in not voting for either of those hacks. I am not trying to prop up capitalism or make excuses for it and certainly see no merit in republicans or democrats and assume you also vote ALP.
Well off to print some money so we don’t need to work again as we will all be millionaires.
On Aug 15 2012 @ 2:29am tomb wrote about the US
“They can’t borrow as no one in their right mind would lend to them. The Chinese are trying to offload their treasuries…” really?….. really?
I know that the Austrians have a fantasy about no one buying Treasuries just like they have a fantasy about everyone buying gold.
Look up Bloomberg article by Daniel Kruger Aug 16 2012 @ 6.53 and you will see that the Japanese in June bought $10.4 Billion taking their years total of US treasuries to $61.3 Billion.
The Chinese added $300 million for the month raising this years buy to a total of $12.4 Billion.
Now there is some concern that the Chinese have put a ceiling on their buying for this year but Kruger quotes an interest rate strategist as saying “so far that’s no problem for the US because there are so many other willing buyers” so many other willing buyers or as tomb might say people who are out of their minds.
(BTW I’m sorry for being responsible for mass unemployment, I’m sorry for voting for Himmler and the ALP but on the up side has anyone seen the statue of Sean Connery that’s been erected in the main square of the Estonian capital. Estonians they just keep kicking goals)
right steve so the fed buys treasuries to stop others from buying them? Always able to find guys who say stupid things but the figures at bea show the percentage of treasuries owned by foreign countries and they are declining including china’s so you can quote whatever article you like but it won’t change the fact foreign countries are losing interest in treasuries as they unlike you understand the implications of printing money to stimulate.
Weimar republic steve.
tomb My point still stands. China may be buying less than it did but it is still buying, not selling.
Weimar? You think hyper inflation is the problem? I know that the Austrians do. Austrians calculate inflation as growth in money supply rather than in prices. Scratch an Austrian and they will say that hyper inflation is all ready here.
But I can see the parallel. In 1921 the Inter Allied Reparations Commission set Germany the task of paying 100,000 tonnes of gold. (ie more than half the gold ever mined) Failing that they could pay in non German currency setting Germany the task of swapping German Marks for foreign currency. The swaps soon became as ludicrous as the pure gold demand.
So for the US to repeat Wiemar all we need is for the US to loose a world war and then for the victors to demand 100,000 tonnes of pure gold. Simply expanding the money supply will not get us to Wiemar.
Damn Ive run out of nice things to say about Estonia.
It was printing money that caused the hyper inflation in Germany and even they know that. Like most things you say steve I’m sure you read an article from some magazine that had sloppy research or you just say things because you want them to be true and know if you check them out they won’t be and hope that people accept your crap or just let it slide.
China’s holding of US treasuries has dropped from 1307 billion in June 2011 to 1164.3 billion in june 2012 and this is not from zine this is from the US treasury.
I know you like to talk about the Austrians and bush and anyone else to escape the fact you don’t understand money but I have no interest in who says it only what they say so no point citing one idiot after another if you don’t know then that’s it and clearly you don’t.
tomb When I check the figures I see that in 2010 China held $1.16 Trillion which by December 31/2011 had fallen to $1.15 Trillion and the most recent figure I could find was for June 2012 and the figure stood at $1.164 Trillion.
So the figure went down a bit then up a bit. I see no massive sell off.
Yes the Wiemar hyperinflation was due to printing money but my point is that the US reasons for printing money looks nothing like the reasons Germany had for printing money. The US is printing money to counter deflationary pressures and to refinance banks that looked shakey. The Germans printed money because they were forced at gun point to exchange their currency for foriegn currency. This caused the German currency to plunge so that they had to print more money to cover the ever widening spread.
Now surely in your heart of hearts you must know that the two situations are worlds apart.
If you cant acknowledge this then ask yourself these questions
When hyper inflation took off in Germany could they reverse it?
If inflation takes off in the USA can they reverse it?
(a little help Germany could not reverse because the problem was external printing was just a response)
( The US can reverse at any time because it controls its money supply)
tomb I did see a report of China holding a peak of $1.3 Trillion in 2011 but just a couple of points point one so what, point two wouldnt you expect a slow down in China to be reflected in Chinese overseas invetments, point three China often rearanges its overseas investments.
Just back to hyperinflation. The US sells treasuries and inflation adjusted treasuries. The outlook for inflation is pretty reliably measured by the gap between the non adjusted and the inflation adjusted treasuries. Needless to say the gap is and has been pretty small meaning that those people whose full time job is to guess the future inflation rate are guessing that it will be pretty small.
Weimar republic anyone?
printing money is printing money the reason is irrelevant and the consequences the same. This is basic!!!! The USA if it creates hyper inflation can only get rid of it by massive money withdrawal which probably wouldn’t be possible as it is HYPER inflation and most likely have to ditch it’s currency.
You said china is still buying treasuries and the treasury department says they have been selling for the last year so you didn’t know what you were talking about and running around getting figures which prove they are not buying bears that out, no one said a massive sell off that’s just you again trying make up an argument which doesn’t exist.
China is slowing which in other posts you seem to deny was even possible but now to cover your mistake you want to admit it. China is slowing and this has nothing to do with buying treasuries. You don’t get it so leave it alone steve. THe balance of trade is still positive for china so slowing has nothing to do with it, we are talking chinese government buying treasuries and they have to do something with the money so they buy other bonds and sell US treasuries.
as for those predictors of anything before and during this crisis it is no doubt you are with them as a firm denier of any real problem but they have been wrong for most of there predictions and very few people put there faith in them except the few zealots left. The second point is there isn’t hyperinflation and may not be if they stop printing money so the predictors are not saying anything about the relation between printing and hyper inflation rather more about the probability of continuing to print as the FED has been reluctant lately and the numbers are building against it as it becomes obvious to blind freddy it isn’t working and the consequences are already being felt with the devaluation of the country and the inevitability of inflation if they keep doing it.
“printing money is printing money” not so! Wiemar printed notes and put them into circulation. The US has “printed” notes and lent this money to banks. The money sits in vaults giving everyone the impression of bank solvency. When the economy picks up these banks may want to use this money to lend out and then it will be in circulation, then it has the potential to be inflationary. If the US government becomes concerned it can recall some loans, it can raise the statutory deposit limits or it can raise interest rates. All these measures will take money out of circulation if necessary.
You don’t like me saying no massive sell off, fine Ill change it to no significant sell off.
Like Arthur before you there’s the suggestion that I have blind faith in Chinese capitalism. If you scroll back on this thread to my post of October 12 2011 @ 8.29 you will notice that I give 13 reasons why the Chinese economy might go belly up.
they are printing money for the FED to buy treasuries!!!!!!! They also give money to the banks to help them get solvency which they would normally get by calling in funds owed. This means more money in circulation not in the vaults. You seem to look superficially for what you want to see and then give up. Analysis would show that it must mean more circulation than otherwise would occur.
Wiemar print money kill debt any bells ringing there?
You say maybe china could go belly up. In other posts you consistently say they wont or no reason why they should.
Beware the Faustian bargains of central banks
By Scott Minerd
In Goethe’s 1831 drama Faust, the devil persuades a bankrupt emperor to print and spend vast quantities of paper money as a short-term fix for his country’s fiscal problems. As a consequence, the empire ultimately unravels and descends into chaos. Today, governments that have relied on quantitative easing instead of undertaking necessary structural reforms have arguably entered into the grandest Faustian bargain in financial history.
As a result of multi-trillion-dollar quantitative easing programmes, central banks have compromised their ability to control the money supply, making them vulnerable to runaway inflation. When interest rates rise, the value of central bank assets could fall below the face value of their liabilities, potentially rendering them incapable of protecting the purchasing power of their currencies. To better understand the potential consequences of quantitative easing, it is useful to review the historical evolution of central banking. Early central banks were essentially clearing houses for gold. Individuals and trading companies placed their bullion on deposit and received a claim that could be redeemed upon demand. The system’s strength was largely derived from its simplicity. Today’s global monetary system, by contrast, has virtually no gold backing and depends entirely on faith that central bankers can control the supply of paper money.
When founded in 1913, the Federal Reserve’s definition of eligible reserve assets was extended beyond gold to include short-term bills and then in the 1930s, Treasury securities. The problem with using Treasury securities as a reserve asset is that, unlike gold, Treasuries have duration. This means that in a rising interest rate environment, the value of the Federal Reserve’s asset portfolio could potentially decline below the face value of its liabilities (Federal Reserve notes).
In 2008, just before the first of two rounds of quantitative easing, the Federal Reserve had $41bn in capital and roughly $872bn in liabilities, resulting in a debt to equity ratio of roughly 21-to-one. The Federal Reserve’s portfolio had $480bn in Treasury securities with an asset duration of about 2.5 years. Therefore, a 100 basis point increase in interest rates would have caused the value of its portfolio to fall by 2.5 per cent, or $12bn. A loss of that magnitude would have been severe but not devastating.
By 2011, the Fed’s portfolio consisted of more than $2.6tn in Treasury and agency securities, mortgage bonds and other fixed income assets, and its debt-to-equity ratio had dramatically increased to 51-to-one. Under Operation Twist, the Fed swapped its short-term securities holdings for longer-term ones, thereby extending the duration of its portfolio to more than eight years. Now, a 100 basis point increase in interest rates would cause the market value of the Federal Reserve’s assets to fall by about 8 per cent, or $200bn, leaving it insolvent, with a capital deficit of about $150bn. Hypothetically, a 5 per cent rise in interest rates could cause a trillion dollar decline in the value of the Federal Reserve’s assets.
As the economy continues to expand, the Federal Reserve will eventually seek to normalise monetary policy, resulting in higher interest rates. In this scenario, the central bank could find that the market value of its portfolio has declined to the point where it no longer has enough sellable assets to adequately reduce the money supply and maintain the purchasing power of the dollar. Given US dependence on foreign capital flows, if the stability of the dollar is drawn into question, the ability of the US to finance its deficits may falter. The Federal Reserve could then find itself the buyer of last resort for Treasury securities. In doing so, the government would become hostage to its printing press, and a currency crisis or runaway inflation could take hold.
To hedge against deterioration in the dollar’s purchasing power, investors have already begun migrating towards hard assets such as gold, commercial property, and artwork. Other assets likely to perform well in the immediate term because of the effects of quantitative easing are credit-related instruments including bank loans and asset-backed securities. European equities are likely to outperform US equities over coming years because of ongoing balance sheet expansion by the European Central Bank. Long-duration, fixed-rate assets such as government bonds are likely to underperform in the years ahead, indicating that now may be a better time to sell Treasury securities than buy them.
Less than half a year before the centennial of central banking in the US, neither policy makers nor investors have much to celebrate. By abandoning monetary orthodoxy and pursuing large-scale asset purchases, global central banks have increased the risk of inflation and compromised their ability to stamp it out. It is too early to predict exactly how this Faustian bargain will play out; but, with each additional paper note that rolls off the printing press or gets conjured up in the ether, the likelihood of a happy ending becomes increasingly evanescent.
http://en.wikipedia.org/wiki/Faust
http://en.wikipedia.org/wiki/Goethe's_Faust
http://www.ft.com/intl/cms/s/0/813ad3c4-eaba-11e1-984b-00144feab49a.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct&ftcamp=crm/email/2012829/nbe/MarketsAfternoon/product#axzz24xClHzPT
The printing press has reached its limits
Date
August 31, 2012 – 3:39PM
Few jamborees excite financial markets as much as the symposium of international central bankers which is held annually in late August at Jackson Hole in the Rockies.
Interest this year focuses around whether, with the American recovery again running out of steam, the US Federal Reserve is about to signal a further round of quantitative easing, marking the third such burst of money-printing in that country since the crisis began.
Yet it is also fair to say that the gathering no longer holds quite the same cachet it used to. Faith in central banks as guarantors of macro-economic stability has been shaken to breaking point by the events of recent years, a crisis which they utterly failed to see coming, still less were able to prevent.
The symposium has been further devalued by the fact that many of the top European central bankers, including Mario Draghi, president of the European Central Bank, are still so busy fire-fighting that they have failed to show up.
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If nothing else, the event serves to highlight that five years after the crisis began, monetary policy is still struggling to deliver meaningful solutions. In the UK, the government has put its faith in a combination of ‘‘fiscal conservatism and monetary activism’’ to lift the economy out of its funk.
In the event, government spending has hardly been checked at all, while monetary activism has failed to revive the economy as hoped. Output remains firmly stuck a full 4.3 per cent below its pre-crisis peak.
Central banks stand widely accused of having failed. Is this fair? Not entirely. Just as they were much too highly rated before the crisis hit, they have now become somewhat oversold.
Part of what went wrong in public policy in the lead-up to the credit crunch is that too much trust was vested in central banks, which were widely credited with almost superhuman powers. This led to a feeling of false security and a blissful disregard of what the bankers, the politicians and the wider economy were up to.
Whatever happened, it was thought, monetary policy could always be relied on to come riding to the rescue. In the US, they even had a term for it – the ‘‘Greenspan put’’, after the former Fed chairman Alan Greenspan.
Mr Greenspan enthusiastically played up to his role as one of the immortals, with such Delphic-like observations such as: ‘‘I know you think you understand what you thought I said, but I’m not sure you realise that what you heard is not what I meant.’’
At the time, this remark was thought a sign of great wisdom. Today, it just looks idiotic.If the crisis has taught us anything, it is that it is unwise to place too much faith in central banks. The most they can hope to do is paper over the cracks.
In this regard, they have so far proved relatively successful, with the possible exception of the dysfunctional European Central Bank, so torn apart by national differences that it can scarcely be regarded as a proper central bank at all.
Again with the possible exception of the eurozone, the mistakes of the 1930s, when failure to counter a violent contraction in money and credit led to cascading bankruptcies and mass unemployment, have generally been avoided.
Yet there is still a lingering belief that central banks could and should be doing more. This stems from the idea that the root of the problem in advanced economies is merely one of confidence and demand.
If this is true, then the task of reviving growth should be relatively straightforward. If ways could be found of getting the money flowing again, by persuading households and businesses to spend rather than save, all would be well. It follows that central banks should keep on pushing interest rates deep into negative territory until they get a result.
Unfortunately, it’s not working. Money-printing may have prevented much worse outcomes, but it doesn’t seem to have got demand growing again. All kinds of bonkers ideas have been suggested for going further.
Why not give consumers the money to spend instead, or simply cancel the 375 billion pounds of government debt the Bank of England has bought through quantitative easing? Or maybe the government could stop borrowing altogether, and simply monetise the deficit?
It scarcely needs saying that this is what happened in Weimar Germany. It would also be illegal under the Lisbon Treaty. Permanent expansion of the money supply, with no means of withdrawing the cash once the economy picks up again, would lead to a run on the pound, hyperinflation and, eventually, sky-high interest rates.
In any case, if demand is not responding to QE, then the problem may not be one of demand at all. There is, regrettably, a much more uncomfortable conclusion to be drawn. In a recent article, Raghuram Rajan, a former chief economist at the IMF, articulated what I have long found the most compelling way of looking at the economic crisis.
For decades, he wrote, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition, and to pay for vote-winning entitlements.
So to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same.
Predictably, this proved unsustainable. Without politically painful supply-side reform to correct these failings, we can look forward to years of stagnation or worse. Central banks may have succeeded in preventing a repeat of the Great Depression, but they cannot correct these underlying deficiencies.
To think they can somehow magic away all our problems is to descend into the fantasies of the past.
The Daily Telegraph, London
http://www.shadowstats.com/article/no-414-hyperinflation-special-report-2012
analysis is a bit bleak but data is interesting
Happy aniversary.
Its now a year since Schapiro told us that capitalism only had 3 weeks.
I see that to commemorate the aniversary some other guy has said that Australia is on the Greek road. (I had no idea that we were even in the Euro zone)
Long live Steve Keens prediction that the Aust housing bubble will burst in 07,08,09,10, 11, 12 oh well some time soon.
Well Bill a year has gone by and I will ask the obvious. Why did Shapiro get it so wrong? Why did Keen get it so wrong? Why did you think that they were saying something that was cutting edge? Why did I sum their positions up immediately as bullshit?
Who can tell maybe I just lucked out.
I don’t mean to be too harsh. Everybody can get things wrong. Just this week the IMF announced that they have been using the wrong fiscal multiplier. Talk about your basic mistake! It only means that they have to reverse their advice about austerity to EU countries. No harm done just maybe a few million more unemployed than was necessary.
Political economy is all about breaking hearts and cracking heads as talk moves from what type of crisis to what sort of recovery this is.
http://www.bloomberg.com/news/2012-10-15/sorry-u-s-recoveries-really-aren-t-different.html
Any one remember the discussion on Iceland?
Iceland was one of the first bankrupt countries.
They told the international banking community that their losses were of no concern to the people of Iceland. Iceland was in a similar position to Ireland, Spain and Greece except that today Iceland’s economic growth is 2.9% and it’s unemployment rate is 5%
Arthur you argued that you could see no benefit in a policy of massive devaluation. Maybe you should give Iceland and for that matter Argentina another look.
http://digitaljournal.com/article/334265
Still laughing. Apparently Argentina is about to default on their loans yet again. Beats me why people lend them money in the first place.
November 27, 2012 10:00 am
OECD slashes 2013 growth forecast
By Claire Jones, Economics Reporter
The OECD has slashed its forecast for growth in 2013 and warned that the risk of a serious global recession cannot be ruled out.
In its economic outlook, published on Tuesday, the OECD said it expected growth of 1.4 per cent next year in the group of 34 economies that make up the membership of the Paris-based organisation – down from 2.2 per cent forecast in May – and called for several of its members to step up their policy response.
“Over the recent past, signs of emergence from the crisis have more than once given way to a renewed slowdown or even a double-dip recession in some countries,” said Pier Carlo Padoan, OECD chief economist. “The risk of a major contraction cannot be ruled out.”
just an interesting article regarding china’s trade surplus and foreign reserves and perhaps they are not the panacea people think they are.
http://thediplomat.com/pacific-money/2012/09/28/the-dollar-trap-chinas-misunderstood-foreign-exchange-reserves/
The sky is falling, the sky is falling. Hang on, no it’s not. The earth is rising, the earth is rising.
http://www.bloomberg.com/news/2012-11-29/world-economy-in-best-shape-since-2011-investors.html
On Wall Street
November 30, 2012 1:50 pm
Loose Fed policy raises spectre of 2007
By Henny Sender
Financial conditions are as loose today as they were in 2007, Ben Bernanke noted in a speech he gave in New York on November 20. The Federal Reserve chairman had good reason for that observation.
High-yield bond and loan market issuance year to date in both the US and Europe stands at about $570bn – on a par with the peak five years ago. Almost 30 per cent of all junk bonds have few terms, a new high, according to data from JPMorgan, while debt issuance for the purpose of paying the owners dividends is also above 2007 levels. Issuance of collateralised loan obligations this year will come in at about $45bn, more than the past four years combined.
Most shadow banks and credit hedge funds have never had it so good. So far, this year, distressed debt is among the best-performing hedge fund strategies. “You should be thankful for the Federal Reserve if you are an investor in credit markets,” notes Michael Cembalest, chief investment officer of the private bank at JPMorgan. “The rising tide in credit has lifted all boats.” Today, the debt of fewer and fewer companies trades significantly below 100 cents on the dollar, Mr Cembalest adds.
Also this past week, Equity Residential, the apartment landlord controlled by Sam Zell, partnered with AvalonBay to buy property company Archstone Enterprise, paying $6.5bn for 60 per cent and 40 per cent respectively. Archstone was formerly in the hands of Lehman Brothers. The bank’s original top-of-the-market purchase of Archstone was typical of the frenzied activity in evidence in 2007, as well as one of the main contributing factors to Lehman’s downfall.
Thanks to the Fed, there are so many ways in which it seems it is 2007 once again. But to what extent is that a good thing?
Mr Bernanke’s speech was hardly upbeat; it was all about the necessity for Washington to come to grips with issues surrounding the fiscal cliff, the package of tax increases and spending cuts due to take effect from January unless a deal is reached. But neither in the speech nor in the questioning after (led by his former colleague at Princeton University, Alan Blinder) was there much discussion about the downside of the current Fed policy.
In depth
Central banks
Bank of England
How the world’s central banks are addressing global economic uncertainty
There are several downsides, quite apart from the fact that the Fed’s policies cannot continue indefinitely and their efficacy diminishes with each round of easing. That is one reason why Jeff Aronson, co-founder of Centerbridge Partners, returned money to investors recently. At this point, after so much credit spread tightening, there is far more potential downside than upside. Other drawbacks, of course, are that households cannot earn anything on their savings, pension funds are badly underfunded and insurers cannot generate enough investment income. The real beneficiaries of easy money are speculators.
Meanwhile, from a narrow financial markets point of view, yet another downside is the fact that market prices have lost any real meaning. Prices suggest that the world is a safer place but is it really?
Probably not. The world is much more frightening today than it was in 2008. Growth in most parts of the world is far slower, while Europe looks to be in recession. Joblessness is a challenge in many parts of the globe. The geopolitical situation is far less stable. Governments are cash strapped and have far less room to support either their economies or their banks.
Yet prices don’t reflect risk at all. Should Philippine government debt really be yielding 3.6 per cent? In 2008, it cost 800 basis points to buy protection against a Philippine default. In June, the price was 220bp. It is now a mere 100bp. Hedge funds nervous about the state of the world and seeking to buy protection in the credit default swap market have had a disastrous time as the credit markets keep tightening.
In 2007, senior staff at the New York Fed compiled a list of all the indicators, suggesting the prices of many financial assets were no longer rational, and presented that list to their colleagues in Washington. Among the indicators they cited was a Middle Eastern telecoms group whose initial public offer was close to 700 times oversubscribed. Their concerns were dismissed.
This time, Mr Bernanke’s Fed is even more complicit.
http://www.worldbank.org/en/country/ghana
OK if this link works scroll down to the bottom where you will find a graph about Ghana’s GDP explosion.
Ghana hasnt really had a sudden explosion the real story is that the statistics have caught up with reality. Oh yes I hear you say Ghana is such an insignificant piece of real estate but soon we will see a proper statisical update for Nigeria. My point is that like China and India Africa is coming. World capitalism is exactly that world capitalism. Europe may be stagnant but Asia and Africa are booming.
still trying to prepare for deterioration in crisis but the realisation that nationalism is out and the extent of globalisation is apparent along with inability to deal with too big to fail banks. Seems they are going to limit their liability in saving any bank
http://www.ft.com/intl/cms/s/0/f3383e7e-42c3-11e2-a4e4-00144feabdc0.html#axzz2ElPewsh2
Hi all, I’ve been busy studying online courses in finance (4 courses) and related statistics (3) plus many others (total 20 so far).
Just want to mention that two courses in microeconomics and one on economics will be starting in January and there are now more than 200 others…
http://www.class-central.com/
Im going to post two links because I think they both add to understanding of what is currently happening. They both come from Bloomberg which I think is the most useful site around. (happy to be told if you know a better one)
One is about China buying US treasuries. A bit of a counter to the idea that China was dropping treasuries as fast as they can and the other is a comparison of Mc Donalds workers and their bosses. Even Bloomberg can see that the workers need to unionise and wage class struggle.
http://www.bloomberg.com/news/2012-12-25/china-foreign-exchange-manager-calls-u-s-global-bright-spot-.html
http://www.bloomberg.com/news/2012-12-12/mcdonald-s-8-25-man-and-8-75-million-ceo-shows-pay-gap.html
OH SHIT! Could Europe really be healing itself?
http://www.economist.com/news/finance-and-economics/21569727-government-bond-markets-peripheral-countries-are-soaring-time-celebrate
Tomb is it too early for me to claim victory in our argument about where Capitalism is heading?
http://www.bloomberg.com/news/2013-01-21/davos-doom-loses-to-merkel-draghi-as-euro-defies-roubini.html
Japan loosening monetary policy yet again in desperate attempt to arrest slide. Sth Korea now feeling the pinch also. IMF lowers expectations of world growth and yet they still think the stimulus will get us out of this after 5 years of finger in the dyke.
http://www.ft.com/intl/cms/s/0/2feb0830-65c7-11e2-a17b-00144feab49a.html#axzz2IouBqORh
http://www.ft.com/intl/cms/s/0/6aa68b02-65d6-11e2-a17b-00144feab49a.html
interesting analysis of the state of the USA
http://www.forbes.com/sites/investor/2013/01/02/prepare-for-a-stock-market-plunge/
An attack on trade may in fact eventuate as the crisis deepens
http://blogs.ft.com/gavyndavies/2013/02/03/who-is-afraid-of-currency-wars/
things are not improving
http://www.washingtonpost.com/business/eurozone-economy-shrinks-a-bigger-than-expected-06-percent-in-q4-as-germany-falters/2013/02/14/bdf7fed6-768d-11e2-b102-948929030e64_story.html
cracks starting to appear, trashing currencies as a result of stimulus presenting more problems than inflation
http://online.wsj.com/article/SB10001424127887323764804578310050286716968.html
http://www.ft.com/intl/cms/s/0/3b6dbde4-823a-11e2-843e-00144feabdc0.html#axzz2MECCdPLD
http://www.ft.com/intl/cms/s/0/e76e5b7c-8801-11e2-8e3c-00144feabdc0.html#axzz2NFWV9IX4
http://www.ft.com/intl/cms/s/0/cd089fe4-8b31-11e2-8fcf-00144feabdc0.html#axzz2NRLITKtI
Yes tomb the outlook for the UK is sad, not because there’s something fundamentally wrong with the UK but because its leaders have adopted wrong ideas. Ideas do matter and if you hitch yourself to the wrong ones you will fail. Nothing will defect the current leaders from their faith in austerity not even reality itself. A comparison of the UK and Swedish economies should be enough for mortals like us.
http://www.guardian.co.uk/business/economics-blog/2012/jul/30/britain-sweden-eu-contrasting-economies
moving on to the past
http://online.barrons.com/article/SB50001424052748704836204578354374105296986.html
The inevitable cost of free lunches
http://www.ft.com/intl/cms/s/0/502b369e-8c85-11e2-8ee0-00144feabdc0.html#axzz2O5wdjMso
http://www.ft.com/intl/cms/s/0/d1c982d2-91d5-11e2-b839-00144feabdc0.html#axzz2OC43f8rj
Steve, Interesting that the Guardian article doesn’t state what Sweden’s prinicpal exports are. They probably wouldn’t approve: iron ore (lots of mining and new mines), chopping down forests (timber) and hydro-power (back up in part by nuclear power – the two main sources in Sweden). Sweden supplies 80% of Europe’s iron ore needs and the price of iron ore has increased significantly ude to increasing Chinese demand over a short period of years. I think you, Tom and I can agree as to the consequence for the Swedish economy when the prices go down.
Barry I would believe that Sweden’s economy was riding a resource bubble if it was true but it is not true.
In Feb 2011 the price of iron ore was $187 by Sept 2012 that price had crashed to $99.
If Sweden was riding an iron ore bubble its economy would have crashed in 2012 as did the price of many iron ore producing companies.
Honestly can anyone believe that a country supplying base minerals to Europe can be having a happy time? Barry I think that you have missed the point of the article.
Barry mineral and fuel account for 20% of Sweden’s exports. The vast majority of Sweden’s exports are sophisticated products. They unlike Australia are not riding a resource bubble.
http://www.swedishtradehistory.com/Relations/From-raw-materials-to-environmental-technology/
Steve, thanks for the linked article which has more up to date information than the sources I had used. If you read my post gaain, you’ll see that I didn’t actually say that Sweden was enjoying a resource bubble based on iron ore. Rather, iron ore, along with timber and hydropower, constitute the resource base of the Swedish economy and allow its heavy orientation toward foreign trade. On the foundation of this base, engineering accounts for about half its exports.
The article to which you linked doesn’t provide a statistical breakdown of the principal export categories. I’ve spent 20 minutes trying to find a simple current statistical analysis of what is actually exported but have been unable to do so.
The article to which you linked did not say that the vast majority of Sweden’s exports are sophisticated products but rather that Sweden is manufacturing more. It is exporting steel and pulp – and Volvo cars – along with telecommunications technology and military armaments.
My point was that the Guardian article did not mention the kind of exports that made Sweden’s economy relatively strong over time – because the Guardian tends not to like trees being chopped down and new mines opened up. The shift from exporting less timber to exporting more pulp does not mean trees are no longer chopped down in vast numbers.
One could argue that the recent fall in the price of iron ore has harmed the economy, as unemployment is rising and Sweden’s National Debt Office has increased its estimate for sales of nominal bonds. http://www.bloomberg.com/news/2012-10-23/sweden-raises-2013-borrowing-forecast-as-deficits-widen.html Official unemployment is around 8.0% and some critics, such as trade unionist Jan Elding, claim the actual rate is 20%. (This is a footnoted claim in wikipedia but Elding’s document is in Swedish).
The Guardian also might not approve of the Swedish Government’s commitment to free trade, which it claims is the basis of its alleviation of people from poverty and its welfare state: “Sweden’s trade policy is based on free trade. The Government’s Statement on Trade Policy that was presented in the Riksdag on 14 April 2010 begins with phrase, “Sweden’s development – from poverty to a welfare society – is the history of deregulation and free trade”.” http://www.government.se/sb/d/3086/a/118563
As you may know, the Swedish government is also hoping to put off or minimise crisis by a embarking upon a significant program of privatisation.
I don’t see how capitalist economies can stall crisis for ever, and find it strange that so many people see Sweden as some kind of model for doing this.
Barry you can seethe exports by category here.
http://atlas.media.mit.edu/country/swe/
The point of the article was that 2 similar countries have had different experiences with the EU crisis. One has contracted and one has expanded. At minimum this poses a question.
My point is that seeing that the UK and Swedish economies are broadly comparable and that one has contracted and one has expanded in the face of difficult economic circumstances the answer for this may lie in the ideas they work under.
You “don’t see how capitalist economies can stall crisis for ever,….” Well Sweden has had crisis. The banking crisis of the 1990’s and the failure of companies like SAAB but as the Swedish Chinese community say “Crisis is just another word for opportunity”
yes the chinese saying is similar to the one they used in the last depression, meaning if you are rich and have excess money you can make a killing after a crisis as did general motors ford etc. It is a real opportunity for capitalists to feed off those that failed. The workers on the other hand have no such opportunity it is a disaster for them!!
BTW Sweden and the UK are not similar economies. Amazed Steve didn’t cite Norway but of course when you look at places like Japan that have used stimulus for decades without success and are now going into uncharted waters and facing hyperinflation in the near future you probably want to stick to those few who are still treading water.
The most successful economy and the largest in Europe is Germany which is opposed to stimulus but we shouldn’t mention that or Greece, Spain, Ireland or any of those that stimulated themselves into bankruptcy.
Thanks for the link, Steve. I didn’t know about that site and it is very useful for data on all countries. I still don’t see evidence for your claimn that the vast majority of Sweden’s exports are sophisticated products.
And I would think that increasing unemployment and government debt would point in the direction of crisis. I suppose governments will keep propping up capitalism via unemployment and debt for as long as we let them.
More broadly, I don’t see much difference in the strategic thinking of UK and Swedish governments – aren’t they both committed to debt, to privatisation, to propping up failed major private enterprises and to accepting increasing unemployment? Both also use additional taxes, like the VAT, to raise revenue: in Sweden it’s a 25% rate and in UK 20%.
The main difference that I can see is in the rate of personal tax on income: around 60-70% in Sweden and averaging around 30% in UK. I still don’t know why anyone would want the Swedish model of crisis management.
Another difference is that Sweden has no minimum wage in law – the UK does. I wonder how this translates into actual wages in both countries.
There are plenty of clever minds out there, who were once revolutionaries and red leftists, who could apply themselves to a plausible alternative but seem to be more interested in how to keep the system going these days.
Yes tomb Capitalists do turn crisis into opportunity that is part of their genius, that’s part of why their system has continued to expand while “Marxists” have looked on, wrung their hands and predicted imminent doom.
Norway looks nothing like the UK, Sweden has enough similarities that economic journalists write articles comparing the UK and Sweden.
People have been predicting hyperinflation for 5 years now. My question is how many more years do we have to wait for people stop warning about the danger of hyperinflation when we live in an era of threatening deflation.
Germany is just having the best of times its currency is heavily undervalued while its banks take over the finances of Europe all the time while German spokespeople complain that Germany is shouldering the burden. In private I’m sure they piss themselves with laughter.
Barry in your post on Sweden March 23 2013 @ 7.28pm you mention iron ore 3 times and seem to be arguing that Sweden’s economic performance can be attributed to the high iron ore prices.
My points have been that iron ore prices have been volatile, that iron ore represents less than 6% of Swedish exports and that Sweden’s main exports are of sophisticated commodities. By sophisticated I mean not raw materials but commodities that have had a considerable amount of labour spent on them such as pharmaceuticals, phones, cars and weapons.
correction iron represents less than 2% of Swedish exports
Steve, my sources were out of date (as I said in my first reply to you)and I had the wrong impression that iron ore was still a significant earner for Sweden. But I didn’t say there was a resource bubble.
I’ll repeat for the last time that I was having a go at the Guardian’s greenie biases – the Swedes have benefited enormously from iron ore, timber, hydro (dams) and nuclear.
From that specific issue, we have developed a discussion about whether Sweden is a model for how to deal with crisis or whether all that is solid will melt into air in Sweden as well as everywhere else.
Of course, it won’t just melt – people will have to apply the heat. 🙂
Just on the hyper inflation question apart from the fact that it has failed to materialize this guy gives a very clear explanation as to why the real threat is deflation.
http://www.bloomberg.com/news/2013-03-20/why-global-economies-face-an-age-of-deflation.html
If people still cant get past the idea that printing money must raise prices, Krugman writes a lot about money supply and liquidity trap which has held up pretty well in the real world.
Seems Sweden may not be much different to the UK, both headed to negative growth and time will tell who comes out of this in better shape but assume the UK as they dealt with it earlier however one thing is certain the majority of the population loses.
http://www.thelocal.se/45214/20121221/#.UVCOzldUKO8
and this makes an even bleaker look for the swedish economy
http://www.konj.se/1445.html
US still stagnant despite massive stimulus
http://online.wsj.com/article/SB10001424127887323393304578364670697613576.html?mod=googlenews_wsj
Remember the good old days when you guys were pointing to Italian bond rates as a sure sign that something awful was about to happen? At the time bond rates had just edged north of 6%.
Well just recently Italian bond rates went negative. Just sayin
A better link damn Financial Times
http://www.reuters.com/article/2015/10/23/eurozone-bonds-italy-idUSL8N12N0S020151023
In this thread Arthur on Nov 10 2011 stated
“Theories of “final crisis” or “collapse” are simply wrong. Transition from capitalism will involve revolution, not a collapse.”
In her book Reform or Revolution Rosa Luxemborg wrote “Bernstein began his revision of the Social Democracy by abandoning the theory of capitalist collapse. The latter,however,is the cornerstone of Scientific Socialism.”
I guess that Rosa just got it wrong but thats a bit difficult because Rosa was leading the argument on behalf of Marxist orthodoxy so if Rosa is wrong then Marxist orthodoxy is wrong.