Economy, Banks, Gold, and other stuff.

[Bigfella]

As the saying goes "Capitalism without bankruptcy is like Christianity without Hell"; if you are not allowed to go bankrupt what is the incentive to do good business? It's a license to do whatever you want without regard - only the public pays. I reject such a system entirely.

Mario Monti, Italy’s prime minister, quips that, for Germany, “economics is a branch of moral philosophy”. Countries must pay for sins of commission (budget deficits) and omission (poor bank supervision).

....guess we can add the English to the list....

[cyppok]

Dor the reality is sovereign debt is unsecured, you can't seize a country they still have weapons an army. Even if the country is broke the people will defend themselves.

You assume that bank debt = gdp burden for the regular people. So far yes, unless you stand up like Iceland and tell everyone whom loaned your banks money to 'eat sht and die' and control the situation for the regular folk. Ergo you abrogate debts and by virtue of accounting someones' assets. Did you really do it? nope they were worthless before you publicly stated "I ain't paying for that!" they just expected you to, like a tool.


The problem in the whole situation rises from very simple arithmetic and exponential functions associated with debt. Pay-ability declines as interest rates and money in circulation is used up to pay it. Forward consumption and thus gdp growth is destroyed by trying to get it today through financing. The more you pull consumption towards today from tomorrow the less able you are to bear the burden. Even Japan with perpetual declining rates cannot escape the sinkhole, even if their population would be growing they wouldn't be able to fund themselves. Why? because their deficits grow at faster velocities than the ability to pay. Same thing in Europe. If you spend more and more each year on bureaucrats and create more and more rules for labyrinthine fee payments from businesses sooner or later you grow the first far faster than the last.

Gold thoughts I think the physical buying frenzy due to the discount from 1650 to 1400+ or so (today at least) is pulling forward demand, a lot of it. Since prices are made on the margin this intermediate future buying will subside a bit and we enjoy another ride down to ferret out everyone leveraging for the recovery play, my opinion at least is such. Whomever thinks this drop was due to ETFs and not some sovereign or a combination of factors is crazy. 500 tons forced the drop. Even if someone sold to themselves to do it, its' a lot of volume. Perhaps I am wrong and it rallies beyond its losses. I kinda get this feeling its a suckers rally and everyone will get their wallets chopped off.

[snapper]

Mademoiselle,

I use the point about sovereignty to counter the notion that “ANY bailout in Europe [as it] means a loss of sovereignty and therefore democracy.”

Markets (read: large financial institutions) rule, OK?

In 1994, James Carville said, “When I die, I want to come back as the bond market. You can intimidate everybody.”

The April 2013 IMF Global Financial Stability Report points out that the world holdings of bank assets alone are 162% of global GDP, and if bonds and equities are added in, the total rises to $259.2 trillion, or 370% of GDP (a mere $70 trillion).

In the US, the comprehensive is 425% of US GDP, in the EU 460% of EU GDP and in Japan 550% of Japanese GDP. Small potatoes, compared to Luxembourg (2,015%), the UK (786%), Denmark (667%) or the Netherlands (663%). See: [ IMF Global Financial Stability Report (GFSR) -- April 2013 -- Table of Contents ]

What does it matter how you vote? Well, do you think there’s a difference between the parties on, say, social issues? The treatment of poor people, women, minorities or AIDS? How about looking at how the tax burden would be divvied up under different leadership? There’s lots of things that matter.

President Obama continued the bank and corporate bailouts started under President Bush. The alternative was too horrible to even contemplate.

. . .

“if you are not allowed to go bankrupt what is the incentive to do good business?”

Ever boycott a company because you didn’t like their ethics?
I have, and when enough people do, it works.

. . .
“Hunger tomorrow”

OK, I’ll buy that. Because, hunger today is real, and hunger tomorrow is one possible scenario, and not the most likely one.

. . .

“Start again.”

Not an option. Break the global economy and hundreds of millions will be pushed to the brink of starvation, and scores of millions, perhaps hundreds of millions will die, or lead short, brutal lives at near-starvation levels. We tried that in the 1930s, and we learned that it’s not a moral option.

You, and I, may not like the steps needed to keep the global financial system afloat, but the alternatives are simply wrong.

. . .

Education, healthcare, food, housing . . . those may, or may not be ‘rights’ as you see them, but they are urgent national interests. Where education, healthcare, food and housing are inadequate, nations fail.

That’s not freedom.
That’s not democracy.
That’s neglect.
And, in my world view, that’s wrong.

. . .

“No” unemployment implies stagnation.
North Korea has “no” unemployment.
It isn’t exactly the optimal economic model.

David, Sir Since we are speaking in English here a simple 'Miss' is fine but thank you, good to see they still bring up some Gentlemen in Honk Kong.

I shall not answer all your points in detail as we clearly disagree on 'ethics' and the economics of a way out of the corner that measures by Governments and Central Banks have landed us in. So let me pick one inaccuracy that I feel you have painted me with; "Markets (read: large financial institutions) rule, OK?"... But I never supported the bank bailouts! When you're bust declare bankruptcy (which is there, after all, for just situations) and let others pick up the pieces. The truth is, as I suspect you aware, that QE benefits precisely these 'large financial institutions' at the expense of the taxpayer. No bailing out the banks was digging a larger hole and now they (the banks) are profiting from what you consider, and can only be described as, a form of 'social monetarism'. Freidman must be turning in his grave! The truth is that is more harmful to 'ordinary people' than the 'large financial institutions' and just another form dishonesty.

The question politicians ask is: If we borrow more now can we create enough growth to address the deficit in the near future - hopefully before our creditors lose faith in our ability to repay them? Well that depends on I think on what you spend it on. Sure you can support bankrupt banks and business's and create '60,000 new teachers' (a la M. le President Hollande plan) but if they don't create a profit - and I mean cash profit on your investment - then you've just landed your country deeper in debt. I am aware that things such education and infrastructure projects take time to 'mature' and reap dividends but if they don't then clearly it was wrong to borrow and invest as you did. This I would submit is the case with both Bush's and Obama's 'stimulus packages'. You can't micro manage an entire economy and that is why it fails. A return of GDP $2.3 trillion GDP growth in tax returns in no way covers the investment though it might be argued that some 'capital investments' have yet to pay off... no new Hoover Dam was there that I missed? IF the stimulus had worked you might be looking at closing the deficit but there is no hope of that under 'Mr Caring' Obama, who admits that is perhaps 10 years away.

So plan B is print and as you know that effectively helps the banks more than ordinary person, or as the Americans call it 'Main St'. So much for caring by QE.

The ethics of this are distorted. You say that stimulus and QE enable people to eat now. It is true but it cannot continue - while you are feeding them now you are lying about the future. They should be saving their money in whatever retains value because on this course the $ will inevitably collapse. You call that ethical?

Nor do I see Government interference in every aspect of a persons life as right. I don't want the Government to educate any children I have thank you - nor dictate what they are taught! I don't see why when I am in Britain or elsewhere I have to wear a seat belt in my car. It's my damn head that goes through the window. No, no, no! I will accept advice and may at times be grateful for it but laws telling us what the curve of cucumber can be (EU) and what I can and can't do in every particular in return for a form of 'social welfare' that has bankrupted Europe is not wanted nor maintainable. Socialism simply doesn't make a profit nor does it 'liberate' anyone because to be 'free' is to have things - assets or property in economic terms - that are 'yours', as in you decide what to do with them. In Europe we see the signs on the wall after Cyprus and writ large. What was once yours is no longer. Private property may become a myth. Perhaps you think that this will solve the problems of the euro?

I am aware of European GDP to bank asset ratio but the thing you forget to mention (as does the IMF conveniently) is that on average eurozone banks are leveraged around 27 to 1, whereas in the US that ratio is closer to 14 to 1and in the UK around 19 to 1. To break Euroland is therefore multiples easier than the US.

So no when I say 'the market' I do not mean 'too big to fail' banks. We ceased doing capitalism when we created Central Banks with a license to print money as that favours the 'large financial institutions'. I would support the introduction of non bank controlled currencies along the Hayekian model. As for the ethics of continuing what is going on... it's either a delusion or a lie, and I think we both know that the latter is the truth.

--Sara

[astralis]

cryppok,

The problem in the whole situation rises from very simple arithmetic and exponential functions associated with debt. Pay-ability declines as interest rates and money in circulation is used up to pay it. Forward consumption and thus gdp growth is destroyed by trying to get it today through financing. The more you pull consumption towards today from tomorrow the less able you are to bear the burden. Even Japan with perpetual declining rates cannot escape the sinkhole, even if their population would be growing they wouldn't be able to fund themselves. Why? because their deficits grow at faster velocities than the ability to pay. Same thing in Europe. If you spend more and more each year on bureaucrats and create more and more rules for labyrinthine fee payments from businesses sooner or later you grow the first far faster than the last.

nations are not individuals. thus the mechanics that may lead to a person's bankruptcy, which you describe above, does not apply directly to nations.

case in point, the british empire's debt rose -exponentially- while it was growing, and ironically only experienced a decline well into the empire's...well, decline.

the entire austerian argument, having repeatedly seen its theories fail in real life, have now gone back to its original theme: "dosen't matter if it's economically inefficent, it's just morally wrong!"

as for the gold stuff:

12 Rules of Goldbuggery | The Big Picture

[astralis]

snapper,

You can't micro manage an entire economy and that is why it fails. A return of GDP $2.3 trillion GDP growth in tax returns in no way covers the investment though it might be argued that some 'capital investments' have yet to pay off... no new Hoover Dam was there that I missed? IF the stimulus had worked you might be looking at closing the deficit but there is no hope of that under 'Mr Caring' Obama, who admits that is perhaps 10 years away.

you are missing the point of stimulus. it was to create demand, raise employment, and restart GDP growth, not as a deficit-reduction measure.

that growth ACTS as a deficit-reduction measure is a happy side benefit.

moreover, the stimulus was not 'micromanaging an entire economy'; it simply was not big enough to act that way. $787 billion sounds big-- and it is-- but against the backdrop of a $14 trillion economy, the effects are going to be muted at best.

finally, regarding the larger point:

A continual focus on smaller government uber alles necessarily creates intellectual blinders, in several ways.

first, the idea that as smaller government is always better, thus any solution that involves greater government spending no matter what the situation, will always backfire.

second, intellectual mirror imaging. because austerians think that smaller government is always better, they -assume- that their intellectual foes, keynesians, believe that bigger government is always better.

that is simply not the case.

keynesians believe that an expanded fiscal policy is necessary in the case of a severe recession or depression-- defined as so serious that monetary policies fail. to use a metaphor, it works as steroids to be used only in a bad case of heart failure.

[snapper]

....guess we can add the English to the list....

When can I expect the 'Peoples Correctional Police' or whatever? They may have to join a queue.

the entire austerian argument, having repeatedly seen its theories fail in real life, have now gone back to its original theme: "dosen't matter if it's economically inefficent, it's just morally wrong!"

It is morally wrong because the stimulus + QE method doesn't work. It is a deception. It is also morally wrong to keep people as dependency slaves in the first place. Sure helping them is good morally and charitable but to create slaves of them while claiming to help them is just adding insult to injury. QE and is stealing from the people you - and I - wish to help. More tax inhibits the creation of more real jobs and not just tax payer subsided jobs.

you are missing the point of stimulus. it was to create demand, raise employment, and restart GDP growth, not as a deficit-reduction measure.

that growth ACTS as a deficit-reduction measure is a happy side benefit.

moreover, the stimulus was not 'micromanaging an entire economy'; it simply was not big enough to act that way. $787 billion sounds big-- and it is-- but against the backdrop of a $14 trillion economy, the effects are going to be muted at best.

finally, regarding the larger point:

A continual focus on smaller government uber alles necessarily creates intellectual blinders, in several ways.

first, the idea that as smaller government is always better, thus any solution that involves greater government spending no matter what the situation, will always backfire.

second, intellectual mirror imaging. because austerians think that smaller government is always better, they -assume- that their intellectual foes, keynesians, believe that bigger government is always better.

that is simply not the case.

keynesians believe that an expanded fiscal policy is necessary in the case of a severe recession or depression-- defined as so serious that monetary policies fail. to use a metaphor, it works as steroids to be used only in a bad case of heart failure.

On the 'intellectual blindness' I would largely agree with you. In certain circumstances, invasion or whatever, it may be necessary to increase the role of Government. I have yet to meet a Keynesian though who doesn't think more Government is the solution. Keynes is the bolthole of all socialists.

Regarding the 'stimulus' I am at loss as where you find the sum of $787 billion... Did that include TARP and other bailouts? Does it include QE? To suggest that the stimulus was only $787 billion is to delude yourself.

[astralis]

snapper,

It is morally wrong because the stimulus + QE method doesn't work. It is a deception. It is also morally wrong to keep people as dependency slaves in the first place. Sure helping them is good morally and charitable but to create slaves of them while claiming to help them is just adding insult to injury. QE and is stealing from the people you - and I - wish to help. More tax inhibits the creation of more real jobs and not just tax payer subsided jobs.

this is precisely why it's impossible to debate this rationally. it's no longer a issue of economic pragmatism or efficiency-- it's 'slavery', or the harbinger of the totalitarian state...

I have yet to meet a Keynesian though who doesn't think more Government is the solution. Keynes is the bolthole of all socialists.

then that means you need to meet real keynesians. keynesian theory dictates very clearly that there is a time and place for a reduction in government that will maximize economic efficiency. and that government spending during a time of economic depression is also meant to maximize economic efficiency. IE, these are economic calculations, not political.

socialism, on the other hand, is not concerned with economic efficiency but with how to bring about a more equitable outcome. that's politics and not economics.

again, this is reverse imaging because austerians tend to conflate the two: the austrian school of economics and the political theory of libertarianism.

Regarding the 'stimulus' I am at loss as where you find the sum of $787 billion... Did that include TARP and other bailouts? Does it include QE? To suggest that the stimulus was only $787 billion is to delude yourself.

you really must learn to differentiate between various expenditures. the stimulus i'm referring to is the recovery act, which was explicitly -designed- as stimulus. TARP and bailouts, on the other hand, weren't; they were last second interventions to prevent financial collapse, not to goose demand.

QE is monetary policy, not fiscal policy.

again, conflating everything is akin to stating that a bicycle and a space shuttle is one and the same because they're modes of transportation.

[Parihaka]

Australia, having ridden out the recession rather well due to mining sales to China, is now being warned that it has to throttle back federal and state budgets
Budget pressures on Australian governments - Grattan Institute
The problem with Keynesianism is that while happy to borrow and spend during recession, politicians are far less happy about cutting govt expenditure during good times.

[DOR]

.

cyppok,

There is a body of academic work focused on the financial strangulation of emerging economies through corporate investment linked to key political families. During the Cold War, the necessities of the day might have generated support from the US and World Bank that would effectively strip the country of sovereignty in favor of “stability” and “reliability.” One side effect was that multinational corporations got to keep their investments and international banks were repaid on their loans and bonds.

cf Iran, 1953; Guatemala, 1953; Dominican Republic, 1962; Brazil, 1964; Indonesia, 1965; Panama, 1968; and Chile, 1973, to name a few.

. . .

You wrongly assume that I assume bank debt = GDP burden for the regular people.

And, you wrongly assume that nations that default on their debts will be willingly accepted into the global financial markets after a short time-out. As for Iceland, nationalizing the banks and defaulting on foreign debt occurred 14 weeks before the government fell, due to mishandling of the financial crisis. Nine months ago (June 2012), the country began to pay back some of their international debt.

You also wrongly assume that money injected into an indebted economy is used for consumption.

And, please remember that Japan’s $1.2 trillion in forex reserves and domestically denominated government debt are characteristics not found in most of the crisis countries.


= = = = =

snapper xiaojie *

When I said “markets rule, OK?” I didn’t mean to imply that either you or I prefer it that way. Rather, it was a statement of existing reality. Apologies if that was unclear.

Government savings in this environment – when households are scared and corporates are wary – means reducing consumption, which reduces production, , which reduces fiscal revenues and employment, which reduces demand.

I don’t see a solution in that scenario.

* “Miss,” in Chinese.

[Bigfella]

When can I expect the 'Peoples Correctional Police' or whatever?

Never. Even if I had the power and the desire I wouldn't lift a finger. Why even attempt to stop somebody who so discredits their own arguments with stuff like this:

It is morally wrong because the stimulus + QE method doesn't work. It is a deception. It is also morally wrong to keep people as dependency slaves in the first place. Sure helping them is good morally and charitable but to create slaves of them while claiming to help them is just adding insult to injury. QE and is stealing from the people you - and I - wish to help. More tax inhibits the creation of more real jobs and not just tax payer subsided jobs.

Still confusing moral philosphy with economics. Still ranting about 'slavery'. Still funny.

[Bigfella]

Australia, having ridden out the recession rather well due to mining sales to China, is now being warned that it has to throttle back federal and state budgets

.....or increase taxes. The report doesn't specify that it can only be one or the other. Despite our self-perception we are not a high tax society by OECD standards. That doesn't mean there aren't areas we can & should cut back in. Unfortunately the incoming government is probably going to leave middle class welfare alone & just hit the peole at the bottom again.

The problem with Keynesianism is that while happy to borrow and spend during recession, politicians are far less happy about cutting govt expenditure during good times.

True, but I'd rather try to cut back spending in an economy that has been spared the worst aspects of an economic downturn than try to rebuild one that has been hit hard.

As it is Australians have convinced themselves that we are in the midst of the latter and are among the truly wretched of the earth (I shit you not, people here genuinely think we are one step shy of Greece). Expect howls no matter what happens. We are very good at that.

[Doktor]

Never. Even if I had the power and the desire I wouldn't lift a finger. Why even attempt to stop somebody who so discredits their own arguments with stuff like this:



Still confusing moral philosphy with economics. Still ranting about 'slavery'. Still funny.

In all fairness, I believe DOR brought it. Read post #41.

[snapper]

this is precisely why it's impossible to debate this rationally. it's no longer a issue of economic pragmatism or efficiency-- it's 'slavery', or the harbinger of the totalitarian state...

Still confusing moral philosphy with economics. Still ranting about 'slavery'. Still funny.

Philosophy* as we are being trivial...

Since you both make similar points let's deal with the issue. Firstly though I would point out that it wasn't me that first brought the 'ethical' dimension into the debate:

What kind of person would have the cold, heartless world view that focuses with debts due decades from now, rather than hunger today?

I think this is a valid question, though presumably Bigfella would disagree. The point is that if Bernanke and Obama are right then indeed they are stopping being from going hungry today (which is the moral aspect) and 5-10years from now. However if they are wrong then the opposite is true; they are economically incompetent and by causing people to starve are morally culpable.

The other ethical dimension that comes from these economic policies relates to theft. I presume you both agree that you have a right to own private property whether it be your salary, your car, your laptop or pc or your house. It's yours right and nobody should be able to come along and take them away from you. If this is NOT the case what is the point of going out to work? or going to college to get better qualifications? So if you agree that you have some 'right' to own private property then an infringement of this right would be 'wrong' as well as economically counter productive since you would have less money to spend on whatever you chose - if for example you were running your own business then that becomes harder - someone may need to be layed off etc.

So the 'theft' has recently taken two forms the more obvious of which is the Cyprus example. I'm sure even Bigfella would think there's something morally dubious if 10-70% of whatever he has in his bank account were taken or 'taxed' over a bank holiday weekend. It is clearly an infringement on our presumed 'right' to own private property and as our Governments purport to support our rights to own private property they are breaking the rights they claim to uphold when they do such a thing. This would be clearly morally 'wrong'.

The other way that we are robbed is by inflation of course though this is not so overt. It's very easy to see though that if you keep 100 £s or $s or whatever in a bank for a year and the bank pays 0.3% interest while inflation is say 2.3% then you have lost 2% of the purchasing power you had at the end of the year. Well QE and low interest rates help mainly the banks as they are further up the distribution chain. Ergo claiming that QE, which creates more money and is inflationary, helps the man on the street to eat etc is precisely wrong. It diminishes what he can buy with his money if his wages don't rise to the same percentage as inflation. Well wages as we know are not rising by and large in with inflation so in real terms the average person is getting poorer - he is being stealithy robbed - while the large financial institutions - who the man on the street has bailed out and must pay extra taxes either now or in future to pay for - get richer. Whether this is morally 'right' you must judge for yourself.

As for the slippery road to totalitarianism Hayek said "To be controlled in our economic pursuits means to be...controlled in everything" and he's right. If you do NOT have a 'right' to private property then who do you work for? Clearly not yourself as whatever you earn or buy with your earnings can be confiscated or 'taxed' at any time. If DOR, aka David, is correct when he says

The financial big boys siezed sovereignty from national governments long, long ago.

then clearly 'our economic pursuits' ARE being controlled and who we vote for makes not a fig of difference, unless perhaps you find a candidate like Dr Paul. It is no coincidence that Marx practiced economics and started by socialising the ownership of the means of production. Well we now have social ownership of alot of our banks for what is a bailout payed for by our taxes now or in the future, but a form of 'nationalisation'? Then look at the property market... See; Housing's Trek From America's "Socialism", Through UK's "Communism" Ending in China's "Capitalism" | Zero Hedge Yes there are very direct correlations between economic policy and totalitarianism and liberty.

[astralis]

pari,

The problem with Keynesianism is that while happy to borrow and spend during recession, politicians are far less happy about cutting govt expenditure during good times.

but this is not an issue with Keynesianism; it's an issue with democracy. while austerians firmly believe that deficit cutting in a recession is actually expansionary, i've also seen some unfortunately deluded fellow-traveling centrists make the argument that only by falsely portraying deficit cutting now as 'needed medicine' can we take care of the long-term fiscal problem.

unfortunately as we discussed earlier, with the UK example, the contractionary effects of deficit cutting during a recession is such that it is self-defeating to do so-- the deficit actually grows worse.

the fact that the US and other nations are talking continually about deficits would seem to indicate that not everyone is happy to borrow and spend during a recession. mostly the well-off elites, whom fear not the direct consequences of what it is they advocate for.

[astralis]

snapper,

Yes there are very direct correlations between economic policy and totalitarianism and liberty.

allow me to put it this way. the US in the 1940s had a top marginal tax rate of 94%, extremely stiff tariffs, wage/price controls, rationing, and outright government takeover of major industries.

would you state that the US was on a road to totalitarianism then?

was the US more free in 1850 with no income tax than it was in 1913, when the income tax was instituted?