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EJ
11-30-11, 04:01 PM
Essential Trends - Part II-A: The End of Engineered Stagflation


http://www.itulip.com/images2/OilSunsetMED.png

• Why did stocks markets plummet more last week than during any Thanksgiving week since 1942?

• Why are oil prices rising as the global economy slows?

• Why did global central banks buy more gold in Q3 than any period since the collapse of Bretton Woods in 1971?

Last week of the Bureau of Economic Analysis released revised U.S. GDP numbers for 2011. They reveal a U.S. economy destined for a new recession before the economy recovers from the last one, a mid-gap recession in iTulip terminology.

That hasn't happened since 1938.

Yet price inflation is rising across the board, even in goods like apparel and autos. Inflation indexes for these items have remained flat or declined since the early 1990s due to increased mechanization of production and foreign competition with low wage rate countries. Now they are rising as a direct result of the Fed's failed Print and Pray policies aimed at reflating home prices and the Treasury's unofficial Weak Dollar policy that creates cost-push inflation via rising import prices. The price of a car in the U.S. has gone up more over the past two quarters than at any time since the early 1970s, even though units sales of autos, hammered by the recession, remains depressed at early 1980s unit sales volumes.

As the prices of goods and services rise in a weak labor market, real wages fall. The broadest index of wage costs printed a -1.5% real decline in October, as the U.S. economy remains stubbornly stuck in an output gap of 7% of GDP where it landed in early 2009. Two and a half years and trillions of stimulus and bailouts and QEs later, the gap is still 7%. We got nowhere.

The American Financial Crisis of 2008 that led to The Great Recession resulted from a collision of the first Peak Cheap Oil Cycle with a 30-year-old credit bubble as it reached peak risk and hubris in late 2007 with over a trillion in excess mortgage credit financed with bogus asset-backed securities, now on the Fed's books. The next U.S. economic crisis will also be triggered by an oil price related external event. Current course and speed, our staggering economy, barely maintaining forward momentum, stuck in an Output Gap Trap smaller but no less inescapable than in the 1930s, will trip over a spike in oil prices, sending the economy back into recession in 2012.

The reason for the oil spike: the inexorable escalation of Syria's civil crisis into civil war and regional conflict.

Two previously identified crises outside America's boarders that present risks to the weakened U.S. economy are the collapse of China's property bubble and Europe's sovereign debt quagmire. But these are likely to deescalate next year, at least they will take a back seat to oil.

China is in the midst of the credit bubble collapse crisis we forecast a year ago when the People's Bank of China began a program of rate hikes intended to create a soft landing for the nation's property bubble. We predicted a crash by Q3 2011. We also forecast massive and immediate fiscal and monetary reflation by the People's Bank of China and the legislature leaving no opportunity to short the event, even if we did get the timing right. China's uniquely mercantile, centrally planned FIRE Economy will once again come through with the necessary financing to keep the game going, as it has for 35 years, to maintain continuous growth, to justify unelected rule, much to the benefit of commodity exporting countries around the world. Tip for Jim Chanos: Never short China's Great Wall of Money. It's even more hazardous than shorting U.S. Treasury bonds.

The imminent demise of the euro has been widely forecast for more than two years since the euro crisis started with the not so surprising announcement by Greece's new socialist government in November 2009 that the previous administration had been lying about the nation's budget deficit. But reversion to national currencies is not an option for euro zone countries. They locked themselves in a monetary cage and threw away the key a decade ago. They have no choice but to clean up the mess they've made inside it since then. We are betting they will, eventually, but it will be a long and painful process. Europe, forced forward toward greater federalization by the prospect of a collapse of the euro and economic calamity will instead choose fiscal integration and, later, the implementation of an integrated tax and fiscal policy authority. The cost of the alternative -- a collapse of the euro and a total loss on euro bond debts of debtor nations in the zone -- is higher. They will choose the cheaper route, but they will take it in fits and starts.

U.S. re-entry into recession in 2012 is inevitable, followed by a new round of economic stimulus via deficit spending. Meanwhile, oil prices will spike as high or higher than in 2008, as regional instability in the Middle East worsens the stagflation that the Fed has engineered as its answer to preventing another Great Depression with Print and Pray.

How can the U.S. use this new crisis to escape its Output Gap Trap? I argue that the U.S. will over the next two to three years undertake a bold program of new infrastructure development in response to a new energy crisis arising from a regional conflict in the Middle East. The political attitude toward inflation will shift to a level of tolerance of inflation reserved for wartime. New Energy Crisis economic policy will replace the policy of Print and Pray in place since early 2009 to produce an output surplus that finally closes the output gap created by The Great Recession.

We begin our investigation close to home.

The American Output Gap Trap

You wouldn't know the U.S. economy was still in trouble by reading this year's holiday season shopping news. Black Friday retails sales jumped 26% year over year, the reports note optimistically.

Let's put the news in context.


http://www.itulip.com/images2/RetailSalesJan1947-Oct2011wtmk.png
Retails sales on the Black Friday weekend are up 26% from last year, logging $52.4 billion during the four-day weekend,
up from $45 billion last year, the National Retail Federation says. But that $7.4 billion of year-over-year growth
won't make up for the $62 billion in potential retail sales lost to The Great Recession.
It will take more than a weekend spending binge to close an epic output gap.


Our Output Gap Trap charts put the latest GDP news into context. First, a restatement of the theory.
iTulip Output Gap Trap Summary: An economic recession produces a gap between actual economic growth and the output potential of an economy at full employment with low inflation -- an output gap. If the gap is small enough and the recovery strong enough, the gap closes in a few years and the economy returns to "normal." But if the recession is severe and the gap it creates is large, it may not close before the next recession opens it anew. The Great Recession produced an output gap greater than 7% of GDP. In order for the economy to recover to potential in five years requires an economic recovery growth rate that averages 4% annually. At an average of only 3% annual growth the economy will take 20 years to recover to potential, during which time a new recession will inevitably open the gap further; the economy cannot recover to potential and enters a self-reinforcing downward spiral, an Output Gap Trap. The U.S. economy fell into an Output Gap Trap 1930s and escaped during WWII when federal government deficit spending grew public debt from 60% to 130% of GDP and created a 34% output surplus and annual inflation that exceeded 18% in some quarters during and after the war. The U.S. entered another credit bubble and crash induced Output Gap Trap in 2009 with an output gap of 7% of GDP.
A depression, contrary to popular use of the term, is not simply a very bad recession. A recession is a period of economic contraction that lasts from as little as two quarters, as in the case of the 2001 recession, to as much as three years as from 1930 to 1933. Combine the early 1930s recession with the seven years of output gap that followed the recession and you have the decade of The Great Depression. By comparison, the misnamed Great Recession has been exceedingly mild. It stated with a year-and-a-half long recession versus three, an output gap of 7% versus 25%, and only a few months of deflation versus several years. But as we shall see the output gap portion of the current economic depression may prove just as intractable as The Great Depression version.


http://www.itulip.com/images2/depressionscomparedoutputgapswtmk.png
Deep Recession + Persistent Output Gap = Depression (Log scale base 5 shows relative severity)
The current depression is a milder version of the 1930s, but shares a similarity of dynamics.
Note gigantic output surplus during WWII after The Great Depression.


A large and persistent output gap creates long-term unemployment.


http://www.itulip.com/images2/outputgapunemploymentQ11947-Q32011wtmk.png
The bigger the output gap, the worst long-term unemployment gets.


Have we made any progress out of our Output Gap Trap since Q2 2009 when the recession officially ended? Unfortunately, not.

The next chart is from our previous July 2011 Output Gap Trap update with quarterly GDP data as reported then for Q1 and Q2 2011.


http://www.itulip.com/images2/outputgapUpdateJuly2011wtmk.png
Using GDP data from the BEA in July 2011, growth since the end of the recession averaged 2.5% (orange arrow).


The chart shows that at a 3% growth rate the output gap will close by 2019, assuming no recessions occur before then. At a 2% growth rate the gap will never close. The actual 2.5% rate as of July 2011 put economic growth on parallel track to potential output, albeit lower. Call it a "New Normal" if you like. But the latest data show that even the New Normal is not holding.

Here is the same chart updated with last week’s revisions to Q1 and Q2 data and new Q3 GDP data. Yellow highlights the range of data that the BEA revised.


http://www.itulip.com/images2/outputgapUpdateNov2011wtmk.png
Average annual economic growth since the end of the recession revised from 2.5% to 1.5% (orange arrow).


With this new data, we see the average annual growth rate since the end of the recession has been cut from 2.5% to 1.5%. The output gap remains stuck at around 7% of GDP with no improvement after two years of fiscal and monetary stimulus.

According to standard economic theory, a persistent output gap is supposed to produce deflation because a weak labor market weighs on demand. But U.S. economic policy makers have engineered stagflation instead, as I predicted they would in my book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble (http://www.amazon.com/gp/product/1591842638?ie=UTF8&tag=wwwitulipcom-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1591842638)http://www.assoc-amazon.com/e/ir?t=wwwitulipcom-20&l=as2&o=1&a=1591842638.

In this analysis, we found price inflation across the board, even in goods that we think of as cheap. For example, apparel.


http://www.itulip.com/images2/CPIApparelJan1948-Oct2011wtmk.png

The primary tool of inflation creation since early 2009 has been dollar depreciation, as predicted here in 2007; the Fed and Treasury were to choose the Foolproof Way out of deflation in the form of a weak dollar policy. The mechanism is cost-push inflation from imports that produces an out-sized impact on prices in the domestic economy.

It worked. As the chart below shows, a two year, 7% of GDP output gap has not kept inflation from rising beyond the Fed's 2% target zone.


http://www.itulip.com/images2/outputgapQ12000-Q32011wtmk.png
Output Gap + Inflation = Stagflation


Print and Pray is a policy choice: for an over-indebted economy, a modicum of nominal growth with moderate inflation is better than zero or negative nominal growth and no inflation.

Japan's bouts of deflation since the mid 1990s have been blamed on the series of output gaps that Japan has gone through since 1993. The Japanese economy has escaped only twice since then: from 1996 to 1997 and briefly in 2007. Japan is unable to use currency depreciation to promote inflation, for reasons we won't go into here that have to do with the net negative impact of such a policy for country like Japan that runs a current account surplus; currency depreciation is self-defeating.


http://www.itulip.com/images2/JapanOutputGapInflation1983-2015wtmk.png
Output Gaps and inflation in Japan, 1983 to 2015 -- as optimistically projected by the IMF in 2011.


The worst case scenario was The Great Depression when massive output gaps produced a deflation spiral. Deflation reached double digits in some quarters in the early 1930s. WWII launched the U.S. back out of its Output Gap Trap in 1939 with a gigantic 34% of GDP output surplus and high inflation. Three smaller output surplus periods between 1965 and 1980 produced The Great Inflation that peaked in 1980. We'll go into the history of output gaps and surpluses, inflation, and deficits and the implications in Part II.


http://www.itulip.com/images2/outputgapsinflationQ11929-Q32011wtmk.png
Output and inflation nirvana has occurred only twice in the U.S. since 1929, from 1955 to 1965 and again
from 1991 to 2007. At all other times, output was in surplus, producing undesirably high inflation.


What's going in below the surface of an economy that is operating far below potential yet is at the same time experiencing inflation? What will happen to the U.S. economy is, as we expect, oil prices rise in response to an escalation of Syria's civil conflict into war, and civil war into a regional conflict? How might U.S. policy makers take advantage of this development to close the output gap created during the last recession?

Essential Trends - Part II-B: War Economy Theory (http://www.itulip.com/forums/showthread.php/21066-Essential-Trends-Part-II-B-War-Economy-Theory-Eric-Janszen?p=215643#post215643)


http://www.itulip.com/images2/KoreanCivilWar.png
U.S. Marines landing at Inchon as battle rages during Korean Civil War.
Location: Inchon, Korea
Date taken: 1950
Photographer: Hank Walker
Life Images


• Inside an engineered stagflation

• Post-credit bubble, pre-war economy

• Sectors of the stock market speak

(This article is a continuation of Essential Trends - Part I-B: Gold in an Era of Global Monetary System Regime Change (http://www.itulip.com/forums/showthread.php/20639-Essential-Trends-Part-I-B-Gold-in-an-Era-of-Global-Monetary-System-Regime-Change-Eric-Janszen))

Underlying the combination of depressed output and rising inflation is an increase in import prices resulting from two years of Print and Pray policy.

We're accustomed to seeing inflation in insurance, health care, education and other non-traded services that have been inflated via the sector-specific credit-money of the rent seeking institutions of the FIRE Economy. In 2006 we created an inflation chart that shows how we experience inflation int he U.S. The price of traded durable goods, such as autos, have remained flat or even declined due to a combination of increased mechanization of manufacturing and low wage manufacturing in Asia and Latin America. (By non-traded we mean that goods and services purchased domestically that are not subject to foreign competition.)

The price of non-durable goods, such as clothing, declined while the prices of non-traded services, especially health care, insurance, and housing, continued to climb at double-digit annual rates. The combination of the two, deflation in the prices of traded goods and inflation in non-traded services and some goods (e.g., housing), produces the benign CPI number that the BEA has printed since 1990. Starting in 2001, oil prices pushed up the price of all energy-related items, such as food, a process interrupted by the crash of 2008. However, energy and food prices are left out of the CPI as being "too volatile" to include. I argue that 10 years of energy price increases does not constitute a short-term trend. At some point persistent cost-push inflation from high energy prices will have to be figured into the CPI.


http://www.itulip.com/images2/PCEQ11959-Q32011wtmk.png
Declining or flat traded goods prices + Rising non-traded services prices - "volatile" energy prices = Benign CPI


The question we have asked since 2006 is this: what happens to headline inflation if the U.S. loses the good deflation component of the pricing regime because something occurs to increase the prices of imported durable and non-durable goods?

The "something" that happened was the collapse of the housing bubble and the Print and Pray reflation policies adopted by the Bernanke Fed to cope with its macroeconomic impact.

We promised you inflation before the end of 2011 due to misguided asset price inflation policy. Bernanke and company delivered. more... $subscription (http://www.itulip.com/forums/showthread.php/21066-Essential-Trends-Part-II-B-War-Economy-Theory-Eric-Janszen?p=215643#post215643)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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jiimbergin
11-30-11, 05:22 PM
Thanks EJ, for a great commentary. Now to get into the meat of it in Part 2

Slimprofits
11-30-11, 08:24 PM
Q1 FY 2012:

http://www.washingtonpost.com/business/economy/fed-survey-finds-economy-growing-at-slow-to-moderate-pace-in-most-parts-of-country/2011/11/30/gIQAKnkLDO_story.html


WASHINGTON — The economy expanded at a slow to moderate pace over the past two months in most areas of the country, but overall hiring was weak, according to a Federal Reserve survey released Wednesday.

Modest improvement in all but one of the Fed’s 12 banking districts suggests the economy is growing but barely enough to keep the unemployment rate from rising.

vinoveri
11-30-11, 10:39 PM
How will the fiscal policy driven infrastructure spending be financed, .... taxes, warbonds, fed monetization?

What will happen to the long bond in your view, when the output gap goes negative and inflation ramps up?

Will the fed try to restrain the yield from rising or is that part of the plan?

They've tried to kickstart housing with low rates and failed, and now they will switch to "remember the 1970's" and "better buy now as inflation hedge".

Do not higher yields on treasuries pose a problem for the "solvency" of the US -increasing interest payments on the US debt - and yield spiral up a la the 70's, or will the Fed soak up enough to supress yields.

doom&gloom
12-01-11, 02:25 AM
I feel like a lot of this post bets the farm on Syria. the middle east is always a wild card issue, but I wonder why Syria gets all the focus now. there is plenty to look at in Egypt/Israel, the Iranian issues, etc.

raja
12-01-11, 09:18 AM
China's uniquely mercantile, centrally planned FIRE Economy will once again come through with the necessary financing to keep the game going, as it has for 35 years, to maintain continuous growth, to justify unelected rule, much to the benefit of commodity exporting countries around the world. Tip for Jim Chanos: Never short China's Great Wall of Money. It's even more hazardous than shorting U.S. Treasury bonds.

China's exports will shrivel under the global economic slow down.
So how will China pay for it's oil?
Will oil-exporting nation's accept China's Great Wall of Fiat Money?


The reason for the oil spike: the inexorable escalation of Syria's civil crisis into civil war and regional conflict.

How will civil war in Syria affect oil output in Saudi Arabia?
I don't see it . . . .



Two previously identified crises outside America's boarders that present risks to the weakened U.S. economy are the collapse of China's property bubble

It's more than just a housing bubble; it's demand destruction from importers.


. . . . and Europe's sovereign debt quagmire. But these are likely to deescalate next year, at least they will take a back seat to oil.

Or they could come to a head, as others have predicted.

As for China, see above. Regards Europe, you're betting that the German people will choose to give unending financial support to the periphery countries, and the people of the periphery will cede sovereignty to the Fatherland. I think you will lose that bet. You are underestimating the rage building up against financial gaming by the 1%. The class war has started, and it will not be good for business.


The U.S. economy fell into an Output Gap Trap 1930s and escaped during WWII when federal government deficit spending grew public debt from 60% to 130% of GDP and created a 34% output surplus and annual inflation that exceeded 18% in some quarters during and after the war. The U.S. entered another credit bubble and crash induced Output Gap Trap in 2009 with an output gap of 7% of GDP.

Do you agree with Krugman, that the government needs to do mega-spending to achieve a recovery?


By comparison, the misnamed Great Recession has been exceedingly mild. It stated with a year-and-a-half long recession versus three, an output gap of 7% versus 25%, and only a few months of deflation versus several years. But as we shall see the output gap portion of the current economic depression may prove just as intractable as The Great Depression version.

The bad times are just getting started.
It's a global economy. As Europe and China go down the tubes, it will act as a multiplier to our own financial problems.


But as we shall see the output gap portion of the current economic depression may prove just as intractable as The Great Depression version.

O.K., so we've moved from "disinflation" to "depression". At least we can end that debate.


In this analysis, we found price inflation across the board, even in goods that we think of as cheap.
The mechanism is cost-push inflation from imports that produces an out-sized impact on prices in the domestic economy.

The inflation is temporary, because demand destruction will kick in.

metalman
12-01-11, 11:06 AM
China's exports will shrivel under the global economic slow down.
So how will China pay for it's oil?
Will oil-exporting nation's accept China's Great Wall of Fiat Money?



How will civil war in Syria affect oil output in Saudi Arabia?
I don't see it . . . .




It's more than just a housing bubble; it's demand destruction from importers.



Or they could come to a head, as others have predicted.

As for China, see above. Regards Europe, you're betting that the German people will choose to give unending financial support to the periphery countries, and the people of the periphery will cede sovereignty to the Fatherland. I think you will lose that bet. You are underestimating the rage building up against financial gaming by the 1%. The class war has started, and it will not be good for business.



Do you agree with Krugman, that the government needs to do mega-spending to achieve a recovery?



The bad times are just getting started.
It's a global economy. As Europe and China go down the tubes, it will act as a multiplier to our own financial problems.



O.K., so we've moved from "disinflation" to "depression". At least we can end that debate.



The inflation is temporary, because demand destruction will kick in.

read part ii?

metalman
12-01-11, 11:16 AM
China's exports will shrivel under the global economic slow down.
So how will China pay for it's oil?
Will oil-exporting nation's accept China's Great Wall of Fiat Money?



How will civil war in Syria affect oil output in Saudi Arabia?
I don't see it . . . .

part ii... saudis pick up 2 mil barrels/day of 4 mil drop.


It's more than just a housing bubble; it's demand destruction from importers.

part ii... lays out china's 'great wall of money'


Or they could come to a head, as others have predicted.

???


As for China, see above. Regards Europe, you're betting that the German people will choose to give unending financial support to the periphery countries, and the people of the periphery will cede sovereignty to the Fatherland. I think you will lose that bet. You are underestimating the rage building up against financial gaming by the 1%. The class war has started, and it will not be good for business.

i agree. ej says in part ii that europe will be forced together by the euro crisis. optimistic...


Do you agree with Krugman, that the government needs to do mega-spending to achieve a recovery?

part ii... no.


The bad times are just getting started.
It's a global economy. As Europe and China go down the tubes, it will act as a multiplier to our own financial problems.

part ii... yep.

O.K., so we've moved from "disinflation" to "depression". At least we can end that debate.

part ii... stagflation/depression -> war/inflation.


The inflation is temporary, because demand destruction will kick in.

part ii... depreciated dollar 'foolproof way' ended deflation... crushes middle class with inflation & lower incomes.

argument over in 2009... but deflationistas hang on & on & on.

NCR85
12-01-11, 12:06 PM
What is the rationale behind the idea that potential GDP never diverges from the historical trend? I find it a highly suspicious concept.

I have a speculation: the ingrained notion that growth should always return to "potential" and various spin-offs of the idea are what causes bubble formation. If the economy won't return to potential on it's own power, come hell or high water, people will bid the market up until it does. Any plausibility to this?

jiimbergin
12-01-11, 12:09 PM
What is the rationale behind the idea that potential GDP never diverges from the historical trend? I find it a highly suspicious concept.

I have a speculation: the ingrained notion that growth should always return to "potential" and various spin-offs of the idea are what causes bubble formation. If the economy won't return to potential on it's own power, come hell or high water, people will bid the market up until it does. Any plausibility to this?

EJ discusses this is a post in PART II-B

Chris Coles
12-01-11, 12:43 PM
We are experiencing very rapid food price inflation here in the UK. Add that if the Syria problem becomes an Iran/Syria problem, then all bets are off.

gwynedd1
12-01-11, 12:59 PM
A little wall paper can really freshen up a place and make it nominally not look so bad. Yet why can't people ask themselves what actual product have they created?

Eventually someone needs to make a product of some kind. 5 tons of assorted food staples, commodities , copper bullion, and oil drums per capita is impressive, but we had that stuff back in Roman times didn't we? I mean if the hottest fund is "Sargon's bitter vetch fund" what does that say about our system?

gwynedd1
12-01-11, 01:03 PM
We are experiencing very rapid food price inflation here in the UK. Add that if the Syria problem becomes an Iran/Syria problem, then all bets are off.

Just bought some dry beans. Still have a few from one year ago with the price tags

black turtle from .99 to 1.39 per pound
pinto from .49 to .99 per pound

So basically I am eating .49 per pound beans right now. I'd say it was a good investment.

c1ue
12-01-11, 02:01 PM
i agree. ej says in part ii that europe will be forced together by the euro crisis. optimistic...

I agree that at some point Europe should fiscally integrate.

Where I do not agree is that this will occur quickly enough to avert the present crisis.

The longer the process takes, the more likely one or more demagogues in the appropriate nations starts presenting the 'too good to resist' alternative of just leaving the EU and all the associated euro trauma behind.

Historically I cannot recall a single example of a unification achieved via debt consolidation.

Give me unified taxation and regulation doesn't have the same ring.

Equally so the EU doesn't have either the military force or the popular mandate, to force unification.

There have been examples of unification in the face of a common threat - but in every single case this unification fell apart as soon as the threat abated. Thus even a successful 'integration' achieved by bureaucrats is going to fall apart should the integration succeed in its titular goal.

Clearly then the only way the union can come together and stay together is in the face of an ongoing crisis.

And how is this better?

Sooner or later people are going to start thinking this.

The rationale behind the bureaucrats is quite clear: they think integrating nations into a federation is like mergers and acquisitions of companies by a conglomerate.

They're going to find out yet again that it isn't.

porter
12-01-11, 02:40 PM
Why does the output gap matter? If we don't close it won't it just create a new trendline? I realize that our private and public sectors have debt loads based on potential output, but won't inflation and amortization take care of the gap in just a few years? Shouldn't this paying down of debt factor into this analysis somehow since we are basing our analysis on the output gap trap causing a debt and currency crises?

Prazak
12-01-11, 02:49 PM
The longer the process takes, the more likely one or more demagogues in the appropriate nations starts presenting the 'too good to resist' alternative of just leaving the EU and all the associated euro trauma behind.

Indeed, Le Pen has already picked up on it, and there's a national election just round the corner, in which Le Pen often manages to punch above his weight (so to speak). It will be interesting to see how much of the French right migrates (if one may use such a term in speaking of the National Front) toward his daughter come April.

leegs
12-01-11, 02:52 PM
. . . Equally so the EU doesn't have either the military force or the popular mandate, to force unification. . .



I gather, perhaps incorrectly, that it is EJ's premise that the sheer mechanics of implementing another currency (see quote below) are such a challenge that this creates the forcing function for the integration. It seems like a mundane thing, but having experience with the types of systems in question, I know that it's not. Whether it's a big enough deal to override the factors that you mention would seem to be the question.



It took a small army of software engineers several years to implement the euro in the banking and retail systems used by thousands if not millions of businesses across Europe and around the world. Try to imagine how Greece, 12 years later, could coordinate the implementation of a new national currency with every bank and business Greece does business with -- in secret.

gwynedd1
12-01-11, 02:58 PM
If fiscal integration means a single currency, then I would want no part of it. The hinterlands get chronic currency shortages. You can have a locale exchanging goods with each other even without hard currencies. Once they begin trading in the larger trading block currency, currency shortages not only prevent them from buying outside the trading block, but they even lose local liquidity and cannot trade with each other. When the PIIGS joined the EU its was inevitable. I'd have fixed exchange rates, capital controls and my own currency. I'd certainly have land taxes to also insulate it. The PIIGS in my opinion destroyed themselves the day they joined. How far from the farm will the common water well be dug?

Britain knew this. They may crash and burn but with their own currency they will not be part of the German empire.

c1ue
12-01-11, 04:16 PM
I gather, perhaps incorrectly, that it is EJ's premise that the sheer mechanics of implementing another currency (see quote below) are such a challenge that this creates the forcing function for the integration. It seems like a mundane thing, but having experience with the types of systems in question, I know that it's not. Whether it's a big enough deal to override the factors that you mention would seem to be the question.

I don't disagree at all that reissuing new national currencies is a gigantic headache.

But this headache isn't one which 99 out of every 100 citizens in any given (former) EU country has to worry about.

Again a look at history shows that people will keep on using a currency long after it ceases making sense - if said currency doesn't impose more problems than the convenience it offers.

However, I think it is quite safe to say that the 'convenience' of the euro was all in the past, and in this present the problems incurred by said euro are far more prominent.

I'd guess iTulip/EJ are using the Roman debasement of coinage as an example - where massive destruction of purchasing power was not accompanied by dissolution. However, there was literally no alternative in that era.

There was Rome, and there was howling wilderness.

That is not the case today.

jk
12-01-11, 06:18 PM
Why does the output gap matter? If we don't close it won't it just create a new trendline? I realize that our private and public sectors have debt loads based on potential output, but won't inflation and amortization take care of the gap in just a few years? Shouldn't this paying down of debt factor into this analysis somehow since we are basing our analysis on the output gap trap causing a debt and currency crises?

output gap= unemployed and underemployed people along with other underemployed resources. not a happy time. it's not just about numbers. it's about people.

doom&gloom
12-01-11, 09:03 PM
Why does the output gap matter? If we don't close it won't it just create a new trendline? I realize that our private and public sectors have debt loads based on potential output, but won't inflation and amortization take care of the gap in just a few years? Shouldn't this paying down of debt factor into this analysis somehow since we are basing our analysis on the output gap trap causing a debt and currency crises?

not only is it about the unemployed and their current mental emotional state, but it is about government transfer payments from the working to the same unemployed to try and keep them from rioting etc. The numbers may sound small in terms of trillion+ dollar budgets, but you are creating a permanent underclass "on the dole" at the same time you are trying to cut back on their dole and inflate awy your debts, meaning their purchasing power shrinks. that is tied inot the idea of the "working poor" article that came out recently, or the one about not having the money to survive a $1000 emergency bill because there is no savings.

Os the output gap grows, more people fall into it over time, and deventually the early ones sink under debt load, hunger, etc. Thst is the start of major social unrest.

I always say that the people will put up with governmental theft so long as they feel they are getting a small share as well. But when times get hard, they pay close attention, that they do not put up with the same shit as in the past. Hence the militarization of police forces -- just in case you know. And the current dfense bill emplhasis on "domestic terrorists" and using the army against them. WHO is a domestic terrorist? An member of al-kookie who snuck across the border, or a OWS member who riots in the street? Who decides? How?

Starving people bring down governments. Part of my farmland thesis. Look at the growth in the SNAP program. It is unabated. This is not a good sign when it comes to future social unrest.

raja
12-01-11, 11:51 PM
read part ii?
Nope.

I dropped out of the Select Club after what I consider was a major ethical lapse by the Boss . . . .

This action did not result in any damage to my bottom line, such as I suffered before my apostasy :(

metalman
12-01-11, 11:57 PM
Nope.

I dropped out of the Select Club after what I consider was a major ethical lapse by the Boss . . . .

ooooooooo! how juuuuuicy! do tell... ;_PR

Chris Coles
12-02-11, 07:11 AM
Originally Posted by porter

Why does the output gap matter? If we don't close it won't it just create a new trendline? I realize that our private and public sectors have debt loads based on potential output, but won't inflation and amortization take care of the gap in just a few years? Shouldn't this paying down of debt factor into this analysis somehow since we are basing our analysis on the output gap trap causing a debt and currency crises?


Let us put this another way. Take the sale of a new BMW, made in Germany and sold there for say, 50,000 Euro. Now in a normal free market society, if you want to sell your BMW in, say Greece, you have to accept the value that a Greek can afford to pay. The best way of finding that out is to sell the BMW at an auction. But there they might only get a value of, say, 20,000 Euro. So the value earned has a direct relationship to the local economy. If they cannot afford to pay, you have to reduce the price or not sell at all.

What went wrong is that the manufacturer is permitted to sell at the full German price throughout Europe. So, outside of Germany you need to have a source of funding to pay the German price. So the banking system provides excessive debt, right across the Western economies to allow the Greek to pay the German price.

Eventually there is so much debt and the debt then reduces the ability of the Greeks to pay their every day bills to the extent, they now cannot even pay for the existing debt they ran up to buy the BMW's'.

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.

THAT is an output gap.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

It is the repayment of the debt overhang that causes the underlying problem of the gap; between what was normal before to what is possible today.

If every manufacturer was forced to accept the "Local" value obtainable by say an auction, then all the books would balance.

If you go back in history to where every town in the UK was what was called a Market Town, where all product was sold at auction at the market that day. Then you will note that the whole UK economy was both stable and fair.

What was paid in London was not what was paid in any other location that was less prosperous.

Today we live in a feudal mercantile economy where an large prominent manufacturer expects to be able to be paid their best price in every market they address.

That is not the way a true free market operates.

Ergo, that is where the output gap originates. From manipulation of the free market.

vinoveri
12-02-11, 11:07 AM
Let us put this another way. Take the sale of a new BMW, made in Germany and sold there for say, 50,000 Euro. Now in a normal free market society, if you want to sell your BMW in, say Greece, you have to accept the value that a Greek can afford to pay. The best way of finding that out is to sell the BMW at an auction. But there they might only get a value of, say, 20,000 Euro. So the value earned has a direct relationship to the local economy. If they cannot afford to pay, you have to reduce the price or not sell at all.

What went wrong is that the manufacturer is permitted to sell at the full German price throughout Europe. So, outside of Germany you need to have a source of funding to pay the German price. So the banking system provides excessive debt, right across the Western economies to allow the Greek to pay the German price.

Eventually there is so much debt and the debt then reduces the ability of the Greeks to pay their every day bills to the extent, they now cannot even pay for the existing debt they ran up to buy the BMW's'.

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.

THAT is an output gap.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

It is the repayment of the debt overhang that causes the underlying problem of the gap; between what was normal before to what is possible today.

If every manufacturer was forced to accept the "Local" value obtainable by say an auction, then all the books would balance.

If you go back in history to where every town in the UK was what was called a Market Town, where all product was sold at auction at the market that day. Then you will note that the whole UK economy was both stable and fair.

What was paid in London was not what was paid in any other location that was less prosperous.

Today we live in a feudal mercantile economy where an large prominent manufacturer expects to be able to be paid their best price in every market they address.

That is not the way a true free market operates.

Ergo, that is where the output gap originates. From manipulation of the free market.

Great summary.

You hit on the point which many understand - debt can fuel growth - not necessarily a bad thing, but the system seems antithetical to a free society without periodic debt jubiliees, but even with jubilees, the incentive will be to consume and borrow, and not save.

Debt taken on to invest and yield wealth through production - GOOD
Debt taken on to consume - BAD

The problem is that incentives to produce, which should be and are driven be demand and ROIC, seem more and more driven by demand which is driven by the incentive of CREDIT - consumption relies more on credit, whereas before it relied on income or savings.


The consumer doesn't want their credit cut off, and the business owners don't want the consumer's credit cut off either b/c their reason for being in business is this credit driven demand (e.g., auto companies is one example). An argument can be made that such a system does indeed give rise to growth, perhaps moreso than a less credit based system.

The logical conclusion would seem to be:
give everybody enough credit to buy whatever they want - this makes everyone "happy" and drives demand
businesses boom serving this demand and productive owners get "rich" selling on credit
periodice debt jubilees (e.g., FED "prints" periodically to pay off the debts) - and there's nothing to prevent this once we move to a global currency
...
make things cheaply an disposable so that they must be replace fequently - driving demand
enact statutes requireing people to replace cars, HVAC, toothbrushes on a certain schedule
...

The stock market will go to the moon, business will boom, we can all get "good jobs" working and everyone will be brainwashed believing they're "happy".

This is where modern economics can lead human nature. This is the nightmare.

Chris Coles
12-02-11, 12:32 PM
Great summary.

You hit on the point which many understand - debt can fuel growth - not necessarily a bad thing, but the system seems antithetical to a free society without periodic debt jubiliees, but even with jubilees, the incentive will be to consume and borrow, and not save.

Debt taken on to invest and yield wealth through production - GOOD
Debt taken on to consume - BAD

The problem is that incentives to produce, which should be and are driven be demand and ROIC, seem more and more driven by demand which is driven by the incentive of CREDIT - consumption relies more on credit, whereas before it relied on income or savings.


The consumer doesn't want their credit cut off, and the business owners don't want the consumer's credit cut off either b/c their reason for being in business is this credit driven demand (e.g., auto companies is one example). An argument can be made that such a system does indeed give rise to growth, perhaps moreso than a less credit based system.

The logical conclusion would seem to be:
give everybody enough credit to buy whatever they want - this makes everyone "happy" and drives demand
businesses boom serving this demand and productive owners get "rich" selling on credit
periodice debt jubilees (e.g., FED "prints" periodically to pay off the debts) - and there's nothing to prevent this once we move to a global currency
...
make things cheaply an disposable so that they must be replace fequently - driving demand
enact statutes requireing people to replace cars, HVAC, toothbrushes on a certain schedule
...

The stock market will go to the moon, business will boom, we can all get "good jobs" working and everyone will be brainwashed believing they're "happy".

This is where modern economics can lead human nature. This is the nightmare.

You hit the nail on the head; there is no value adding with a credit based system.

In a more normal true free market, the ONLY way to increase prosperity is through value adding. Buy some Iron ore and turn it into steel, value adding. Now you have a product to sell, but must accept the value the market places upon the steel. Your market is entirely dictated by the local prosperity. So THEY have to also find a way to add value .... sow seeds, reap crop, add value...

In such a true free market, the price paid is always dictated by the quantum of local prosperity. So in which case, as a seller of product, you can only sell what they can afford to buy.

But in a credit based system, NO ONE has to add value, all they need to do is borrow that which they do not have in the first place. Ergo, the market place is totally distorted.

flintlock
12-02-11, 02:11 PM
There aint no free lunch. This is not the 19th century, where the poor were left to die on the vine, or forced to emigrate. Now the state COULD get away with ignoring the 99%. People are kidding themselves if they think they can actually force anything on those in charge. What has changed is the fact that it is no longer politically acceptable to mow down crowds in the street with Maxim MGs. My concern is will they think of more creative means to accomplish the same?( wars, famine, disease, etc)

The modern welfare state is forced by political pressures to pay for this " output gap" with entitlements of course, the costs of which tend to get out of hand, even when/if the economy returns to normal( which it won't). Of course its cheaper and more productive to put people back to work, and let them take care of themselves. Most so called solutions I've heard never address this, which is really the heart of the matter. What do we do with all the superfluous humanity?

The wise nation that realizes the heart of the matter will return to their natural nationalistic tendencies. Especially those with stable population growth. Just like survivors in a lifeboat know to drop the oars and get the hell out of Dodge after a shipwreck. Look for the break up of the EU, and a return to nationalism, along with all the fun that goes along with that. You are not going to change the basic nature of man, regardless of how many conferences, Unions, and meetings you hold about it.

If people wanted to really do something about all this they'd spend more time figuring out how to encourage an end to the limitless growth economic model, which got us in this mess in the first place. But all I hear is talk about how those in power can keep what they have without fundamentally changing a thing.

thriftyandboringinohio
12-02-11, 02:47 PM
... This is not the 19th century, where the poor were left to die on the vine, or forced to emigrate. ....

All the points in your post were excellent, but this one is especially good.

In the 1800s the US had a huge undeveloped continent, and every unhappy poor person could take "the agrarian option". Walk west, claim some ground, and scratch out a subsistence living by farming and hunting - my grandfather did exactly that. The agrarian option is long gone. Now we can only find a job, get on the dole, or die of starvation under a bridge.

Slimprofits
12-02-11, 06:19 PM
Let us put this another way. Take the sale of a new BMW, made in Germany and sold there for say, 50,000 Euro. Now in a normal free market society, if you want to sell your BMW in, say Greece, you have to accept the value that a Greek can afford to pay. The best way of finding that out is to sell the BMW at an auction. But there they might only get a value of, say, 20,000 Euro. So the value earned has a direct relationship to the local economy. If they cannot afford to pay, you have to reduce the price or not sell at all.

What went wrong is that the manufacturer is permitted to sell at the full German price throughout Europe. So, outside of Germany you need to have a source of funding to pay the German price. So the banking system provides excessive debt, right across the Western economies to allow the Greek to pay the German price.

Eventually there is so much debt and the debt then reduces the ability of the Greeks to pay their every day bills to the extent, they now cannot even pay for the existing debt they ran up to buy the BMW's'.

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.

THAT is an output gap.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

It is the repayment of the debt overhang that causes the underlying problem of the gap; between what was normal before to what is possible today.

If every manufacturer was forced to accept the "Local" value obtainable by say an auction, then all the books would balance.

If you go back in history to where every town in the UK was what was called a Market Town, where all product was sold at auction at the market that day. Then you will note that the whole UK economy was both stable and fair.

What was paid in London was not what was paid in any other location that was less prosperous.

Today we live in a feudal mercantile economy where an large prominent manufacturer expects to be able to be paid their best price in every market they address.

That is not the way a true free market operates.

Ergo, that is where the output gap originates. From manipulation of the free market.

one of the best things I've ever read, anywhere. brilliant explanation

labasta
12-02-11, 07:26 PM
The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.



I agree with your post except the above. A shrinking economy makes the debt larger by reducing the income relative to the money owed. The shrinking economy (as you had excellently pointed out) is due to the debt being too large to pay sucking the blood from everything else which creates a downward spiral to bankruptcy (which is one way debt is cancelled I suppose).

There seems to often comes a time in the debt/money system where the debt is too big and creates an implosion. The debt has to be canceled or reduced and the system rebooted. How and over what time frame this happens is one of the reasons I browse itulip now and again. It won't be a world war as no-one will fight it but the regular troops. Vietnam was the last time a draft was semi-successfully initiated. Even then they had trouble. Now it would be an impossibility. Plus America/Europe/China is broke under the current structure.

I think it could have been 2001, but they just had enough debt push in the tank to give us an extra few years of the current system.

I suspect the ptb will try and keep the current system going for as long as possible and we will see many many years (decades) of continued decline in real economic activity. I imagine that at some time during this, people will lose it and the system will change and we will see something much fairer and more equitable (but not OWS style). If not, then I see techno feudalism being the theme for civilization forevermore.

c1ue
12-02-11, 07:27 PM
In a more normal true free market, the ONLY way to increase prosperity is through value adding. Buy some Iron ore and turn it into steel, value adding. Now you have a product to sell, but must accept the value the market places upon the steel. Your market is entirely dictated by the local prosperity. So THEY have to also find a way to add value .... sow seeds, reap crop, add value...

In such a true free market, the price paid is always dictated by the quantum of local prosperity. So in which case, as a seller of product, you can only sell what they can afford to buy.

But in a credit based system, NO ONE has to add value, all they need to do is borrow that which they do not have in the first place. Ergo, the market place is totally distorted.

While I don't disagree with your description of value add, I do disagree that any credit is necessarily bad.

The process you describe above is not so much different than what a bank 'should' be operating as: short term borrower, long term creditor.

In the process of transmuting short term deposits into long term credit extended to businesses, the bank serves a legitimate role no different than a steel smelter taking in ore and churning out railroad rails.

And while, as I've noted before, I do think your desire of having community based credit is admirable, it is not suited for many, many types of businesses.

Community based credit is likely fine for small, local businesses. It is likely fine for relatively low capital cost businesses. It is similarly well suited to low risk, 'lifestyle' type businesses.

It is not, however, well suited at all for high competitive risk, high capital intensity, highly speculative, or some combination of these three, type businesses.

How would community financing, for example, put together enough capital for a semiconductor wafer fab which costs in the $3 billion range?

While credit and money issuance certainly has been abused, and will certainly be abused in the future, the alternative of hard money is just as destructive.

Chris Coles
12-03-11, 02:01 AM
While I don't disagree with your description of value add, I do disagree that any credit is necessarily bad.

The process you describe above is not so much different than what a bank 'should' be operating as: short term borrower, long term creditor.

In the process of transmuting short term deposits into long term credit extended to businesses, the bank serves a legitimate role no different than a steel smelter taking in ore and churning out railroad rails.

And while, as I've noted before, I do think your desire of having community based credit is admirable, it is not suited for many, many types of businesses.

Community based credit is likely fine for small, local businesses. It is likely fine for relatively low capital cost businesses. It is similarly well suited to low risk, 'lifestyle' type businesses.

It is not, however, well suited at all for high competitive risk, high capital intensity, highly speculative, or some combination of these three, type businesses.

How would community financing, for example, put together enough capital for a semiconductor wafer fab which costs in the $3 billion range?

While credit and money issuance certainly has been abused, and will certainly be abused in the future, the alternative of hard money is just as destructive.

Thank you C1ue, you make some interesting points. However, you seem not to fully understand where I am coming from; I am not advocating community credit; I am advocating local community savings invested as free enterprise equity capital into the first stage start up IN that local community as also a new way to fund the first stage of the invention process.

My argument being that these first stage companies should be much better capitalised so that they are more stable; better able to overcome normal "gusts". Again that by setting the challenge to the surrounding local community, over the long term, the local saver becomes an integral part of the success of the local employment environment.

At the moment, there is no connection whatever between saving money in a bank and local employment; other than that road seems to have depleted local employment; rather than enhanced it.

The point you make regarding the larger enterprise is again misplaced. If you look at the way such are funded in, say, Japan, they get money lent at rates below any that will create a return. I well remember Sony once getting hundreds of millions at 0.002% which is for all intents and purposes, equity.

No business can prosper for the long term without a solid foundation of equity capital to enable it to endure "Gusts"

In the distant past, all the larger enterprises were funded by far sighted savings institutions at the national level delivering equity capital and very long term low interest credit for working capital. At one time, all such working capital was 25 year @4% and the trade in such bonds was an integral part of the national economy.

Today, a large business might be paying nearer 20% for 4 year money.

What we need and if I have anything to do with it will be delivered; is an old fashioned savings institution that, once it has delivered the local community into stability; then it will set out to also adequately capitalise all the larger enterprises that underpin the national economy. That by long term leadership with credibility built from delivering free enterprise to the nation; savers will see the long term benefit to their own communities by also permitting a proportion of the overall savings to be so invested.

What we have today is exactly the opposite; moreover, that has failed to deliver.

Turning to the UK in the past; we did not have banks delivering any form of credit. We were, and to a large extent, still are, an agrarian society with farmers trading all over the nation in local auctions. Farmers markets were and still are the bedrock of the economy. I grew up watching farmers with large rolls of notes trading face to face with each other for profit in an auction based market where they could only get at the value in another farmers roll of notes. We have forgotten just how stable that can be. Price of wheat was sometimes stable for more than a century.

The idea that we can only move forward as a stable society with the underpinning of the likes of the big investment banks is a complete illusion. It is they that have failed. Yes, they might have spread enormous sums of debt right across the Western economies. But their model has now brought the entire Western economies to the brink of disaster.

We must return to a savings invested long term as equity capital economy. Moreover, particularly into tiny new manufacturing businesses in each and every local community. From that new solid layer of grass roots employment will stem the flow of new skills we need to be able to compete as a nation.

You grow successful crops from the seed with a good seedbed; and successful nations in the same way.

Chris Coles
12-03-11, 02:09 AM
I suspect the ptb will try and keep the current system going for as long as possible and we will see many many years (decades) of continued decline in real economic activity. I imagine that at some time during this, people will lose it and the system will change and we will see something much fairer and more equitable (but not OWS style). If not, then I see techno feudalism being the theme for civilization forevermore.

Thank you labasta. This time, perhaps, you are being too pessimistic. We will see if you are right over the next few months as I am setting out to see if there is a potential for the change I see as imperitive. My view is some of the leadership is very good and far sighted; now we have to wait to see if they feel they can deliver.

Chris Coles
12-03-11, 02:11 AM
one of the best things I've ever read, anywhere. brilliant explanation

Thank you sir; Deep Bow!! ;_Y :(

raja
12-03-11, 07:48 AM
The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.
THAT is an output gap.

It's also demand destruction, an anti-inflation force.



The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.No, there is another way.

Write off the debt,
Let the banks fail,
Nationalize them,
Prosecute the banksters and clawback their illgotten gains.

And, of course, rewrite and enforce financial regulations to take the power away from the Financial Elite.

This can be accomplished by Revolution, preferrably non-violent.

According to M Hudson:

By giving taxpayers this voice in government, the Dutch and British democracies provided creditors with much safer claims for payment than did kings and princes whose debts died with them. But the recent debt protests from Iceland to Greece and Spain suggest that creditors are shifting their support away from democracies. They are demanding fiscal austerity and even privatization sell-offs.


This is turning international finance into a new mode of warfare. Its objective is the same as military conquest in times past: to appropriate land and mineral resources, also communal infrastructure and extract tribute. In response, democracies are demanding referendums over whether to pay creditors by selling off the public domain and raising taxes to impose unemployment, falling wages and economic depression. The alternative is to write down debts or even annul them, and to re-assert regulatory control over the financial sector.

gwynedd1
12-03-11, 05:02 PM
How will the fiscal policy driven infrastructure spending be financed, .... taxes, warbonds, fed monetization?

What will happen to the long bond in your view, when the output gap goes negative and inflation ramps up?

Will the fed try to restrain the yield from rising or is that part of the plan?

They've tried to kickstart housing with low rates and failed, and now they will switch to "remember the 1970's" and "better buy now as inflation hedge".

Do not higher yields on treasuries pose a problem for the "solvency" of the US -increasing interest payments on the US debt - and yield spiral up a la the 70's, or will the Fed soak up enough to supress yields.

Trying to keep up housing prices is the problem that got us here. Capital spending is always highest when rehabilitating worthless property for this reason. When people bought houses they could not afford they did not even have furniture in them, a simply proof. Thus the best way to ruin the the economy is to support housing prices. Though refinancing is somewhat canceling out this road to ruin.

Infrastructure spending is self financing with capital and labor surpluses now existent within the economy. However with the perverse monetarist accounting, its not apparently obvious to those in charge.

gwynedd1
12-03-11, 06:03 PM
Let us put this another way. Take the sale of a new BMW, made in Germany and sold there for say, 50,000 Euro. Now in a normal free market society, if you want to sell your BMW in, say Greece, you have to accept the value that a Greek can afford to pay. The best way of finding that out is to sell the BMW at an auction. But there they might only get a value of, say, 20,000 Euro. So the value earned has a direct relationship to the local economy. If they cannot afford to pay, you have to reduce the price or not sell at all.

What went wrong is that the manufacturer is permitted to sell at the full German price throughout Europe. So, outside of Germany you need to have a source of funding to pay the German price. So the banking system provides excessive debt, right across the Western economies to allow the Greek to pay the German price.

Eventually there is so much debt and the debt then reduces the ability of the Greeks to pay their every day bills to the extent, they now cannot even pay for the existing debt they ran up to buy the BMW's'.

The banks are so over their capital limits they cannot lend, (now even to each other), the people, riding around in their BMW's cannot afford to pay their bills and the manufacturers of all the every day products are watching their market reduce because their customers do not have any spare cash to buy them.

THAT is an output gap.

The only way out is a long process of repaying the original debt while the economy shrinks to the level that allows the repayment.

It is the repayment of the debt overhang that causes the underlying problem of the gap; between what was normal before to what is possible today.

If every manufacturer was forced to accept the "Local" value obtainable by say an auction, then all the books would balance.

If you go back in history to where every town in the UK was what was called a Market Town, where all product was sold at auction at the market that day. Then you will note that the whole UK economy was both stable and fair.

What was paid in London was not what was paid in any other location that was less prosperous.

Today we live in a feudal mercantile economy where an large prominent manufacturer expects to be able to be paid their best price in every market they address.

That is not the way a true free market operates.

Ergo, that is where the output gap originates. From manipulation of the free market.

There are a lot of ways to put it. The problem with the Euro is that it didn't transmit the reality of the transaction which was the consumer + the Greek balance of trade. The BMW was purchased with the credit of Greece closing the value gap the consumer was not filling. Greece balanced the transaction with debt in the balance of trade. One pays off debt with either future productivity or their future income at a discount. If the debt cannot be met, then the seller is under their own illusion that they are making profits. Not a pretty picture indeed. A Greek currency of their own would have been seen as rising prices correcting this dynamically and to the consumer. Now they are left with a misallocation of resources.

If Greece pays with wealth producing assets this may have the effect of reducing their ability to pay, furthering the cycle. Unfortunately merchantalist minded forces behind this transaction inherently seek out these assets, and are not typically interested in raising the consumption of their own population. They are quite happy to skim the output of their own population which gives buying power to financial powers in predatory mechantalist fashion. This is a big money maker. Take the living standards and consumption of the host population and sell it to a foreign population which would hopefully expose an under producing asset and then purchase it (under producing because of the artificial balance of trade).

gwynedd1
12-03-11, 06:43 PM
There aint no free lunch. This is not the 19th century, where the poor were left to die on the vine, or forced to emigrate. Now the state COULD get away with ignoring the 99%. People are kidding themselves if they think they can actually force anything on those in charge. What has changed is the fact that it is no longer politically acceptable to mow down crowds in the street with Maxim MGs. My concern is will they think of more creative means to accomplish the same?( wars, famine, disease, etc)

The modern welfare state is forced by political pressures to pay for this " output gap" with entitlements of course, the costs of which tend to get out of hand, even when/if the economy returns to normal( which it won't). Of course its cheaper and more productive to put people back to work, and let them take care of themselves. Most so called solutions I've heard never address this, which is really the heart of the matter. What do we do with all the superfluous humanity?

The wise nation that realizes the heart of the matter will return to their natural nationalistic tendencies. Especially those with stable population growth. Just like survivors in a lifeboat know to drop the oars and get the hell out of Dodge after a shipwreck. Look for the break up of the EU, and a return to nationalism, along with all the fun that goes along with that. You are not going to change the basic nature of man, regardless of how many conferences, Unions, and meetings you hold about it.

If people wanted to really do something about all this they'd spend more time figuring out how to encourage an end to the limitless growth economic model, which got us in this mess in the first place. But all I hear is talk about how those in power can keep what they have without fundamentally changing a thing.

Oh but there is a free lunch. They used to call it rent. The laws of conservation were written by those that owe their existence to the first cause where there is no cause. It does not seem so now since there is that class that think themselves fit to receive the inheritance and to rent it out. Its those that have no free lunch that are the most conspicuous because they do not have it.

c1ue
12-03-11, 10:49 PM
Thank you C1ue, you make some interesting points. However, you seem not to fully understand where I am coming from; I am not advocating community credit; I am advocating local community savings invested as free enterprise equity capital into the first stage start up IN that local community as also a new way to fund the first stage of the invention process.

Thank you for the clarification.


My argument being that these first stage companies should be much better capitalised so that they are more stable; better able to overcome normal "gusts". Again that by setting the challenge to the surrounding local community, over the long term, the local saver becomes an integral part of the success of the local employment environment.

At the moment, there is no connection whatever between saving money in a bank and local employment; other than that road seems to have depleted local employment; rather than enhanced it.

While I understand what you are saying, it is unclear to me that explicitly linking local savings with local employment will stop the financialization of the economy.

It is this financialization which is primarily responsible for employment losses.

While TBTF banksters have a longer reach, it does not follow that a non-TBTF bankster is necessarily any better. We saw in the S & L scandal in the United States that white collar criminal activities are not in any way a pure function of size.


The point you make regarding the larger enterprise is again misplaced. If you look at the way such are funded in, say, Japan, they get money lent at rates below any that will create a return. I well remember Sony once getting hundreds of millions at 0.002% which is for all intents and purposes, equity.

No business can prosper for the long term without a solid foundation of equity capital to enable it to endure "Gusts"

In the distant past, all the larger enterprises were funded by far sighted savings institutions at the national level delivering equity capital and very long term low interest credit for working capital. At one time, all such working capital was 25 year @4% and the trade in such bonds was an integral part of the national economy.

Today, a large business might be paying nearer 20% for 4 year money.

I certainly agree a foundation of capital is necessary for any business, but it is unclear to me still how a large multinational exporter like Sony can in any way build a capital base on community savings. What exactly is the community a nascent Sony would depend on?

I'd also note that many of the large businesses today were built on savings: tax dollars redirected into subsidies by government, as well as government sponsored basic research, government paying for products (see semiconductors), government guaranteed loans, and so forth.

Be that as it may, I still do not see how a closed ecosystem of community savings and community businesses plays out in the world arena.


What we need and if I have anything to do with it will be delivered; is an old fashioned savings institution that, once it has delivered the local community into stability; then it will set out to also adequately capitalise all the larger enterprises that underpin the national economy. That by long term leadership with credibility built from delivering free enterprise to the nation; savers will see the long term benefit to their own communities by also permitting a proportion of the overall savings to be so invested.

What we have today is exactly the opposite; moreover, that has failed to deliver.

Turning to the UK in the past; we did not have banks delivering any form of credit. We were, and to a large extent, still are, an agrarian society with farmers trading all over the nation in local auctions. Farmers markets were and still are the bedrock of the economy. I grew up watching farmers with large rolls of notes trading face to face with each other for profit in an auction based market where they could only get at the value in another farmers roll of notes. We have forgotten just how stable that can be. Price of wheat was sometimes stable for more than a century.

The idea that we can only move forward as a stable society with the underpinning of the likes of the big investment banks is a complete illusion. It is they that have failed. Yes, they might have spread enormous sums of debt right across the Western economies. But their model has now brought the entire Western economies to the brink of disaster.

We must return to a savings invested long term as equity capital economy. Moreover, particularly into tiny new manufacturing businesses in each and every local community. From that new solid layer of grass roots employment will stem the flow of new skills we need to be able to compete as a nation.

You grow successful crops from the seed with a good seedbed; and successful nations in the same way.

I've said before and said again that your goal is admirable.

However, it is far from clear to me that it is a prescription for fixing our present ills.

The banker of yore wasn't a friendly person either; just because he wasn't a faceless bankster does not in any way change the fundamental basis of the profession. Banking by definition is trying to squeeze profit out of those being lent to, while paying as little as possible to those being borrowed from.

A simple thought experiment: if a bankster offers 6% interest on deposits, but the community savings fund only offers 3%, where do you think the money will flow to?

The point isn't that investment banks are good. They are not, though they do fulfill a role. The point is that there is a lot more necessary to have a correctly functioning and minimally parasitic FIRE component to an economy besides localization.

Regulatory and enforcement functions are necessary at all levels.

Chris Coles
12-04-11, 04:32 AM
Thank you for the clarification.



While I understand what you are saying, it is unclear to me that explicitly linking local savings with local employment will stop the financialization of the economy.

It is this financialization which is primarily responsible for employment losses.

While TBTF banksters have a longer reach, it does not follow that a non-TBTF bankster is necessarily any better. We saw in the S & L scandal in the United States that white collar criminal activities are not in any way a pure function of size.



I certainly agree a foundation of capital is necessary for any business, but it is unclear to me still how a large multinational exporter like Sony can in any way build a capital base on community savings. What exactly is the community a nascent Sony would depend on?

I'd also note that many of the large businesses today were built on savings: tax dollars redirected into subsidies by government, as well as government sponsored basic research, government paying for products (see semiconductors), government guaranteed loans, and so forth.

Be that as it may, I still do not see how a closed ecosystem of community savings and community businesses plays out in the world arena.



I've said before and said again that your goal is admirable.

However, it is far from clear to me that it is a prescription for fixing our present ills.

The banker of yore wasn't a friendly person either; just because he wasn't a faceless bankster does not in any way change the fundamental basis of the profession. Banking by definition is trying to squeeze profit out of those being lent to, while paying as little as possible to those being borrowed from.

A simple thought experiment: if a bankster offers 6% interest on deposits, but the community savings fund only offers 3%, where do you think the money will flow to?

The point isn't that investment banks are good. They are not, though they do fulfill a role. The point is that there is a lot more necessary to have a correctly functioning and minimally parasitic FIRE component to an economy besides localization.

Regulatory and enforcement functions are necessary at all levels.

Aha! Now I see where you are coming from; you only see this as though at all times, funding for business comes from bankers. It was NEVER thus.

What I am doing is re-establishing the base foundations for an economy built upon an equity capital economy. NOT a banking economy.

The clue, (no pun intended :) ), is your repeated reference to banking.

You say the banker offering a higher percentage of interest will attract the savings. However, it is not interest that is paid from equity capital; it is dividend and historically dividends were always in the order of 8% to which you also may add capital appreciation as the business prospers and others surrounding the original investment see the ongoing potential for a better income from such investment than what they hold elsewhere.

Again, I say that the original funding always came from what is almost invisible today, the stock market "Jobber" .... who was the interface between the company wishing to raise funds and the stock broker. My perception came from all the papers left behind from my Paternal Grandfather who was a Jobber on the London Stock Exchange.

He had great adventures. Also he lived in a era where his word was his bond. So all we were left with were simple letters discussing this or that investment.

We must walk away from banking as a solution. In that respect, THAT is the underlying undercurrent of your debate; that "Financialization" is the twin edged sword.

You see it as; the banking system is the underlying funding for the large companies and that without such financialization we will not get such large and "seemingly" successful companies.

I say that history has been distorted by the PR emanating from banking that has driven everyone to believe that without banks there is no economy.

The true purpose for banking was always as a source of short term working capital. That was their marketplace and their function.

What has occurred over the last six decades or so, is that banking has forced themselves into a position of dominating the funding of lending disguised as "Capital"; against the interest of everyone other than a bank.

Today, everyone is at last waking up to the reality that banks do not create prosperity; other than for themselves.

My point is that when you change from bank funding of loans; for use as capital; to local savings invested as equity capital; you get several benefits.

You can see where your money is invested.

The money placed as equity capital, spent as purchases from that business, back into the local economy; REMAINS IN CIRCULATION WITHIN THE LOCAL ECONOMY.

It is the local economy that prospers from equity capital investment; not the banker.

That is the lost knowledge we have to relearn.

Now add that not only does your original investment retain the money spent within the local community; it retains employment that you can see with your own eyes; and, brings in additional prosperity from the profits of the business.

Again, if the business fails, all that has happened is your savings have been spread throughout the local economy; retaining the prosperity of the wider community.

Banking is a dead end.

Banking has failed as a business and presents no long term solution to the retention of prosperity within any community.

The large investment banks are a failed idea. All they have done is reintroduce a medieval feudal system we all thought was dealt a death blow at the end of WW2.

Yes, local banks serving their original function of providing that important working capital function; have a useful place within a equity capital based economy.

But banking as we know it today is a failure. The sooner we all wake up to that simple fact, the better for everyone.

Chris Coles
12-04-11, 05:06 AM
Turning to the dividend. This is another aspect of the change from a equity capital based system to a bank loan system. Has everyone noticed that dividends have almost disappeared from many companies. Their market value has been brought in as a measure of the value of the investment. That is only to the benefit of the banks who are draining almost all the profits as interest to be paid back into their own business.

Bank interest paid for the loans, drains away the dividend. Indeed, as a dividend directly competes with the attractiveness of the rates paid to the saver by the bank; then dividends must be suppressed.

Slowly, over many decades, we came to lose sight of all the advantages of an equity capital based economy and instead fell into believing in the siren voice of a banking system that is always hell bent on getting their hands on every penny that they can. It is their business model.

The secondary effect was that they were followed down this dead end by executive governments that found they could borrow money from the banks simply by turning a blind eye to the banking systems use of high levels of leverage. That such new money allowed the government to also take the banking systems lead to stem the flow of private savings into new research and deliver all long term research money from government.

Today we seem to have also fallen into the idea that the economy is today driven by government. No one turns to a old idea called a savings institution; everyone turns to government.

Banking has failed to deliver; governments are so over borrowed, they cannot continue to pretend they also deliver. We have to turn the page and return to local savings creating new industries that then grow more slowly; always based upon the idea that true prosperity stems from value adding with the money supply, (instead of as now, driven by bank leverage), is driven by value adding.

Let a woman, for an example, take a needle and thread and a piece of cloth and create an attractive design and sell it. That is simple value adding. The profit she makes has to be adjusted by a slight addition to the overall money supply. Now take that simple message and extend it right across an economy and you can now see how, over even just a few decades, we can replace all that lost prosperity.

We have to return to a simple model of equity capital investment into any form of value adding. A recognition that any such investment does not decrease prosperity; it adds prosperity even if it fails.

Income from dividends must be the primary aiming point of any business so invested into by the local saver.

Now, all you need to do is allow a proportion of those local savings to be placed into a larger national savings institution; to permit those larger investments into the larger form of business and replace ALL government spending on all forms of business and research with equity capital.

No need for government borrowing.

All money, savings, so invested, retained within the nation as additional prosperity.

Central bank function; to slowly add to the money supply as and when needed, to allow for the function of value adding right across the nation.

To repeat; investment banking has become a failure; a failed idea that has reached its point of collapse. It simply does not work. All it has achieved is re-introduce a medieval feudal economy that simply DOES NOT WORK. PERIOD!

The future is an economy built upon local savings invested as equity capital; PARTICULARLY free enterprise equity capital, invested into any local, or national, business that can add value and create employment.

gnk
12-04-11, 06:04 AM
EJ:


Europe, forced forward toward greater federalization by the prospect of a collapse of the euro and economic calamity will instead choose fiscal integration and, later, the implementation of an integrated tax and fiscal policy authority. The cost of the alternative -- a collapse of the euro and a total loss on euro bond debts of debtor nations in the zone -- is higher. They will choose the cheaper route, but they will take it in fits and starts. I recall a quote attributed to Henry Kissinger, and I paraphrase:

"When I need to call China, or Russia, I know who I need to speak to. But when I need to speak to Europe, who do I call?"

The reason I bring this quote up is that it demonstrates there is no real central "de jure", as opposed to the current "de facto" leadership in Europe. On EJ's EMU analysis, I am in complete disagreement. The system is collapsing faster than "Merkozy" can react to it. There is no common language, there are extremely different economies, and the process of debt deflation/depression is accelerating. I see this daily. I live in Greece now and I am witnessing a huge change in people's perceptions. Talk of the drachma is not uncommon. People want to blame someone or something, and the Euro will take the hit. The Drachma is seeming like real alternative to many more people. I wouldn't be surprised if such currency nationalism exists elsewhere in the periphery. People are asking themselves: "if I starve under the Euro, why save it?"

When southern europeans start believing they have nothing more to lose, it is then goodbye to the Euro. A flashpoint will be reached just as in MENA. Blame needs to be assigned to someone or something. It will be the Euro. Germany wants to starve the periphery, and it will end in disaster. As I have written before, German plans of European domination always end in spectacular failure, this time is no different.

Peak Oil and The EU disaster will both take center stage next year. 2012 will be much more worse than EJ writes, JMHO. The full EU disintegration process can even begin this week. It's anyone's guess.

EJ, your conclusion of full integration requires a decisionmaker... someone to decide that a Euro collapse is more costly, and that same someone who also has the power to dictate a policy and outcome to the rest of Europe. Such a person does not exist.

Europe has no Ceasar.

Just as in the US, a financial junta has taken place in Europe. Italy's Monti is a former employee of Goldman Sachs, and Greece's Papdemos - a former employee of the Federal Reserve, and the ECB. This is the banksters' last stand. To appoint so called "technocrats" that can save the system. But are they technocrats, or mere bankers that have no idea how the system actually works... the same "technocrats" that devised the faulty Euro architecture to begin with? Probably the same technocrats that pitifully decried "no one saw this coming!"

Once it is apparent that these new leaders can no better deliver results than their predecessors.... it's game over.

Slimprofits
12-04-11, 09:59 AM
U.S. re-entry into recession in 2012 is inevitable, followed by a new round of economic stimulus via deficit spending.
First part is probably spot on and the second part is laughable. Your assessment of politics is continuously missing something. From declaring that Obama was a FIRE candidate, to endorsing his candidacy months later, to declaring the Scott Brown election as some kind of righteous political awakening, the beat goes on....

c1ue
12-04-11, 10:29 AM
Aha! Now I see where you are coming from; you only see this as though at all times, funding for business comes from bankers. It was NEVER thus.

I fear you are misunderstanding - I have never stated that banks are the only way by which capital can be gathered, then deployed to business.

You must further clearly define what a 'bank' is in your terms.

Strictly speaking, any institution which receives deposits (in return for paid interest) and then makes loans is a bank. You can have variations where the deposits don't receive interest as in a Jewish gamach, but the aim is still the same: short term borrow, long term lend.

There are alternate ways by which capital can be gathered and then deployed: angel funding (wealthy individuals), venture capital, government tax & subsidy, and so forth.


What I am doing is re-establishing the base foundations for an economy built upon an equity capital economy. NOT a banking economy.

The clue, (no pun intended :) ), is your repeated reference to banking.

You say the banker offering a higher percentage of interest will attract the savings. However, it is not interest that is paid from equity capital; it is dividend and historically dividends were always in the order of 8% to which you also may add capital appreciation as the business prospers and others surrounding the original investment see the ongoing potential for a better income from such investment than what they hold elsewhere.

The problem with your statement above is that you are using historical data which counts dividends from companies which historically were sponsored by the government. The East India company, for example, was one of the earliest corporations and was literally given a monopoly on East India trade. This is hardly a prime example of either a community funded enterprise nor a 'normal' dividend payment scheme.

You're also ignoring that early stage enterprises cannot afford to pay dividends. The growth stage of any company requires excess profits to be reinvested for growth.


You see it as; the banking system is the underlying funding for the large companies and that without such financialization we will not get such large and "seemingly" successful companies.

I say that history has been distorted by the PR emanating from banking that has driven everyone to believe that without banks there is no economy.

The true purpose for banking was always as a source of short term working capital. That was their marketplace and their function.

As I noted above, your impression is quite wrong.


What has occurred over the last six decades or so, is that banking has forced themselves into a position of dominating the funding of lending disguised as "Capital"; against the interest of everyone other than a bank.

In fact banks have always been the dominant source of funds. The only difference was in the past, the 'bank' as an institution may well have been a family like the Rothschilds as opposed to a corporation engaged in banking.

To say that banks only have dominated in the last 6 decades is to ignore the very real impact of such families as the Rothschilds, as well as more overt examples such as the Medici takeover of Florence.

The only difference between today and the past - as Dr. Michael Hudson has noted - is that in the past sovereign power trumped finance power. Sovereign rulers and states have soldiers, whereas finance power at best has mercenaries.


Today, everyone is at last waking up to the reality that banks do not create prosperity; other than for themselves.

I think this statement is far too strong. Warren Buffet, as a shadow bank, has done quite well both for himself and his entire holding company, including its employees, for many decades.

It is far from clear to me that the inherent abuses implicit in banking must always result in ruin.


My point is that when you change from bank funding of loans; for use as capital; to local savings invested as equity capital; you get several benefits.

You can see where your money is invested.

The money placed as equity capital, spent as purchases from that business, back into the local economy; REMAINS IN CIRCULATION WITHIN THE LOCAL ECONOMY.

It is the local economy that prospers from equity capital investment; not the banker.

That is the lost knowledge we have to relearn.

Now add that not only does your original investment retain the money spent within the local community; it retains employment that you can see with your own eyes; and, brings in additional prosperity from the profits of the business.

As I noted previously, these precepts might apply to a local business, but how would they apply to say, Groupon? Amazon? Taiwan Semiconductor? Siemens? General Electric's generator business?


Again, if the business fails, all that has happened is your savings have been spread throughout the local economy; retaining the prosperity of the wider community.

So now you're expanding the definition of the local economy upwards such that failures can be absorbed via collectivization of risk. What then is the definition of 'local' in a dollar or pound figure? In a regional aspect?

Note that a physical definition of local inherently disadvantages the less wealthy and less populous regions, whereas a monetary definition of local presents great challenges of its own.


The large investment banks are a failed idea. All they have done is reintroduce a medieval feudal system we all thought was dealt a death blow at the end of WW2.

I guess your definition of failed is different than mine. If the definition of success is growth and increased profits, the investment banks have done very well indeed.

You are also failing to distinguish between a deposit bank and an investment bank. Goldman Sachs is clearly the latter, but what is Bank of America? Citibank?

What proportion of the real estate bubble self reinforcing chain of transactions was investment bank? GS didn't originate a single mortgage, but it and its cohorts, as well as the supposed deposit banks, were clearly driving the entire chain from mortgage origination on up, as well as influencing ancillary functions like title law, appraisals, credit ratings, and so forth.

While I understand your desire to see a better deployment of local capital for local benefit, you have not successfully shown to me that the operational aspects of your proposal are viable.

You assert that dividends are a better ROI mechanism than interest, but dividends are the hallmark of mature companies. Dividends before maturity are rare and arguably fiscally unwise for companies; furthermore dividends are voluntary as we can see from the various tech companies like Apple and Google.

You also seem to imply that community investment presents less risk as individual investments are pooled throughout all the different individual investments in community businesses. Yet it is precisely the pooled money which allow investment banks their abuses.

What precisely prevents a community investment pool manager from exercising the exact same abuses his i-bank counterpart engages in?

How do you get everyone in the community to invest their savings into this pool? Or prevent multiple competing pools from forming?

It seems much of the issues you seek to solve assume altruistic or at least idealistic behavior on the part of both savers and managers. For i-banks, neo-liberal theory was that competition would force this behavior - we all know how well that has worked out.

To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

Chris Coles
12-06-11, 05:47 AM
I fear you are misunderstanding - I have never stated that banks are the only way by which capital can be gathered, then deployed to business.

You must further clearly define what a 'bank' is in your terms.

Strictly speaking, any institution which receives deposits (in return for paid interest) and then makes loans is a bank. You can have variations where the deposits don't receive interest as in a Jewish gamach, but the aim is still the same: short term borrow, long term lend.


I agree with your definition of a bank.

However, before answering the detailed points you raise I must introduce a thought that sprang into mind as I read your comment; particularly the last sentence:


To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

That prompted me to remember a wonderful Cirque Du Soleil show played out in the City of Salisbury in Wiltshire here in England in the early 1990's. They played Faust, and the part I instantly remembered was when the poisoned challis was presented with their depiction of bright blue sparks emanating from the offered bowl of wine.....

So soporific, so sublime..... all we need is some regulation and all will be fine again. Go on, take a sip! No harm!

That in turn reminded me of all the many meetings I have had with bankers. One that brought in his junior so he could demonstrate how to humiliate me. Or the one who, when I was introducing another colleague, interviewed us in a broom cupboard.

Or the best of all a meeting over lunch with one who set out in detail why the banking system has to move their managers every 18 months or so, due to the propensity to steal money from client accounts to use for their own "projects". Particularly old lady's accounts that remain dead for most of the year.

What I have learned over a lifetime is that the idea of a bank has deep flaws that relate to their having so much of other peoples money in their hands, day after day. That when you factor in the immense universe of different personality traits within humanity; you get such a variety of solutions. Their business is to take some money in and lend it out, but not on a one to one ratio, instead on a many to one ration.

So banks lend out money, more than they hold as a reserve and always expect to receive back even more than they lend as additional interest earned. At first sight this is a rather easy thing to deal with..... except that it always ends with a drain on the rest of any national economy.

It always ends with a bust.

We keep going through a period of seeming prosperity; only to end with a downturn.

You are like the bridge engineer that has built a bridge that keeps falling down; next time it will be different, all we need is a little more regulation and I will get it right .... next time! Sic!

Banking has its use in an economy, but the banking model has a deep flaw, while at first glance it seems to bring greater prosperity; in the end, (as everything has to end), it drains away prosperity. The more the banks lend, the greater the instability.

Add, that as I have also discovered, it leads to two other problems; it gives governments the idea that they can also borrow to create new industry, outside of the private sector; and, that it has no mechanism to fund free enterprise equity capital investment into new, particularly creative, businesses.

The end result we can see all around us today, many millions of young people unemployed, whole nations on the brink of financial collapse.

Banking on it own ..... repeatedly ......... fails.

So, what is wrong?

As things stand, we do not have a recognised mechanism to replace that lost prosperity; to create all those millions of jobs.

Banking is like a strong acid, it needs an opposite; an alkaline to provide a balance; to neutralise the negative function of a banking dominated economy.

That function is an adequate source of free enterprise equity capital.

So, as you see, a debate helps to uncover the force of the underpinning thinking that brought me to write, nearly two decades ago, about an idea I called The Capital Spillway Trust. And, it has taken me that same length of time to discover another part of the underlying reasoning.

A balanced economy must have an equivalent flow, back into the economy, of equity capital, to balance out the depleting effect of interest bearing bank lending. That is, if you believe, as I do, in free enterprise and private, competitive business. True free enterprise, true free markets; to take the ideas of the millions and allow them to become a reality.

Banking has to have control and thus must be balanced by the freedom of free enterprise.

That free enterprise equity capital both balances economically as well as socially.

That, if we must have a banking system; we must also have at every level of society, equivalent savings institutions dedicated to the delivery of free enterprise equity capital back into the economy to neutralise the acidity of banking.



There are alternate ways by which capital can be gathered and then deployed: angel funding (wealthy individuals), venture capital, government tax & subsidy, and so forth.

I can only answer that it is my understanding that the Bank of England agrees with my view, that we do not have any functional mechanism to create free enterprise jobs at the grass roots of society using equity capital.



The problem with your statement above is that you are using historical data which counts dividends from companies which historically were sponsored by the government. The East India company, for example, was one of the earliest corporations and was literally given a monopoly on East India trade. This is hardly a prime example of either a community funded enterprise nor a 'normal' dividend payment scheme.

This is a red herring; I am always talking about the creation of true free market, free enterprise business. I am never talking about the actions of governments; other than to disparage them. We all agreed, many decades ago, that monopoly is not the way to produce a functional economy.


You're also ignoring that early stage enterprises cannot afford to pay dividends. The growth stage of any company requires excess profits to be reinvested for growth.

If you look at the detailed proposals as set out in The Capital Spillway Trust Response to the Green Paper; Financing a private sector recovery, www.chriscoles.com/page4.html (http://www.chriscoles.com/page4.html) you will see that I always accept that there must be a period between initial investment and profit. Indeed, if you also look at chapter 3 The Road Ahead from a Grass Roots Perspective www.chriscoles.com/page3.html (http://www.chriscoles.com/page3.html) you will also note that I quote from discussions with Japanese businessmen that told me about their one, ten and one hundred rules where they do not expect profit for at least ten years.




As I noted above, your impression is quite wrong.

In fact banks have always been the dominant source of funds. The only difference was in the past, the 'bank' as an institution may well have been a family like the Rothschild's as opposed to a corporation engaged in banking.

To say that banks only have dominated in the last 6 decades is to ignore the very real impact of such families as the Rothschild's, as well as more overt examples such as the Medici takeover of Florence.

It is true that there are many that attribute all our financial problems to the likes of families such as the Rothschild's; or, again, that they are the defining reason, as you so describe, for all of our past success. What I believe is that, as with any family business, if it works and brings in a profit, why change anything?

All I can add is that I do not believe in any conspiracy; simply that they need to look more deeply into the underlying problems their own prosperity has brought their surrounding nations.

That their own prosperity has been brought at a price they now must take into consideration. That banking, without the input of equity capital to balance the economies; is constantly becoming unstable. That on its own, it keeps failing to deliver stability.


The only difference between today and the past - as Dr. Michael Hudson has noted - is that in the past sovereign power trumped finance power. Sovereign rulers and states have soldiers, whereas finance power at best has mercenaries.

It is my humble opinion, openly expressed; that governments should NEVER be involved in any form of job creation. As all that brings is a bureaucratic model that inevitably develops into feudalism.


I think this statement is far too strong. Warren Buffet, as a shadow bank, has done quite well both for himself and his entire holding company, including its employees, for many decades.

All I will add is to ask him, please, to take a careful look around him and ask if the long term effect of working a feudal mercantile economy, has brought true, long term prosperity; to the wider nation that surrounds him.


It is far from clear to me that the inherent abuses implicit in banking must always result in ruin.

As I noted previously, these precepts might apply to a local business, but how would they apply to say, Groupon? Amazon? Taiwan Semiconductor? Siemens? General Electric's generator business?

The precepts I have set out are only set down as applicable to the very small first stage start up. I have never set out to exclude the needs of the larger enterprise...... except that I do believe that if we continue to only fund new start ups under the banner of venture capital, where the new business is funded to become a purchase by another, larger company; then we lose all the many benefits of a fully competitive industrial economy.


So now you're expanding the definition of the local economy upwards such that failures can be absorbed via collectivization of risk. What then is the definition of 'local' in a dollar or pound figure? In a regional aspect?

Note that a physical definition of local inherently disadvantages the less wealthy and less populous regions, whereas a monetary definition of local presents great challenges of its own.

One of the great challenges is to allow a less prosperous part of the wider economy to become involved with their own supply chain. Look back at history and it was quite the normal thing for the local population to turn out to "Build a Barn" for a neighbour. That is in point of fact, true local capitalism, Indeed, free enterprise capitalism. They do not take a share; they give their labour to help another to also prosper. What I am going to deliver is exactly the same mechanism, but this time set around the concept of local savings used, where the local community wish, (NOT imposed by any other mechanism), to create new employment.



I guess your definition of failed is different than mine. If the definition of success is growth and increased profits, the investment banks have done very well indeed.

Here we introduce a subtlety; my idea of success is that the many become both free, prosperous and thus successful. There are many today that do not believe that the investment banks have achieved that.


You are also failing to distinguish between a deposit bank and an investment bank. Goldman Sachs is clearly the latter, but what is Bank of America? Citibank?

What proportion of the real estate bubble self reinforcing chain of transactions was investment bank? GS didn't originate a single mortgage, but it and its cohorts, as well as the supposed deposit banks, were clearly driving the entire chain from mortgage origination on up, as well as influencing ancillary functions like title law, appraisals, credit ratings, and so forth.

In a very real sense, this paragraph shows exactly what I am talking about. It is a good description of the many ways the banks currently function. All inter-related. All have contributed to their difficulties.


While I understand your desire to see a better deployment of local capital for local benefit, you have not successfully shown to me that the operational aspects of your proposal are viable.

You assert that dividends are a better ROI mechanism than interest, but dividends are the hallmark of mature companies. Dividends before maturity are rare and arguably fiscally unwise for companies; furthermore dividends are voluntary as we can see from the various tech companies like Apple and Google.

This is a point for debate. As at present, there is no functioning mechanism to deliver the free enterprise equity capital; it is easy to say it will not work. So here we are with a new invention; and the only way to discover if it will work is to invest in it.

I have always said, publicly, that if I can get my hands on a fair value for the telecom IP I have previously created, then I would place a large proportion of that value into an introduction of the whole concept. That I am happy to place my own money where my mouth is. That exercise is taking more time than expected so, recently, I have opened up a discussion with the BoE to see if there might be another way for the exploitation of my IP value. I will keep iTulip informed.


You also seem to imply that community investment presents less risk as individual investments are pooled throughout all the different individual investments in community businesses. Yet it is precisely the pooled money which allow investment banks their abuses.

What precisely prevents a community investment pool manager from exercising the exact same abuses his i-bank counterpart engages in?

How do you get everyone in the community to invest their savings into this pool? Or prevent multiple competing pools from forming?

It seems much of the issues you seek to solve assume altruistic or at least idealistic behavior on the part of both savers and managers. For i-banks, neo-liberal theory was that competition would force this behavior - we all know how well that has worked out.

The local community has to form their own "Local" Capital Spillway Trust fund. They do not invest any savings, nor ask anyone to save with them. Their function is to enable the transfer of prosperity presently locked into the shadow banking system; back into their own local community via job creation.

No one takes a "skim" off the top. All they have to do is encourage others in their local community to create a business plan that is acceptable to an accountant and form a formal business. So both the local accountant and solicitor, (attorney in the US), are there to enable a professional overview.

Anyone may set up such a local operation. So, if there are those that believe others are not sticking to the rules as set out, then they may compete.

The new business gets their equity capital and access to working capital for every job they create by submitting a PAYE record. So the existing tax record system underpins the exercise. Not tax record of new employee, no funding.

The new business owner holds 80% of the equity rights with the balance, 20% staying with the local fund. But the aiming point for the new business is to pay dividends on the whole investment.

They may no pay themselves anything more than an agreed minimum income until profitable.

Their entire operation will be widely open to scrutiny by all the local people. This is the local communities Barn Building exercise.

By involving everyone, openly, in the new way to fund the creation of new jobs in each local community; I feel certain that while there will always be the possibility of stupidity; the general rules as set out will serve to reduce such to the very minimum.

This is an open exercise designed to encourage everyone within any local community to get involved in their local business community and thus their own local economy.

Their children need jobs; they can see the whole process working within their own control.

I have set out enough here. Go read the documents again if there are other concerns. The whole thing has been downloaded by many others world wide.



To me it seems more that what is missing is effective regulation and enforcement - a supervisory function.

See above.

c1ue
12-06-11, 02:56 PM
What I have learned over a lifetime is that the idea of a bank has deep flaws that relate to their having so much of other peoples money in their hands, day after day.

I must say I am still unclear how you can reconcile this belief with having a local pool of money which in turn is somehow immune to this exact same flaw.

Local entities can be as much, if not more, corrupt than national entities.

My own view is that any source of power - which money is - will ultimately be abused. There can be no magical formula for removing the inherent danger of accumulation of power.

And in turn, capital in the modern world cannot be segregated into small enough pools to defuse this danger. There are far too many requirements - both industrial and societal - which require such accumulation.

Thus while I do agree that regulation is not in itself a magical mantra - the Soviet Union was a prime example with its bureaucracy still rampant today - at the same time the free market itself is equally no panacea.

The position we are in today, however, is clearly one in which the regulatory side must gain ascendancy.

Personally my view is that the only stable system is one which is always changing - and thus change, in particular unpredictable change, is the only way to prevent gaming of the system.


It is true that there are many that attribute all our financial problems to the likes of families such as the Rothschild's; or, again, that they are the defining reason, as you so describe, for all of our past success. What I believe is that, as with any family business, if it works and brings in a profit, why change anything?

All I can add is that I do not believe in any conspiracy; simply that they need to look more deeply into the underlying problems their own prosperity has brought their surrounding nations.

I fear you again misinterpret what I've said. I've never ascribed conspiratorial roles to the Rothschilds or whomever. The highly visible role said banking families have played in the history of Europe is, however, well documented.

And my point being, banking as a force in government and society is in no way a new phenomenon.


I can only answer that it is my understanding that the Bank of England agrees with my view, that we do not have any functional mechanism to create free enterprise jobs at the grass roots of society using equity capital.

Given the Bank of England's role (or lack thereof) in the formation of asset bubbles in England, as well as subsequent quantitative easing, I cannot say adding the BoE's imprimature to any proposed reform process is beneficial.


This is a red herring; I am always talking about the creation of true free market, free enterprise business. I am never talking about the actions of governments; other than to disparage them. We all agreed, many decades ago, that monopoly is not the way to produce a functional economy.

Why is the fact that most large corporations of today, as well as the large corporations of yore, are/were in fact quasi-government agencies at least in some part, not a factor when you cite the historical return rate of corporate dividends?

As for 'true free market' - this is frankly the refuge of insufficient contemplation. Any market no matter how free in the beginning, inevitably loses 'freedom' as the winners in said market seek to preserve or improve their own position.

Thus a 'true free market' is a theoretical construct which we'll never see for any length of time ever.


One of the great challenges is to allow a less prosperous part of the wider economy to become involved with their own supply chain. Look back at history and it was quite the normal thing for the local population to turn out to "Build a Barn" for a neighbour.

...

The precepts I have set out are only set down as applicable to the very small first stage start up. I have never set out to exclude the needs of the larger enterprise...... except that I do believe that if we continue to only fund new start ups under the banner of venture capital, where the new business is funded to become a purchase by another, larger company; then we lose all the many benefits of a fully competitive industrial economy.

Raising a barn is a relatively low skill, high labor process, and the results are something which pretty much everyone in a farming community will need at some time.

I've repeatedly asked you how such a cooperative venture as you propose could build a semiconductor wafer fab - the products of which form a key if understated role in modern existence, and the construction of which is anything but low skill.

Your telecom patents in fact would be completely worthless without the baseband chips, the routers, the RF towers, CPUs for processing, and so forth.

Thus while you may not specifically be advocating against larger enterprises, it is still quite unclear to me how you can legislate out the existence of banks - in order to legislate in the community funding - without in turn affecting the capability to form such larger enterprises.

Or let me put this more clearly:

If the local community savings enterprise as you've noted is so powerful, why then do you require the outside assistance of the BoE or any other in order to demonstrate its effectiveness?

I would think even a town of 10,000 should be more than enough to demonstrate the effectiveness of this strategy and institution, and with this success in hand would come the opportunity to repeat in a larger venue?

Chris Coles
12-11-11, 05:50 PM
The only useful answer is to say that history will be my judge. I have set into motion a debate that I personally believe in. The answers can only stem from getting on and setting it all into motion. That I intend to do; one way or another.

So let history be my judge.

metalman
12-15-11, 01:37 PM
on cue, msm catches on...

U.S. Shoppers Foot Bill for Soaring Pay in China

BY JUSTIN LAHART

One of the things that's showing up in Christmas stockings this year: higher prices, courtesy of China.

After decades as America's go-to destination for low-cost consumer goods, China is undergoing a profound shift. Rapid economic development and a smaller supply of young migrant workers are pushing up labor costs. Tack on rising raw-materials prices, driven largely by Chinese demand, and a strengthening currency, and China-made goods aren't the bargains they used to be.

In the past year, labor costs have risen 15% to 20% at Michaels Stores Inc.'s Chinese suppliers, says John Menzer, chief executive of the arts-and-crafts retailer.

http://online.wsj.com/article/SB10001424052970204026804577098773308400202.html?m od=ITP_marketplace_0

bart
12-15-11, 01:50 PM
http://www.nowandfutures.com/images/imports_china_inflation.png





http://www.nowandfutures.com/images/import_price_index.png

don
12-15-11, 03:59 PM
on cue, msm catches on...

U.S. Shoppers Foot Bill for Soaring Pay in China

A well-crafted headline - keeping in mind that's about all most people read. China - adds to the foreign scapegoat background radiation. Rising pay - always bad . . . . Put concisely and to the point ;_Y

The MSM know their job and they know it well.

bart
12-15-11, 04:05 PM
Yes, wages are and have been soaring in China - up to about $6,000 per year.

US minimum wage translates to about $14,600 and true average yearly income is about $40,000.




http://www.nowandfutures.com/images/china_yearly_wages.png

charliebrown
12-15-11, 04:26 PM
Thanks Mr. Bart,

It would be interesting to know how much food, clothing, shelter and medicine $6000 can purchase in China.
Is it the same amount as 40K in the U.S?

bart
12-15-11, 04:54 PM
Thanks Mr. Bart,

It would be interesting to know how much food, clothing, shelter and medicine $6000 can purchase in China.
Is it the same amount as 40K in the U.S?

No - far from it. One example, the US spends about 10-11% of CPI on food. In China, its close to 40% if memory serves.

Medical is a lot cheaper though. A Big Mac is about $4 in the US and about $2.27 in China for what its worth, and Purchasing Power Parity from the OECD shows the Yuan undervalued at about 80%. Very tough to get reliable data.
For what its worth, my daughter has lived in Beijing on & off for years and her *very* rough guess is that the yuan is undervalued around 50% against the dollar based on her living costs and guesstimates.

FRED
12-15-11, 05:51 PM
Thanks Mr. Bart,

It would be interesting to know how much food, clothing, shelter and medicine $6000 can purchase in China.
Is it the same amount as 40K in the U.S?

Here's our analysis of personal consumption expenditures by country.


http://www.itulip.com/images2/InternationalPCEHousingSortwtmk.png

jk
07-19-12, 10:16 PM
The next U.S. economic crisis will also be triggered by an oil price related external event. Current course and speed, our staggering economy, barely maintaining forward momentum, stuck in an Output Gap Trap smaller but no less inescapable than in the 1930s, will trip over a spike in oil prices, sending the economy back into recession in 2012.

The reason for the oil spike: the inexorable escalation of Syria's civil crisis into civil war and regional conflict.
kudos to ej on this. this was posted 11/30/11, about 8 months ago. i recall reading it and thinking that what was happening in syria was small scale, not close to a civil war. but it appears to be a civil war now, somewhat like the spanish civil war in which each side was funded and armed by hostile great power coalitions. don't know about the prediction of recession in '12, which ej has apparently backed away from recently. nonetheless, a prescient and/or exceedingly well informed observation re syria.

Chomsky
07-20-12, 08:16 AM
kudos to ej on this. this was posted 11/30/11, about 8 months ago. i recall reading it and thinking that what was happening in syria was small scale, not close to a civil war. but it appears to be a civil war now, somewhat like the spanish civil war in which each side was funded and armed by hostile great power coalitions. don't know about the prediction of recession in '12, which ej has apparently backed away from recently. nonetheless, a prescient and/or exceedingly well informed observation re syria.[/COLOR]


Fantastic call - and one that is awful to be right about.

As for a recession call, others are starting to yell from the rooftops:

http://www.creditwritedowns.com/2012/07/evidence-of-coming-recession-is-overwhelming.html

jpatter666
07-20-12, 09:15 AM
Fantastic call - and one that is awful to be right about.


Agreed -- but I'm hoping he was only right on the first half of the call and that he's wrong on the regional conflict. Hopefully, the near-decapitation of Assad's leadership circle by the resistance will mean Syria implodes and does not spread.

BadJuju
07-20-12, 09:30 AM
Agreed -- but I'm hoping he was only right on the first half of the call and that he's wrong on the regional conflict. Hopefully, the near-decapitation of Assad's leadership circle by the resistance will mean Syria implodes and does not spread.

Hard to say, especially with tensions flaring between US/Israel and Iran. Although I think Iran is digging its own grave by trying to close the Strait of Hormuz when one considers that most of that oil goes to Southeast Asian countries instead of the USA.

jpatter666
07-20-12, 09:56 AM
Hard to say, especially with tensions flaring between US/Israel and Iran. Although I think Iran is digging its own grave by trying to close the Strait of Hormuz when one considers that most of that oil goes to Southeast Asian countries instead of the USA.

Yeah....very large numbers of carriers heading that way. I'm thinking it's more to intimidate Iran (and Israel -- don't even *think* of trying to pre-emptive strike) before the election than anything. An Obama strike on Iran would sink any hope he has of reelection.

Chris Coles
07-20-12, 10:12 AM
Yeah....very large numbers of carriers heading that way. I'm thinking it's more to intimidate Iran (and Israel -- don't even *think* of trying to pre-emptive strike) before the election than anything. An Obama strike on Iran would sink any hope he has of reelection.

You obviously do not have to hand a history of the Falklands war where Margaret Thatcher won and raised her standing through the roof.

jpatter666
07-20-12, 03:16 PM
You obviously do not have to hand a history of the Falklands war where Margaret Thatcher won and raised her standing through the roof.

A Conservative could pull that off as Thatcher did. Also witness Bush and Iraq (before it all went to hell). If Obama did it it would alienate his base completely and Republicans would *not* turn to him. Indeed, they'd claim it was a "Wag the Dog" scenario.

Apples and Oranges.

BadJuju
07-20-12, 04:03 PM
Yes, I think the time for that has passed. Bush spent the good will of the American people with Afghanistan and Iraq. Libya wasn't a focus because it was so fast and impersonal.

raja
07-22-12, 08:51 AM
Agreed -- but I'm hoping he was only right on the first half of the call and that he's wrong on the regional conflict. Hopefully, the near-decapitation of Assad's leadership circle by the resistance will mean Syria implodes and does not spread.
I think it's unlikely that the 2nd half of EJ's call -- "the inexorable escalation of Syria's civil crisis into civil war and regional conflict" -- will materialize.

Two reasons:

First, some Arab countries are pro-rebels, so we wouldn't have a unified Arab pile-on against the rebels like we saw against Israel in the past.

The United States and dozens of other countries moved closer on Sunday to direct intervention in the fighting in Syria (http://topics.nytimes.com/top/news/international/countriesandterritories/syria/index.html?inline=nyt-geo), with Arab nations pledging $100 million to pay opposition fighters and the Obama administration agreeing to send communications equipment to help rebels organize and evade Syria’s military, according to participants gathered here.



Second, the trend lately has been going against the Arab dictators:

The Arab Spring is a revolutionary wave (http://en.wikipedia.org/wiki/Revolutionary_wave) of demonstrations (http://en.wikipedia.org/wiki/Demonstration_(people)) and protests (http://en.wikipedia.org/wiki/Protest) occurring in the Arab world (http://en.wikipedia.org/wiki/Arab_world) that began on 18 December 2010. To date, rulers have been forced from power in Tunisia (http://en.wikipedia.org/wiki/Tunisian_Revolution), Egypt (http://en.wikipedia.org/wiki/2011_Egyptian_revolution), Libya (http://en.wikipedia.org/wiki/Libyan_civil_war), and Yemen (http://en.wikipedia.org/wiki/2011_Yemeni_revolution); civil uprisings have erupted in Bahrain (http://en.wikipedia.org/wiki/2011–2012_Bahraini_uprising) and Syria (http://en.wikipedia.org/wiki/2011–2012_Syrian_uprising); major protests have broken out in Algeria (http://en.wikipedia.org/wiki/2010–2012_Algerian_protests), Iraq (http://en.wikipedia.org/wiki/2011_Iraqi_protests), Jordan (http://en.wikipedia.org/wiki/2011_Jordanian_protests), Kuwait (http://en.wikipedia.org/wiki/2011_Kuwaiti_protests), Morocco (http://en.wikipedia.org/wiki/2011_Moroccan_protests) and Sudan (http://en.wikipedia.org/wiki/2011_Sudanese_protests); and minor protests have occurred in Lebanon (http://en.wikipedia.org/wiki/2011_Lebanese_protests), Mauritania (http://en.wikipedia.org/wiki/Mauritania), Oman (http://en.wikipedia.org/wiki/2011_Omani_protests), Saudi Arabia (http://en.wikipedia.org/wiki/2011_Saudi_protests), and Western Sahara (http://en.wikipedia.org/wiki/2011_Western_Saharan_protests), as well as clashes at the borders of Israel (http://en.wikipedia.org/wiki/2011_Israeli_border_demonstrations) in May 2011.




Sure, the the sectarian split in the Arab world between Sunnis and Shiites is there, but I see open warfare between them as unlikely. Remember, the Arab obsession against Israel (historicaly justified, in my opinion, and requiring some kind of fair resolution) is the main focus of Arab politics, and what's happening in Syria has nothing to do with Israel. What would other Arab countries have to gain by stepping into a Syrian civil war?

Of course, this doesn't mean that the situation with Iran won't escalate . . . but that wouldn't be "the inexorable escalation of Syria's civil crisis into civil war and regional conflict" that EJ is predicting.

jk
07-22-12, 09:35 AM
what's happening in syria has quite a bit to do with israel. syria is the transit point for arms shipped from iran to hezbollah. cut syria away from shiite iran and you cut off the lifeline of shiite hezbollah.

raja
07-22-12, 12:02 PM
what's happening in syria has quite a bit to do with israel. syria is the transit point for arms shipped from iran to hezbollah. cut syria away from shiite iran and you cut off the lifeline of shiite hezbollah.
Of course, none of the Shia governments are going to like seeing Shia Assad toppled . . . .

But what is Iran going to do about it?

If you're talking about shipping weapons from Iran to Hezbollah in Lebanon, Iraq is geographically between Syria and Iran -- what did Iran do when we took over Iraq?

Can you give me a scenario suggesting how a wider conflict could spread from the downfall of Syria's government?

jk
07-22-12, 12:37 PM
Of course, none of the Shia governments are going to like seeing Shia Assad toppled . . . .

But what is Iran going to do about it?

If you're talking about shipping weapons from Iran to Hezbollah in Lebanon, Iraq is geographically between Syria and Iran -- what did Iran do when we took over Iraq?

Can you give me a scenario suggesting how a wider conflict could spread from the downfall of Syria's government?
assad is not shia. he is alawite. you really ought to know the facts before creating theories about them.

one thing iran will do is retaliate- the small beginning was the recent blowing up of israeli tourists in bulgaria.

iran actually has airplanes and ships which allow it to ship weapons other than by land routes. their difficulty is, i believe, lebanese airspace. i am not sure about all the issues here, but my impression is that weapons have been shipped by air to syria, then transported on the ground into lebanon.

there are shia populations in suadi arabia and the rest of the gulf states. they could become more active in a military sense, and attempt to create "civil wars" there, too. it is interesting to contemplate what role the shia-led gov't of iraq might play.

don
07-22-12, 02:50 PM
http://graphics8.nytimes.com/images/2012/07/22/books/review/0722-IYER-cover/0722-IYER-cover-articleLarge.jpg


Desert Pitch

By PICO IYER

A HOLOGRAM FOR THE KING


By Dave Eggers
312 pp. McSweeney’s Books. $25.

Where is our new-millennium Norman Mailer? It’s startling, 50 years on, to look back at the work of Mailer in the 1960s — from “The Presidential Papers” to “The Armies of the Night” — and see such unabashed ambition, such reckless audacity and such a stubborn American readiness to try to save the Republic from itself and bring it back to its original promise. Mailer’s very titles — “Advertisements for Myself,” “An American Dream” — told us he was on a mission, committed to the transformation of country and self, and even as he gave himself over to unremittingly private (and epic) meditations on God, the Devil, cancer and plastics, he was also determined to remake the civic order. He ran for mayor of New York City, he tried his hand at directing movies and in 1955 he helped start an alternative weekly known as The Village Voice. Part of the exhilaration of Mailer was that he cared so ravenously even when he failed; he was shooting for the moon even when he shot himself in the foot.

Dave Eggers comes from a much more sober, humbled, craft-*loving time, and his latest novel is the opposite of a failure: it’s a clear, supremely readable parable of America in the global economy that is haunting, beautifully shaped and sad. But for all the difference between their generations, you can feel in Eggers some of the hunger, the range and the unembarrassedly serious engagement with America and its ideals that gave Mailer’s work such force. Eggers asserted his bravado — along with some tonic self-*mockery — in the very title of his first book, “A Heartbreaking Work of Staggering Genius” (a title of which Mailer would have been proud); he followed it up with a very different kind of book, a novel, “You Shall Know Our Velocity,” about the impenitent determination of two young Americans to travel the world giving money away. Yet even as he has written seven substantial books in 12 years, Eggers has also established his own publishing house, bristling with attitude and backward-looking invention. He’s started two magazines whose names (Timothy McSweeney’s Quarterly Concern and The Believer) openly declare their interest in homemade whimsy and optimism — or, you could say, in the past and in the future. He’s established nonprofit writing and tutorial centers across the country and, in his spare minutes, helped write two feature movies, “Where the Wild Things Are” and “Away We Go.”

Like Mailer, he’s almost underrated precisely because he’s so ubiquitous and dares us to mock him with his unapologetic ambitions. Yet where Mailer was consciously working in a deeply American grain, with his talk of revolution and transcendence, Eggers speaks for a new America that has to think globally and can’t be sure where the country fits on the planetary screen. And where Mailer was bent on showing us how America could remake the world, Eggers, with ferocious energy and versatility, has been studying how the world is remaking America. Most of our great contemporary examinations of cultural sampling and bipolar belonging come from writers with immigrant backgrounds. It’s invigorating, in that context, to see how Dave Eggers, born in Boston to classic fifth-generation Irish stock (his mother was a McSweeney) and raised in Lake Forest, Ill., has devoted himself to chronicling the shifting melting pot, seeming to tell others’ stories more than his own.

In his fourth major book, “What Is the What,” he gave us a nonfiction novel about Valentino Achak Deng, a Sudanese “Lost Boy” who survives wars at home and refugee camps abroad only to find that his problems are by no means behind him when finally he gets to Atlanta, and the Land of the Free. Some critics may have bristled at the notion of a young white American writing the story of a real-life African villager, but it took a writer of Eggers’s artistry (and vulnerability) to give Deng’s story its heartbreaking power. In his next (nonfictional) work, “Zeitoun,” Eggers turned the story of Hurricane Katrina into a brilliantly structured and propulsive narrative whose all-American protagonist just happened to be a Muslim house-painter brought up in the Syrian coastal town of Jableh, married to a former Southern Baptist from Baton Rouge and eager to construct a new life through hard work and tending to others. The American Dream, the author was reminding us, is coming to us now in Arabic.

In both “Zeitoun” and “What Is the What,” Eggers’s heroically self-effacing prose revealed the people we blindly walk past on our city streets every day. “Zeitoun,” in fact, began as part of a Voice of Witness series of oral histories through which Eggers is hoping to inform us of those faraway places whose destinies are ever more central to our own. Like Mailer, Eggers seems ready to take America by the scruff of its neck and ask us what we’re going to do about injustice and a sense of community; but where some writers celebrate America as a home for second lives and triumphant reinvention, Eggers seems bracingly wary of happy endings, as if convinced that our real work is still ahead of us.

In “A Hologram for the King” — a kind of “Death of a Globalized Salesman,” alight with all of Arthur Miller’s compassion and humanism — Eggers at once pushes that project forward and, characteristically, gives us an entirely different and unexpected story. Alan Clay is a 54-year-old self-employed consultant (as everyday and malleable as his name) first introduced on the 10th floor of a glassy Hilton in Jeddah, where he’s come to try to redeem his fortune, and America’s. Day after day Alan is driven, usually late, to a large white tent in the desert — part of the King Abdullah Economic City, or KAEC (as in “cake”) — where three young colleagues sit around with laptops waiting to show a holographic teleconferencing system to King Abdullah, on behalf of Reliant, an American company that is “the largest I.T. supplier in the world.” Day after day, the king fails to arrive and the Americans lie around, fret about the absence of Wi-Fi and kill time in the emptiness. Desperate for something to happen, Alan lances a cyst on his neck with a crude knife — and later a needle — just to feel the blood flow.

“Hologram” flashes past in an appropriately quick series of brief, displacing passages with plenty of space around them for us to feel the vacancy and nowhereness; if Mailer attached himself to Hemingway in honor of the older writer’s unabashed competitiveness and machismo, Eggers here is drawn more to the best thing in Hemingway, his style of clean lines and sharp edges. Scene after scene is so clear and precise — “A plume of smoke unzipped the blue sky beyond the mountains,” a “pair of headlights appeared as a blue sunrise beyond the ridge’s ragged silhouette” — that it’s easy to overlook just how strong and well wrought the writing is.

The vast empty spaces of the desert stand, of course, for the holographic projections that now determine Alan’s (and America’s) destiny, while Saudi Arabia, a puritan kingdom where everyone seems to be boozing on the sly, is the perfect Other that constantly confounds and defeats its New World visitors. In the long, empty days Alan befriends a penguin-shaped young Saudi who tools around in a 30-year-old Caprice and sports Oakley sunglasses above his handmade sandals (he once spent a year in Alabama); he meets lonely expats and looks in on an embassy debauch where a man in a spacesuit is “feigning weightlessness.” Every detail perfectly advances a vision of American aspiration at a time of economic collapse and midlife crisis: just two floors below a gleaming condo in the desert that speaks for the virtual future that the Saudis (and Americans) are counting on is another room where 25 foreign laborers are squeezed into a tiny space, exchanging blows over a discarded cellphone.

Yet even at home, we come to see, Alan has been living in a house for sale where he’s taken for a “ghost”; he’s run out of money to pay his daughter’s college bills, and the only one who has ever fought for him is his “constantly cruel ex-wife.” Over a long career working for Fuller Brush and Schwinn bicycles and a dozen others, he’s somehow encouraged the outsourcing of manufacturing that has led to both him and his country becoming redundant. In Florida, he eats from vending machines, and in his home in suburban Boston he watches old Red Sox DVDs again and again. At the book’s opening, his neighbor Charlie, who’s recently discovered transcendentalism and speaks (as Mailer might have) of “grandeur and awe and holiness,” walks into a lake to his death. In Alan’s America, even Walden Pond has become a cesspool.

Eggers’s command of this middle-*management landscape is so sure — and his interest in the battle between humanity and technology so insistent — that his book might almost be a DeLillo novel written for the iPhone Generation, though delivered by DeLillo’s more openhearted and Midwestern nephew. Eggers’s inhabiting of the terms and tics of a distinctly American consciousness is as remarkable as, in earlier books, his channeling of Sudanese and Syrian sensibilities. He knows how businessmen, faced with a terrible proposal, will say, “Let’s table it for now”; he registers how door-to-door salesmen point out, “A stranger rings, a friend knocks”; he cites the wisdom of Jack Welch. To a world of glass and emptiness — “I feel like a pane of glass that needs to be shattered,” Alan tells another consultant — he brings his rather old-fashioned interest in neighborhood values and service. And his Saudi Arabia sounds to me note-perfect, from the soldier seated in a beach chair next to a Humvee, soaking his feet in an inflatable pool, to the secret drag races in the desert.

Nearly every action in the book carries a symbolic resonance: each time Alan is approached by a foreign woman, he becomes disengaged and, in fact, impotent, and when finally he does go into a local hospital for his cyst, he’s worked on by a team made up of Chinese, English, German, Italian, Russian and mongrel Lebanese medical professionals. Yet underneath the global blueprint is a story human enough to draw blood. Anyone who’s traveled will recognize the plaintiveness and vague menace of the Saudis who loom before Alan, or the likable Saudi Panza who tries to scroll to a Fleetwood Mac song on his iPod as Alan prepares to tell him another corny joke. The buddy movie is clearly a significant form for Eggers, but, like Hollywood, he has upgraded it: from the frat-boy do-goodism of “You Shall Know Our Velocity” to a vehicle that features a young Muslim and an aging American, and asks what happens when velocity gives out.

At first glance, a reader might wonder what a story about a flailing American businessman trying to win a contract over the Chinese in the Saudi desert has to do with Eggers’s celebrated memoir about losing both of his parents within five weeks at the age of 21, and tending to his younger brother. But the strength of all his work comes from his sense of loss and pain, mixed with his decidedly American wish to try to bring his orphaned characters to a provisional shelter. It’s Eggers’s tragic sense — “Were scars the best evidence of living?” he writes here — that gives fiber and nuance to his desire for something better, and ensures that his hope for some kind of understanding never becomes merely sentimental. Alan speaks for something essential to Eggers — and poignant — in his constant oscillation between the wish to do the right thing and his awareness that he doesn’t have a clue what the right thing might be.

Like Mailer, in other words, Eggers has a vision, with the result that there’s nothing random about the projects he takes on or the ways he pursues them; to the casual observer, he may seem all over the place, but underneath the wild diversity of his interests is a profoundly searching and meticulous craftsman who could hardly be more focused. “A Hologram for the King” is, among other things, an anguished investigation into how and where American self-confidence got lost and — in the central word another lonely expat uses for Alan — “defeated.” At one point, a fellow passenger on a plane mentions to Alan how even the Statue of Liberty is depicted moving forward, so committed is America to the future tense; four *pages on, Alan recalls being told, at length, about how an all-important contract for blast-resistant glass in Freedom Tower, built on the ashes of the World Trade Center, has been given to a Chinese company, working (to compound the insult) from an American patent.

In places, the book becomes almost a nostalgic lament for a time when life had stakes and people worked with their hands, knew struggle. Alan’s father, a World War II veteran who still has shrapnel in his lower back, rages at his son for helping to take business abroad; the deeper sorrow is the suggestion that moral clarity and a sense of purpose also got outsourced in the process. As he mourns the decline of a time when men were more in touch with their animal selves and an outer wilderness could save us from a wilderness within, Alan reminisces about the hunting trips he took with his dad as a boy, thinks about the time he took his daughter to see one of the last launchings of the space shuttle at Cape Canaveral (and they met an old-fashioned, in fact Maileresque, American hero and explorer, an astronaut). When Alan is invited by a local friend to a Saudi mountain village, he tries to reach back to a world of John Wayne certainties and, cradling a gun, blows up the one human connection he’s so happily made.

This may all sound a little too much like metaphor — or romanticism — but Eggers’s sense of loss is hard-earned and his feeling for his characters as affectingly real as his epigraph from Beckett (“It is not every day that we are needed”). At times, his book reminds one of Douglas Coupland’s deeply wistful tales of Generation X’s search for belief and direction, at other times of the weightless suburban drifters of Haruki Murakami’s world, all but longing (in “The Wind-Up Bird Chronicle,” say) for an earlier era of intensity and war. A sense of impermanence and possible disaster is always very close in Eggers’s work — here it’s sometimes devouring — and that is what makes his good nature and hopefulness so rending, and so necessary. Every now and then he pulls back from his engagingly stumbling characters to suggest a larger order: “The work of man is done behind the back of the natural world. When nature notices, and can muster the energy, it wipes the slate clean again.”

In the end, what makes “A Hologram for the King” is the conviction with which Eggers plunges into the kind of regular working American we don’t see enough in contemporary fiction, and gives voice and heft to Alan’s struggles in an information economy in which he has no information and there’s not much of an economy. At one point, with nothing to do, Alan starts writing to his daughter to persuade her to forgive her mother, the ex-wife who has all but destroyed him. “People think you’re able to help them and usually you can’t,” he writes. “And so it becomes a process of choosing the one or two people you try hardest not to disappoint.” Such is the fragility of Alan’s situation, though, that even that modest hope seems far from guaranteed, mostly because Alan is such a non-virtual man, the opposite of a hologram.

Norman Mailer probably hated the fact that many of us consider his great, essential narrative to be his “nonfiction novel” about Gary Gilmore, “The Executioner’s Song”; the whole long, tragic story is delivered with extraordinary documentary fidelity and restraint, and yet only someone as obsessed as Mailer was with rebellion and possession could have invested the tale with such intensity. In much the same way, Eggers has developed an exceptional gift for opening up the lives of others so as to offer the story of globalism as it develops and, simultaneously, to unfold a much more archetypal tale of struggle and loneliness and drift. Public and private explorations come together, and as this groundbreaking writer grows wiser and deeper and more melancholy, evolving from telling his own stories to voicing America’s, he might be asking us how we can bring the best parts of our past into a planetary future.

http://www.nytimes.com/2012/07/22/books/review/a-hologram-for-the-king-by-dave-eggers.html?ref=books

raja
07-22-12, 04:37 PM
assad is not shia. he is alawite. you really ought to know the facts before creating theories about them.
As far as knowing the facts . . . .

Syria is approximately three quarters Sunni, but its government is predominately Alawi (http://en.wikipedia.org/wiki/Alawi), a Shia sect that makes up less than 15% of the population.
http://en.wikipedia.org/wiki/Shi%27a%E2%80%93Sunni_relations#Syria

and . . . .

Alawis are self-described Shia Muslims, and have been called Shia by other sources including the influential Lebanese Shia cleric Musa al-Sadr (http://en.wikipedia.org/wiki/Musa_al-Sadr) of Lebanon (http://en.wikipedia.org/wiki/Lebanon).
http://en.wikipedia.org/wiki/Alawi




one thing iran will do is retaliate- the small beginning was the recent blowing up of israeli tourists in bulgaria.
That was in retaliation for killing Iran's nuclear scientists.
And . . . that's a far cry from starting a "regional conflict" such as EJ suggests.



iran actually has airplanes and ships which allow it to ship weapons other than by land routes. their difficulty is, i believe, lebanese airspace. i am not sure about all the issues here, but my impression is that weapons have been shipped by air to syria, then transported on the ground into lebanon.
I'm not saying Iran would like it if Assad was kicked out . . . but I don't see them starting a regional conflict over it.


there are shia populations in suadi arabia and the rest of the gulf states. they could become more active in a military sense, and attempt to create "civil wars" there, too. it is interesting to contemplate what role the shia-led gov't of iraq might play

Perhaps EJ needs to define what he means by "regional conflict". If it means "conflict in the region" . . . well, there is always conflict in the region, right? No one will ever go wrong predicting that. Heck, three Arab dictators have been toppled in the last year or so. So, I hope that's not EJ's prediction, for if it were, it would be pretty lame.

If "regional conflict" means conflict between countries -- which I think was EJ's meaning -- then "attempts to create more civil wars" doesn't qualify. I'll say it again . . . I doubt that Assad's downfall would be a tipping point leading to a regional conflict in the sense of interstate war.

raja
07-22-12, 04:47 PM
Desert Pitch

By PICO IYER

A HOLOGRAM FOR THE KING


By Dave Eggers
312 pp. McSweeney’s Books. $25.



Hey Don, I really like some of the stuff you post.

Would it be possible to boldface a couple of the key points when you make a long post -- like c1ue often does. Sometimes all the info on the Net gets a bit too much, and if a post is long I'll just tend to skip it if I can't quickly see what it's about.

lakedaemonian
07-22-12, 06:36 PM
Can you give me a scenario suggesting how a wider conflict could spread from the downfall of Syria's government?

I can think of a couple realistic possibilities:

1.)The void that existed in Northern Iraq that became a somewhat autonomous-ish Kurdistan within Iraq could expand to include a portion of Syria territory with Syrian ethnic Kurds which could cause a growing rift with Turkey which has a long history of conflict in suppressing Kurdish independence in the region including it's own significant and perpetually unhappy Kurdish minority.

2.)Asymmetric attacks against Israel being launched from Syria/Lebanon as a direct/indirect result of the instability/fall of the Syrian regime and the power vacuum that inevitably follows which would compel Israel to act in proactive self defense.

3.)The fall of the Assad regime and/or it's retreat to a smaller and more defensible position leads to sectarian division and potential post Assad civil war and long term instability, much like former Yugoslavia and the rally cry of "someone has to do something" compels intervention.

4.)Concern over Syria's WMDs(yes I know credibility in this regard is low, but Syria's development/possession of them seems to be well supported) compels some to consider a limited intervention. It must be noted that there are plenty of examples of fairly quite/covert intervention to mitigate WMD risk that have been quite successful.

5.)The fall of the Assad regime leads to a hard shift that overshoots in the opposite direction towards an islamist/fundamentalist movement/government...much like Iran post Shah.

And like Iran's military post Shah, the Syrian military may be unable to act as a calming/stabilizing force due to it's strong alignment with the Assad regime.

Egypt's military is viewed by many as a symbol of Egyptian nationalism...can the same be said of Syria with it's military? I'm thinking not. I'm thinking less Egypt(where it's too soon to tell if it will blow apart at the seams) and more Yugoslavia post Tito.

I'm not going to try and predict how long it will take to transition to a post Assad Syria.......but it's inevitable that the Assad regime can't continue in it's current iteration for much longer. Even if Assad is able to consolidate his grip on power through a level of violence that would make 1982 Hama seem like a tea party I can't imagine Syria would be able to recover economically without huge external support.

The closest example of potential success for Assad would probably be Sri Lanka.

After many years of insurgency and civil war, and with considerable economic/military/political support from China....Sri Lanka was able to decisively liquidate the last Tamil Tiger militant movement...the level of violence and crimes against humanity/war crimes seems quite considerable......but with China playing diplomatic top cover Sri Lanka has been able to win the civil war....now it has to win the peace.

But I would rate Assad's chances of survival at only a fraction of that of Sri Lanka's civil war government.

don
07-23-12, 07:05 AM
Would it be possible to boldface a couple of the key points when you make a long post -- like c1ue often does. Sometimes all the info on the Net gets a bit too much, and if a post is long I'll just tend to skip it if I can't quickly see what it's about.

A number of 'Tulipers (on other postings) have noted they feel the opposite way - no bold, please, let me figure out what's noteworthy for myself. Occasionally I've excerpted a piece but overall feel a service to the author in presenting what he has written. A minor conumdrum.

raja
07-23-12, 08:43 AM
I can think of a couple realistic possibilities:

1.)The void that existed in Northern Iraq that became a somewhat autonomous-ish Kurdistan within Iraq could expand to include a portion of Syria territory with Syrian ethnic Kurds which could cause a growing rift with Turkey which has a long history of conflict in suppressing Kurdish independence in the region including it's own significant and perpetually unhappy Kurdish minority.
Conflict between Turkey and ethnic Kurds would primarily be about Turkey maintaining its present Kurd population within it's borders. The most that could occur would be some sort of a Kurd/Turkish war, which would not develop into a regional conflict involving other countries.


2.)Asymmetric attacks against Israel being launched from Syria/Lebanon as a direct/indirect result of the instability/fall of the Syrian regime and the power vacuum that inevitably follows which would compel Israel to act in proactive self defense.
In the short and medium term, I think a power vacuum in Syria would focus Syrians on the process of filling that vacuum, rather that engendering attacks on Israel. The Syrians would be too busy attacking each other, at the very least politically.


3.)The fall of the Assad regime and/or it's retreat to a smaller and more defensible position leads to sectarian division and potential post Assad civil war and long term instability, much like former Yugoslavia and the rally cry of "someone has to do something" compels intervention.
That would not be a "regional conflict".


4.) Concern over Syria's WMDs(yes I know credibility in this regard is low, but Syria's development/possession of them seems to be well supported) compels some to consider a limited intervention. It must be noted that there are plenty of examples of fairly quite/covert intervention to mitigate WMD risk that have been quite successful.
That would not be a "regional conflict".


5.)The fall of the Assad regime leads to a hard shift that overshoots in the opposite direction towards an islamist/fundamentalist movement/government...much like Iran post Shah.
And the Syrian islamist/fundamentalists invade Israel? Not likely.