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Amazing recovery. S&P 500 hit 1250. Many 401K suckers now think that they can get their money back if they wait until it hit 1400. May be that's true. What they don't understand is that they are in a big and hungry crowd of retiring baby boomers...
"And once there was no more Soviet Union, those that run the US no longer had to pretend that they were on the side of the common man, that they offered a better alternative than communism."
"The risk--very real in previous decades--that expansionary monetary policy would destabilize expectations and erode confidence in the Federal Reserve's commitment to effective price stability is simply not an issue today. "
Oh Brad, you with your costs and economic language and nonsense about it being five times more worthwhile to fight unemployment today. Why not admit what is REALLY going on? What happened in 1989? Well yes, there was the Exxon Valdez, And Seinfeld premiered. But there was something else that also happened, in Eastern Europe and Russia...
And once there was no more Soviet Union, those that run the US no longer had to pretend that they were on the side of the common man, that they offered a better alternative than communism. A fifteen year run of US unemployment from, say, 1970 to 1985. might have had unfortunate effects on the attempt to convince the world of how great the US was. But with the Soviets gone, the plutocracy can reveal its true colors --- and those true colors are: who gives a damn how long unemployment lasts, and how bad it is? Doesn't affect my life in my penthouse --- and what are those whiners going to do anyway? Shout in the streets, write blogs, complain to their friends? Like I care.
See-Saw Economy or a Series of Shocks? by CalculatedRisk on 10/14/2011 01:25:00 PM
Kelly Evans at the WSJ makes an interesting observation: Economy in Full Swing (Watch Your Head)
So far, incoming September economic reports have been surprisingly firm. Auto sales rebounded to their highest level since April. Chain-store sales posted year-on-year growth of 5.5%. The economy added 103,000 jobs, and manufacturing sentiment improved a bit. [Retail sales increased 1.1% in September] ... If this feels like a 180-degree turn from August, that's because it basically is. It would be one thing if this were a special case, or a broad turning point in the economy. But, in fact, this kind of volatility, these jerky swings in growth, have become the norm. Consider what has happened so far this year: Real gross domestic product shrank in January and February, according to tracking firm Macroeconomic Advisers. Then it surged by more than 1% in March. It contracted again in May and June—only to jump by more than 1% again in July.
This isn't typical. Since 1992, monthly GDP has fallen about a third of the time when the economy hasn't been in recession. This year, even assuming a small gain in August, monthly GDP has fallen about half the time. Monthly GDP isn't released by the Bureau of Economic Analysis (BEA). Evans is using an estimate from Macroeconomic Advisers.
"Yes, the economy is very sluggish - 103,000 jobs was a weak report, just better than low expectations - but I think the economic volatility is related to events and hopefully not some new normal. "
I wonder if the economy is so weak and fragile -- based on a financial system on life support -- that every shock is simply more noticeable and more injurious than it might have been otherwise. The inertial dampers are offline.
Critical Update Notificat...: Shocktoberfest !!
they are forcing me to
External locus of control.
Locus of control - Wikipedia, the free encyclopedia
Work on it. Or not. The choice is, of course, yours alone to make. or is it?
Auto Sales are increasing because of Sub Prime auto loans by Government Motors. It worked out so well for houses - why not cars.
Next thing you some Wall Street boy wonder will be bundling and securitizing them.
Although growth is sluggish - due to the significant slack in the system (excess capacity, lack of demand) and also high levels of household debt, I think the volatility this year can be blamed on a series of events including extreme weather (significant snow storms, flooding, hurricane Irene), the oil price increase related to the "Arab Spring", the tsunami in Japan, and the debt ceiling debate in D.C. during late July and early August.
Also the ongoing European financial crisis keeps flaring up and impacting the U.S. economy.
First of all, such shocks have always been there. It's that we don't have the capacity to absorb and ignore them. Even for the Arab spring, if it weren't for high commodity prices and weak exports the governments could have remained in power by cutting the price of fuel and food or boosting incomes just enough to keep the crowds below the threshold their police or military could squelch.
Second of all, given the inability to increase total effective money supply (cash + credit outstanding) as I predicted the prospect for growth becomes a zero sum game which invites very different behaviours and outcomes in the economy. Don't mistake the one-time gain of smoothing down supply chains or credit spreads for growth. The best that can hoped for is to keep total effective money supply flat, replacing corporate or household debt with government ones. There is no possible credit bubble or ponzi scheme left that is large enough, but even if there theoretically were the amount of leverage would mean increased sensitivity to these random shocks
If you disagree with me, I believe I started blabbing about this back when auto sales were over 15mn SAAR in 2008 and it could be my own selective bias, but I feel like I did accurately describe the macro economy up until now. I've been wrong about other things like the stock market, timing, and even the reappointment of Bernanke -- but not this.
Bad Dawg Bobby:
" Only with years of learning about economics can the clarity and depth of this depression not seem incredibly obvious. "
That could explain the action out of the Fed and DC. I have no doubt, when it comes to economics they are smarter than I am, but maybe they are to smart to see what they are doing to the average person. If they are right, the economy will correct itself, if not hold on to your socks we are going for a ride.
Wean yourself from the bankers. Don't sweat the other stuff.
my sewer rate went up 33% in 2009 because of a faulty interest rate swap. my water rate went up to meet revenue-to-debt bond covenants.
FIRE is embedded in almost everything we use.
About Asia: The most dynamic is South Korea, they got their faces collectively lost in 1997 with IMF loan of over 50 billion. Since then LG and Samsung, they are very innovative companies and also hiring foreigners. Malaysia and Singapore is also good ones but the rest is still stuck in feudalism. Big boss is always right even if he is wrong Cambodia and Laos could be next "tiger" ones, Koreans are investing heavily both of them. Thailand...maybe someday. India...the same.
FIRE - via zirp (enabled by nitwit acolytes like and the Gramm/Rubin axis of evil) struck a gentlemans' agreement with MiC - free money, endless war.
It seemed foolproof... so much planet left to plunder, so little time...
There are people here so bitter and angry that they're willing to hurt anyone, tear anything down. They don't want to fix anything, they want to smash everything.
The economic welfare of the majority of Americans cannot be fixed without addressing the grotesquely unequal distribution of wealth. That is simply the truth. National single payer health care would help. Investing in infrastructure would help (doesn't have to be high speed rail, there are millions of bridges waiting for repair). Bringing tax codes on the wealth back into some semblance of historical norms would help. Closing corporate loopholes would help.
What won't help is telling people not to be angry.
Soaring Suburban Poverty Catches Communities Unprepared
EDGEWATER, Colo. -- "Before the unraveling, Selena Blanco and her family felt secure in their hold on middle class life in this bedroom community just west of Denver. She and her husband both held professional jobs in industries that seemed sheltered from trouble, his in technology, hers in health care. Together they brought home $100,000 a year, enough to allay concerns about paying the bills, let alone having to ask for help.
But over the last two years, both have lost their jobs. Her unemployment check ran out in the spring, leaving them to subsist on his jobless benefits alone, about $1,500 a month.
The Blanco's shattered fortunes have supplied them an unwanted new status, one they share with millions of suburban households in a nation previously accustomed to thinking of suburbia in upwardly mobile terms: They are poor.
They are officially so according to the federal government's definition, which sets the poverty line for a family of five at an annual income of $26,023 or less. It is viscerally true when one sees how Blanco, 28, now spends her day. She takes her four-year-old son to a county-operated Headstart program, free preschool for the poor. She forages for clothes at thrift stores. She scrounges for coupons to keep her family fed."
This story has resonance for me, I remember as a child, foraging for clothes with my mother at thrift stores. I marvelled how quickly my mother's hands picked through the piles of used clothes.
All of our bedrooms were rented out to boarders, and we slept downstairs in the dinning room, till the mortgage was paid off.
October 14th, 2011 | The Big Picture
I am no conspiracy theorist, and my assumption is this has been an oversold rally. However, I love that Bill King (of M. Ramsey King Securities) asks the questions that others gloss over:
SPZ s rallied 13.75% from the pre-NYSE open low on October 4 to October 12 high. Normal markets do not rally almost 14% in 6 sessions. Normal buyers do not behave this way. Volume was lacking on the rally; there was little real buying. The compelling question is: Who forced SPZs higher and why?
14% in 6 sessions? That some serious shite!
The market hasn’t been “normal” since 1998.
Greenspan, Bernanke, Rubin, Trichet, Paulsen, Geithner, Dodd, Frank, etc. have worked hard to de-regulate, obfuscate, and manipulate the system so that it would become prone to fraud and high-frequency booms and crashes.
The astonishing thing is that they are all scratching their heads wondering why people are losing confidence in them and the system. They can’t even dream of connecting the dots between a 14% rise in six low-volume sessions and “Occupy Wall Street” outside their windows.
Patrick Neid :
October 14th, 2011 at 3:00 pm I think China just pulled a 20% move in the same time frame.
HFT algos, pushing up ETF algos, which rebalance, pushing up prices. Not much human sellers left in the markets. Mostly algos running around out there.
Same effect for down days, that lead into down spirals.
Equities have been behaving super-double-plus-spooky since the second week of August. Just look at SP500 on a one-year scale and it’s striking. It’s just buzzing about 1150 and spitting random signals. I could see the HFT leeches / ETF whinnies producing something like that. I’m ready to bet that correlation within SP500 is extremely high right now.
I call that a Tourette market.
Just more evidence that the market is rigged and HFT is calling the shots. Let’s see if the algos can pierce through and hold the 300-day SMA in the INDU and SPX. Looks very possible now, but this could very well be a head-fake at the top of this trading range.
No one is saying that HFT are rigging the markets. At least, I’m not. The problem with HFT and algo trading in general is that they introduce a lot of noise. Normally HFTs are operating on extremely short periods and, in theory, they have no net effect day-to-day. Their noise is filtered out, dampened by the overall market.
But I’m wondering if we haven’t reached the point where algos are simply talking to each other. It could look like what we’re seeing : algos generating high frequency noise with essentially no damping, feeding back in each other and the whole system starts to resonate at much lower frequency though non-linear coupling. Here, I would guess that the coupling term is humans tweaking the models on a scale of a few days.
If you ever played with self-resonating VCFs on a old style modular synthesizer, you’ll grok right away what I’m talking about.
The world isn´t ending by a long shot.
There is no planet x and no elusive meteorites will threaten us in the foreseeable future. No flesh eating alines hungry for gold to save their atmosphere will appear. All these fairy tales originate with forces that have an interest in people chasing rising prices for overabundant stuff. These forces run a hoard and sell business. Look it up. Warehousing? It isn´t just about overabundant physical stuff but also more or less less worthless shares of major stock watering scams. There is a reason that these scams are still down 60-80% from their 2000 highs. IMO about a third of the Dow Jones Industrial Average should have a one for ten reverse split to write off worthless stock.
I agree that the stock market isn’t acting in a “normal” fashion; the volatility, both up and down, as well as intraday and interday, has been large.
I have created a chart that illustrates this volatility and comments on it; it can be found at a post at my blog here:
Regardless of who or what was doing the buying, or on what volume, the negativity was so thick on every blog, twitter feed, and media outlet that there and everyone thought we were repeating 2008 that the market rallied.
We were seriously oversold and now everyone is surprised by the rally or blaming HFT fraud?
So many internal measures were pointing to a rally that it is really not that surprising. What is surprising is the speed of the rally.
In the end we have not broken out of this to month bear flag so until that happens we could just be consolidating these August losses.
I am no conspiracy theorist, and my assumption is this has been an oversold rally.
reply: ———- Yup, you got it. A bunch of grizzled and young Turk traders sat around their individual walls of LCD screens and spent the past week or so trying to outsmart each other, resulting in a group exasperation that is known as an oversold rally. Just like the advanced investment texts say, circa 1980. Golly, the big money sure works in mysterious ways. Any other explanation is just paranoia or stupid ideas from people who don’t understand anything except junk investing and simpletonism. Really. You nailed it. BullsEye!!!
Visited your site and agree with your conclusion (caution). What’s causing it? Don’t know, but I also don’t think the instability is a good sign, and that the system has changed, fundamentally, in a way that only those running the scam can fully understand (I suspect we’ll someday learn that we’ve ben robbed — again).
I also agree with rd’s observation that the link between such market behavior and OWS is lost on TPTB (I’d also include Saint Ronnie and his push for deregulation, generally and as a long-term goal, in the list of those responsible).
My eyes are on the .618 re-trace of the move from the 2011 highs to the recent 1074 SPX lows. That’s at about 1257 SPX.
The Big Picture
The bulk of those billionaires did the bulk of their billion building in eras of higher taxes and lower executive compensation. People have nothing against billionaires when the set up seems fair and it’s clear they worked hard to get there. Case to point Steve Jobs.
It’s really the wannabees that cause the problems, the millionaires trying to squeeze their way up the ladder and who need to cheat by dodging tax codes, hiring armies of lobbyists to change the rules and rigging corporate boards to turn corporations from job creating machines to dollar squeezing machines.
Very few people hate the ones who look like they play it square. They hate the ones that look like they juking the system, exporting US jobs and placing short term profits over long term economic stability.
Seriously? You can’t imagine the world without CABLEVISION???!!! Millions of us are dreaming of the day, and not just Knicks fans.
Some of the shining stars you name are responsible for a litany abuses and rank among the near-monopolists who have treated their employees and customers like utter shit in the pursuit of CEO bonus-inducing short term cost-cutting. Or nose-cutting, as it sometimes turns out.
Remember when Home Depot fired all their full time professional store employees and replaced them with know-nothing temps, while the CEO scored a huge bonus? Remember how HD went from a decent place to shop to abysmal, directly as a result?
Remember how Wal-mart employed battalions of people advising on how to move production overseas to save a few cents per trinket? I said advising, but if you wanted to get on the Wal-mart shelves it was more like “forcing.” You can bet plenty to the protesters know exactly how that worked, and faced or had parents who faced the fallout of the wholesale shipment of jobs out of the US. They know who greased the skids for that and who benefited. And it’s not simply a case of labor-arbitrage, as the right wants us to believe.
The real faces behind these billionaires are the millions of customers and employees who have been collectively treated abhorrently, while providing those often undeserving and seemingly ungrateful few with the means to become ridiculously wealthy.
“I don’t want to get political in this note”
Your passive-aggressive disingenuousness is quite remarkable.
Big swings, both up and down, such as seen this summer and fall often indicate the stock market isn't healthy and more trouble is in store.
Why so? Lehman Brothers’ failure has brought home to emerging market central banks that economic and financial links between nations have become far stronger in recent decades. The idea held by many before 2008 that their economies could “de-couple” in the event of a severe slowdown in the advanced economies is no longer credible. Here’s one of the main conclusions of the meeting:
Financial globalisation has multiplied the number of transmission channels and associated risks through which external factors influence domestic economic and financial conditions in emerging market economies. This complicates the assessment of the outlook for inflation and growth. It also introduces an additional dimension – the evaluation of financial stability risks – to the objectives of central banks. Monetary policy in emerging market economies has become much more complex as a result.
If that is the case, then emerging central banks will pay less attention to domestic price pressures, and attach more weight to what is happening in global financial markets, than in the past.
Are "Wall Street’s Masters of the Universe" feeling some heat?:
Panic of the Plutocrats, by Paul Krugman, Commentary, NY Times: It remains to be seen whether the Occupy Wall Street protests will change America’s direction. Yet the protests have already elicited a remarkably hysterical reaction from Wall Street, the super-rich in general, and politicians and pundits who reliably serve the interests of the wealthiest hundredth of a percent. ...Consider first how Republican politicians have portrayed the modest-sized if growing demonstrations... Eric Cantor, the House majority leader, has denounced “mobs” and “the pitting of Americans against Americans.” The G.O.P. presidential candidates have weighed in, with Mitt Romney accusing the protesters of waging “class warfare,” while Herman Cain calls them “anti-American.” ... And if you were listening to talking heads on CNBC, you learned that the protesters “let their freak flags fly,” and are “aligned with Lenin.”The way to understand all of this is to realize that it’s part of a broader syndrome, in which wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.Last year, you may recall, a number of financial-industry barons went wild over very mild criticism from President Obama. ... And then there’s the campaign of character assassination against Elizabeth Warren, the financial reformer now running for the Senate in Massachusetts. ...What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees — basically, they’re still in a game of heads they win, tails taxpayers lose. And they benefit from tax loopholes that in many cases have people with multimillion-dollar incomes paying lower rates than middle-class families.This special treatment can’t bear close scrutiny — and therefore, as they see it, there must be no close scrutiny. Anyone who points out the obvious, no matter how calmly and moderately, must be demonized and driven from the stage. ...So who’s really being un-American here? Not the protesters, who are simply trying to get their voices heard. No, the real extremists here are America’s oligarchs, who want to suppress any criticism of the sources of their wealth.Richard H. Serlin"They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens."mmckinl
A key thing to realize is that making money on Wall Street is very different from making money producing things.
If you make money growing strawberries, and then you sell them to a consumer, that's a pretty Pareto optimal transaction: The consumer gives you money in exchange for strawberries. The consumer gets more personal value from the strawberries than from the money or else he wouldn't make the exchange. The strawberry producer gets more personal value from the money than from the strawberries or else he wouldn't make the exchange. And with strawberries you can safely assume that both parties are pretty accurate in their calculations of value, as there's not that much asymmetric information about strawberries.
But with financial transactions there is often tremendous asymmetric information. A layperson sells his stock in March of 2009 wrongly thinking it will only plunge further. A very expert finance person buys it knowing it's substantially underpriced given its expected earnings. This was not a Pareto optimal transaction at all. The layperson seller did not sell because the stock was worth less to him than the money. He only sold because he very mistakenly thought it was, and the savvy finance expert took advantage of his ignorance. Now, there was an external effect that was good for society in that that pushed the price closer to an accurate efficient one, helping allocate capital better. But in many cases any external effect is a lot less than the gain to the finance expert, and in the case of some financial transactions the external effect is actually a negative one, a huge negative one.
The bottom line is that finance billionaires don't always create more wealth than they earn, sometimes far from it. Asymmetric information is huge here and so are externalities, often huge negative ones, not just positive.
Disclosure: I've myself made a lot of money buying stocks when they're undervalued. There's a positive value here in pushing prices in an efficient direction, but maybe a lot less than what I've made. My solution is that I plan to eventually give this money to charity. Another is steeper taxes on financial speculation, at least of certain types whose positive externalities are not large, or especially where the externalities are negative."But with financial transactions there is often tremendous asymmetric information."Edward Lambert
And, an asymmetric playing field. Computer trading now accounts for 70% of all trading.
The average investor portfolio is being "whipped sawed" day after day.For those of you who think that inequality of wealth is not affecting the economy and therefore isn't an urgent issue for healing the sick economy, I would think that you are rethinking your views...Richard H. SerlinI should add that in that March 2009 example, if you hadn't of bought, the price might have gone even lower and the layperson might have sold at an even lower price. There's a lot to it, and financial transactions have to be looked at case by case. But the key point is that there's a huge amount of asymmetric information and externalities here which makes the finance market very different from the average market, and this is a reason why good financial regulation can tremendously increase total societal utils.William of OckhamBrother Krugman's message is quite clear, understandable and to the point. However, it can be viewed another way;IrishRed
Daddy Warbucks and friends have all of the apples in the bushel except for three and the rest of us have to divide those three amongst ourselves.
With so many apples, Daddy Warbucks can afford to give a few apples here and there to buy influence, change law and control the government in a way that greatly benefits himself and his friends and not the rest of us.
Daddy Warbucks doesn't like it when those of the 'three apples' make noise about fair distribution. Those to whom he has given apples, rush to support Daddy Warbucks' views even though they know how morally and ethically bankrupt they are.
Please review the Seven Deadly Sins and the compare and contrast them with the Seven Heavenly Virtues. Your assignment is to pick the political party that best alligns itself with Heavenly Virtues and vote accordingly.
AmenI suspect the Occupiers' refusal to identify themselves with any established party or organization is based on their assumption that there is NO "political party that aligns itself with Heavenly Virtues."rjs
Given that nothing has changed for us in the 99% despite elections in 2006, 2008 and 2010 that overturned ruling party majorities, I firmly believe they're correct.GOP Rep Peter King: "We Can’t Allow More Coverage Of Occupy Wall Street, Or They Will Win" - Home - The Daily Bail: Video - Congressman Peter King (R-NY) with Laura Ingraham - Oct. 7, 2011Ignacio
Runs 1 minute. The establishment protectors of corporate America and the Wall Street Kleptocracy are growing scared.
“It’s really important for us not to give any legitimacy to these people in the streets,” said King on Laura Ingraham’s radio show Friday evening. “I remember what happened in the 1960s when the left-wing took to the streets and somehow the media glorified them and it ended up shaping policy. We can’t allow that to happen.”
http://dailybail.com/home/gop-rep-peter-king-we-cant-allow-more-coverage-of-occupy-wal.htmlFrom what I read, I realize that this "occupy W St." movement is similar to the so called "indignados" ("the angry") that took place in Spain with special strength during the municipal elections. The most important difference is that while in New York, the movements focuses rightly against the W.St financial lobby, in Spain, the movement identified, also correctly, municipal corruption as their main objective.Lafayette
I don't know If Wall Street Masters of the Universe are really feeling some heat. I don't think so. They have sent their wolves to cry against the movement in TV and they have the money to do so for a long time. W. St. protesters need to build an potent internet tool to thwart the new campaign and to establish themselves as a permanent protest until there comes, some day, when they are prepared to transform their protests and ideas in a political move.CARPE DIEM!
The moment is ripe for this grassroots movement to coalesce around a Progressive Agenda that will serve as a litmus-test for candidates in next year's elections.
Without that agenda, the movement will lose focus and dissipate. We will not elect a Progressive Congress. We will not implement Reformational Change so necessary to the future well-being of Americans today or their children tomorrow.
Towards producing such an agenda - which is clear, focused and limited to key objectives - I submit this version for consideration and debate here: https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0BxDaVjkRehhSMWZiMjFiMDAtMTcyNC00MDEyLWE2NGItMjE1MGE4ZWE3ZjQ3
October 9, 2011 | naked capitalism
" … a policy of devaluation of the US dollar may trigger trade and currency wars."
"May trigger currency wars?" It WILL trigger more currency wars, which in fact have already begun. And it’s not just the U.S.
We are witnessing a global, massively n-player Prisoner’s Dilemma, where each of the players, by rationally making those choices that maximize their own chance of surviving and retaining their assets, inevitably acts to produce outcomes that are ultimately worse — in almost every case — for themselves and for everybody else than if they had cooperated and taken their losses at the beginning.
This inevitability of things is the most essential feature of the catastrophe.
In the case of Greece, whether or not it’s true that the Europeans and whomever else have learned nothing from Lehmann in 2008 is secondary. (Though it certainly seems that European policymakers and big institutions are sleepwalking towards the abyss.)
The central point is that everybody — the German pols and people, the Greeks, the French and German banks, Morgan Chase and the other U.S. TBTFs which hold 85 percent of each others’ counterparty risk, and every other player — is rationally attempting to take the best course of action for themselves in the circumstances.
And thereby down and down we go.
You expect THESE pilots to land THIS plane under CURRENT conditions. Just a magic printing party and all will be well. Just a bit more FAITH and prosperity is just around the corner……..BALDERDASH!!!
Bend over and prepare for a crash.
i dont think the planned end game is war or starvation but neglect via reduction in SS and medicare which will kill millions prematurely and then they will introduce your last event — disease- they will set up a virus – which has limited availability vaccine for the 1% plus protection and utilities workers
the balance of the population will be at risk: they want 160 million eliminated – they have no use
Is this where we guess what’s going to happen in the next 12 months ? Here’s my guess. The OccupyWallStreet crowd is willfully ignored, and things continue getting worse for the unfortunate 99%, until such time as the enablers, the gatekeeper police and military authorities figure out that to save the entire structure they have to do the unthinkable, they have to turn on their masters.
Then we get lots of targeted killings, which may actually escalate into complete anarchy, or it may culminate with control being reestablished just in time for the shooting war to start. After that, well, there really is no place to hide in a war like that. You either die in the fighting, or by starvation and disease. Everybody have a nice day, especially you 1% whose greed caused all this, and you know who you are.
Das says that US debt can not and will not be repaid, at 93% of GDP, as is often heard in mainstream political discourse. However, at the end of WWII the public debt was 160% of GDP yet it was mostly paid down before it started climbing again. How can it be possible to pay down higher debts in one era and impossible in another? The limiting factor, as I see it, is lack of economic production (and excessive military spending), not the amount of current debt the government holds. The growth in production is affected by lack of demand which, in turn, is being affected by the levels of household debt which significantly exceed the level of public debt.
Also, the $5T increase in federal debt after the GFC has been matched by a close to similar reduction in state and local government debts in the U.S.
Does the US really control its currency?
As I see it, the US is in a eurozone-like construct with China, in which the US is Southern Europe and China is Germany.
If the Chinese government decided to sell their T-bills, interest rates would soar and the US would have a full-fledged currency and sovereign debt crisis, with its own banks betting on US bankruptcy.
Both the level of the US dollar and the sustainability of its sovereign debt are controlled in Beijing.
The key difference is the the US controls its own central bank so it could launch another round of QE to absorb any Chinese selling. The PIIGS don’t control the ECB.
your name explains a lot. If China so wants, it can create global inflation and then sell T-bills and buy US corporate assets instead.
The Fed would not be able to finance US sovereign debt via the printing press, since that would make a hyperinflation problem out of an imported inflation problem. So US interest rates would soar.
The US would not be able to finance its deficit nor cut it without sending the country into a depression and political upheaval.
Devaluation is not an option, since the US has no capital controls and, in this example, China would not sell dollars, only T-bills. Moreover, devaluation would be dangerous in an already inflating environment.
In this context, the US would be exactly in the same position as Southern Europe is today.
This post is errant nonsense. The idea of growth as a solution has always been bogus. Growth of what? Does growth in drug traffic, prostitution, war, child pornography help? It does to economists. For thirty years we have lived the fiction that corporate growth equals prosperity. That is bunk.
Government must begin cutting down the superrich to life size. There is plenty of money there, it is just held by 1/10% of the population.
Corporate wealth may be accessed by franchise taxes based upon total assets. Corporate income taxes produce nothing but evasion. We need a tax holiday for the non rich. Let the rich pay for the government they have bought. All these problems can be solved, but not by the strategies which have created the problems. Das should stick to writing about trading fiascos. His devotion to free market mumbo jumbo disqualifies him as a serious commentator on the world economic situation.
Brilliant. Thank you, Yves!
Satyajit Das also appeared on Max Keiser last week. Here’s the link to the clip (if begins in the second half of the show):
As for me, at the moment I am hunkered down at the Ground Zero of the GFM (Global Financial Meltdown) — you guessed it, that would be Greece… Life is really tough down here these days. The frappes and the souvlakis are no longer of the quality I had gotten used to in past years, and everybody is stressed out and out to rip you off.
So I guess it’s time for this old boy to kiss this third world nation good bye (yes, that’s Greece again), and move on to greener pastures… once I figure out where those greener pastures might be…
Beard writes: “It is impossible to borrow real goods and services from the future”
Really? I would categorize oil as the most real source of the most vital service (concentrated energy) necessary for the continuation of industrial civilization. What do you consider pumping Texas dry in a mere half century if it isn’t borrowing from the future?
“If the money had not run out would not the boom still be going?” Tautological questions like this have no meaning, and only serve to obfuscate the way systems operate.
- In a fractional reserve banking system money can only be created as debt and loaned into existence. No amount of “printing” increases the amount of money in circulation if its velocity is zero (i.e. no new loans are made).
- If Helicopter Ben were true to his nickname and flew over the City dropping Federal Reserve Notes it would increase the amount of money in existence, but then we would have a Potlatch system rather than a fractional reserve banking system.
- Loans are only issued in the expectation of earning a return in the form of interest.
- If debt grows at a rate faster than the rate of growth in ability of borrowers to pay both the loan amount and its associated interest, it eventually reaches a point where it cannot be repaid and becomes valueless.
- Because of the necessity to cover interest costs, a debt-based money system depends upon continued exponential growth of debt, growth in the exploitation of natural capital, and growth of consumption (demand).
- Permanent exponential growth (of anything) is a mathematical impossibility in a finite world.
The US tried to sustain exponential growth of debt to mask stagnant real wages and massive redistribution of wealth, and it only took 30 years for Peak Debt to push the housing market over the cliff and render the banking system fundamentally insolvent.
“Money” will always run out because it is the product of debt, and debt is not cost free or infinite as you seem to believe. “Printing” money simply lowers the total debt burden of the borrower and thus the effective interest rate. If expected return on capital falls below zero because of inflation or fear of default, no new loans are initiated, and that money heads for the nearest financial casino in search of speculative yield.
Is it possible to structure a financial system that allows a sustainable economy to function? Perhaps, but there are no examples beyond hunter-gatherer societies that I am aware of.
I emphasize that a U.S. recession is certainly possible, given that a Eurozone recession looks very likely. It is entirely conceivable that European policymakers will fail to gather the necessary resources in time to prevent financial-market contagion to peripheral countries, such as Italy and Spain, or to recapitalize their banks sufficiently quickly in the face of or, better yet, in advance of a Greek default. Such a financial shock, if it occurs, could be transmitted to the United States with sufficient severity to lead to recession here. This would be a new negative shock, however, and does not appear to be built into current early-warning financial indicators in the United States to a sufficient degree to make a U.S. recession the base case at this time. My current reading of the financial market indicators of the U.S. business cycle is that investors are more concerned about Japan-style economic stagnation right now than about a traditional recession.
Economist's ViewTim Duy:
Don't Let Monetary Policy Off The Hook, by Tim Duy: Re-reading Federal Reserve Chairman Ben Bernanke’s latest testimony to Congress left me increasingly puzzled by his conclusion:
Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector. Fiscal policy is of critical importance, as I have noted today, but a wide range of other policies--pertaining to labor markets, housing, trade, taxation, and regulation, for example--also have important roles to play. For our part, we at the Federal Reserve will continue to work to help create an environment that provides the greatest possible economic opportunity for all Americans.
This is a clear effort to shift the focus away from monetary policy onto the fiscal side of the equation. But I think there is a significant flaw in that position. Fiscal policymakers will be completely unable to address medium- or long-term budget issues as long as there exists a sizable output gap and high levels of unemployment. Persistently low levels of output will necessitate deficit spending, and low interest rates will justify that spending. That is the lesson of Japan. Nor will the economy naturally gravitate toward such any other outcome – we are stuck in a liquidity trap. That is also the lesson of Japan.
Assuming the proximate cause of the current US economic environment is indeed a liquidity trap, then a solution to that problem lays solely in the hands of monetary policymakers. In short, the primary economic challenge is to lift the US from the zero bound floor; until that happens fiscal policy will limp along like that of Japan, with ever-growing debt that does little than serve as a partial stopgap. The deficit spending becomes a long-run outcome rather than a short-run solution.
Simply put, the Federal Reserve needs to take responsibility for ending the liquidity trap. Instead, as Scott Sumner summarizes:
The Fed has plenty of credibility, that’s not the problem. The problem is that they are using the credibility to assure investors that low inflation is here to stay. With the right target, there would probably be no need for massive quantitative easing, or other extraordinary policies.
First and foremost, low inflation is the primary objective of Fed policy. They have repeatedly set expectations that the increase in the balance sheet is only temporary, and will be reversed as soon as possible. On not one but two occasions this cycle they prematurely shifted gears to setting expectations for tighter policy, which is effectively the same thing as engaging in tighter policy. They have offered a half-hearted attempt to remedy this situation by announcing a commitment to low rates, but have made it remarkably clear it is not a real commitment. From the Fed minutes:
Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public, with some noting that such an indication did not remove the Committee's flexibility to adjust the policy rate earlier or later if economic conditions do not evolve as the Committee currently expects.
Fear of inflation prevents the Federal Reserve from making an unconditional commitment. And therein lies the stumbling block to real policy change. It is virtually impossible to imagine reestablishing the pre-recession nominal GDP trend, and entirely impossible to regain the pre-recession price trend, without accepting a temporary acceleration of inflation along the way.
More succinctly, we will not lift the economy off the zero-bound without accepting higher than 2% inflation. Since the Federal Reserve has made it clear they will not accept inflation greater than 2%, the economy will not clear the zero-bound. And if the economy does not clear the zero-bound, we will be faced with perpetual and unavoidable deficit spending.
Deficit spending is not accommodated by the Federal Reserve via low interest rates; it is made necessary because the Federal Reserve sees no urgency ending the lower bound challenge. Which means it is ridiculous to believe that the Fed can dump off this problem on fiscal policymakers. How can the state of monetary policy have deteriorated so much that now even Bernanke claims “regulation” is holding back the economy? Yet here we are.
Where should the Fed go from here? First and foremost, they need to make a commitment to pull away from the zero-bound. As Sumner suggests, they need this commitment clearly defined by a target such as reestablishing nominal GDP or price level. The need to implement open-ended action to achieve this target. My suggestion is to announce they will make permanent additions to their balance sheet by purchasing on the secondary market $5 billion of US Treasury securities every week until the target is reached. I think they need to make permanent additions to be credible – they have clearly expressed that previous balance sheet expansions should be viewed only as temporary.
Won’t this amount to monetization of deficit spending? Yes, but if Sumner is correct, less than might be feared, as the commitment is more important than the size of the purchases. And I already arrived at the conclusion, aided by Bernanke’s 2003 speech, that the situation requires a greater coordination of monetary and fiscal policy. Moreover, even if sizable purchases are required, there is no reason this needs to be a problem. As Bernanke has already explained, the Fed simply needs to make clear its target and once that target has been reached, they will adjust policy appropriately to maintain the nominal GDP or price level trend. In other words, purchases will be suspended and policy will by that point revert to traditional interest rate management, with the possible reduction of the portion of the balance-sheet expansion that to-date has been viewed as temporary.
Once the Fed achieves normal monetary conditions, the ball will be back in the hands of fiscal policymakers, who may then soon understand that policy is a lot different when interest rates create real constraints on spending and taxes. But that is a battle for another day.
Bottom Line: It is ludicrous for the Fed to declare the primary economic responsibility is now on fiscal policy. As long as we are in a liquidity trap, fiscal policy is stuck in a never-ending cycle of deficit spending. Absent that spending, the economy will simply slip backwards into recession again and again. The exit from the liquidity trap can only come from the monetary side of the equation. Try as he might Federal Reserve Chairman Ben Bernanke cannot escape his policy responsibilities. And we shouldn’t let him.
Posted by Joseph Cotterill on Oct 05 12:34.This looks a bit like how 2012 will turn out, doesn’t it?
European countries are at present locked into a severe recession. As things stand, particularly as the economies of the USA and Japan are also faltering, it is very unclear when any significant recovery will take place. The political implications of this are becoming frightening. Yet the interdependence of the European economies is already so great that no individual country, with the theoretical exception of Germany, feels able to pursue expansionary policies on its own, because any country that did try to expand on its own would soon encounter a balance-of-payments constraint. The present situation is screaming aloud for co-ordinated reflation, but there exist neither the institutions nor an agreed framework of thought which will bring about this obviously desirable result. It should be frankly recognised that if the depression really were to take a serious turn for the worse – for instance, if the unemployment rate went back permanently to the 20-25 per cent characteristic of the Thirties – individual countries would sooner or later exercise their sovereign right to declare the entire movement towards integration a disaster and resort to exchange controls and protection – a siege economy if you will. This would amount to a re-run of the inter-war period.
If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place.
It was written in 1992.
From an essay penned at the birth of European Monetary Union, by the late Wynne Godley in the London Review of Books. They’ve now released it from the pay-walled archives. Worth a read. Godley was wrong about how 1992 would turn out but it makes for uncomfortable reading in 2011.
But talk about reflation or nominal GDP as the things the eurozone (and in particular Italy) are crying out for today, and you get funny looks. It may not be the answer, but few now even ask the question.
Just a few moments ago I posted on the fact that the US is officially in bear market territory. On Twitter, I said that “in Fall 2008, 10-year yields went to extreme lows and then the liquidity train went into overdrive. Stocks rallied, bonds fell.” I wonder if we will have a repeat now. Felix Zulauf believes so:
Once the S&P 500 falls to 1000 or below in the first half of 2012, the Fed will come in and try to support the system. Eventually the ECB [European Central Bank] will try to do the same thing in Europe. The damage in Europe will be greater, as Europe’s financial system is even weaker than the U.S.
-Zulauf: "I expect the market to go below the latest lows in September"
We should focus on the ECB this time since the crisis has now moved to Europe. My question on Twitter was “If we get on the liquidity train, what assets will central banks buy?” More specifically, what would the ECB buy? Marshall and Warren Mosler suggest that they provide a full backstop to Greece as a quid pro quo for austerity. This is not a politically feasible plan as they point out; it would work neither for those at the ECB against monetising debts nor for Greece where the economy is being crushed by the contraction that is synonymous with fiscal consolidation.
The reality, however, is that the ECB’s equity capital is €10 billion. If Greece defaults, the ECB will lose a multiple of that amount and then you run into the bankruptcy/seigniorage problem that Willem Buiter explained in a piece I highlighted over the summer:jerry denim:
As long as central banks don’t have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage).
However, the scale of the recourse to seigniorage required to safeguard central bank solvency may undermine price stability. In addition, there are limits to the amount of real resources the central bank can appropriate by increasing the issuance of nominal base money. For both these reasons, it may be desirable for the Treasury to recapitalise the central bank should the central bank suffer a major capital loss as a result of its lender of last resort and market maker of last resort activities.
-Central banks can go broke
At which point on the chart does Washington run out of excuses for not putting TBTF Zombie banks in receivership?
Please God let this be the crisis to finally break the grip of the TBTFs.
Foreclosure Blues :
not a chance…because the tbtf’s are the agents of the extraction machine funded by the fed…no one has enough power to root them out…
Typing Monkey :
At which point on the chart does Washington run out of excuses for not putting TBTF Zombie banks in receivership?
Please God let this be the crisis to finally break the grip of the TBTFs.
I’m all for this (in fact, I believe it’s inevitable), but I hope you realize that the general economy is going to experience a hell of a lot of problems once this happens? This is not a magic bullet by any stretch of the imagination.
Yeah, it probably will be painful either way we go. And for sure, to get back on track will require patience and pain on ALL our parts, rich and poor alike.
But I liken it to pulling blood sucking ticks off a pet pup. Sure there will be some discomfort for your pet, but if you leave them on, you run the chance of the blood sucking parasites killing the poor little pup.
And when I refer to Wall Street, I am talking about blood sucking parasites, as disgusting as that might sound.
They don’t teach omelette-making anymore.
these “monetesation” ‘solutions’ are simply the continuation of the ongoing wealth transfer via debt control machine of the Federal Reserve. Discussions as if it is anything other is just distraction.
these “monetesation” ‘solutions’ are simply the continuation of the ongoing wealth transfer via debt control machine of the Federal Reserve. Foreclosure Blues
If liquidity was really the problem then a short term loan of existing money would suffice. Instead, we have a systemic solvency problem caused by the government backed counterfeiting and usury cartel (as usual).
It should be obvious that a money system based on theft (immoral), usury (mathematically unsustainable) AND government privilege (fascist) cannot be a good thing.
Yearning to Learn:
it would seem that there are 2 things that will severely constrain the Fed/ECB
1) commodities and Precious Metals.
The market learned from the post-Lehman drop off. They learned that the Fed will prop up equity valuations by so called “printing” (although obviously it’s not quite the accurate word).
The big winners were those who flocked to oil, commodities and PMs.
there is no doubt that equities are affected by “liquidity” but it seems that commodities are moreso… with devastating effects. therefore it seems to me that efforts to reflate equities will instead flow into commodities again, but this time at a more rapid clip…
2) how to do this politically given what happened last time. The Fed/ECB can shovel all it wants into the banks, where it promptly dies. going into an unfillable hole, into CEO bonus payments, and into the pool where the bank can leverage/gamble.
none of it is transmitted to Main street, and thus the added liquidity lacks any velocity…
Main street noted that the banks got Golden parachutes while Main Street got a golden shower.
thus: politically it will be trickier. Do they honestly think they can say “what’s good for Wall St is good for Main St” again?
Thus, the Fed/ECB will need to come up with a way of propping up equity and the banks, WITHOUT allowing commodity price appreciation, AND HOPEFULLY transmitting the bank/equity improvement through to the average John and Joe.
it’ll be tough.
I agree, it’ll happen, but we’re going to have to see carnage in the equity markets first to scare Joe-6 into agreeing.
and calls for nationalization will be strong.
It’s proven nearly impossible to ban private credit creation (there’s always some way around it), but it *would* be good if the government *discouraged* it — it would keep a handle on the bubbles.
I agree with you that fiat issued by a democratically controlled government is the only legitimate money to declare “legal tender”. Unfortunately, we don’t even seem to have democratically controlled governments. If we did, we could also have a “post office bank” type operation for conservative savers.
The private banking cartel has completely screwed up and proven dramatically that they should not be allowed to run the economy…. but they’re still in charge.
Oct 03 | alphaville.ft.com
For someone who hasn’t got much to add about the current state of the market, Bob Janjuah still manages to crank out 1,500 words in his latest piece for Nomura.
Bob firmly believes we are in a third stage of a secular bear market, More…
For someone who hasn’t got much to add about the current state of the market, Bob Janjuah still manages to crank out 1,500 words in his latest piece for Nomura.
Bob firmly believes we are in a third stage of a secular bear market, which is about to get nasty.
The key basic problems remain weak trend growth in the DM world, which we think will continue for another three to five years, the policy errors (in our view) of the current set of policymakers, and the existing set of inadequate ‘old world’ policy institutions.
In or within a year from now I expect global equities to be 25% to 30% lower. My S&P500 target for the low in 2012 remains 800/900, and I think an ‘undershoot’ into the 700s is entirely possible. For the valuation-focused, assume S&P 500 EPS in 2012 of $90/$100, and P/Es in the 8 to 9 area – I see this kind of P/E as the new norm in the kind of world we are in. In this bearish outcome I would expect 10-year bund yields at 1% to 1.25%, 10 year UST yields at 1.25% to 1.5%, and 10-year gilts below 2%. The USD should do well, credit and commodities should not.
Here I have to insert an important caveat regarding Germany and bunds. My core assumption remains that in the euro zone policymakers do not attempt to fix an excess leverage and low growth problem with more leverage. This type of plan obviously appeals to Tim Geithner, but the core euro zone should be extremely concerned by the suggestion that leveraging the EFSF is a supposed “solution‟
Echoes of Albert Edwards in there. He too thinks the S&P should trade on a single digit PE and expects the yield on US treasuries to fall further.
In the short-term, Bob expects the S&P 500 to bottom in the low 1,000′s later this month, by which time he expects to see 10-year bund yields below 1.5 per cent and US Treasuries under1.75 per cent.
Beyond October 2011, on a two- to three-month basis into year-end/early 2012, I still see a possibility of a decent counter-trend risk rally. Should this materialise, the S&P500 could move from a low in October of around 1000, up to/towards 1200 by end-December 2011/January 2012. I see many possible drivers of this risk squeeze: Greece could be bailed out through to early 2012, which is when I would expect it to default and the restructuring of the euro zone to begin in earnest; Kevin expects a two- to three-month patch of „better‟ data in Q4 2011; QE2 in the UK; ECB rate cuts; positive EFSF headlines or progress; positive PSI headlines or progress. At least part of President Obama’s fiscal ‘boost’ should happen, and something is better than nothing. Additionally, should the S&P 500 hit the low 1000s (over the next month or so, as I expect) and the unemployment rate exceeds 10%, I believe the Fed will be unable to resist another dose of QE, whereby QE3 will be a rehash of QE2. Finally, I think positioning and sentiment by late October 2011 will be such that markets are ripe for a decent squeeze.
Bob reckons QE3 would be an even bigger policy mistake and won’t hold his breath waiting for a solution to the Eurozone debt crisis.
I expect the next year to be about capital and job preservation. Any counter-trend rally should be tradable but short lived – it should be viewed opportunistically. My core message is bearish. Over the past month Kevin and I have looked closely for anything that could change our view and have come up with nothing. Even the hope that EM or China can go on a multi-trillion USD investment binge to re-ignite global growth seems pretty forlorn, as China’s last fiscal and credit binge in 2008 is proving very costly to clean up. The euro zone may positively surprise us with a clear and credible plan for the region, involving major debt and economic restructuring for Greece, Portugal and Ireland, a major recapitalisation of the euro zone financial system, and the formation of a „neue-eurozone” with a hard-money ECB at the core. We can but hope. The only alternatives are immediate full fiscal union, or full on unlimited unsterilised monetisation by the ECB. Both “options” are I think extremely unlikely.
Sachs: Corporatocracy is Replacing Democracy
Paul Ryan, American Values and Corporatocracy, by Jeff Sachs: My new book, The Price of Civilization, describes why America needs a "mixed economy," one where a more effective federal government regulates business and invests alongside the business sector. In his review of my book, Congressman Paul Ryan, an avowed libertarian, describes my book as anti-American in its values. ...
Ryan ignores the extensive evidence in the book showing that Americans support the values of a mixed economy, not of Ryan's free-market libertarianism. Americans today by large majorities support public education, Medicare, Social Security, help for the indigent, stronger regulation of the banks, and higher taxation of the rich. ...
On issue after issue, Washington is presently bucking the public's values, rather than respecting them. A majority of the public wants to preserve social programs, but they are being cut anyway. A majority wants higher taxes on the rich, but they are being cut rather than raised. A majority wants to end the wars, but they continue anyway.
The reason is the following. America is losing its democracy as our politicians trade their votes for campaign contributions from the corporate lobbies. We have a corporatocracy rather than a democracy, and Ryan stands at the center of it. The Wall Street Journal, which commissioned Ryan's review of my book, is the leading print mouthpiece for the corporatocracy.
Since entering Congress in 1999, Ryan has helped to prevent effective oversight and regulation of the banking sector. ... Ryan's re-elections have been consistently funded by the insurance, banking, and homebuilding industries. Banks such as the Bank of America and Citigroup, two of the largest bailout recipients, have been high on Ryan's contribution list; so too have major lobbying groups for the financial industry, such as the American Bankers Association and the Securities Industry & Financial Market Association.
America's corporatocracy is governed by vested interests rather than moral or economic principles. After financial deregulation led to the 2008 collapse, Ryan's enthusiasm for free enterprise suddenly took a second place to his new enthusiasm to rescue the banks through a giant taxpayer-funded bailout. The "free-market" Wall Street Journal similarly defended the bank bailout, all of a sudden lecturing its readers about market failures and the limits of the free market.
As soon as the banks were saved with public money, Ryan, the Journal, and most of the political class swung back to deregulation. Ryan voted against reforms of Wall Street. He inveighed against taxing or otherwise controlling the bonuses received by the CEOs and senior managers of the bailed-out banks. When it comes to the poor, however, Ryan has a different response: slash Medicaid spending, come what may. ...
My views ... run to the very idea of America: a democracy of the people, by the people, and for the people, not a government of the corporations, by the corporations and for the corporations. ...
The Arab spring is dawning in America, young, educated and jobless. If the police state continues to abuse them, expect the protests to turn violent like the Arab spring. I am sick and tired of Jamie Dimon and David Koch going against the American people.
Has Brad DeLong denounced this concern with morality as a puritanical overreaction and misplaced concerns about moral hazard, as he did with the concerns about the bank bailouts?
My point being that it is not only the Republicans that tend to be tools and fools for the status quo? They are just more obvious.
I really have trouble with Mr. Sachs born-again populism.
For over 30 years his economic policies have served the corporations and oligarchs very well. Even his recent African program pushes corporate farms over helping indigenous small farmers. Stating that displaced farmers will be able to move into urban areas where they will have access to social services. Perhaps he's never seen urban slums in Africa?
Maybe he's trying to make amends to all the people his policies have harmed or maybe he just knows which way the wind is blowing.
I agree. He is a very dangerous person, a tool of financial oligarchy, kind of neoliberal Harvard mafiosi (see http://www.softpanorama.org/Skeptics/Pseudoscience/harvard_mafia.shtml). Here is what Wikipedia tells us about his participation in the economic rape of Russia (aka "shock therapy" with its Wiemar level inflation and corrupted "rapid fire privatization" by Yeltsin cronies):
Nancy Holmstrom and Richard Smith pointed out that, in advising implementation of his shock therapy on the collapsing Soviet Union, Sachs "supposed the transition to capitalism would be a natural, virtually automatic economic process: start by abandoning state planning, free up prices, promote private competition with state-owned industry, and sell off state industry as fast as possible…". They go on to cite the drastic decreases in industrial output over the ensuing years, a nearly halving of the country's GDP and of personal incomes, a doubling of the suicide rate, and a skyrocketing unemployment rate. The Lancet  has recently reported that rapid privatization of the Soviet Union caused a 12.8% death rate increase among males in just two years, a claim that The Economist attributed to alcoholism, though The Lancet article attributed the rise in alcoholism to changes in the economy.
"Corporatocracy"--There's a word for that. Mussolini described it, as a good thing. We could use his word. It's certainly a more accurate description of where things are going than "Socialism for the rich." Which is really a euphemism to avoid using the other word.
Everyday, the tide is turning against the economics of the conservatives. But will they jump ship? ... no... because they are still being funded by business, instead of the people.
and the weakening of democracy was made worse by the supreme court decision to allow corporations freedom in funding politicians.
The only way to change the situation is for the people to fight back... with demonstrations and solidarity... imagine that
Keith Olbermann pointed out Wednesday night on Countdown that the major newspapers had been ignoring the five-day-long "Occupy Wall Street" protests, but would have scrambled to cover a similar-sized tea party protest.
"Why isn't any major news outlet covering this?" he asked. "If that's a tea party protest in front of Wall Street about Ben Bernanke putting stimulus funds into it, it's the lead story on every network news cast. How is that disconnect possible in this country today with so many different outlets and so many different ways of transmitting news?"
His guest, author Will Bunch, suggested the disconnect was caused in part by the news networks being out of touch with the pain of the 25 million Americans who are unemployed.
Every time they threatened to move our jobs unless we took pay cuts, they declared war, every time they shipped our jobs overseas, they declared war, every time they paid lobbyists to get elected officials to roll back employees rights, they declared war. Workers have stopped turning the other cheek, the war was declared long ago....It's time to fight back!
Police in New York have violently dispersed an anti-Wall Street rally, arresting more than seven hundred people after a dramatic showdown on Brooklyn bridge. Thousands joined the movement dubbed 'Occupy Wall Street' - in protest against what they call corporate domination. James Corbett, editor of independent news website http://www.corbettreport.com says the police brutality may provoke an escalation of violence.
funny how fraud news was like "GO EGYPT GO" when they were having their revolution but now that america wants a revolution they are like "LOOK AT THIS HIPPIES THAT DONT HAVE ANYTHING BETTER TO DO AND JUST WANT ATTENTION" if that doesnt show that our mainstream media is run by the bankers(same people this guys are protesting) then I dont know what will
The Brooklyn Bridge has been shut down in one direction after protesters camped out near Wall Street spilled onto the roadway. Police have made hundreds of arrests and were continuing to stop people from blocking the roadway Saturday evening.
The protesters are railing against corporate greed, global warming and social inequality. The group has been camped near Manhattan's downtown financial district for two weeks and has clashed with police on earlier occasions.
Goldman Sachs is a criminal organisation masquerading as a "bank". Goldman Sachs advised the Greek Government on how to commit fraud by cooking the books and fooling banks to lend money it could never repay.
Former employees included Robert Rubin who spent 26 years there and Henry Paulson. Who was responsible for the abolition of Glass-Steagall under Clinton? Rubin! Who bailed out the banksters with billions of US taxpayer money? Paulson! Who paid for Obama to be elected? Get the picture!
And its not only Greeks up in arms about the situation they've been dumped into. The U.S. is also witnessing angry moods - in the nation's financial hub. Hundreds have thrown their weight behind the latest demonstration, named "Occupy Wall Street", to protest against the huge influence and bad behaviour of corporations and billionaires. RT's Anastasia Churkina was there.
Demonstrations began on September 17 to show U.S. citizens anger over a financial system that favors the rich over all other American citizens. Chanting, "We are 99 percent," thousands of protesters gathered near Zucotti Park, close to Wall Street and began their march. Around 5 pm, while attempting to enter the financial district at 55 Wall Street, they were met by curious onlookers from the balconies who were leisurely watching the protesters and doing the unthinkable -- drinking champagne.
I became aware of Brecht as a playwright during a course of study while an undergraduate in university while taking a course in modern drama. I do not remember so much now except that my favorite of Brecht was Mutter Courage und ihre Kinder, or simply, Mother Courage.
The Mackie Messers of Wall Street are nothing new. Each generation has the responsibility to rein in its predators. It is just a question of whether anyone will sing a ballad about them after they are gone.
September 30 | FT Alphaville
the S&P 500 ex financials has a market cap of $10tn. Net Debt is $3tn and trailing EBITDA is $1.6tn. so the market cap weighted net debt to tailing EBITDA ratio is less than 2x which is low. If you stip out GE this ratio falls to 1.7x.
Apple and Microsoft alone have $70bn of net cash. Trailing FCF is $1tn. Private sector fixed capital investment is at an all time low at 12% of GDP...corporates have hoarded cash
the data i see says that corporate financial leverage is low. why do you think it is not? i would like to see the data to help correct my view if i am wrong
October 1 | FT Alphaville
if you learn nothing from history, you are bound to repeat the mistakes of the past - the horror story of uncontrolled short selling via an easily manipulated CDS market is creating havoc again.
Basically the rising spreads are nothing else but a concerted effort to create a run on banks and countries.
We warned about this repeatedly during the 2008-09 crash but regulators and politicians have not heeded the warnings, now they reap the whirlwind. Heinz Geyer, Temple Associates, London
29 September 2011 | guardian.co.uk
Keynes was right: only government can get us out of this jobs slump. And only taxing wealth can restore US prosperity
John Maynard Keynes: the government needs to 'prime the pump' to pull the economy out of recession. Photograph: Tim Gidal/Getty Images
The Reverend Al Sharpton and various labor unions announced Wednesday a March for Jobs. But I'm afraid we'll need more than marches to get jobs back.
Since the start of the Great Recession at the end of 2007, the potential labor force of the United States – that is, working-age people who want jobs – has grown by over 7 million. But since then, the number of Americans who actually have jobs has shrunk by more than 300,000.
In other words, we're in a deep hole – and the hole is deepening. In August, the United States created no jobs at all. Zero.
America's ongoing jobs depression – which is what it deserves to be called – is the worst economic calamity to hit this nation since the Great Depression. It's also terrible news for President Obama, whose chances for re-election now depend almost entirely on the Republican party putting up someone so vacuous and extremist that the nation rallies to Obama regardless.
The problem is on the demand side. Consumers (whose spending is 70% of the economy) can't boost the American economy on their own. They're still too burdened by debt, especially on homes that are worth less than their mortgages. In addition, their jobs are disappearing, their pay is dropping, their medical bills are soaring.
Businesses, for their part, won't hire without more sales. So we're in a vicious cycle. The question is what to do about it.
When consumers and businesses can't boost the economy on their own, the responsibility must fall to the purchaser of last resort. As John Maynard Keynes informed us 75 years ago, that purchaser is the government.
Government can hire people directly to maintain the nation's parks and playgrounds and to help in schools and hospitals. It can funnel money to help cash-starved states and local government so they don't have to continue to slash payrolls and public services. And it can hire indirectly – contracting with companies to build schools, revamp public transportation and rebuild the nation's crumbling highways, bridges and ports.
Not only does this create jobs but also puts money in the hands of all the people who get the jobs, so they can turn around and buy the goods and services they need – generating more jobs. Not exactly rocket science.
But congressional Republicans are firmly opposed. Why don't Republicans get it? Either they're knaves – they want the economy to stay awful through next election day so Obama gets the boot. Or they're fools – they've bought the lie that reducing the deficit now creates more jobs.
Republicans claim businesses aren't hiring because they're uncertain about regulatory costs, or their taxes are too high, or they can't find the skilled workers they need. But if these were the reasons businesses weren't hiring – and consumer demand were growing – we'd expect companies to make more use of their current employees. The average number of hours worked per week by the typical employee would be increasing.
In fact, the length of the average workweek has been dropping. In August, it declined for the third month in a row, to 34.2 hours. That's back to where it was at the start of the year – barely longer than what it was at its shortest point two years ago (33.7 hours in June 2009).
Republicans say America can't afford to spend more. In truth, we'll be in worse shape if we don't. If the economy remains dead in the water, the ratio of public debt to the total economy balloons.
Besides, the United States can now borrow money from the rest of the world at fire-sale rates. Interest on the ten-year Treasury bill is now just a notch above 1%. That's an almost unprecedented deal. With so many Americans unemployed and so much of our infrastructure in disrepair, this is the ideal time to get on with the work of rebuilding the nation.
But it won't be enough for government to become the buyer of last resort – in Keynes's words, to prime the pump. If the economy is to continue to grow and create jobs after the government has stopped the priming, there must be enough water in the well. Yet, now and in the foreseeable future, America's vast middle class doesn't have the purchasing power to keep the mechanism going.
For more than 30 years, the median wage in America has barely increased, adjusted for inflation – even though the economy is twice as large as it was three decades ago. Almost all the gains have gone to the top – especially the top 1%, who now receive over 20% of total income (it was just 10% in 1980).
As long as America's vast middle class could continue to borrow on the rising value of their homes, they continued to spend – thereby keeping the economy going. But going deeper into debt is not a sustainable strategy. Now, after the bubble burst, America's middle class doesn't have enough money to maintain the economy at or near full employment.
Any long-term strategy for rescuing the American economy must therefore seek to reverse the widening gap in income and wealth. One place to start is tax reform. The earned income tax credit – a wage subsidy for lower-income workers – should be enlarged and expanded. Taxes on the middle class should be reduced – including social security payroll taxes (80% of Americans pay more in payroll taxes than they do in income taxes).
Taxes on the wealthy, on the other hand, should be increased. The president has proposed closing some tax loopholes that allow the super-rich to reduce their tax liability, and to end the tax cut on the rich put in place by George W Bush in 2001 (thereby increasing the top marginal tax rate to what it was under Bill Clinton – 39%).
But the nation should go much further, particularly in light of the large budget deficit projected several years from now. We need more tax brackets at the top, with higher marginal rates. The capital-gains tax (now at 15%) should be raised to match the income tax rate. And a wealth surtax of 2% should be applied to all wealth in excess of $7m.
Needless to say, Republicans won't go along with anything like this. They balk even at the president's modest plan. It would be better for President Obama to assume that he will get no Republican support this year and next, and build his 2012 election campaign around a bold plan to revive jobs and the American middle class.
Well, the Republicans ARE both knaves and fools aren't they?
The big mystery is why the Republicans keep getting elected. It is true that the media is largely controlled by vested interests who act for the self-same top percentile who own most of the wealth. But still, are people and electors so monumentally stupid?
It is the same in the UK. People time after time elect the Conservatives into power. And each time they rip off the majority of the population and give the wealth to the few who already have far more than they could ever consume. They screw over the education system, suck money out of public services, and run down the health service. Then people forget all this and elect them again.
- Overpopulation is the problem everywhere.
Have you caught the Slate series on the future in which robots will be replacing humans in many jobs?
We've seen robots take over many jobs that require routine activities and manual labor. But what impact will they have on high-skilled workers, including medical professionals, lawyers, scientists, and journalists?
Given that the is a surplus of unskilled labor in the USA are you all ready for the latest wacky proposal from Washington?
There go the crazies in the USA once again blaming Canada for the attack on the WTC when it was American incompetence that facilitated the event.
Criminals from Canada - oh please, all of the guns in Canada come from the USA.
The USA is not a nation with a general desire for above average intelligence.
Most people are hired by small to medium size private firms. Yes. That is correct. And most of those firms are LLC's or other companies with pass-through taxation, meaning the tax is not accessed at a "business" level, but at the personal level of the owner(s).
That being said, the individual still only taxed on the profits of that company. The individual is able to write off the business expenses the firm spends on rent, salaries for employees, etc. against the revenue the firm generates. Most of these small firms make very little profit and therefore, the actual income taxed against the individual is quite small.
Therefore, setting a new tax bracket for the people with extremely high net incomes each year (+$1 million) would not affect many of these small businesses. And the ones it would affect are not "struggling." Quite the contrary, they are extremely successful and able to bear a slightly higher marginal tax rate at the extreme end of their income.
From here in Britain I sense that the only people the US and your State Governments are likely to hire are military personnel, police officers and prison guards. But I don't think that is to kick start your economy rather to keep everyone in line.
Government's obviously do much more than that. A good friend of mine's was just hired by the National Institute of Health (NIH) as a researcher. She has a PHD in biology and she is also a medical doctor. She is doing base research on highly communicable diseases. She is paid very well (has to be to pay off her school loans). Eventually she would like to move into the private bio-tech industry but her time at NIH will provide her an excellent background.
Anyway, point is that government spending is often framed as some bureaucratic drone, stamping page after page of meaningless paperwork. Many, many people who work for the government in the United States (both state and federal) are highly educated and perform important tasks that contribute to the private sector. The bio-tech industry that has blossomed around the NIH in Maryland is proof of that. The private sector is a good thing and the free market works generally well but government can and does help and contribute to the success of the overall economy.
Why don't Republicans get it? Either they're knaves – they want the economy to stay awful through next election day so Obama gets the boot. Or they're fools – they've bought the lie that reducing the deficit now creates more jobs.
You quoting Keynes as axiomatic doesn't help. They think Keynes the proven cause of all recessions.
They're prepared for short term pain. They're expecting another Reaganite lurch to the right in response. Less tax and less public sector and less regulation means wealth will be concentrated with those that "deserve" it and "understand" how to use it and are unhampered by "meddling" government in using it. And then if there is a repeat of Reagan magic there comes another decades long boom.
They are after all not a reality based community. They create their own reality. http://www.nytimes.com/2004/10/17/magazine/17BUSH.html
By the way they care about the economy and want a healthy economy, but that's not quite the same as caring about jobs for "LOSERS". http://video.cnbc.com/gallery/?video=1039849853
What's for certain is, if your losing races, you aren't going to improve by FATTENING your supposed best horse.
You keep her hungry, not over-stuffed.
If these rich boneheads are really where the jobs come from, then make them hungry and I guarantee they'll get off their duff and figure out how to keep on top.
## President Obama, whose chances for re-election now depend almost entirely on the Republican party putting up someone so vacuous and extremist that the nation rallies to Obama regardless ##.
This is the nation that gave us the younger Bush. I think Obama is dead in the water.
Presumably someone in negative equity is unable to borrow more money. It says much about today's economy that people are expected to borrow in order to purchase consumer goods. That is certainly the case in the UK and possibly in the USA. Of course this does have the rather obvious problem that at some point people have to start paying down their debts. Unless you have a rapidly growing population eventually growth from debt has to come to an end and go into reverse. That is the point we have reached in the UK.
The problem is ideological... Neoliberalism (leisez-faire) vs Keynesianism (economic interventionism)
The republicans have subscribed to the former, and no amount of reasoning will get the message through.
It's all so well explained and laid out in the utterly brilliant book that Naomi Klein wrote about macroeconomics - The Shock Doctrine.
Dotsonascreen; I agree entirely, but it ain't gonna happen, is it?
The great majority of the world's population struggle to exist, every day of their lives. We, fortunate souls in the developed world, are maybe, rich enough to survive for a few weeks or months at best, if every penny of our income suddenly dried up. Yet, this great majority would rather quarrel amongst themselves, like children in a playground, to climb that extra rung up the social or status ladder - to become 'middle class' or whatever. They still prefer to sneer at those they consider financially, educationally or socially inferior to themselves - the doctor looks down on the teacher, who feels superior to the car mechanic, who is sure he is better than the bin man, and the bin man is convinced he's way above the shelf stacker.
And, all the time they fail to see the blindingly obvious; they're being manipulated, fooled, lied to and despised by the tiny few who pull all the strings. Isn't it odd that whenever there's a economic crisis, the right wing press, always manage to pin the blame on single parents, social security blaggers and recently, anyone who happens to work in the public sector (while all the time totally ignoring the fact that without the public sector, the robber barons of business and banking would have no infrastructure in which to operate). Of course, it's just a diversionary tactic to deflect the spotlight away from the real culprits and the extraordinary thing is, Joe Public still 'buys it'.
David Cameron was almost right; he should have said "the vast majority of you are in it together' and if he'd said that, he'd have been spot on. But we don't realise this and until we do, the tiny culpable, unscrupulous, uncaring and unaccountable elite will continue to get away with it. Sadly, I fear, Marx's workers are still far from uniting; divide and conquer still being the order of the day.
Can someone explain something to me?
On your good days, yes.
I see a similar statement to this frequently:
Consumers (whose spending is 70% of the economy) can't boost the American economy on their own. They're still too burdened by debt, especially on homes that are worth less than their mortgages
I don't understand what the relative values of the mortgage and the house have to do with income. If my house appreciates in value, I do not see that until I sell the house. So if a house falls in value, I don't see that until I sell. I understand this can slow down mobility in looking for work, but how does the (unrealized) value of an asset effect income?
You seem to have missed out on the frenzy of refinancing and trading up* that inflated incomes for well over a decade, but which really took off after the internet bubble collapsed. A very, very large part of the country was living many thousands of dollars per year over their real incomes, just by letting a little air out of the balloon every year or two. How did plain 3-bedroom houses in the San Fernando valley get up past $600K? How did people who make $50K a year afford them? They sold the $400K house they couldn't afford for $500K, took $50K out in cash to split been living expenses and a cruise, and put the rest down on the next house. Then...
* And, if so, good for you; I mean it.
Keynes did advocate state intervention in an economy as solutions to deep recessions (like the 30's Depression) or to achieve goals to full employment, though he always erred on the side of caution too,like saving enough money in government coffers for a rainy day and not overspending. The post war consenus finished by the end of the 70's because of inflationary pressures brought on by the '73 oil shock and excessive pay demands and industrial strife brought on by over-zealous trade unions. The problem now has been over zealous bankers and a misplaced singular faith in the free market who were allowed to borrow with no sensible regulation or restraint (similar to what happened in the '29 Wall Street Crash).
Globalisation has been very damaging to much of the Industrial sectors of the West (certainly in the UK) which has led to vast worklessness and an expanded underclass.The Germans have proved with their mixed/Social Market economy that you can still have a thriving manufacturing sector working in partnership with capital, hence the reason Europe is now looking to them to bail out the Euro and countries like Greece, but after today's vote, I agree with those dissenting Germans who are asking ''Why should we bail out other nations for economic mistakes they made and we didn't?'.
September 28, 2011 | naked capitalism
Earlier you said that Europe’s banking crisis wasn’t as severe as it is in the United States. I had thought it was worse.
There are a number of differences. There hasn’t been the wholesale financial mortgage fraud in Europe that flourished in the United States – except in Ireland, where they found the average mortgage to be worth only about 20 or 22 cents on the dollar, especially with Anglo-Irish Bank and the Royal Bank of Scotland there was a huge fraud. But in Continental Europe there was less fraud – merely over-lending against property, in the context of a fiscal policy that taxes labor and industry rather than land or natural resources and gives tax subsidy to debt financing.
Only now are Europeans having the discussion that they should have had 10 or 20 years ago. Nobody wants the Greeks and Portugal to starve. The question is, what’s the best way to help them? Is it simply to give money to their governments? They would simply pay their bankers. Supporting bond prices by buying bonds in the market would reward speculators. If the aim is to support Greece, why include the financial sector or gamblers?
Treasury Secretary Geithner is reported to be pressuring the Europeans to bail out the banks because Goldman Sachs and others American banks have gambled that Greece and other countries can pay, and written default insurance. It seems that if these U.S. banks lose the bets that they’ve made, they’ll go under and Washington will have to bail them out. So Mr. Geithner is telling Europeans to sacrifice their economies so that U.S. financial casino gamblers won’t take a loss. This did not go over very well in Europe.
Are you referring to the credit default swaps that U.S. banks hold, and the insurance policies they have written against European bond defaults?
That’s a big part of the problem, along with lines of credit. Throughout Europe and the United States most banks have lines of credit with other banks. Just as individuals have overdrafts with their bank, most banks have credit lines with numerous other banks. Right now, banks are canceling their lines of credit with many European banks, because nobody knows really what bank balance sheets are worth. Europe has been as lax as U.S. authorities in conducting “stress tests” to get honest reporting. Banks are allowed to fiddle with their accounting practice so much that most analysts view them as being pretty fictitious.
So if a bank finds out that you’ve lost your job or that you’ve been misrepresenting your income they’re going to say, “I’m sorry. We’ve got to lower your credit card amount from $10,000 to $2,000,” or “We’re canceling your credit card.” Well, that’s what the American banks are doing to the European banks. So all of these lines of credit that are all created on a computer keyboard are being canceled and that’s creating a balance sheet problem. So that’s why people call this the balance sheet recession, not really a worker spending recession.
Has the financial system reached its limit?
It’s reached its debt limit. The financial system is much more a debt system than one based on equity financing, that is, a share of the gains made from the loan. The bank’s product is debt – and neither businesses, real estate or people (or governments, for that matter) can afford to pay more than they’re paying now. Much of the economy already is in negative equity.
Is any financial investment safe?
Nobody knows of any. That’s why people are buying gold. They’re trying to protect what they have at this point more than to make further gains. It’s not that they love gold as such, because there isn’t all that much use for it, after all. Its price is rising because investors have lost faith in governments – except for the U.S. Treasury, whose short-term debt now is yielding almost nothing. People are moving into Treasury IOUs because it can simply print the money to pay. It doesn’t need to borrow – as we’ve seen with the $13 trillion in financial bailout debt created just since 2008.
Everything else is insecure. If you look at markets going up 400 points one day, down 400 points another, this wild zigzagging is a market for professionals. If you don’t have a billion dollars in computer-driven trades, you don’t have much chance, because there’s no rational explanation grounded in the real economy is to why the stock market should careen so wildly up and down.
Do you think that lack of confidence in governments is driving the precious metals markets, specifically gold?
It’s also copper, and even food. People are trying to move out of financial securities into thing that are tangible – farmland, wheat and trophies.
Do you feel that that the move into tangibles is rational?
It’s a self-protective response by people who worry that they may lose if they buy stocks or bonds. Not since the 1920s has the stock market been so limited to professionals, especially as the Bush and Obama administrations have decriminalized financial fraud by not prosecuting it and by understaffing the government’s major regulatory and justice agencies. If people buy stocks today, they may lose money – and even if they put their money in a bank, it may go bust. So investors want to get out of the financial superstructure back into the real economy.
The problem is that what people call “the economy” has been financialized. In the United States last year, 40 percent of corporate profits were made by the banking sector. The rest of the economy is shrinking under the weight of debt deflation – interest and fees paid to this financial sector.
Germany is the strongest economy because it’s better structured in many ways, and more industrial. It has a higher proportion of the real economy to GDP, and also is much lower-cost, because it hasn’t built financial overhead into real estate and family budgets to anywhere near the extent that has occurred in the United States.
Countries that have let themselves become post-industrial service economies are finding out that if you don’t make things, you can’t live forever by going to Las Vegas. The casino always wins – and today’s casino is Wall Street. It’s a zero-sum game for the economy – with the economy’s losses plus Wall Street’s gains netting out to zero. So in economic jargon, the financial sector has become a transfer payment, not playing a productive role.
As long as we’re speaking of Germany, what is good about its economy? Can you describe its social safety net and what you began to say about housing there?
The typical American family spends about 40 percent of its budget on housing. In Germany it’s only about 20 percent. There are a number of reasons for that. For starters, real estate prices are whatever a bank will lend. Easier credit means higher debt leveraging – and hence, higher property prices.
German homebuyers must pay 20 or usually 30 percent of the purchase price down, so they don’t have 100 percent mortgages like there are in the United States. And mortgages are self-amortizing. For renters, there are co-op arrangements for a much larger market supplied at cost, in contrast to the United States, where the rental market is owned by landlords who squeeze out as much as possible over and above the actual cost of maintaining the property.
A German moving to Hamburg or Frankfurt may join a co-op organization and pay perhaps $1,000 or $2,000. Anyone can join. So there’s not much motivation to buy houses as a speculative means, because it’s usually cheaper to rent than to buy – and less effort for upkeep. As a result, there has not been a German financial bubble to bid up prices as has occurred in the English speaking or neoliberalized countries where people have been panicked to buy before prices rise even further beyond their reach.
In thei tme of Ricardo two hundred years ago, the most important element in labor’s budget was food. He judged wage competitiveness largely by the price of bread. But today, labor costs are set by what it costs workers to buy or live in a home, whose price is set by highly debt-leveraged credit terms. So Germany’s low unit labor costs are not simply the result of high technological productivity. They reflect low housing costs and relatively low social security costs. It hasn’t financialized its economy to anywhere near the extent that the United States has done.
You have said that Social Security in Germany is pay-as-you-go. Who is paying: the government or citizens?
Basically, individual citizens. Pay-as-you-go is an American way of putting it, but the Germans call it a “generation treaty.” The young generation agrees to support retirees, on the understanding that when it gets old, new employees will support it in turn.
By “pay as you go” I mean that there are no financial intermediaries as in the United States – no saving in advance to lend to the government to provide funding to cut taxes on the higher income and wealth brackets. Alan Greenspan and his right-wingers claimed that government budgets were just like private budgets, so that workers need to pay for their own Social Security by saving in advance – and then drawing down these wage set-asides. So FICA withholds over 13 percent of employment costs to pay much more into a government fund than actually is paid out.
This extra money is used to buy Treasury bonds. The Treasury uses this revenue to cut taxes on the rich, and on real estate and to give subsidies to the financial sector. So the effect is to move away from progressive taxation into regressive taxation.
What makes the U.S. system a con game is that when it comes time for the Social Security Administration to start paying out more than it is taking in – by selling off the Treasury securities that it’s been buying for all these decades – these sales have the same financial effect as when the government issues and sells fresh Treasury bills to finance a new budget deficit. So all this pre-saving is unnecessary from the financial standpoint. The gimmick has been to shift the year-to-year tax burden off wealth onto employees.
The idea of pre-saving for Social Security is as absurd as trying to pre-save for a war. What if the government said, “Maybe there’s going to be another war that may cost, say, $3 trillion. Let’s prepare by saving that in advance, by taking it out of employee paychecks to buy Treasury bills.” Soon enough, politicians would get the idea of using this money to cut taxes on their major campaign contributors, the wealthy.
The trick has been to convince voters that paying excess Social Security contributions is a user fee, not a social program to be paid out of the general budget by progressively taxing the wealthiest brackets. By contrast, Germany’s policy of paying out of current tax revenue is what Adam Smith recommended that governments do. Just as he said that wars should be financed on a pay-as-you-go basis, so that people would understand their cost.
So employees and employers pay much more into the system than is paid out.
That’s the idea: to save enough in advance, beyond what you currently have to pay, to lend the revenue to the government to cut taxes on the rich. It’s pay-in-advance rather than pay as you go. Pay much more than the government needs at present, so that the Treasury has enough money to slash the income tax that wealthy people have to pay. You can follow the Treasury Bulletin or the Federal Reserve Bulletin to see how the savings of the Social Security Administration go up every year – and are lent to government. (George W. Bush wanted to put this money into the stock market to create a stock-price boom that would enrich Wall Street – and would collapse once the flow of funds was reversed and more stocks were sold to pay retirees than new employees paid in. Thank heavens that potential bubble was averted.)
The result that we have today is not really a Social Security system. It’s a system of taxing employees instead of the rich. This tax shift increases the cost of employing people in the United States. That is one of the reasons, in addition to the housing costs, that prices America out of world markets.
The system that financial lobbyists have put in is designed to tax labor and siphon off so much that American labor cannot compete in any market in the world except in arms markets and special markets, and food. So what they call free-market efficiency is crippling the efficiency of the United States by adding to housing costs and adding needlessly to the Social Security and Medicare costs.
There’s no need for these pre-savings to have taken place. Workers could have kept much more of their wages and the government would have had to maintain higher taxes on the rich. But the Republican policy was to tax labor and un-tax wealth – class war with a financial fist.
Since we’ve talked about Social Security, what about the new Super Congress – the Committee of 13, with Obama being the 13th member? What is the composition of this committee, and what automatic budget cuts will go into effect in November if Republicans reject the Obama budget?
The Super Congress is made up of people that President Obama has selected largely because they want to cut Social Security. They pretend that it must be paid as user fees, in advance, to stem the budget deficit that has resulted from untaxing the estates of billionaires – the super-rich – and continuing the regressive tax shift that has been underway since the 1980s.
The basic rule of high finance is that big fish eat little fish. Millions of Americans have put their paychecks into Social Security. Just as corporate raiders set their eyes on emptying out pension funds to pay themselves (and their stockholders and bondholders), so financial lobbyists are seeking to raid the Social Security fund. Their motto is, “Let’s take the employees’ money and give it to ourselves.”
President Obama’s “Main Street” is Wall Street. His talent as a politician is to get votes from Main Street and deliver policies to Wall Street. He actually seems to believe that Social Security should be cut back to give money to his major campaign contributors. The rich are his constituency today, just as they were for George W. Bush. So Obama may cast the deciding tie-breaking vote, but as we’ve spoken on your program before, he’s already appointed people to the Budget Commission and the Social Security Commission when he was first elected, people who want to cut back Social Security by pretending that there’s a crisis. Their working assumption is that if the government needs money the poor should lose, not the rich.
It’s hard for congressmen or senators to vote against Social Security and Medicare, because most voters are in favor of these programs. So President Obama’s strategy is to take the Social Security issue out of Congress – and give himself an opportunity to posture during late September and October to propose pro-labor policies that he knows a Republican Congress will reject, thereby triggering the “automatic” budget cutbacks he negotiated in August with the Republicans.
If you look at who the campaign contributors of the Super Committee, they’re mainly in the financial sector. Even if they committee members are unpopular, they’re going to be able to retire with such high paying jobs in the financial sector. This is what the Japanese call Descent from Heaven. They’ll get their payoff for taking the heat on stiffing the Social Security recipients for their Wall Street constituency.
I’m amazed that there’s not more of a political reaction against this. People have worked hard to save for Social Security out of their paychecks. These are real savings. For Republicans to characterize these payments as an “entitlement” is to treat the elderly as if they’re mere welfare recipients freeloading off the rich – while it’s actually the banks and big fortunes that have been given the handout.
If the Bush and Obama Administration can give $13 trillion to the banks to save them from taking losses on their bad investments, then why can’t they give another trillion to Social Security? The reason is, there’s a class war on. If you don’t realize this, then you’re not going to understand what politics is all about these days.
However, it’s not the kind of class war that people talked about a century ago. It’s fought in the financial arena. The idea is for the big sharks to take the savings of the little savers. They exploit labor not by employing it – as in Marx’s description in Vol. I of Capital – but financially, by loading it down with debt and making labor spend a working lifetime to pay it off. So instead of the wage slavery socialists used to talk about, you have debt peonage today.
Food is becoming very expensive in the United States. Do you see this trend continuing, and is the rise in food prices a consequence of the weak dollar?
It’s not a consequence of the weak dollar. One factor is global warming, which is creating water shortages all over the world. Urbanization also is doing this. But also there’s been a huge diversion of cropland to grow gasohol – to make gasoline out of corn or rapeseed or other crops. This has diverted land and water away from food for cars and other energy.
We are now seeing incipient water wars in the West. Who will get the scarce water? Will it be urban areas, or agricultural farmland? What will the price of water be? Will it be diverted to make gasohol and coal liquids?
The Canadian tar sands are one of the worst projects, because they use about ten gallons of water for every gallon of coal gas. I was the economist working for ERDA, the Energy Research Development Administration, around 1975 and did the study of this. The Carter Administration came in they said, “Look. How are we going to pay for all this high-priced OPEC oil now that the OPEC countries are raising the price?” Carter’s solution was for coal gasification and liquefaction to lower oil costs while raising the price of wheat, by diverting water away from agriculture.
Speculators all over the world are buying land as they move out of credit and finance. Land is real, and everybody needs to eat, after all. So food is becoming as speculative an investment vehicle as gold, copper or stocks – and water monopolies.
So you would say that speculation is one of the big reasons why food is going up – land speculation, food speculation and water.
Not only speculation, but the fact that water levels are falling. Food is made as much out of water as out of soil. The weather is another problem. Global warming is causing weather changes that reduce crop yields, as flooding and droughts go together.
Putting land into gasohol production was a political decision, right?
Yes. The mainstay of America’s trade balance has been food exports. A constant in U.S. foreign policy since 1945 has been to promote food export markets to cover the cost of American imports and military spending abroad.
Why is the cost of gasoline rising?
This would be a job for anti-monopoly regulators to look at if they were still regulating. President Obama has appointed a justice department that refrains from prosecuting economic crime, and an environmental department much like the Reagan version. It gives the oil companies whatever they want, such as new offshore drilling rights. Obama has put deregulators everywhere in a way that George Bush, as a Republican, was not able to do, because the Democrats would have opposed a Republican president from disabling the regulatory agencies to the extent that Obama has done. But they can’t stop their own party leader doing this.
Are there similarities between the economic crisis of September 2008 and the present situation?
Yes, we’re still in the aftermath of 2008. Economists are talking about a double-dip recession, but we’ve never gotten out of the first crash. The economy has not recovered. The stock market has gone up, because the Federal Reserve has been flooding it and the bond market with liquidity. But employment, living standards and sales are not going up. Housing is still down. So we’re in more than a Great Recession. We’re going into a lost decade.
We’re entering a period where wages will drift downward in a slow crash, because the government is not renegotiating mortgages downward or canceling bad debts. It is not bailing out the cities that are in trouble and there’s a downward financial spiral basically coming from the debt situation.
The question shouldn’t be whether we’re in a double-dip recession, but why a recovery from the crash has not taken place. Why haven’t the bank bailouts created jobs? How could the government create $13 trillion of Treasury and Federal Reserve cash, loans and guarantees to Wall Street for the wealthiest one percent of our population without this trickling down and created jobs?
How do we jumpstart an economy when 70 percent is consumer spending, but consumers aren’t spending because they’re spending their money to pay off debts taken on in the past, or worried that they may be unemployed? In other words, what has Washington not been doing that it should have been doing? What has it left out of account?
Before President Obama he was elected he said he was going to renegotiate mortgages downward. But the banks have not done this. So did he just give up and say, “Well, just forget it”? The Federal Reserve flooded the banks with liquidity, but they sent it abroad. They argue – with good reason – that the economy is shrinking too much to qualify for enough loans to borrow its way out of debt.
It should be obvious by now that giving money to the banks doesn’t create jobs for the people. It is mere propaganda to call the rich “job creators.” They have put in place an extractive financial system that has destroyed jobs. They’re the ones that are closing down the factories and outsourcing American labor.
Are the banks creating a permanent depression?
That’s the outcome of their business plan, which is to take the entire economic surplus in the form of debt service. Banks want to create as much debt as they can. Debt is their “product.” The economy is merely “collateral damage” to a financial dynamic that is impersonal, not deliberate.
Every economy for hundreds of years has seen debts grow more rapidly than can be paid. At a point there’s a crash, which normally wipes out debts. It also wipes out savings on the other side of the balance sheet, of course. But this time the government has tried to keep the debt overhead on the books – and to tax the population to give banks enough to make sure that the rich don’t lose money. Only industry and labor will lose.
The effect will be to de-industrialize the economy even more, because markets shrink without consumer spending. Companies won’t invest, stores will close, “for rent” signs will go up, tax payments to the cities will fall, and municipal employees will be laid off while social services are cut back. The economy will shrink and life will get harder.
Why aren’t economists talking more about this obvious phenomenon of debt deflation? It is the distinguishing phenomenon of our time. But opinion-makers are insisting that the solution is simply to give more money to the banks. Not many people are asking why this isn’t working. And when they do ask, they don’t get much media coverage.
Could you explain debt deflation? It’s a confusing term.
Economics textbooks depict people earning income and spending it on the goods and services they produce. This is why Henry Ford said he paid his workers $5.00 a day – so that they could buy the Fords they made. Economists call this circular flow Say’s Law.
But people spend a rising proportion of their income to pay debt service. That is their first charge. Before they decide how much is available to spend on goods and services, they have to pay their credit card debt, student loans, other bank debt, and of course the mortgage. The more they pay the banks, the less they have to spend on goods and services.
Business sales shrink, because the banks recycle their interest receipts into even more loans – on even “easier” terms, meaning more debt leveraging. So the “real” economy of production and consumption shrinks while the payments to the financial sector go up.
Financial investors don’t buy many goods and services. They leave their revenue in the financial system, mainly to be lent out on new loans, sent abroad or used for speculation. Debt deflation is what happens when spending is diverted away from buying goods and services to paying debts. The financial sector grows, relative to the “real” production-and-consumption economy. So debt deflation of the underlying economy goes hand in hand with asset-price inflation fueled by increasingly loose credit and steeper debt leveraging.
I see. And then that deflates the economy.
Yes. Less national income is available to be spent on goods and services, and more is given to the financial sector.
The Federal Housing Authority is suing the major banks – Bank of America, Chase, Citibank, Deutsche Bank and other big banks. What is the lawsuit about?
These banks misrepresented the junk mortgages that they were making and selling to outside investors. They packaged mortgages and sold them to pension funds, insurance companies and foreign banks. Ratings agencies bid for clients by agreeing to give junk mortgages AAA ratings – as good as the U.S. Government. But the mortgage lenders and the ratings agencies they hired assured clients that these mortgages were good and could be paid – or at least that the market would continue to rise, so that if there was a default, new buyers would play the role of the proverbial “greater fool” and buy properties being foreclosed.
It turned out that the appraisals were based on unrealistic appraisals and either fake or absent reports on the borrower’s income and hence ability to pay. They were no-documentation loans, and the biggest banks have turned out to be running a fraud. Bill Black has written more on this than anyone else, at the University of Missouri in Kansas City.
By the way – if we’re talking about debt deflation and other financial issues, there’s a UMKC economic blog, called New Economic Perspectives. Prof. Black and I (and others) write about how the financial sector has become what he calls criminogenic. In other words, it’s been criminalized, and bankers have run what he calls “control fraud.” The economy’s largest financial market, real estate mortgage lending, turns out to be based on crooked real estate brokers, appraisers, underwriters, ratings agencies and so9 forth. Right down the line almost everybody’s been engaged in a gigantic fraud that’s helped inflate the real estate bubble. Whereas when similar fraud happened in the 1980s with the savings and loan associations thousands of people went to jail, nobody’s gone to jail yet. Hardly anybody’s been arrested. And yet they’re on a much larger scale than Bernie Madoff.
The Justice Department is reluctant to prosecute fraud, because the largest perpetrators are the banks that already are dependent on the U.S. Government for bailouts. So from the Justice Department’s vantage point, the government simply would be fining itself, because it would turn around and lend the crooked banks enough to keep them in business. So they’re not sending anybody to jail, not even Angelo Mozilo of Countrywide, the toxic bank at the core of junk mortgage lending. It’s now part of Bank of America.
So in effect the United States has decriminalized financial fraud. The Federal Housing Authority that brought the suit you cite had three years from the time it took over Fannie Mae and Freddie Mac, the housing guaranty agencies, to bring up fraud. So it’s making the point that government-guaranteed agencies bought “toxic waste” from crooks. The inference is that Citibank, Chase Manhattan, Wells Fargo and Bank of America are a financial gang. It’s now being asked to make restitution. Or at least the FHA has to pretend to go after them.
The banks tried to stop this by having the Iowa attorney general head a group of attorneys general to make an overall agreement with the banks, basically to forgive them. In effect, their position is that “They’ve stolen $13 trillion. Let’s fine them $100.” The Obama Administration is backing this little slap on the wrist.
But now the New York attorney general and I think his Nevada counterpart have said, “Wait a minute. These guys have falsified loan documents and written in false figures. These guys are crooks. Bank of America is like a mafia. These are absolute crooks and we’re going to go after them and fine them and get restitution.” And that’s why Bank of America stock is down six percent today, because now they think, “Oh, my God. What if they actually enforce the law?”
Obama’s attorney general Eric Holder, seems reluctant to enforce the law. He seems like the crooked sheriff who works for the gangsters who run a small town, as their protector. So this should be what the election is all about – to make Holder and Obama prosecute the frauds rather than making sure that the crooked banks don’t lose anything.
But despite all this, the important thing is that the real estate bubble would have developed in any event, simply because of the exponential financial dynamics at work and the increasing tax favoritism for real estate – taxing labor and industry rather than land rent.
Talk about the University of Missouri-Kansas City economics blog, the New Economic Perspectives on MMT that you mentioned. What is modern monetary theory?
Basically, it’s the realization that we’re not on a gold standard anymore. When banks make a loan, they create a credit on their computer keyboard and their customer signs an IOU. So the loan creates the deposit, not the other way around.
Governments can do this too. They don’t need to borrow from banks. They can create the money on their own keyboards to pull the economy out of recession. Some people call this post-Keynesian, others call it heterodox. We’re the opposite of the Chicago School, which claims to be free market but actually is pro-banker. Its idea of a free market is to let gangsters be part of the economy, as if crime is all part of individualistic gain seeking.
What is “modern” about today’s money is that it is created by banks electronically at will – “freely.” If the government runs a deficit, it pumps spending power into the economy – either the goods-producing sector, or Wall Street balance sheets. But if the government runs a surplus, it sucks revenue out of the economy.
If we’re going to spur recovery today, we need employment. The way to get this when there’s a lack of private sector demand is for the government to become the source of demand, by running a deficit. This is the opposite of what the Republicans and the Democrats are saying. But even Herbert Hoover as well as Roosevelt said back in the 1930s. The Republicans and the Democrats back then realized that the government had to spend more money to get the economy out of recession. Today both parties are pushing austerity plans.
If people want to read about Modern Monetary Theory, where would they go on the Internet?
To the UMKC (University of Missouri-Kansas City) economics blog: New Economic Perspectives. Most of my articles are posted there. Another good source is Yves Smith’s Naked Capitalism, and also the Levy Institute.
What about currencies – the dollar and euro as well as the renminbi and yuan?
Currency markets are in turmoil because nobody knows how Europe will resolve its debt crisis. People are moving out of the euro into the dollar, and then out of the dollar into gold. They’re moving out of everything financial. Meanwhile, currency markets are being swamped by huge computer programs. There’s no underlying way to relate exchange rates to domestic consumer prices, labor’s wage rates anything that the textbooks talk about. It’s now all about the flow of funds – on credit, dominated by speculators.
If debts are canceled, how would this be done?
The original plan for bad mortgage debt was to reset mortgages to match the current property prices. That’s one method. Or, you can bring mortgages in line with rental valuation, by asking what a home would rent for – and then capitalize the net rental revenue at, say, 5 percent interest. That would be a reasonable price for the property, so banks would be told to reset the mortgage at that level.
So the banks would write off a lot of the debt.
Yes. And somebody would have to lose and it would have to be the big bank depositors because the Federal Deposit and Insurance Corporation insures depositors up to $100,000 or $200,000, I think pretty positively. So the big rollers would lose.
And they’ve increased. The wealthiest one percent of Americans in 1979 had 39 percent of the interest, dividends, rent and capital gains. Now they have about two-thirds. They’d have to go back to their historical proportions and the economy would become much less polarized between rich people and the rest of the economy. So you’d have a much more normal economy by writing down this financial fat or parasitism. You’d get rid of it.
Michael Hudson, thank you very much.
Jim Haygood :
Several years ago, Michael Hudson proposed a model detailing how the FIRE (Finance, Insurance and Real Estate) economy tends to outgrow the underlying productive economy. It proved to be a very description of a ‘financializing’ economy up to 2007.
What’s striking about this incredibly prolix interview is how few insights, not to mention solutions, it offers. Hudson is indeed a treasure (despite his MMT slumming). But it seems like he’s off his game the last few years.
Here is a solution for you:
Michael Hudson will be on a panel at this weekend’s AMI American Monetary Institute 7th Annual Monetary Conference. Dennis Kucinich’s solution is being promoted; it is his H.R.6550 NEED Act (National Emergency Employment Defense Act) which is BIG as it changes the Monetary System to benefit everyone, not just bankers.
Can someone here report on this conference please. The Monetary Reform Conference starts tomorrow. It needs more coverage.
These protests should turn into a Main Street Rally with messages of the road to take to help everyone.
Congressman Kucinich’s Historic Monetary Reform Bill
Congressman Dennis Kucinich introduced an employment bill Reforming Our Money System: The NEED Act proposes a historic money reform, containing all the monetary provisions of the American Monetary Act including ending “fractional reserve” banking.
2011 Monetary Reform Conference Speakers/Schedule
The 7th Annual AMI Conference will be held at University Center, in Chicago, Sept. 29 – Oct. 2, 2011.
…Congressman Dennis Kucinich introduced the National Emergency Employment Defense Act (“NEED,” HR 6550*) which contains all the monetary reform provisions of The American Monetary Act- see the brochure at http://www.monetary.org. It is much more than regulation; it fundamentally reforms our private CREDIT/DEBT system now wrecking our nation and harming all humanity, and replaces it with a government MONEY system.
The Act achieves reform with 3 basic provisions. All three are necessary; doing one or two of them wouldn’t work and could cause more damage.
First the Federal Reserve gets incorporated into the U.S. Treasury where all new money is created by our government – what people think happens now.
Second, It ends the fractional reserve system. Banks no longer have the accounting privilege of creating our money supply. All their previously issued credit is converted into U.S. Money through an elegant and gentle accounting change. The banks are held accountable for this conversion and from that point operate the way people think they do now – as intermediaries between depositors and borrowers.
Third, new money is introduced by the government spending it into circulation for infrastructure, starting with the $2.2 trillion the engineers tell us is needed to properly maintain our infrastructure over the next 5 years. Infrastructure will include the necessary human infrastructure of health care and education.
Banks are encouraged to continue lending as profit making companies, but are no longer allowed to create our money supply through their loan making activity.
Thus, The NEED Act nationalizes the money system, not the banking system. Banking is absolutely not a proper function of government, but providing the nation’s money supply is a key function of government. No one else can do it properly. Talk of nationalizing the banking business really acts like a poison pill to block real reform. Same for talk of the states going into the banking business keeping the fractional reserve system in place, and allowing the banks to continue creating what we use for money! That would reform nothing and actually endorses the fractional reserve system! It is a farcical diversion, misleading some good people away from real monetary reform at the only time reform is possible – during a crisis. All serious Monetary reformers understand that banks can not be allowed to create our money supply.
Despite prejudice against government, most people are surprised to learn that history shows government has a far superior record in controlling the money system than private controllers have. And yes that includes the continental currency, the Greenbacks and even the German Hyperinflation; which by the way took place under a completely privatized German central bank, with all governmental influence removed! These facts, though not taught in your econ classes, are discussed at length in my book “The Lost Science of Money” (by Stephen Zarlenga which can be purchased at http://old.monetary.org/lostscienceofmoney.html about which Michael Hudson wrote: “The history of money is critical to understanding the greatest problem the third millennium will face. Stephen Zarlenga’s “Lost Science of Money” book provides the needed background for seeing the basic structural issues at work.”)
Perhaps you will consider Prof. Kaoru Yamaguchi’s Systems Dynamics study of the American Monetary Act? He examined it with the most advanced computer systemology and found that:
It pays off the national debt
It provides the funds for infrastructure (solving the unemployment problem)
It does this without causing inflation. You can read his results at http://www.monetary.org?……
And, endorsed by?
James K. Galbraith to the Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010.
How the Economists Facilitated the Crisis and How HR 6550* Solves it
He has repeated his solutions for a long time. They are fairly simple:
- Shift the tax burden off labour and capital and onto land.
- Let banks fail, prosecute for fraud.
- Reform banks, have CBs fund deficits.
Obviously these things aren’t happening any time soon.
Sorry, but that’s pure neoliberalism. In a fiat currency, the issuer has ZERO need to borrow anything to finance its spending. Further, since it is merely borrowing back its own IOUs and is therefore incurring no new current liabilties via the borrowing transaction, it isn’t even proper to call what it is doing “borrowing”. (It is a debt swap or asset swap depending on who is recording the transaction.)
Given then that there is no need (or even ability) to borrow, interest payments are actually optional. As such, the interest rate is also meaningless, since interest need not even be incurred.
Note also that this is accounting, not economics, so if you don’t understand, ask a CPA, not an economist.
So why do we conduct this sham borrowing? Because rich people who are afraid to invest their money still want to earn money on it. In other words, the US government “borrows” as a gift to the wealthly in appreciation for their not paying taxes.
It’s true that the US can simply create as many $$ as they want at any time they want at the cost of dollar devaluation compared to other currencies. Payment of interest tends to support the exchange rate value of the dollar and the rate should rise or sink depending on the relative strength of the dollar to other currencies (among other things).
As such, expectations of a strong dollar should support lower interest rates than expectations of a weak dollar. So tell me, how can the weak (and weakening) dollar command such crap rates as it does today?? Are other currenciew that much crappier or is the Fed buying all the government debt or ????
I believe the answer you are fishing for it that the U.S. dollar is strong and U.S. sovereign debt interest rates low because the dollar is the global reserve currency and U.S. debt is denominated in dollars, which it can print on a whim.
Beware however, the reserve currency status of bucky is changeable. The principal support for this status used to be the strength of the U.S. economy and its financial system. That support is declining and as far as I can see, the dominant reason for bucky’s dominance is the wonderful gift of OPEC selling oil only in dollars, and the strength of the U.S. military. We are Rome, 100 AD.
The audio of the original interview is available on the site of Bonnie Faulkner’s radio program “Guns and Butter” which airs on KPFA 94.1 FM Berkeley:
Hudson, who really is one of the great voices today, also appeared on Guns and Butter in 2010, talking about “Europe’s Financial Class War Against Labor, Industry and Government.” That prescient interview is also worth a listen:
There are other interviews with him in the Guns and Butter archives, as well.
Thanks for the long treatment of German social policy. I find little to disagree with.
He claims that Germans tend to put down 20-30% on a home. My experience is that people here should pay much more. Buy early, buy once and buy only when you’ve got most of the money saved. Actual practice may be closer to his figures. 0 down, 5% down, even 10% down? Unthinkable. Also buyers over 50 years old can expect trouble.
REgarding rental markets, I don’t know what he means by coop-organizations. There is a lot of quasi state-subsidized rental property and a legal framework that gives tenants more rights than in the US. Rents are much lower than in the US and in many attractive markets it is cheaper to rent than to buy.
The German housing market shows bubbles in attractive western GErman cities like Frankfurt, München, Hamburg, where 1500 ft2 can go for 1 million +. How much is related to overall uncertainty and the flight of capital to safe markets is hard to tell.
So Michael Hudson: “The supposed contrast between “bad” central banks and “good” commercial banks is a lobbying effort seeking to monopolize credit creation in the hands of commercial banks, by promoting a travesty of how central banks are supposed to act . . . The reality is that commercial banks have fueled an enormous asset-price inflation in recent years . . . Unlike the United States and England whose central banks were founded to monetize the government debt so that they wouldn’t have to pay interest, the EU’s Maastricht and Lisbon Treaties rule that the European Central Bank must be independent from the government – which means in practice, acting on behalf of the commercial banking monopoly. They must avoid creating “inflationary” credit (any money at all that takes business away from the commercial banks) by not buying government debt. The ECB is to serve the commercial banks only. It can create money to bail them out, for them to give away, to lend out, to pay dividends or to pay their own salaries and bonuses. But it cannot fund government operations. It must starve the governments to make them entirely dependent on commercial banks.”
That is an excellent capsulization of a structural-capitalist reality in Europe which has been under-emphasized, and I greatly appreciate your concise presentation here. There are historical issues with the problematic creation of money by public authorities in Europe not touched on here which make the background somewhat more complex. For the present circumstance, though, that’s where Europe is: private, self-interested oligarchs, _and they alone_ re allowed to create ‘money.’ Using that privilege, they have lost their shirts in real estate and excessive lending to weak public authorities. Having blocked governments from controlling the money supply, the bankers are now threatening to ‘strike’ if tax revenues aren’t promised to them to make them whole.
On another note, Bill Black’s representation of the securitization racket in the US and Britain as ‘control fraud’ is a truly concise and cogent descriptive. I’ve heard him mention it before, but we now really see what he meant with the mass forging of documents. I’ll remember the usage going forward, and I thank you for raising that characterization here again.
Is any financial investment safe?
Of course, the appearance of a flight to the “safe haven” of U.S. Treasuries would have nothing to do with hundreds of trillions in interest rate swaps being manipulated on computer screens to make it appear that real world investors are happily buying U.S.T’s to get a return of less than the inflation rate (manipulated so that retirees get no COLA), would it?
At best it is ironic that too many Congresscriminals and other politicians are into gutting/cutting worker pensions, the safety net, while they themselves maintain their own VERY cushy medical coverage, their permanent and VERY cushy pension system.
I want to see the robber barons in government (local and national) totally gut their own benefits and perks before they even get to mention the existence of any such for people who actually WORK for a living.
Taxation: a flat tax of 50% on ALL non-labor income (interest, dividend, capital gains, lottery/inheritance-same thing-what have you). A Tobin tax on ALL financial and stock market transactions. Elimination of the income cap on social security taxes. Rendering private health insurance a niche market to deal with extraordinary medical care of last resort, EVERYONE else in single payer (rich and poor alike). Holding medical doctors to their medical oath that mentions NOT A WORD about “first, make loads of money”. Change laws of incorporation to include social responsibility BEFORE maximizing shareholder value. Ban profits from going out of country untaxed. If you make a profit/sell anything in country A, then you are liable first to pay taxes on profits in country A. No way out by headquartering in criminal scum countries like the Caymans or the UAE. If corporations are “people” then ALL the execs running that “person” are personally responsible for any and all damage done to the environment or people. People can go to jail, lose their shirts in lawsuits, etc. The actual people behind the corporation, those who make decisions or OK decisions have to be held PERSONALLY responsible for the results.
Banks MUST provide loans to business and may NOT hoard/hold cash. If they are not providing loans to businesses and people then they have no purpose to existing and must dissolve. All states should have a N. Dakota style central state bank. Private banking must be a backwater operation.
Those are starters.
Oh, another thing. The MINIMUM interest legally allowed on savings or T-bills, etc, can be no lower than inflation. That is, the minimum interest rate on savings MUST keep up with inflation at a minimum. The old laws against ursery must come back.
Finally, no political campaign donation, by an individual or corporate “person” can exceed $1000. Period. PAC spending on political advertising must be limited to be no more than that of the actual party they support in any given district/state and ALL such organizations MUST disclose precisely who paid (down to individuals and corporations) for the advertising.
I am very supportive of Mr. Hudson’s overall political point of view, but I think he makes a logical error (or possibly in his case a rhetorical error because he’s too smart to make a simple logical error) that is quite common in economics.
He writes: “If the government runs a deficit, it pumps spending power into the economy – either the goods-producing sector, or Wall Street balance sheets. But if the government runs a surplus, it sucks revenue out of the economy.”
In fact, if the government runs a surplus it does suck base money out of the banking system, but it’s not clear that it sucks revenue out of the economy. Elsewhere, Mr. Hudson makes it clear that bank loans create deposits (which in turn create spending and revenue).
Presumably, if somehow the government going from deficit to surplus fostered a jump in bank lending, then in fact revenue in the real economy might go up when the government ran a surplus. I’m not saying it automatically would go up. Of course it wouldn’t automatically do anything. But it’s not clear, ceteris paribus, that it wouldn’t go up.
This is why economics is always 16 equations and 19 unknowns, no matter what your political point of view is.
Deficit expenditure increases non-government net financial assets, and taxation decreases non-government NFA. Tsy issuance neither increases nor decreases non-government NFA, but only shifts their composition from reserves to tsys, that is, alters the composition and term structure of government liabilities. Credit extension within the private sector neither increases nor decreases net financial assets, since the net is zero.
I came late to this interview. It is a great exposition. It touches on the issues of kleptocracy, class war, and wealth inequality. And for that, kudos. We need more, much more, discussion of this type.
It gives a very clear rationale for why Europe is not going to solve its problems with the current crew of bankers and politicians. Ditto for this country.
I also wanted to say that I agree with crazyman’s point above.
September 27, 2011
Meh. Unfortunately the guy sounds like a goof. Would have been better if he were someone who projected more credibility. He just sounds like any other hack trader spouting predictable platitudes about the markets.
but how are we supposed to “protect ourselves”? for example, a 50-year-old with just a 401k? what can you do but sit and watch, praying for a better day?
The first rule of investing is preserve capital. The second rule is never forget rule #1.
It sounds as if you have not gotten over the memory of the markets of the 1990s and 2000s before the crash. Those are never coming back.
The place to be in deflation is in cash and high quality bonds.
September 26, 2011 | The Big Picture
Morgan Stanley Research channels our prior discussion on earnings during recessions:
“We have heard investors suggest $80 in EPS was a fair bear case for 2012. We decided to look at history as a guide in assessing the bear case EPS. The 2001 recession saw a 13% revenue decline and a 57% EPS drawdown. The 2008 recession saw a 14% revenue decline and a 51% EPS hit, peak-to-trough. For 2012, bottom-up estimates (excluding financials) embed a 5% revenue INCREASE and just over 10% year-over-year EPS growth. If prior recessions prove relevant to next year’s economy, $54 to $68 in EPS in 2012 would be a more likely range than the $112 that the bottom-up consensus estimates currently embed.”
What should SPX prices be? Depends upon how much earnings fall during the coming slow down/recession. If we get a pre-2000 recession drop of 15%, then we are priced fairly. A 2001-recession like drop of 25% means more downside. Of course, the 2008 outlier — earnings plummeted 44% during the credit crisis — well, that means a whole lot more downside work in equities . . .
The various indicators that smooth corporate results over multi-year periods (CAPE, Q, etc.) have been screaming that the S&P 500 has been consistently over-valued for over a decade now and reached over-valuation territory again in the past year.
It is quite clear that the Fed has equated achieving over-valued asset prices, including houses, equities, bonds, and commodities with being a proxy for meeting their dual mandates of managing inflation and employment during the last half of the Greenspan era and the entire Bernanke era.
I trust most TBP readers can see the faults in this analysis but more importantly p/e is really a dreadful indicator, and its a stretch to even call it that.
It’s better off being called what it is, a sentiment indicator, though I’m certainly not original in saying this, Phil Roth stated as much in an interview two decades ago, it rings more true now than it did then when you have to predict your indicator and then predict your indicators impact on the market its no wonder you are highly likely to fail in your forecast before you even state it.
Mark E Hoffer:
“…it’s better off being called what it is, a sentiment indicator…”
too bad, for them, that most (Di-)vestors, period, don’t ken that..
but, I suppose, the Wool has to come from Somewhere, right?
Winter is, afterall, coming up, no?
What should SPX prices be? Depends upon how much earnings fall during the coming slow down/recession.
Why “should” SPX prices reflect the cyclical slow down/recession lows of the earnings? Why this normative? Why would this be the “fair price”? What is “fair” supposed to mean, anyway?Or more generally, why “should” SPX prices be at x-multiple (e.g., 15) of next year’s (or so) earnings?
Hoisted from comments, this from reader barrisj. When I went to read the London Banker post in question, I too was struck by the passage barrisj singled out:
A remarkable document has been placed today on the “London Banker” blogsite, the testimony of Marriner Eccles to the Senate Finance Committee in early 1933. His testimony later was rewarded by President Roosevelt by bringing Eccles to Washington to help write or draft several seminal laws that essentially saved US capitalism from itself. In fact, “London Banker” highlighted this particular passage from Eccles’ testimony:
It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.
Where are people such as Marriner Eccles today?
I strongly recommend reading the post in full. Eccles gave a eloquent diagnosis of how the Depression became so severe and intractable, and a cogent, layperson friendly set of recommendations. I have yet to see any similar length discussion of our current crisis that is as clear and compelling.
Yes, Eccles is describing debt deflation. Whether he has the causal relationship right, I doubt. That is, it seems more likely that the credit bubble led to the income disparity and loss of purchasing power and malinvestment that he describes, rather than that income disparity led to the credit bubble.
But whatever view you take of that, he is describing debt deflation. The problem surely is that simply writing off the debt is not risk free or consequence free either. When such large amounts of money and investments are lost outright, which is what it amounts to, there will be large losers and large winners, and while the quote about the rich will get enthusiastic assent here, its not clear that the only losers are the rich. On the contrary.
yeh but the the losers have already been bailed out and paid off. Anyone who would lose on reduction of mortgage debt or even unsecured consumer debt have all been assisted by the government massively. They have already won so forcing them to write down some debt would not make them into losers it would just put them back to even because they Tarp was supposed to pay off their toxic debt, at least that was the reason sold to the public. So there should be some write downs.
F. Beard, you can’t bailout the nation equally. That’s mathematically impossible.
All savings (fiscal*) is someone else’s debt. To wipe out debt is to wipe out savings. To increase savings is to increase debt. To encourage saving is to encourage debt. To say there is too much debt is to say there is too much saving.
Most importantly the act of ‘bailing out’ savers, is identical to reinforcing existing debt (e.g. denying the ability to default).
The only way to ‘bail out everyone equally’ is to do nothing… because bailing out everyone is the act of attempting to reach the state we are already in.
Next, F.Beard, I hate to shatter your world view, but it is also impossible to decrease debt without inconveniencing savers. Decreasing debt means decreasing savings. Savers don’t want their savings to decrease, in fact, they want the opposite (I’d know, I’m a saver).
Indeed, what savers want is high interest rates and savings that produce increasing ‘income’ every year. This requires that debts have high interest rates and that ‘rent’ increases every year.
Hence, any debt reduction requires that savers be inconvenienced.
– (*Physical savings are a different beast because you can save physical things without creating debt. However, it is rare that anyone has saved significant physical wealth, and when they do most of it isn’t ‘real’ but instead another form of implicit fiscal savings [e.g. gold intended to be sold for favors in the future])
mansoor h. khan:
“All savings (fiscal*) is someone else’s debt.”
Only in the current design of the system (most money originates when a loan is issued) you are correct. But it does NOT have to be this way.
Money is really equity. Because of government sponsored deposit insurance and implicit government bailout guarantee the potential claim represented by private bank issued money on real goods and services is everybody’s obligation (all citizens of state).
Money is equity and dependent on the economic performance of the state. It’s value must be regulated for it be useful by creating more of it (in times of deflation) and destroying some (in inflationary times).
All you have to do is make a “threat to discontinue deposit insurance” and you see that money is a social contract (a relationship).
Government sponsored deposit insurance and implicit government bailout guarantee of banks make money a “public property” and not “a private property”. The bankers use public property to generate income. And that is not only thing. Their game also cause recessions and depressions.
There is not need for us to live this way!
“not clear that the only losers are the rich”?!
Pray tell, what do the poor have “left to lose” , if matters have progressed already to he point that such measures are even under discussion?
And I note the physical assets backing those written-off values, where there are such (ie buildings, inventory, stockpiled raw materials), are not destroyed, but merely re-valued – and so made available for actual use, rather than just being mothballed, in the hope that some day their value will return.
Want to get residential real estate prices back up in the USA? Then simply burn the existing stock….no? Why not?
I’m being facetious, of course; but the reasons why that’s a bad way to maintain or increase values is imho “illuminating” of the underlying principles, perhaps, and may also illustrate why un- and under-employment is a truly rotten mechanism for adjusting an economy in the face of the pressures of increased productivity brought on by the processes of automation.
Re-value the houses – don’t burn them. Re-distribute the income from automated production – don’t “burn” the employees.
Which is worse - bankers or terrorists
Prove to me that a leader can stand up and create the kind of ire against the banking community that occurred in the 1930s. No one has been able to do that.
This is why we need to start treating money as a contract, not a commodity. Recently Yves ran an article on how no native societies use money as a medium of exchange. The reason is that it is not a notional commodity, but notational trust, which only becomes necessary when society becomes to large and heterogenous to support organic relationships. Wealth has to be productively recycled on a constant basis. Storing it is like storing electricity. It can be done in small amounts, but at the societal level, has to be used as it’s generated. Otherwise we have enormous storm clouds of surplus wealth over a parched economy.
Someone is saying this. Read this book:
The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.
free pdf at http://www.thelightsinthetunnel.com
It makes *EXACTLY* this point…and argues that information technology is the most important force driving income inequality, stagnating wages and weak consumer spending.
In the future, a basic, guaranteed income will be the only way to maintain sufficient consumption to drive the economy. Read the book!!
chris says: September 25, 2011 at 6:31 am don’t they call that Social Security?
“Where are people such as Marriner Eccles today?”
I want to underline this important question.
My first approximation is that it has something to do with structural differences. The US in particular was a rising nation in the 1930s and its elite actually had something useful to do.
Things could have been more humane, but at least the elite served some function.
Now the US is a decaying empire and our elite is more parasitic, zombie rent collectors. If there is a Marriner Eccles in the elite today, they write their name with three ideograms (in Chinese).
I’m a materialist, when it comes to some things.
I suspect that the physical and medical sciences, along with the productive processes and engineering (to say nothing about the communications ) of the 2010s are so qualitatively and quantitatively different from those of the 1930s, that any “solution” (good chemistry word!) then used to address their economic problems would not be directly applicable today.
Actually, I’m now curious as to which historical antecedents the people of the 1930s considered while formulating their responses to the crises of their times – we look to the 1930s – did they look to the 1870s? or did they instead deal with the problems by using theories based and developed on and by observation?
Or did they use a “first-principles” analysis to arrive at their policies? If so, why aren’t we doing the same?
Why are we looking at the 1930s at all, when considering what course to adopt in dealing with these problems?
Human nature does not change, but I would argue we’re not even in the same communication, social, etc paradigms as 1980. After all, the first Personal computers were early 1980s, the first real networking early 1990s.
And genetic splicing, as well as climate issues really only started to emerge in the public mind the past 12 years.
These are different economic systems from ag, forestry, mining, railraods that were still dominant in the 1930s.
This is the scariest comment I have read in years. That we will put so much effort into resolving the deflation crisis, and only end up supporting the basic inequity at the heart of the crisis.
And what is the heart of the crisis? It is two basic decisions. One was to ignore the foreign trade deficits with OPEC and SEA/China (made during the Reagan era) and the other is the decision to privatize the foreign trade deficit (made by Clinton, remember?).
Foreign trade deficits must cause some sector of the economy to issue debt. Governments issuing debt have an opportunity to debate the issue and attain some form of redistributional mechanism among countries and taxpayers. Supporting the foreign trade deficit on the private sector leads to the kinds of bankster predation we have just witnessed.
What to do? Well, I believe that Keynes was more than a slave of the financial sector. His proposal to deal with foreign trade deficits (Bancor) is appealing, and certainly would have reminded the current crop of surplus countries that their wealth rests on their customers’ ability to buy what they sell.
Is anyone aware of a counterfactual study of post-war financial developments under a Bancor regime? (Of course, perhaps the Marshall plan was a version of a Bancor operation but one that was controllable by the US.)
Have I really lost it or no comment above has actually addressed:
“Eccles gave a eloquent diagnosis of how the Depression became so severe and intractable, and a cogent, layperson friendly set of recommendations. I have yet to see any similar length discussion of our current crisis that is as clear and compelling.”
Thought I had commented on that. He was right to think that what was happening was debt deflation. He was probably wrong to think that income disparities caused the credit bubble, the causation was the other way around, the credit bubble caused the income disparities. He was right to think there had to be liquidation or write off of debt. He was wrong to think, if he did, that the solution was redistribution.
Not that there is anything wrong with redistribution, its in fact the hallmark of a civilized society to engage in it. But that does not mean its the answer to debt deflation, it isn’t.
Another fine Eccles quote:
“Chairman of the Federal Reserve Board, Marriner Eccles testified before the House Banking and Currency Committee September 30, 1941. He was asked by Congressman Patman, “Mr. Eccles, how did you get the money to buy those two billions of government securities?” Eccles replied, “We created it.”
Patman asked, “out of what?” Eccles answered, “out of the right to issue credit-money.” Patman then asked, “And there is nothing behind it, is there, except our government’s credit?” Eccles responded, “That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.””
The thing to know about Patman is that he was just as well aware as Eccles where the money was coming from and was deliberately eliciting that testimony. Texas doesn’t make politicians like Patman any more :(. See his interview with Studs Terkel in Terkel’s “Hard Times”.
After checking out the Eccles testimony I found that the historical context can be pretty illuminating as to why his proposals were enacted into law so quickly and why serious proposals for financial reform noawadays seem to get nowhere. Check the date on the committee hearing: late February, 1933.Roosevelt was just a few days away from inauguration (no 20th Amendment, remember) and the Senate was just about to switch from Republican to Democratic control. Nearly half the states in the union had shut down or were shutting down their banks on the pretext of “bank holidays”(New York would do so on March 3rd, the day before FDR took office). More than a million people living mainly in rural areas were using locally-backed scrip in place of US currency. Newspaper records from that era contain a literally unending stream of strikes, riots, blockades of farm produce, hunger marches and lynchings–no MACE or tasers then, police or National Guards simply opened fire. The result? The country’s political class finally got shit-scared enough to do something. That’s what it took.
“The country’s political class finally got shit-scared enough to do something. That’s what it took”
That’s how I see it too. And I don’t see the current elites, political or financial, being all that scared or even concerned about the little people rising up.
They’ve had 100 years to perfect their mass psychology and propaganda games, and our country has become much more authoritarian which provides “protection” for the elites.
Google up “Money Facts – 169 Questions and Answers on Money – A Supplement to A Primer on Money”
This was printed by the GPO at Patman’s request as Chair of the Committee on Banking and Currency in 1964, a period during which Patman was really the most knowledgeable and reform-minded of all the members of Congress.
“”“When our Federal Government, that has the exclusive power to create money, goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… I am saying to you in all sincerity, and with all the earnestness that I possess, it is absolutely wrong for the Government to issue interest-bearing obligations. It is not only wrong: it is extravagant. It is not only extravagant, it is wasteful. It is absolutely unnecessary.”"
Did somebody say “debt-ceiling”? For the Money System Common.
“… as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.”
I read this as “it’s the consumer stupid” but is it the consumer or is it a flawed system that duped the US and subsequently the world to take a dead end road to utopia, i.e. ?
From the original pose which is at the heart of Eccles thesis.
“The problem of production has been solved, and we need no further capital accumulation for the present, which could only be utilized in further increasing our productive facilities or extending further foreign credits.”
Has the problem or production been solved? Eccles is right that we do not need further increase of productive facilities but is wrong about production.
E.F. Schumacher tackles this assumption about production in his book “Small is Beautiful” published in 1973.
“One reason for overlooking this vital fact is that we are estranged from reality and inclined to treat as valueless everything that we have not made ourselves. Even the great Dr. Marx fell into this devastating error when he formulated the so-called labor theory of value’. Now we has indeed laboured to make some of the capital which today helps us produce–a large fund of scientific, technological, and other knowledge; an elaborate physical infrastructure; innumerable types of sophisticated capital equipment, etc–but all this is but a small part of the total capital we are using.
Far larger is the capital provided by nature and not by man – and we do not even recognise it as such. This larger part is being used up at an alarming rate, and that is why it is an absurd and suicidal error to believe, and act on the belief, that problem of production has been solved.”
What is need is a paradigm shift in economics that places goods over people and nature to one that places people and nature over goods.
An emphatic Yes! The nominal value of the CDO-CDS paper is 4X global GDP — which means it can never be repaid in a world of growing population and shrinking natural resources and the exhaustion of the biosphere’s capacity to absorb and recycle our (toxic) wastes.
Prof. Charles Hall has an excellent post on the subject:
The Link Between Peak Oil and Peak Debt (Part I)
September 24, 2011 | naked capitalism
“It is not a choice between no government or bad government. It is a choice between bad government or good government.”
I doubt that there is a choice. Also Krugman’s favorite “abdication of regulatory oversight” stance is simply naive.
In 70th the USA run into serious problems and hypertrophied growth of financial sector was an answer to those problems. As manufacturing started to decline, financial capital came as a new engine of growth. That’s why it was allowed to became dominant force (and this transformation was not without the help of the government; actually it was started by a democrat — Carter). In got in trouble in late 80th, but the dissolution of the USSR prolonged this period for twenty years. Only now chickens start coming home.
As for “abdication of regulatory oversight” stance, it is simply naive as financial capitalism is incompatible with the New Deal, so the New Deal was abolished and it was abolished with full support of government. So there is no any will for regulation as long as we bet on financial capital as the engine of growth.
So this “abdication of responsibility” (aka “giveng banks a free hand”) was only logical. To scream about it as great injustice ignores the sad fact about the bet the country made.
Yes it was and is injustice, but simultaneously it was a logical development, a forced choice due to stagnation/difficulties of manufacturing which in 70th seized to be the engine of growth in view of international competition. Golden age after WWII when main competitors were in ruins ended , countries rebuilt themselves and traditional competitors (Germany and Japan) reappeared as a threats to the USA manufacturing again. Later a new competitors appeared (Korea and China). Also collapse of the USSR had given casino capitalism tremendous boot both ideologically and economically (dollarization of huge, rich region with half-billion people).
It is also important to understand that this “greed is good” smokescreen is part of the ideology of financial capitalism and as such it does not need to be true. It just needs to be useful. As long as people can be brainwashed with it, it is useful. I doubt that Friedman himself believed in this nonsense. He was just a hired gun and wanted money and nothing but money for the services. But as much of Friedman was a corrupt academician at the service of financial oligarchy, he was a talented writer who managed to contribute substantially to the polishing of this ideology and providing it with some additional punch.
In a way it is similar to classic totalitarian states were brainwashed with the particular governing ideology. Some people call this “inverted totalitarism”.
But again, as soon as finance became more profitable then manufacturing there was a writing on the wall: money start flowing to finance and casino capitalism is coming. Some people understood this in 70th. For example John K. Galbraith, Susan Strange( http://en.wikipedia.org/wiki/Susan_Strange)
So if we assume that the financial capitalism (casino capitalism) is a logical stage of development of capitalism the assessment of the situation changes. In no way better regulation is possible in those circumstances, as this means its dismounting. Such dismounting is inevitable, but probably will happen much later. As far as I can tell this stage of capitalism is still close to a zenith (which probably happened in 1991) and might last another decade or two.
In any case the truth is that the government is now first and foremost is an agency of financial capital in Washington and it is banks who dictates the rules. As senator Durbin quipped “Banks are pretty much owns the place”. This is pretty visible in Obama administration.
Hopefully it is not the last stage. It would be interesting to see what is coming after it. And it might be something much worse, not better as resource constrains now play important role in shaping the future. But I suspect that we will not live that long.
Susan the other:
I think you might be cutting us too much slack, Kiev. Actually our economic problems started immediately after WWII. Truman agonized about the recession in 1948 and wanted to get us out of Korea. Eisenhower did his best to keep us out of war. Even so our capitalism could not compete. In 1954, the rumor goes, Fort Knox was empty. We had paid out all our gold on balance of trade settlements. I don’t know how true that is, but I tend to believe it.
So what did the Washington elite do besides put commie spies to death? They threw a big party and called it the “Bankruptcy Ball.” And life went on.
No, it definitely didn’t start in the 70s. But by then we were well on our way. It is just that nobody ever knew where to.
Here is a good historical analysis of the development of finance capitalism over the last many decades.
Financialization and the expansion of debt developed in response to economic stagnation, itself best understood within the context of the contradictions of capital accumulation.Don,
Yes this is a better summary then my post with all its spelling errors. Here is a relevant quote:
Stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse.
This symbiosis had three crucial aspects:
(1) The stagnation of the underlying economy meant that capitalists were increasingly dependent on the growth of finance to preserve and enlarge their money capital.
(2) The financial superstructure of the capitalist economy could not expand entirely independently of its base in the underlying productive economy—hence the bursting of speculative bubbles was a recurrent and growing problem.15
(3) Financization, no matter how far it extended, could never overcome stagnation within production.
While “financialization has become a permanent structural necessity of the stagnation-prone economy” an important point is that financization “could never overcome the stagnation with production” and thus is a temporary (althouth long lasting) phenomena.
As “rapid increases in inequality have become built-in necessities of the monopoly-finance capital phase of the system” the future does not look too bright. Politico-economic conditions might became even more unfavorable for labor. Repressive apparatus and ideological brainwashing are too strong to mount effective resistance.
Thanks for the link!
September 22, 2011 | NYTimes.com
Taking its cues from markets in Asia and Europe, the stock market in the United States spiraled lower at the opening and never looked back. After falling more than 500 points, the Dow Jones industrial average closed down 391.01, or 3.5 percent, at 10,733.83.
Piled on top of a loss of about 2 percent on Wednesday, that represented the largest two-day percentage drop since Dec. 1, 2008. Still, it avoided hitting the bottom for 2011, reached on Aug. 10, at 10,719.94.
The Standard & Poor’s fared as bad. The 500-stock index was down 3.19 percent, or 37.20 points, at 1,129.56. During the day, the prospect of a bear market surfaced when the broader market as measured by the S.& P. approached a cumulative decline of nearly 20 percent. But it ended about 18 percent down from the high of April 29.
The Nasdaq composite was down 3.25 percent at 2,455.67.
September 22, 2011 | naked capitalism
I think professor is a little bit too simplistic. Let be take a devils advocate position:
First of all the applicability of normal distribution to the analysis of prices is not a sure thing. If this is a “new normal” then all this talk about three or four standard deviations is pseudoscientific junk that reveals compete misunderstanding of mathematics.
Second peak oil is not the product of imagination. You generally should expect prices rise “in a long run” as cost of extraction goes up and consumption in developing countries increases. The same is true for many other commodities. It seems that our professor is unaware about this important factor.
Third the behavior of many governments undermine the confidence in fiat currencies. And amount of money printed (by shadow banking system) is such that they can’t be productively invested they spill into everything: stocks, commodities, bonds, etc. That might partially explain a gold run. Speculation definitely takes place but is it a dominant force is far from clear. May be situation is not black and white: in some commodities it is a decisive force and in others it is just a factor, may be important one. Forth the confidence in dollar I think is close to all time low so it not clear to what extent converting currencies to gold is an irrational choice. It well might be a bubble, but this thing will be obvious only in retrospect. High deviation is a good heuristic suggesting bubble but this is just a heuristic. Time series are tricky things from the mathematical standpoint and excessive believe in “standard deviation” nonsense here does not help.
Also prices on some commodities did drop. For example uranium dropped after Fukushima nuclear crisis.
It’s important to note that the primary driver of the holding capacity of the planet is the cost of energy. There is an extremely strong correlation with population growth and energy costs. Other technologies have affected population growth, but again most of those are reliant on low cost forms of energy.
So consideration of a new normal due to a change in energy costs is a reasonable counterargument to this article.
Yearning to Learn:
First of all the applicability of normal distribution to the analysis of prices is not a sure thing
agreed. Mandelbrot proved that with his research (which was not economic but which explains economics exceedingly well, far better than economic research).
and also: one can easily see nonlinear changes in price based on exponentional growth and/or exponential use of resources.
however: one problem with the nonlinear growth argument is that some of these commodities are being used LESS over time, and yet price continues to go up.
Clearly, there is speculation in the commodities markets affecting price in a major way.
what most of us are unsure about is how much is due to speculation (or in this case Pension Funds/Financialization of commodities) and how much due to supply/demand and economic fundamentals.
We heard the “Peak oil” explanation for sky high oil prices a few years ago. Although I ardently believe we are near peak oil production and also believe that we will have a reduction in extractable cheap oil going forward, it still does not and did not explain $150/bb oil in the mid 2000′s. thus the crash down to $35 or so and a bounce back to $100. This volatility is not supply/demand driven.
A financial winter in commodities could hurt us all depending on who takes the losses. Pension funds taking major losses will hurt us all Also: commodity suppliers could be bankrupted and go out of business if we overcorrect, which would cause shortages, not to mention producers who may go out of business leaving nobody to refine the commodity into an end product.
in sum: it could throw us right into severe depression.
Financialization is THE weapon of mass destruction. wielded again and again, it makes locusts seem tame.
‘You don’t get 3, 4, and 5 standard deviation events. A four standard deviation price rise falls outside 99.994% of all outcomes—one in 100,000 years; a five standard deviation price rise is about one in 2 million years. That pretty much covers the time since our ancestors beat things with big sticks.’
This statement assumes that a Gaussian normal distribution applies to price changes in commodity markets. But to echo Kievite, it doesn’t.
Fat tails are an inconvenient reality. Two stock crashes occurred in the 20th century, which were multi-sigma events (not sure whether I have enough fingers to count that high). Similarly, the extraordinary price rise in commodities is a multi-sigma event.
Bell curve math can be useful for identifying bubbles, but one can’t take the ‘once in a million years’ frequency forecasts literally. Try ‘once in fifty years.’
You’d think our central planners might be interested in identifying bubbles. But Greenspan put his head up his rectum and claimed that they are only identifiable in hindsight.
Now we have Benny Bubbles, the Fed’s Greatest Fool, doing his very best to gin up a fresh bubble or three.
When you have a printing press at your disposal, bubbles are easy!
F. Beard :
But Greenspan put his head up his rectum and claimed that they are only identifiable in hindsight. Jim Haygood
Greenspan also said that bubbles were necessary for progress. He also said that legal tender laws were necessary without gold neglecting to say that they are needed with gold too in order to give it value beyond its commodity value.
Thank you for pointing out the glaringly obvious fault in this post. Had the author not gone out of his way to reference Taleb’s ‘Black Swan’ and ‘Fat Tail risk’ the author’s supreme faith in Gausian bell curves may have been excusable, but the whole point of Taleb’s book was that economists and finance types who specialize in forecasting and risk management foolishly depend on pretty but brittle models, and Gausian bell curves are the worst of the worst as far as predicting incredibly complex financial markets which are anything but rational.
Commodities may be overblown but counting standard deviations from a a flawed model constructed from a narrow and inadequate data set proves nothing.
I think you are correct about this piece being over simpilistic. The conclusions seems to be mostly drawn from technical analysis of historical data. The cost of energy plays a huge factor in the cost of producing many commodities. With increased demand and extraction costs running north of $40 per barrel for new production, using historical data as a basis for calculating standard deviations on oil prices is questionable.
In some commodities there has been extensive industry consolidation. For example, over 70% of iron ore is controlled by BHP Billiton, Rio Tinto and Vale. This group has pushed through jaw-dropping price increases with steel demand growing only about 3% per year.
Iron ore costs are the biggest drivers in a steel price that has increased 50% over 18 months. Inflated iron ore prices are not caused by speculation or major changes in supply/demand dynamics – this is simply old fashioned price fixing.
Here is a pretty good post by Professor Hamilton, who is a peak oil disciple. He focuses on fundamental decline in supply of oil as the major reason for the rise of oil price: http://www.econbrowser.com/archives/2011/08/fundamentals_sp.html
Susan the other:
One interesting thing which I cannot cite (sorry again). It might have been Gore Vidal. Anyway, toward the end of the Vietnam war we had amassed a huge pile of gold. Marcos (Sterling Seagraves histories) was our willing smelter. He put his indicia on it and that made it fungible and the Saudi princes accepted it as payment for oil. And as Vietnam wound down and we faced the fact that we had to go off the gold standard, the Saudis agreed to take dollars for oil. That caused the 1973 shock in oil prices.
F. Beard :
How much speculation on commodities or indeed on anything would be possible without loans from the government backed counterfeiting cartel, the banking system? How does anyone buy on margin without so-called “credit”? How can bubbles be blown without (money-from-thin) air?
I have been writing about excessive speculation in oil markets since 2007. In these discussions, I also like to cite this report from 2006 that I later came across.
In oil, excess “financialized” speculation took off in 2004. You can look at the year over year price trends and compare them to supply and demand or external events (wars, threats of war, hurricanes, political instability). Normal speculation should prices rise in anticipation of these and then return to baseline as their effects dissipate or fail to materialize. But from 2004 onwards to the big spike in 2008, this doesn’t happen. Instead prices increased 30%, 40%, 50% a year. There wasn’t any reason for these price rises other than excess speculation.
Excess speculation in oil tracks well with the housing bubble. That is the housing bubble was not the only bubble going.
The pattern was, however, different back then. Today oil prices generally track with the stock market. If stocks are up, oil is up, and vice versa. After the housing bubble burst in August 2007, it was the opposite. If the stock market was down, there was a flight to commodities like oil. If the stock market went up, then prices fell on oil futures. This was not a flight to safety by the way but from one speculative opportunity to another.
The setup for this kind of speculation in oil dates back to a 1993 CFTC rule change that let noncommercial traders (investment banks like Barclays, Morgan Stanley, and Goldman Sachs through its subsidiary J Aron) into the oil markets. Then in 2000 there was the Enron exception that basically allowed deregulated (i.e. opaque) over the counter futures trading. You also had built in 20 to 1 leverage with margins at 5% and you had hundreds of paper barrels of oil for every real physical barrel in the market. I mean seriously in such an environment what would have been shocking is if there wasn’t massive financialized speculation going on.
Despite this there are still a lot of market traditionalists who say it must be supply and demand. This is really more of a religious point of view because there really isn’t any evidence to back it up. The same is true of peak oil. Peak oil will at some point have an enormous effect on price. It just hasn’t had one so far. This is because the peak has a flattened top to it, in part because you can bring future production forward although this should steepen the rate of decline of production in the future.
Current conditions remind me a lot of the period between the housing bubble burst in August 2007 and the meltdown in 2008 with us being closer to the latter than the former. Another crash will kill off oil speculation because crashes tend to do that across the board, both to cover losses and to seek safer havens.
September 22, 2011 | The Big Picture
Asked differently, is the Bernanke Put now dead . . . ?
Hell no, it’s just too early. My guess is November, 2011. It’s far enough off for the markets to fall and hit a congestion level. I’m thinking S&P 900ish or lower. It’s far enough to the end of the year to accomplish window dressing and make Q4 look like an improvement. QE3, Nov 2011, $1T.
Also, Bernanke has built a career on money printing, trickle down economics, asset inflation, and wall street appeasement. He won’t declare his life’s work to be a wasted effort and a mistake by holding back on a big one. Japan has survived an explosion of money printing. So will the US.
I must say, I am impressed by the decline/rout following the Fed statement yesterday, and today’s rather muted (non-existent) follow-through. My guess is that some “artificial” mechanism is providing a veneer of fake prices, and that if any significant volume emerges, it would vanish in a digital heartbeat.
Wile E. Coyote is doing a splendid job of not looking down, as he walks across the air between the cliffs.
The Ben Put has continued the Financialization of commodities which has retarded growth except for international money flows and traders. The continuing run up of oil and just about anything that has a futures market has finally shown a spot light on central bank policies that benefits the few and penalizes main street. The decision to buy MBS paper is a clear sign that another major leg down in housing is upon us with the combination of super low interest rates and FHA low down payment loans meant to spike up comps hoping to extract a few extra dollars for the MBS investors.
The Ben Put continues to believe that financialization of a market in this case American housing is justified as another wave of foreclosed property will be hitting next Spring and Summer.
Way too much of a US centric focus here.
Two major situations became clear this week:
The end game is near in Europe. The contagion leap-frogged Spain and went straight to Italy. And the bank runs have clearly begun.
And China didn’t quite manage to ramp up its internal demand in time to make up for the crash in European and US demand. And now their own central government is admitting that the local governments are not following the “command” of the central bank. They’ve gone rogue with their own lending to keep local demand pumped. That can’t end well.
And the Fed, the Treasury, and the US congress can’t do squat about those problems.
Oh, the carnage of it all. People’s 401K “retirement” plans taking a good beating/thrashing/pummeling/shellacking. I wonder who has the cash to buy the Dow when it stops dropping. Oh, yeah — the top 1%.
This would be great fun if it was only numbers.
As just about everyone knows, Bernanke’s primary field of academic interest was the cause of the Great Depression, his conscious or unconscious raison d’é-tat being the prevention of another depression. He imagines quantitative easing to be one of his most effective tools, and he will continue to use it until they pry it from his cold dead hands.
The result will be the same pattern we’ve had for the last eleven years. Lots of cyclical Sturm und Drang in stocks, but no sustainable gains in the foreseeable future.
Unemployment will certainly get back to 10% as the “wealth-effect ” losses trigger more belt -tightening , and our misguided policies make things more and more dire
Expect the DJIA to fall to 8000 as a symptom along with 10-year yields staying below 2% for months and months with the 2-10 curve below 175 …… after August awful foreclosure news , we can expect at least another 1,000,000 more foreclosures and 1,000,000+ more job losses
September 21, 2011 | naked capitalism
I am not sure entirely what M. Auerbach’s full line of argumentation consists of in pointing out that a quantity as a target does not tell us what result in interest rates or employment they are attempting, or any other result. That is the main point you highlight and it certainly makes sense. What ever results are anticipated, it is my hope that repairing the economy by allowing lending to increase for business expansion, and thereby job creation is the goal. Only if you assume that the economy is a mechanism of market activity, and will rationally respond to the incentive to borrow in order to buy a house, refi a mortgage or other loan or take out new debt for a car, etc., in addition to hoped for business expansion on the supply side of the universe.
Increased demand as well as more job creation from new enterprise or expansion should result from these incentives of loose fed policies.
But there is a variable to the equation that Speaker of the House Boehner enunciated out loud. Apparently the stimulus response mechanism model does not work in the face of organized political opposition in the form of Capital On Strike. If job creators do not want to re invest their own surplus cash, why would they want to go into debt? Even at low rates, even with other peoples money, when they have no intention of expansion, creating jobs, and thereby making Obama and the Democrats look good enough to re elect.
From the text of Boehner’s speech 9/15/2011 at the Economic Club of Wash DC: “I can tell you the American people — private-sector job creators in particular — are rattled by what they’ve seen out of this town over the last few years.
“My worry is that for American job creators, all the uncertainty is turning to fear that this toxic environment for job creation is a permanent state.
“Job creators in America are essentially on strike.”
From the Huff Post article, Prof McElvaine reminds us that FDR made exactly the same claim, but from the point of view that the his policies were under attack by the capital strike. The chances of economic recovery are thwarted by the organized political opposition, blunting the business ass usual response. If Bernanke is such a Depression Era scholar, he must be aware of the political dimension of policy implementation. Policy, is the intersection of raw power in politics with business interests. Decisions are made with a different calculus, and targeting a quantity, without stating a policy goal, is sound and maybe not fury, but still, signifying nothing.
In the 2000 edition of its International Energy Outlook, the Energy Information Administration (EIA) of the US Department of Energy confidently foresaw ever-expanding oil production in Africa, Alaska, the Persian Gulf area, and the Gulf of Mexico, among other areas. It predicted, in fact, that world oil output would reach 97 million barrels per day in 2010 and a staggering 115 million barrels in 2020. EIA number-crunchers concluded as well that oil would long retain its position as the world's leading source of energy. Its 38% share of the global energy supply, they said, would remain unchanged.
What a difference a decade makes. By 2010, a new understanding about the natural limits of oil production had sunk in at the EIA and its experts were predicting a disappointingly modest petroleum future.
In that year, world oil output had reached just 82 million barrels per day, a stunning 15 million less than expected. Moreover, in the 2010 edition of its International Energy Outlook, the EIA was now projecting 2020 output at 85 million barrels per day, hardly more than the 2010 level and 30 million barrels below its projections of just a decade earlier, which were relegated to the dustbin of history. (Such projections, by the way, are for conventional, liquid petroleum and exclude "tough" and "dirty" sources that imply energy desperation - like Canadian tar sands, shale oil, and other "unconventional" fuels.)
The most recent EIA projections also show oil's share of the world total energy supply - far from remaining constant at 38% - had already dropped to 35% in 2010 and was projected to continue declining to 32% in 2020 and 30% in 2035. In its place, natural gas and renewable sources of energy are expected to assume ever more prominent roles.
So here's the question all of us should consider, in part because until now no one has: are the decline of the United States and the decline of oil connected? Careful analysis suggests that there are good reasons to believe they are.
From standard oil to the Carter Doctrine
More than 100 years ago, America's first great economic expansion abroad was spearheaded by its giant oil companies, notably John D Rockefeller's Standard Oil Company - a saga told with great panache in Daniel Yergin's classic book The Prize. These companies established powerful beachheads in Mexico and Venezuela, and later in parts of Asia, North Africa, and of course the Middle East. As they became ever more dependent on the extraction of oil in distant lands, American foreign policy began to be reorganized around acquiring and protecting US oil concessions in major producing areas.
With World War II and the Cold War, oil and US national security became thoroughly intertwined. After all, the United States had prevailed over the Axis powers in significant part because it possessed vast reserves of domestic petroleum while Germany and Japan lacked them, depriving their forces of vital fuel supplies in the final years of the war. As it happened, though, the United States was using up its domestic reserves so rapidly that, even before World War II was over, Washington turned its attention to finding new overseas sources of crude that could be brought under American control. As a result, Saudi Arabia, Kuwait, and a host of other Middle Eastern producers would become key US oil suppliers under American military protection.
There can be little question that, for a time, American domination of world oil production would prove a potent source of economic and military power. After World War II, an abundance of cheap US oil spurred the development of vast new industries, including civilian air travel, highway construction, a flood of suburban housing and commerce, mechanized agriculture, and plastics.
Abundant oil also underlay the global expansion of the country's military power, as the Pentagon garrisoned the world while becoming one of the planet's great oil guzzlers. Its global dominion came to rest on an ever-expanding array of oil-powered ships, planes, tanks, and missiles. As long as the Middle East - and especially Saudi Arabia - served essentially as an American gas station and oil remained a cheap commodity, all this was relatively painless.
In addition, thanks to its control of Middle Eastern oil, Washington had its hand on the economic jugular of Europe and Japan, both of which remain highly dependent on imports from the region. Not surprisingly, then, one president after another insisted Washington would not permit any rival to challenge American control of that oil jugular - a principle enshrined in the Carter Doctrine of January 1980, which stated that the United States would go to war if any hostile power threatened the flow of Persian Gulf oil.
The use of military force, in accordance with that doctrine, has been a staple of American foreign policy since 1987, when President Ronald Reagan first applied the "principle" by authorizing US warships to escort Kuwaiti tankers during the Iran-Iraq War. George H W Bush invoked the same principle when he authorized American military intervention during the first Gulf War of 1990-1991, as did Bill Clinton when he ordered missile attacks on Iraq in the late 1990s and George W Bush when he launched the invasion of Iraq in 2003.
At that moment, the United States and oil seemed at the pinnacle of their power. As the victor in the Cold War and then the first Gulf War, the American military was ranked supreme, with no conceivable challenger on the horizon. And nowhere were there more fervent believers in "unilateralist" America's ability to "shock and awe" the planet than in Washington.
The nation's economy still appeared relatively robust as a major housing bubble was just beginning to form. China's economy was then a paltry 15% as big as ours. Only seven years later, it would be approximately 40% as large. By invading Iraq, secretary of defense Donald Rumsfeld planned to demonstrate the crushing superiority of America's new high-tech weaponry, while setting the stage for further military exploits in the region, including a possible attack on Iran. (A neo-con quip caught the mood of the moment: "Everyone wants to go to Baghdad. Real men want to go to Tehran.")
The future of oil seemed no less robust in 2003: demand was brisk, crude prices ranged from about $25 to $30 per barrel, and the concept of "peak oil" - the notion that planetary supplies were
more limited than imagined, that in the near future production would reach its peak and subsequently contract - was still considered laughable by most industry experts. By invading Iraq and setting up permanent military bases at the very heart of the global oil heartlands, the White House expected to ensure continued control over the flow of Persian Gulf oil and gain access to Iraq's voluminous reserves, the largest in the world after those of Saudi Arabia and Iran.
From an imperial point of view, it was a beautiful dream from which Americans were destined to awaken abruptly. As a start, it quickly became apparent that American technological prowess was no panacea for urban guerrilla warfare, and so a vast occupation army was soon needed to "pacify" Iraq - and then pacify it again, and again, and again. A similar dilemma arose in Afghanistan, where a tribal-based religious insurgency proved remarkably immune to superior American firepower.
To sustain hundreds of thousands of American soldiers in those distant, often inaccessible areas, the Department of Defense became the world's single biggest consumer of oil, burning more on a daily basis than the entire nation of Sweden - this, at a time when the price of crude rose to $50, then $80, and finally soared over the $100 mark.
Procuring and delivering ever-increasing amounts of gasoline, diesel, and jet fuel to American forces in Iraq and Afghanistan may not be the principal reason for the wars' spiraling costs, but it certainly ranks among the major causes. (Just the price of providing air conditioning to American troops in those two countries is now estimated at approximately $20 billion a year.)
With oil likely to prove increasingly scarce and costly, the Department of Defense is being forced to reexamine its fundamental operating principles when it comes to energy. Secretary of defense Rumsfeld's notion that troops could be replaced by growing numbers of oil-powered super-weapons no longer appears viable, even for a power already garrisoning much of the planet for which "unending" war has become the new norm.
Yes, the Pentagon is looking into the use of biofuels, solar arrays, and other green alternatives to petroleum to power its planes and tanks, but any such future still seems an almost inconceivably long way off. And yet the thought of more wars involving the commitment of vast numbers of ground troops to protracted counterinsurgency operations in distant parts of the Greater Middle East at $400 or more for every gallon of gas used appears increasingly unpalatable for the globe's former "sole superpower." (Hence, the sudden burst of enthusiasm over drone wars.) Seen from this perspective, the decline of America and the decline of oil appear closely connected indeed.
Don't bet on Washington
And this is hardly the only apparent connection. Because the American economy is so closely tied to oil, it is especially vulnerable to oil's growing scarcity, price volatility, and the relative paucity of its suppliers. Consider this: at present, the United States obtains about 40% of its total energy supply from oil, far more than any other major economic power. This means that when prices rise or oil supplies are disrupted for any reason -- hurricanes in the Gulf of Mexico, war in the Middle East, environmental disasters of any sort - the economy is at particular risk.
While a burst housing bubble and financial shenanigans lay behind the Great Recession that began in 2008, it's worth remembering that it also coincided with the beginning of a stratospheric rise in oil prices. As anyone who has pulled into a gas station knows, at an average price of nearly $3.70 a gallon for regular gas, the staying power of high-priced oil has crippled what, until recently, was being called a "weak recovery".
Despite the great debt debate in Washington, oil is a factor seldom mentioned when American indebtedness comes up. And yet the United States imports 50% to 60% of its oil supply, and with prices averaging at least $80 to $90 per barrel, we're sending approximately $1 billion every day to foreign oil providers. These payments constitute the single biggest contribution to the country's balance-of-payments deficit and so is a major source of the nation's economic weakness.
Consider for comparison our leading economic rival: China. That country relies on oil for only about 20% of its total energy supply, about half as much as we do. Instead, the Chinese have turned to coal, which they possess in great abundance and can produce at a relatively low cost. (China, of course, pays a heavy environmental price for its coal dependency.)
The Chinese do import some petroleum, but considerably less than the US, so their import expenses are considerably smaller. Nor do its oil-import costs have the same enfeebling effect, since China enjoys a positive balance of trade (in part, at America's expense). As a result, when oil prices soared to record heights in 2008 and again in 2011, Beijing experienced none of the trauma felt in Washington.
No doubt many factors explain the startling rise of the Chinese economy, including lower costs of production and weaker environmental regulations. It is hard, however, to avoid the conclusion that our greater reliance on oil as it begins its decline has played a significant role in the changing balance of economic power between the two countries.
All this leads to a critical question: How should America respond to these developments in the years ahead?
As a start, there can be no question that the United States needs to move quickly to reduce its reliance on oil and increase the availability of other energy sources, especially renewable ones that pose no threat to the environment. This is not merely a matter of reducing our reliance on imported oil, as some have suggested. As long as oil remains our preeminent source of energy, we will be painfully vulnerable to the vicissitudes of the global oil market, wherever problems may arise.
Only by embracing forms of energy immune to international disruption and capable of promoting investment at home can the foundations be laid for future economic progress. Of course, this is easy enough to write, but with Washington in the grip of near-total political paralysis, it appears that continuing American decline, possibly of a precipitous sort, could be in the cards.
And don't think that China will get away scot-free either. If it doesn't quickly embrace the new energy technologies, the environmental costs of its excessive reliance on coal will, sooner or later, cripple its development as well. Unlike Washington, however, the Chinese leadership not only recognizes this, but is acting on it by making colossal investments in green energy technologies.
If China succeeds in dominating this field - as has already begun to happen - it could leave the United States in the dust when it comes to economic growth. Ditching oil for the new energy technologies should be America's top economic priority, but if you're in a betting mood, you probably shouldn't put your money on Washington.
Michael T Klare is a professor of peace and world security studies at Hampshire College, a TomDispatch regular, and the author, most recently, of Rising Powers, Shrinking Planet. A documentary movie version of his previous book, Blood and Oil, is available from the Media Education Foundation.
Expat:It’s propaganda, pure and simple. Why do we think propaganda is something done only by Goebbels or the Soviets? Americans are fed lies and distorted truths from their first days in kindergarten. Tales of Paul Revere’s ride, the Pilgrims, and the treatment of Native Americans.
How about the noble and decent American soldiers of WWII? German troops were terrified of being slaughtered by the Airborne. The myth that Japanese fought to the death or committed suicide for cultural reasons is also partly a lie; US Marines simply did not take Japanese prisoners as a rule. In fact, the situation was so bad that the US high command offered soldiers extra leave if they would bring in prisoners.So, the bank stress tests are just more bullshit from the boys in Washington and on Wall Street. Classify it along with “Just Say No”, Abstinence Only Teaching, Color-Coded Terrorists Alerts, Horatio Alger, Truth, Justice, and the American Way.
I would love to see one, just one, mainstream media outlet call bullshit on these things. Could you imagine a WSJ front page saying “Wall Street Stress Tests are Lies and Propaganda”? No, neither could I.It’s time to remove every single politician and CEO in this country from power. Send them to Gitmo, Helmsland, or Iowa…anywhere unpleasant. Let’s start again.
The American propaganda machine is so slick and pervasive it makes the Soviet and Nazi methods crude in comparison. I personally think a lot of what’s on TV (cop shows) and movies MIGHT be all linked to some Pentagon black budget somewhere, and it’s been going on for years. The MSM is most definitely been corrupted by the feds, and that’s been known for decades.
It’s not what they tell you, it’s what they leave out.
Because they really genuinely think that this economy is a perception problem. They think if people just think that we are okay, they will return to spending 110% of their income. Remember when Phil Gramm slipped and told what (he thought) was the truth – that the recession was “mental” and America was “a nation of whiners”?
Well, since the same folks are STILL running the show, and nothing has changed, and they are still dedicated to getting things back to early 2007, why not do some fake stress tests?
However, I may simply not have been up to the task of making it accessible. Our Andrew Dittmer (a Harvard Phd in mathematics who among other things, has taught group theory to seventh graders) has converted the paper into Layspeak:The May 2011 Bank of International Settlements paper by Claudio Borio and Piti
Disyatat is quite important It suffers, however, from one defect: it is not written in English, but in economese. I have therefore taken the liberty of poetically translating it into our language (and adding occasional remarks here and there). All numbers below are references to page numbers in the original paper.
* * * * *
The global financial crisis led to widespread dislocations and misery. However, another set of victims, hitherto overlooked, were central banking authorities and professors of economics who had staked their names on the thesis that the current configuration of the global financial system (which they had helped to engineer) was generally wonderful. These unfortunate souls were forced to come up with an explanation for the crisis on short notice, and it had to be an explanation in which they themselves played no role.
Ben Bernanke et al. rose brilliantly to the challenge. They remembered that many Asian countries had stocked up on foreign currency reserves in the hopes of never again being at the mercy of the IMF (26, note). Obviously, trying to resist the IMF was wrong and deserved criticism. Moreover, saying bad things about the Chinese would inevitably be welcomed in foreign policy circles eager to talk about the coming “bipolar confrontation” between America and China.
This “savings glut” theory argued that savings by Asian (and Middle Eastern) countries had washed like a tidal wave onto US financial markets, effectively forcing US money managers to invest imprudently in the course of their attempts to cope. For instance, these “excess savings” were widely assumed to have reduced long-term interest rates, thereby making credit cheaper.
There were some obvious problems with the global imbalances theory. Before the crisis exploded, many of the same economists had pointed to the same imbalances as a happy coincidence of needs, leading to better results for all (23). According to the sort of economic theory that was used in these explanations, if “global imbalances” were causing long-term interest rates to fall, that was simply a natural market outcome that should be contributing to equilibrium (23).
Consistency is the hobgoblin of little minds, and the “excess savings” theory was duly welcomed. It was even paid the supreme compliment of being accepted by Goldman Sachs’ lobbying division (see Effective Regulation, part 1, page 1).
Despite the consensus of these eminent authorities, we have decided to take a second look at the theory. Unfortunately, we have found further problems.
The idea of “national savings” or “current account surplus” refers to the total amount of exports sold minus the total amount of imports sold (more or less). The “excess savings” theory holds that this excess had to have been financed somehow, and so presumably by countries in surplus, like China.
However, for the US in 2010, the total amount of financial flows into the US was at least 60 times the current account deficit (9), counting only securities transactions. If this number were correct, then inflows would be 61 times the current account deficit, and outflows would be 60 times the current account deficit. The current account deficit is a drop in the bucket. Why would anyone assume it had anything to do with the picture at all?
Moreover, if the “savings glut” theory was correct, we would expect there to be certain historical correlations between the following variables: (a) current account deficits of the US, (b) US and world long-term interest rates, (c) value of the US dollar, (d) the global savings rate, (e) world GDP. There aren’t (4-6, see graphs).
You would also expect credit crises to occur mainly in countries with current account deficits. They don’t (6).
Suppose we look at a more reasonable variables: gross capital flows (13-14). What do we learn about the causes of the crisis?
Financial flows exploded from 1998 to 2007, expanding by a factor of four RELATIVE to world GDP (13), and then fell by 75% in 2008 (15). The most important source of financial flows was Europe, dwarfing the contributions of Asia and the Middle East (15). The bulk of inflows originated in the private sector (15).
If we look instead at foreign holdings of US securities (15-16), Europe is still dominant, but China and Japan are a little more prominent due to their large accumulations of foreign exchange reserves (15). Still, the Caribbean financial centers alone account for roughly the same proportion as either China or Japan (16). Other statistics provide a similar picture (17-19).
So what caused the crisis? Clearly, the shadow banking system (mainly based around US and European financial institutions) succeeding in generating huge amounts of leverage and financing all by itself (24, 28). Banks can expand credit independently of their reserve requirements (30) – the central bank’s role is limited to setting short-term interest rates (30). European banks deliberately levered themselves up so they could take advantage of opportunities to use ABS in strategies (11), many of which were ultimately aimed at looting these same banks for the benefit of bank employees. These activities pushed long-term interest rates down. Short-term rates remained low because the Fed didn’t raise them as long as inflation didn’t appear to be an issue (25, 27).
The Asian countries played a small role as well. They didn’t want US/European-driven asset price inflation to spill over into distortions in their economies, and so they protected themselves by accumulating foreign exchange reserves (26 and 26 note). That was mean of them. If they had allowed more spillover, then the costs of the shadow banking system would have been partly borne by them, and that would have made the credit crisis less severe in the advanced countries (26). As things stand, instead, the advanced countries are suffering, while Asian countries have bounced back strongly (26).
What should we do? Well, we have suggestions for theory and practice. Let’s start with the practical suggestions.
Countries should do a better job of restraining their financial sectors (24). However, that will probably not be enough (24). Countries should also work together to share the burden of consequences of further crises (27). Unfortunately, countries are irrational and political and so are often unwilling to cooperate in ways we consider wise (27).
Since we can’t count on other countries doing the right thing, we will have to count on the Fed instead. If there is another boom in asset prices, the Fed should cool it off by raising interest rates and so inducing deflation in the rest of the economy. The balance of views in the international community has been shifting in this direction (27).
As for the theory, maybe you are wondering what was wrong with economics that led people to believe in the “savings glut” theory. We have a few ideas.
First, most present day macroeconomic analysis proceeds by imagining that people only trade physical objects with each other. They don’t use money, and they certainly don’t make loans or go bankrupt. Even though the people that make these analyses know that in the real world money and loans and bankruptcy DO exist, they think that is useful to pretend that they don’t and then arrive at authoritative conclusions. We would like to beg them humbly to reconsider this blind spot (2, 12, 21, 27-31).
Second, current analyses of interest rates make a distinction between the “market” interest rate and the “natural” interest rate. The distinction between these two rates is very subtle, so we’ll explain it carefully.
The “market” interest rate refers to the interest rates people pay on various kinds of loans. The “natural” interest rates is an unobservable variable that is equal to whatever economists decide the interest rate really ought to be for the purpose of some model. Usually, this imaginary interest rate is calculated in such a way that whatever the Fed and banks and hedge funds do, it can never change. It only depends on what physical goods are bought and sold in the economy (1-2, 20-23, 29).
In the past, economists have decided to use the imaginary interest rate instead of the actual interest rate. We don’t want to be disrespectful, but is there any chance they might be willing to change their minds?
Since I can’t read poetic economese, but can guess, the shorter version is:
A) Euro and American banks created huge piles of money out of whole cloth.
This was meant to transfer the benefits of those funds to employees (I’m guessing the ones who already had access to good compensation).
B) Asian countries saw this, and held onto some of that spun money to protect themselves when the rest disappeared like fairy gold with the morning sun. Since they saved that money, they can now safely use it to recover.
To stop this from happening again:
1. Don’t let banks and bank employees loot the world economy.
2. Hope that the fed will step in to slap down the next attempt at global fraud.
3. Economists (private and public) need to let their theories get applied as opposed to locked away in pristine settings that have little to do with the real world.
What? Imaginary numbers? (Well, it worked for the mathematicians, and economists are pseudo-mathematicians, so . . . .)
Caribbean shadow pools exceeded Chinese capital? Quick, get the Bank of Sweden Prize[Fools] on the line!: It’s just a geography problem, the formulas can be salvaged!! Seriously, find a macroeconomist who had that figured in accurately, and you’ve got the next Prize Fool tipped.
The decision by Euro-American monetary and securities authorities in the last twenty years to allow any old speculator with a modem and a silly piece of paper to go into business as a bank, completely unregulated, leveraged 30x or more, was the most immoderate act of folly in modern (post-1600) history. Well, ‘bank;’ these were called funds, or ‘investment firms,’ or any old name, but using an asset base of securities (not backstopped by any lender of last resort) they were permitted to ‘lend’ into the capital markets effectively like banks. Creating ‘money.’ Not a few of them were much larger than the financial powers of the smaller sovereign governments. Since they didn’t actually own anything but shelves of derivatives and various government and corporate bonds, they weren’t ‘productive’ [got that right], and weren’t actors who registered in real economic models [real, as in 'reality' TV]. And those unregulated, unconstrained, unproductive actors _completely swamped any actual economic production_ as far as their financial impact, and continue to do so. To the utter detriment of any actual economic activity.
The world’s economic activity is quite capable of becoming unstable or systemically constrained without these ‘shady banks,’ but the non-bank banks have been an uncontained cancer by themselves. Once they’ve killed the economy, they’ll kill the money, and then, maybe, finally kill each other off. Unless we just cut to the endgame first. Unregulated money-issuers have no purpose or right to exist, and they are an uncontrolled threat to everybody not profiting from them as of now.
“It’s more complex then that. Conversion to “casino capitalism” is the natural logic of development of capitalism.”
You’ve got things turned around and convoluted horribly.
So-called “casino capitalism” wasn’t a natural development of any kind; securitization in share form (mortgage pool certificates, etc.) occurred in the 1920s leading up to the Great Crash, and was ended in 1933.
Securitization this time around, in bond form, has yet to be ended, only more institutionalized, unfortunately, and was brought about by a most concerted effort by JPMorgan Chase, the Group of Thirty, the Wall Street Investment houses (Derivatives Policy Group in the late ’90s to “lobby” — i.e., to legally bribe) along with the Private Securities Litigation Reform Act of 1996, the Gramm-Leach-Bliley Act of 1999, and the Commodity Futures Modernization Act of 2000, coupled with that most convenient bankruptcy act against the lower two-thirds — just before the meltdown — and the Depository Institutions Deregulation and Monetary Control Act of 1980 (to kill all federal usury laws), the pattern was most definite, and nothing natural about it at all…..
- Try to understand the meaning of French proverb ““Appetite comes with eating” and how it is applicable to banks.
- Read the book Casino Capitalism by Susan Strange
- Get the vote record of Commodity Futures Modernization Act of 2000
“Well, ‘bank;’ these were called funds, or ‘investment firms,’ or any old name, but using an asset base of securities (not backstopped by any lender of last resort) they were permitted to ‘lend’ into the capital markets effectively like banks. Creating ‘money.’ ”
After the 2008 crash, I started reading about things economic and financial to try to find an answer to my simple question, “Where did all the money go.” I was quite naive but it was pretty clear to me that it wasn’t like a poker game where the money was shifted from one (or many) to another. Seemed that most of it, that had been reflected in stock prices and home values had just evaporated.
My reading included Econned and led me to this blog which I have followed since. Now I think I know a bit more than I did in 2008. Richard’s paragraph, that includes the sentence above, seems to be one of the most succinct answers to my question that I have seen.
super article. translation from economese should be standard equipment on academic publications. “… the Fed is the biggest single source of funding for academic research…”; 3rd paragraph. this factoid is news to me. do you mean all research, or only economic? do you have the source of this readily at hand?
I think she means Macroeconomic research, which is probably the case. Some of the Fed Banks (Minneapolis in particular, but St Louis not far behind) are little more than propaganda mills for right-wing macroeconomics.
I’ve been told the Fed funds a full 1/4 of all grad school econ research. I can’t confirm that but it was from a credible source.
“Since we can’t count on other countries doing the right thing, we will have to count on the Fed instead. If there is another boom in asset prices, the Fed should cool it off by raising interest rates and so inducing deflation in the rest of the economy. The balance of views in the international community has been shifting in this direction (27).”
I thought “taking away the punch bowl” was a fundamental function of the Fed already.
From mid-2004 to mid-2006, the dynamic duo of Greenspan and Bernanke tried the ‘hide the punchbowl’ routine, taking the Fed Funds rate from 1.00% to 5.25% (a record percentage increase) in thirteen quarter-point baby steps. By the time they finished, the US housing market had begun to crumble, and financial markets followed a year later.
Greenspan’s baby steps were a mistake, I’d say. If you’re gonna hike, hike big. Take it up a point, monitor the response, then take it up another point if need be. Don’t baby the banksters — they’re big boys.
This Wednesday afternoon, the mirror image of ‘hide the punchbowl’ will be on display. With Fed Funds pegged at zero for ‘the functional equivalent of forever,’ young Bennie is going to try to assert his bald-pated sway over the entire yield curve.
Mumbling academics told him this will affect ‘expectations.’ Quite the opposite of his intention, my expectation is that what Banzai Bennie will likely achieve in practice is to definitively break the back of the 30-year secular bull market in bonds.
Seeking to suppress near-invisible long rates, at a time when the money-supply M’s are mushrooming higher, is exactly the sort of sophomoric goofball stunt that one would expect from a bunch of purblind PhDs who wear Hush Puppy loafers cuz they don’t know how to tie shoelaces.
Watch Operation Twist blow up in their fool faces, like Wile E. Coyote touching off a box of Acme explosives in a Roadrunner cartoon.
Amid all the market volatility and weakness in the financial sector of late, you may have missed this WSJ front page story: "States Go After Big Bank on Forex".
The story is about growing scandal in the banking industry centered around banks allegedly overcharging pension funds for currency transactions.
"Attorneys general in Virginia and Florida filed civil suits against BNY Mellon alleging that the bank cheated pension funds in those states by choosing improper prices for currency trades the bank processed for the funds," The WSJ reports. "The Virginia lawsuit, filed in a Fairfax, Va., state court, cites internal bank emails allegedly showing that senior bank officials knew about, and endorsed, a currency-trading method that hurt state pensioners."
In addition to Virginia and Florida, California and Tennessee are also suing BNY Mellon and State Street Corp. over the alleged fraud.
The man who uncovered the alleged scam, Harry Markopolos, expects all 50 states to eventually join the suit. If the name sounds familiar that's because Markopolos was a whistleblower on the Madoff Ponzi scheme, only to have his claims ignored by the SEC for the better par of a decade. (See: Harry Markopolos Says Big Banks Worse Than Madoff)
In this case, Markopolos says BNY Mellon and State Street we're taking about "three tenths of a percent from every forex transaction for pension funds" by back-timing the trade to benefit banks at the detriment of their pension fund clients. "It's almost the exact same scheme as the market timing scandals of 2003," he claims.
When and if these cases go to trial is unknown, but Markopolos sure hopes to avoid a settlement. "I want to see them admit guilt," he tells Aaron Task in the accompanying interview. "If [banks] settle it feel like justice denied because they also will settle without admitting or denying guilt. That's just too easy. "
WE all need to get our heads out of the sand and take these corporate renagades down a peg. EVERY state needs corporate law with teeth. NO more getting your corporate charter or LLC renewed if you screw with the public. Being INC or LLC is not right but a privilege. Ban these sociopaths...
Wall Street is all about fleecing main street. There is all that wealth in pension funds and they got to take that. It's a zero sum game. They take it all and your assets add up to zero.
The economy has been fixed, in much the same way the mob fixes a fight, or other sporting event for their bookies. Heads they win, tails you lose.
Matt Taibbi: The $2 Billion UBS Incident: ‘Rogue Trader’ My Ass (Rolling Stone)
They’re not “rogue” for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys “rogue traders” when they make a billion dollars gambling. The only thing that differentiates a “rogue” trader like Barings villain Nick Leeson from a Lloyd Blankfein, Dick Fuld, John Thain, or someone like AIG’s Joe Cassano, is that those other guys are more senior and their lunatic, catastrophic decisions were authorized (and yes, I know that Cassano wasn’t an investment banker, technically – but he was in financial services).
In the financial press you’re called a “rogue trader” if you’re some overperspired 28 year-old newbie who bypasses internal audits and quality control to make a disastrous trade that could sink the company. But if you’re a well-groomed 60 year-old CEO who uses his authority to ignore quality control and internal audits in order to make disastrous trades that could sink the company, you get a bailout, a bonus, and heroic treatment in an Andrew Ross Sorkin book. In other words, “rogue traders” are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts.
We're not sure if there actually ever was a plot for Nouriel Roubini to lose. In case you haven't noticed yet, he's a fairly typical Keynesian establishment figure. In spite of having been one of the few mainstream economists who correctly predicted that the housing bubble would end in tears, he is otherwise never straying very far from the officially accepted economic orthodoxy. As an aside, that was not really a particularly difficult prediction to make. However, the vast bulk of mainstream economists didn't make it, so it is a bit like the story about the egg of Columbus – because so few mainstream economists saw the trouble coming that should have been obvious to anyone with eyes, ears and an abacus (ten fingers would have done in a pinch), Dr. Roubini's timely pre-2008 calamity pronouncements of doom have become his rightful claim to fame.
Ever since, he has become the 'officially allowed to keep us all in a permanent state of fear' economist. 'Officially' allowed because he is not averse to recommending Keynesian 'cures' buttressed by Keynesian analysis. In short he's by and large not much different from the typical establishment quack, albeit a more colorful and at times more original figure. Note that he once worked as a courtier economist for the Federal Reserve – in the department where the rest of the professional apologists for the fiat money system are cooped up and earning way above market wage rates that are deviously extracted from all holders of dollars via the Fed's inflationary policies (he also worked for the IMF, the World Bank, the Bank of Israel, the Council of Economic Advisors and the treasury department, while also teaching at Yale; in short, his vita betrays that he is in fact the quintessential establishment figure).
In that sense, we do actually have great respect for Roubini's decision to abscond and become independent – contrary to his former colleagues, he actually does now earn what the market will pay him.
Alas, although he seems to be eager to court controversy from time to time in order to remain newsworthy, he has not mended his Keynesian ways. Also, the accuracy of his predictions has become somewhat more erratic. For instance, he's been warning people off gold for at least the last $800 of its advance (no surprise there – as far as we know not a single contemporary Keynesian actually understands gold).
However, his forecasting prowess is not really our beef with him. We know all too well that the forecasting business is hazardous – although it is often fairly easy to recognize which outcomes fundamental developments should lead to, it is usually quite difficult to accurately predict the temporal leads and lags involved, not to mention the occurrence of 'left-of-field' developments, better known as 'black swans' these days.
Our beef with Roubini is that he sometimes loudly proclaims nonsense that really makes our hair stand up. Such as when he once argued that a 'gold standard would lead to economic instability' which the fiat money system ostensibly 'prevents, because it affords the central bank the opportunity to intervene' (paraphrasing).
Well, harrumph. For someone who saw the mortgage credit crisis coming this is a remarkably naive and shallow analysis, but we suppose Roubini wants to stay 'well anchored' in the mainstream, sort of like Bernanke's 'inflation expectations'. It's as though he were now and then popping in to say, 'look here, I only wear half a tin-foil hat. The party line is safe with me.'
The Daily Belle accurately remarked at the time:“He believes that a handful of bankers in a room consulting together can set the price of money more effectively than the invisible Hand. This is a form of price fixing. […]The cognitive dissonance is startling, as is the realization that Roubini is held in such high esteem and has been named a top 100 global thinker. Roubini is supposed to be a hard-nosed proponent of the free-market, sound money and entrepreneurialism. But he is evidently and obviously a statist, a socialist who believes that groups of powerful people can make up prices for the market and then attempt to enforce them successfully. It would seem to be an economically illiterate position.”
Anyway, his latest revelation is even more startling – in an interview with the Wall Street Journal (video), after bemoaning the Keynesian standard canard of a 'lack of aggregate demand' (i.e., the infamous underconsumption nonsense that should have been forever banished from economics texts since Hayek's critique of Foster and Catchings in the late 1920's), he suddenly veers off into resurrecting Karl Marx and praising his alleged 'insights' about the destructive nature of capitalism and free markets. The 'money quote' from the interview:“Karl Marx said it right. At some point capitalism can self-destruct itself because you cannot keep on shifting income from labor to capital without having excess capacity and a lack of aggregate demand,” Roubini said. “That’s what’s happening. We thought the markets work. They’re not working.”
Good grief! Well, no, Dr. Roubini, Marx did not 'have it right'. Here we want to briefly point to an interesting discussion with one of our readers a few weeks ago (scroll to the comments section), where said reader took us to task for not making sufficient allowance for the fact that the statist establishment has appropriated a great many terms and in Orwellian fashion has turned them on their head so that they often mean an entirely different thing than they once used to mean. The 'politics of language' so our reader argued, must be considered before framing an argument, because the enemy has sown so much confusion that many arguments need careful vetting of the semantics employed so as to ensure they are not misunderstood.
We are certainly not strangers to this – as we have often pointed out in these pages, the term 'inflation' has been a victim of such obfuscation tactics. Today people think 'inflation' means an 'increase in prices', or often even more narrowly, an increase in consumer goods prices. This obfuscation is the result of decades of propaganda – in reality, inflation used to signify 'an increase in the supply of money'. By substituting in modern-day usage one of the effects of inflation for its cause, the cause has become obscured, so that central banks can nowadays cheekily pose as 'inflation fighters' even though they are the very engines of inflation. We mention this because the term 'capitalism' has become equally loaded. When economists back in Mises' day talked about capitalism, it was clear that they referred to the free market system. Today we have to differentiate between free market capitalism and state capitalism, i.e. the system currently in place. Consider how Roubini conflates the current 'version' of capitalism with 'markets' in the above quote. He advances not only Keynesian underconsumption nonsense, he also reminds us that 'the market doesn't work', a central Keynesian tenet that is the main argument for the alleged necessity of state intervention. However, once state intervention is practiced, there is no longer an unhampered free market economy. One can not blame what doesn't even exist for the ills that have befallen us – and yet, this is precisely what Roubini is trying to do.
The real reason for growing wealth inequality (what Roubini calls the 'shifting of income from labor to capital') is the very central bank-led inflationary fiat money system that Roubini simultaneously sotto voce supports. However, this has nothing to do with 'capitalism' or 'markets'. Essentially Roubini asserts that the problems and failures caused by the very socialist central economic planning institution that he fully supports should be blamed on the market.
In an unhampered free market system the 'shifting of incomes' Roubini criticizes could not possibly happen. As regards Karl Marx, his economic theory was based on the 'labor theory of value', which was thoroughly debunked by Carl Menger just one year after the publication of 'Das Kapital'. Marx also believed in Hegelian historical determinism and held – without supplying any rational explanation for this belief (Mises speculated that Marx was likely informed by 'an inner voice') - that history, with the help of some mysterious force, would inevitably lead to the establishment of socialism at its 'end point' so to speak. Capitalism, so Marx, would self-destruct for the very reason Roubini cites. As Ludwig von Mises noted in 'Theory and History':“Marx never embarked on the hopeless task of refuting the economists' description of the working of the market economy. Instead he was eager to show that capitalism must in the future lead to very unsatisfactory conditions. He undertook to demonstrate that the operation of capitalism must inevitably result in the concentration of wealth in the possession of an ever diminishing number of capitalists on the one hand and in the progressive impoverishment of the immense majority on the other hand. In the execution of this task he started from the spurious iron law of wages according to which the average wage rate is that quantum of the means of subsistence which is absolutely required to enable the laborer to barely survive and to rear progeny.This alleged law has long since been entirely discredited, and even the most bigoted Marxians have dropped it.But even if one were prepared for the sake of argument to call the law correct, it is obvious that it can by no means serve as the basis of a demonstration that the evolution of capitalism leads to progressive impoverishment of the wage earners. If wage rates under capitalism are always so low that for physiological reasons they cannot drop any further without wiping out the whole class of wage earners, it is impossible to maintain the thesis of the Communist Manifesto that the laborer "sinks deeper and deeper" with the progress of industry. Like all Marx's other arguments this demonstration is contradictory and self-defeating. Marx boasted of having discovered the immanent laws of capitalist evolution. The most important of these laws he considered the law of progressive impoverishment of the wage-earning masses. It is the operation of this law that brings about the final collapse of capitalism and the emergence of socialism. When this law is seen to be spurious, the foundation is pulled from under both Marx's system of economics and his theory of capitalist evolution.Incidentally we have to establish the fact that in capitalistic countries the standard of living of the wage earners has improved in an unprecedented and undreamt-of way since the publication of the Communist Manifesto and the first volume of Das Kapital. Marx misrepresented the operation of the capitalist system in every respect.
Well, Roubini has just revived the argument 'even the most bigoted Marxists have dropped'. As to which system has prospered – communism or the market economy – the answer has already been given by history. Socialism wasn't quite as 'inevitable' as Marx and Engels had believed.
Aug 12, 2011 | WSJ
If you do have a strong commitment to something keep you money in cash. Stocks are not had fallen enough. Until they fall keep them in cash and sleep at night. You need keep power dry waiting for opportunities.
Yahoo! FinanceWith Europe on the verge of imploding and the U.S. searching for yet more government answers to our economic ills, it's time to ask: Was Karl Marx right about capitalism being self-destructive?
NYU Professor Nouriel Roubini seems to think so, suggesting Marx "said it right," in a recent interview with The WSJ. "We thought that markets work. They're not working."
Roubini's comments generated a firestorm on the Web, including a retort from Institutional Risk Analytics co-founder Christopher Whalen.
"Those who laud Marx disparage all things American," Whalen writes in his Reuters column.
As you'll see in the accompanying video, Whalen's beef isn't with Roubini as much as with Marx and Marxist theory.
"Marx created the term 'capitalism'. It's a pejorative, insulting description that says all economic activity is a matter of greed," Whalen explains. "If you're any sort of libertarian. If you believe in American principles of democracy and free enterprise, just the fact we use the term 'capitalism' should insult you. We need new labels."
Indeed, an economy that's kept afloat by massive government spending, unprecedented easing by the Federal Reserve and seemingly unlimited bailouts for banks and their creditors cannot be considered free-market anything, capitalism or otherwise.
"This is corrupt corporate statism," Whalen say. "It's the fusion of the old Robber Baron model with a socialist European model."
While that sounds a bit (to me) like fascism, Whalen believe we have to "remake our economic dialogue," suggesting we are "far too confided by labels and terminology of the 19th century."
Rather than Marx, he recommends viewers read Ludwig von Mises' Human Action, as well as the works of America's great economic thinkers, like Thomas Jefferson and Andrew Jackson. "Let's start talking like Americans instead of like spoiled Germans, which is who Karl Marx was," he quips.
Talk Is Cheap, Bailouts Are Expensive
Economic theory aside, the author and analyst says the only viable solution to our economic issues is to stop the bailouts and let the free market work.
"If we have the courage to reduce government and to restructure and not pretend these pieces of paper are still worth par, then we can fix this," Whalen says. "We have to get government out of the way so people can go and be prosperous and create wealth."
Ironically, here Whalen finds himself in complete agreement with Roubini; at least the part about needing to restructure bad debts, rather than continuing the policies of "extend and pretend," which don't seem to be fooling many people on either side of the Atlantic right now.
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at email@example.com
Economist Nouriel Roubini, in an interview with The Wall Street Journal today, reached back into history and paraphrased another well-known economist, to best explain what he thought of today's roiled global economy.
"Karl Marx was right, at some point capitalism can destroy itself," said Professor Roubini, who is best known for his dire outlook on economic developments which has earned him the nickname “Dr Doom”.
"Markets are not working," currently, he said.
Prof Roubini, in the wide-ranging interview, said the global economy was at the precipice of falling into a collective recession, led by the US, the euro zone and Japan, and governments were doing exactly the wrong things to prevent that.
To that end, developed economies like the US and countries in the euro zone were implementing austerity programs in order to try to fix their debt-damaged economies when they should be enacting more monetary stimulus.
Because of that, he predicted the world had a 50 per cent chance of falling into a recession, and that the next 2-3 months would reveal which way the global economy would head.
"We are at stall speed right now, and we do not know if we are going to go up, or down," he said. The world is also operating right now, "in the fog of uncertainty," he said.
Many market analysts feel last week's US credit downgrade unleashed this latest round of market volatility, but Prof Roubini said he didn't disagree with Standard & Poor's premise that the US was on an unsustainable fiscal path and that Washington gridlock made it hard to achieve fiscal improvements.
Also, "we have destroyed our sovereign sustainability," in the US by moving from the healthy surplus of the beginning Bush years to the $US1.3 trillion ($1.25 trillion) deficit reality of 2011, with entitlements being expanded, two wars being fought, financial institutions being bailed out, and low taxes being kept, he said.
In some ways, he said, financial institutions had also become even too big to fail in the last few years, which threatened the US economy which no longer has the financial backstop to deal with such potential failures.
"There is a risk that this is the second leg of what happened during the Great Depression," he said.
Prof Roubini also predicted that "there could be QE3, QE4, QE5," in the US over the next few years.
"Now is not the time for risky assets," and that included the euro, he said.
Over a five-year horizon, it is possible that Italy or Spain could choose to leave the euro zone, if they think it would benefit them and they feel they are losing access to markets by being part of the euro zone.
"It's better to be safe than sorry and I'm putting most of my money in cash," with US Treasuries a smart bet, he said.
Additional reporting: Simon Constable, Tim Aeppel and Brenda Cronin
Aug 12, 2011 | WSJIn a clip from a longer interview with WSJ's Simon Constable, Dr Nouriel Roubini claims Karl Marx was right about capitalism self-destructing. While the U.S. is not there yet, he believes there is considerable danger facing the United States.
September 17, 2011 | naked capitalism
The general public in the US is more accepting of being fleeced by bankers than they are of being fleeced by the government but I don’t think people are as upset as it seems would be warranted. If people are working or have held their job, are not losing their home, or taking massive pay cuts, which is probably 70 % of the work force….
I really don’t know what percentage it is but the minority are those that are angry with the banks but I think they still believe this will be over soon and it is just a normal recession without realizing that a new president will likely not bring a speedy turn around to the economy. Most people are unaware of the implications of the title issues as well and are gladly willing to look for the cheapest house they can find.
It is clear that the majority of people are ok with letting the bankers off the hook no matter what they have done and they we still operate something close to a free market system.
A few years ago I speculated that all of this would be brushed under the rug and the bankers would be let off the hook. But that wasn’t enough…the banks have been rewarded for their criminal behavior and are continuing to reap the rewards of the bailout and easy money from the government. Majority is ruling but it is unfortunate that the majority is wrong. That is what I see from over here……
The banks can put in notes in the computer and they are the gold standard that will not be questions even if they have fabricated the input.
“Is the public fed up enough with bankers that politicians might be forced to take action?”
Obviously not here in the United States, the one’s that would put themselves at risk, are too spread out to do anything to make any kind of impact.
Maybe when enough have been looted enough here in The United States, and government can no longer feed and house millions MORE Americans, then we might see something.
A lot of Americans have their own problems, pretty sure they’re not concerned with citizens in EUrope, we get looted here just as much as they do.
The powers that be of both political parties and the Fed threw everything, including the kitchen sink and the baby and the bath water, into extend and pretend. So far, the stock market rose back up and we did not collapse into consistent double digit headline unemployment numbers (although more realistic measures are there).
However, if the wheels fall of the markets again (which I think is likely in the next two years), it will be clear the the US public that they were had. I think the rage then will be intense. Americans can tolerate a lot but expect results. The “extend and pretend” farce at that time will impact even more of the boomers approaching or are already into retirement that n in 2008-2009.
It will be hard for the political and banking class to survive a wave of very pissed off seniors and 20 somethings. These depressions usually take well over ten years (probably 15-20) to resolve. We are only at year 11 and counting.
Greenspan made the opening move in the early 2000s opening up the money spigots and refusal to regulate after the NASDAQ collapse. That led to the fireworks of the housing collapse and 2008 financial crisis in the early middle game. Bernanke and Congress sacrificed the queen with ZIRP, QE, and TARP. We are really only moving into the late middle game at this point with the Europeans now in the process of sacrificing their queen. We can’t fully envision the end game yet when the math takes over and dicates the result.
jake chase:It is annoying that no banksters have been prosecuted, but the bigger problem is that nothing has been done to correct the financial behavior which caused the crisis. Without a Tobin tax on high frequency trading and derivative bets we are simply drifting toward the next crash which is guaranteed to be even bigger.
I am not aware of a single public figure trying to institute such a tax. Apart from identifying one and running him for President there is no point in doing anything but attempting to protect oneself.
There needs to be a single villain against which the public can channel its anger for anything to really change.
Obviously the reality is that everyone was responsible, to varying degrees, which makes no one responsible. The banks in the US and Germany have, for example, deftly exploited existing sentiment to channel the public’s anger towards big government and “lazy” Greeks, respectively.
If you are interested in changing the policy debate, you really do need to communicate in clear, consistent, black-and-white absolutes using language the public already uses, otherwise the public’s attention will remain unfocused and diverted.
Noble Taxpayers = selfless heroes who saved the economy from the brink of disaster with the bailouts.
Fatcat Bankers = villains for crashing it and trying to loot the treasury.
As per socionomics, the mood changes are reflected in the stock market. We had a run up over the past 2 years that may have peaked earlier this year. If we are at the beginning of a new bear market now, then I would expect that people’s anger will increase considerably over the coming period until the end of the bear. So, if I were a banker, I would run before it is too late.
In daily life I observe that normal average people do understand the workings of the system quite well but they cannot phathom yet that things will turn so bad that it would have impact on their daily life. As long as they still receive their monthly pensions on the same level as planned (here in Switzerland) they think that somehow it will pass them by. The real anger will start when they are faced with specific effects of the problem which may take another year or 2 to show up in this country.
Abigail Caplovitz Field:
I think the US is absolutely ripe for forcing government action. The inchoate rage is palpable outside of elite circles. All that’s needed is to tap into it and channel it into something effective, garnering as much media attention as possible all the way. And if we don’t tap it and channel it, violent civil disorder is surely not far away.
Traditionally the American trigger for violent disorder is police shooting of young black men. But this time it might be one particularly egregious eviction too many; one banker bailout/no accountability contrasted with no help for homeowners/the unemployed too many. The powers that be are aware of the risks, and worried. Consider how the government reacted to the guy painting the Chase bank as if it were on fire;
I’d say the question isn’t, are Americans ready to force change; it’s: Can the Americans’ existing and growing rage be channeled into intentional, constructive change or will it just blow, and like the financial crisis, force improvised change that may or may not be constructive?
Lots of groups are trying, see e.g., The Other 98%, The New Bottom Line, the nurses, etc. But so far it hasn’t added up to a movement. I hope it will, or I believe things will get very messy. In fact, the moment for a movement is perfect, given the presidential election plus all the Congressional races. It’s basically now (meaning this election cycle) or (I’m pretty sure) the country’s going to blow.
lambert strether :
The looting class will continue to loot with impunity. Until they can’t. See Matt 25:13.
We can’t know in advance if or when that moment will come. In the Arab Spring, the moment came when the rentiers asked too much of one street vendor, Mohamed Bouazizi. (Literally: He immolated himself over a permitting issue that made it impossible for him to pay a debt.)
That said, there are straws in the wind. From a couple in a foreclosure case:
“We’re facing losing our homes, and we want to go down letting the whole world know what’s going on.”
“We want to go down…”
Since the current dispensation, our rentier state, provides so many opportunities for people to go down — 6% loss of real wages; ~10% nominal (20% real) DISemployment; 50 million without health insurance — I would imagine lots of people have that scenario in their minds, as a way to give meaning to the ending of dreams and a life that used to be, as did Bouazizi.
This couple sought out the courts. The banksters are trying to choke that option off. When they succeed, what will couples like this one do?
The polity has been neutralized via bread/circuses and the “Oh dear. I don’t like what’s going on, but I can’t really do anything effect” highlighted by Adam Curtis
( http://www.youtube.com/results?search_query=oh+dearism&aq=f ).
The real threat to the bankers are the “industrial elites,” i.e. Coca-Cola pissed at GS for hoarding aluminum or Wal-Mart wanting to help working America because Wal-Mart’s profits derive from Joe Six Pack, not the Thomas Pink crowd or the trucking industry PO’d by the toll hikes on privatized roads.
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