View Full Version : Major US banks worse than Japan's zombies?
http://www.itulip.com/images/lifesupport.jpgMajor US banks worse than Japan's zombies?
Why aren't massive expansions of banking reserves by the Fed working this time?
Back in September 2008 we posted this chart that shows the Fed vastly expanding reserves for member banks. We show the expansion as a percentage rather than an absolute change because the numbers are so large as to be meaningless. The real story is the proportion relative to past crises -- real, as in the case of 9/11, or imagined, as in the case of Y2K:...the Fed expanded its total asset holdings by $600 billion over the last 30 days, with less than a third of this going directly into reserve balances. The graph below puts the latter magnitude in perspective. When the World Trade Center towers burned down on September 11, 2001 many of the financial institutions that played a key role in trades of government securities and interbank loans were wiped out or incapacitated, posing potentially huge liquidity problems. Reserves ballooned to $67 billion, as excess reserves simply piled up in some banks while others remained in need. Last week's spike of $171 billion was 2-1/2 times as big-- the breakdown of interbank lending last week proved more profound than that caused by the physical disruptions in New York in 2001.
Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. - Econbrowser.com, Oct. 2008 (http://www.econbrowser.com/archives/2008/10/balance_sheet_o.html)
This explanation seemed reasonable back in October 2008 when the expansion of reserve deposits were up 150% year over year, only two and a half times larger than ever occurred before during a financial crisis, but now that the expansion has continued to 625% year over year, more than eleven times larger than during the 9/11 emergency, new questions arise.
http://www.itulip.com/images/fedadjustedreserves021584to091908.gif
Pre-crisis reserve level in blue post crisis in red
http://www.itulip.com/images/fedadjustedreserves021584to101908.gif
Pre-crisis reserve level in blue post crisis in red
http://www.itulip.com/images/fedadjustedreserves021584to111908t.gif
Pre-crisis reserve level in blue post crisis in red
We went for a second opinion to a banking expert we know who prefers to remain anonymous of this particular opinion. For the purposes of this interview we’ll call him Dr. Banker.
iTulip: What do you make of the extraordinary levels of bank reserves that the Federal Reserve is pumping into the Federal Reserve System, now at more than 600% higher than November 2007 levels?
Dr. B: Think of the commercial banks that take loans from the Federal Reserve banking system as a person and the money that flows through them as the blood in a person's body. Now think of that person as injured. When he suffers a severe injury and loses blood, the Fed gives him an emergency money transfusion. You can see in your chart below the money transfusions in late 1999 just before the end of the year, due to the Y2K scare -- false, as it turns out -- and in 2001 after 9/11. Some believe that the withdrawal of reserves in mid 2000 caused the market decline that led to the recession of 2001.
http://www.itulip.com/images/fedadjustedreserves011999to011902.gif.gif
Dr. B: After the injury is operated on and healed and the patient is producing his own money again, the money that was added earlier by the Fed's transfusion is drained back out. As you can see from your chart above, the transfusions usually take two to six months and typically six months or so after the crisis is over are gradually withdrawn over a period of several months to return total money in the system to pre-crisis levels.”
iTulip: That makes sense. But why has the Fed this time had to continue to transfuse money? Why are the transfusions so huge and why do the transfusions seem to not be working? Is he still bleeding and the money is pouring through the system? If you try to compare previous expansions with this one on the same chart on the same scale, the differences are quite stark.
http://www.itulip.com/images/fedreservesexpansionepisodes.gif
Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.
iTulip: Interesting. That does not bode well for the efficacy of future transfusions.
Dr. B: No it does not. They can keep the intravenous tube hooked up to a pint bottle or a 100 gallon drum of blood but it doesn’t matter if the blood is not circulating through the patient so he can take it in.
iTulip: Controversial. I see why you are giving this to us on the sly. What evidence do you have to support this theory?
Dr. B: Note that many smaller banks that do not operate as part of the Fed system are working just fine.
iTulip: Go on.
Dr. B: The reason: Credit Default Swaps. It is now well understood that CDS are at the root of today’s financial crisis. Your readers have known that risk since 1999 when you first posted Someone Please Turn on the Lights (http://www.brookings.edu/articles/1999/11globaleconomics_mayer.aspx). Some have suggested (http://www.linkedin.com/answers?viewQuestion=&questionID=336375&askerID=56750&browseIdx=0&sik=&goback=.avq_334677_564729_0_*2) the simple expedient of canceling them all, declaring all of the CDS contracts null and void.
iTulip: That will bring the dead patient back to life, assuming as you assert that he is dead?
Dr. B: CDS certainly killed him but removing them is no cure.
iTulip: Why not?
Dr. B: Federal Reserve Bank of New York Staff Report no. 276 "Credit Derivatives and Bank Credit Supply" by Beverly Hirtle, February 2007 concluded that all of the nation’s largest banks used credit default swaps not to protect existing assets but to expand their balance sheets between 1997 and 2006.Summary and Conclusions
This goal of this paper is to examine the relationship between banks’ use of credit derivatives and the supply of bank credit. Credit derivatives represent an important credit market innovation that, in theory, allows banks to originate and fund loans without holding the associated credit risk. More broadly, credit derivatives are the latest in a series of innovations that have facilitated credit risk management and made it easier for banks to diversify their credit risk exposures.
The key question is whether banks have used these instruments primarily to diversify and thus reduce their risk exposures, or whether banks have undone the diversification by expanding their lending. Research on earlier credit market innovations has found that activities such as loans sales and securitizations have not resulted in overall reductions in bank risk, but rather an expansion of lending (Cebenoyan and Strahan 2004 and Franke and Krahnen 2005). Such an increase is credit supply would be an important consequence of the recent rapid growth of the market for credit derivatives.
http://www.itulip.com/images/bankscdsbysize.gif
Source: Federal Reserve
Dr. B: That was in 2006. As we all know, CDS have doubled again since then.
iTulip: So all of the largest banks relied on CDS to make new loans since 1997.
Dr. B: Correct, and that means that central banks cannot wave a magic wand and declare all CDS contracts null and void because if they do loans that were made in the US by the largest banks only because they were insured by CDS will have to be declared null and void, too. No one knows exactly the total loan value is of these CDS-dependent loans but it must be high enough to call their solvency into question because these banks refuse to lend to each other no matter how much the Fed increases reserves.
iTulip: Have you tried to estimate total CDS dependent loan value?
Dr. B: I have. Back in 2006 when the Fed did the research there were eight banks with assets over $100 billion. As of May 2008 there are 20, as you can see in the chart below.
Bank Assets in $1,000s
http://www.itulip.com/images/bankassetover100billion.gif
Source: Federal Reserve
Dr. B: How much of the combined $10 trillion in assets of these banks was taken on since 1997 and what portion of that expansion was enabled solely by use of credit derivatives? Conservatively, let us estimate the total is 20% of loans. That represents $2 trillion in loans that have to be cancelled in order for the CDS to be cancelled. That is why canceling them is a non-starter.
iTulip: But why does the total value need to be that high to make the decision to cancel all CDS a non-starter for central banks? Doesn’t the act of canceling the CDS mean that these loans are technically ‘bad" loans? No bank can survive a write-down of 10% of assets never mind 20%. Doesn’t this mean these largest banks are technically insolvent?
Dr. B: Now you understand the problem! You nailed it. That is why I say they are dead and all the cash infusions in the world from the Fed won’t bring them back to life. They are dead with the CDS and dead without them. The Fed may as well stop the intra-venous injections of reserves.
iTulip: That implies a loss of, if not all of the banks' assets, a portion of the aggregate value at distressed sale prices. Best case, what, 50% or $10 trillion?
Dr. B: For a $10 trillion loss.
iTulip: Thank you for the opinion. I'm sure it will generate a lively response.
Dr. B: You are very welcome.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Down Under
12-01-08, 05:42 PM
Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.
Excellent insight. Bottom line, the patient is dead and CDS killed him is consistent with what Sinclair has been saying for a long time.
Although others here disagree, I cannot see how gold [& commodities] will not rise significantly over the next few years, as the governments of the world attempt to reflate.
enlightening facts!
I too was reminded of J.Sinclair.
Regarding CDS:
If there is no cure for the patient - turn of that machine and let them die !
The rest of the economy can't wait for the banks to be saved, because there is no cure.
This also implies the big banks will never lend out to main street again.
A sudden stop of lending to main-street has already occurred. And not only consumer credit. Anybody tried to get an Letter of credit (L/C) these days - The Dry-Ship says no?
So let them fail and start programs to direct lend to sound main-street projects & companies. Maybe via remaining sound banks or via a public bank. (like in Germany with the KfW Bank after WWII). (Sound projects exclude the carmakers :))
Hole of the discussion about the crisis in the mainstream media and all of the rescue programs seem to be dominated by the big banks.
But they can not be part of the solution. They are already dead. All that money is wasted.
The same goes for Europe.
The world needs credit - but the world does not need these zombie banks.
However the current spin seems to be: the world needs credit - so you need us (wall-street) - save us!!
steveaustin2006
12-01-08, 07:33 PM
I'm glad CDS was brought up because it is does seem to be the one piece that few analyze in terms of what will happen and it is downright scary that Sinclair seems to understand it - having been in the clearinghouse / derivatives business.
What's interesting is where iTuilip and Sinclair converge and diverge. Both see gold rising above $1500 and a reconstitution of gold into the monetary system - perhaps halting the devaluation of the dollar. However, Sinclair seems more and more certain of hyperinflation - and it is precisely these OTC derivatives that he blames as the eventual culprit.
I had a conversation with him the other day if you can call it that via email and he remains steadfast that hyperinflation is a real possibility based on this derivative problem despite the debt being denominated in USD.
What I have not been able to understand is:
1) By what mechanism does banking circulation become unclogged?
2) What level of investment margin is in the system and has yet to be deleveraged? Everyone throws in the towel on this, yet there must be some way to measure leverage, no?
3) What does the Fed have to do if the $8 trillion pledged already has not already compelled trading partners to begin exchanging dollars for non-dollar denominated assets?
oddlots
12-01-08, 08:09 PM
What was that movie "Weekend at Bernie's." Now starring Hank and Ben
There's a very valuable discussion of the significance of CDS in the Institutional Risk Analytics report from today:
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=326
A few details are sort of mind blowing:
- no collateral is posted for CDS contracts (infinite levearge?)
- they have been used as a tool to trade equity volatility (ie, if I understand it correctly, in the way they are actually used there is no serious attempt to assess the actual default risk of the underlying entity)....
Best to just read it; its beyond me to paraphrase. But the takeaway is exactly as described by EJ above:
"... we have taken the view that the only way to deal with situations such as AIG (NYSE:AIG) (http://us1.institutionalriskanalytics.com/SEC/SEC_Listing.asp?b=&yr=all&qtr=all&cik=5272&s=14) is bankruptcy. Funding the AIG CDS portfolio is an open-ended proposition. But of course Paulson, Geithner et al would rather use tax dollars to subsidize this example of global casino gambling rather than tell the American people the truth about AIG and the other large CDS dealer banks such as C and JPM. And the truth, in our view, is that these large, CDS dealers are basically insolvent, with or without the distorting effects of fair value accounting. And the solvency problems arise not only because of their own CDS positions, but because their dealer counterparties have problems of their own."
But most importantly, the piece of perhaps prescient news is this:
"We hear from a very well placed Buy Side investor with extensive business interests in the US and EU that three primary banking institutions in Europe, two French and one German, have such significant CDS exposure and other problems that they cannot even begin to fund the payouts anticipated over the next quarter.
The funding squeeze reportedly is exacerbated by a near-collapse among weaker players in the hedge fund market, who were accustomed to receiving loans from one large French institution, which then stupidly converted the loans into equity. That's right. This past summer, when the bank put out a call for redemptions of $4 billion in hedge fund investments, says the source, only $400 million was returned. And the French bank also used these same hedge funds and others to reinsure some of its own CDS exposure. Sound familiar? Yup, just like AIG.
Unlike the approach taken by Paulson and Geithner to bailout AIG and JPM (via the Bear Stearns rescue), however, the investor claims that EU officials are considering a moratorium on CDS payments by the three Euroland banks in question. The banks would be given ten years to write down their CDS and hedge fund exposures and would receive additional infusions of capital by their respective governments. The source claims that French banks have such huge exposure to both hedge funds and CDS, sometimes linked together, that the positions are beyond the ability of the EU governments to bail them out without a cessation of CDS payments.
The IRA was not able to obtain a comment from EU officials over the weekend about these allegations. We'll be making some calls Sunday night and Monday. But if this unconfirmed report turns out the be true, then the beginning of the end of the CDS market as we have known it will be at hand. And ironically, the catalyst for the final solution will come not from the failure of a US dealer, but instead by a moratorium on CDS payments by an EU bank"
There's a lot of colour here that somehow fleshes out the issue... well worth a read.
santafe2
12-01-08, 09:08 PM
Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.
Tonight I was reviewing the ECRI Weekly Leading Index, (WLI), and this position helps me understand what I'm seeing there. The economy is dying. It's still breathing shallowly but business activity has fallen off a cliff.
I keep thinking of the scene in The Day After Tomorrow where the RAF helicopter pilots realize their fuel lines are freezing and never understand that the temperature has fallen to -100C.
The chart below is a 40 year business cycle chart representing year-over-year percent of change.
851
The chart below is a 20 year business cycle chart representing business activity level.
852
Comments welcome.
So CDS liabilities are behind the liquidity trap currently facing the CBs. Thoughts?
Down Under
12-01-08, 09:58 PM
"... But of course Paulson, Geithner et al would rather use tax dollars to subsidize this example of global casino gambling rather than tell the American people the truth about AIG and the other large CDS dealer banks such as C and JPM.
I just read Traders, Guns & Money by Satyajit Das, and the only word to describe the CDS and other OTC derivatives is as a casino. It's an absolute joke/outrage/crime what has taken place.
A good interview by Das (http://www.abc.net.au/4corners/content/2007/20070917_subprime/interviews.htm) my be found here although is was recorded in September, 2007 and the focus was subprime mortgage meltdown.
jimmygu3
12-01-08, 10:10 PM
http://www.itulip.com/images/fedadjustedreserves011999to011902.gif.gif
Dr. B: After the injury is operated on and healed and the patient is producing his own money again, the money that was added earlier by the Fed's transfusion is drained back out. As you can see from your chart above, the transfusions usually take two to six months and typically six months or so after the crisis is over are gradually withdrawn over a period of several months to return total money in the system to pre-crisis levels.”
I must point out that the "drain start" and "drain end" points on the chart are being misinterpreted. Since the chart uses year-over-year change, the apparent "drains" are actually mirror image artifacts created one year after the crisis when comparing relatively normal reserve levels to the crisis levels.
However this does not affect the core thesis of the article. Great stuff.
Jimmy
Chief Tomahawk
12-01-08, 10:24 PM
So what insulates small banks from falling real estate prices? Is the assumption their mortgages were sold off to Wall St. and thereby their exposure is manageable? What if the "walking dead" flood the market with foreclosed homes and cut prices for quick sale purposes? At the least the volume of loan writing should drop off, and with that, a small bank's staff. Perhaps the small bank survives, albeit, with one employee working the teller window and lots of empty desks.
By the way, what ever happened to Brian Wesbury's solution of changing the accounting rules? Then again, whatever happened to Brian Wesbury? Haven't seen him in a while. Perhaps he's been reassigned to the Icelandic banking sector???
metalman
12-01-08, 11:47 PM
So what insulates small banks from falling real estate prices? Is the assumption their mortgages were sold off to Wall St. and thereby their exposure is manageable? What if the "walking dead" flood the market with foreclosed homes and cut prices for quick sale purposes? At the least the volume of loan writing should drop off, and with that, a small bank's staff. Perhaps the small bank survives, albeit, with one employee working the teller window and lots of empty desks.
By the way, what ever happened to Brian Wesbury's solution of changing the accounting rules? Then again, whatever happened to Brian Wesbury? Haven't seen him in a while. Perhaps he's been reassigned to the Icelandic banking sector???
the way i read it... the big banks are dead. that's wrecking the economy. then comes the little banks.
I must point out that the "drain start" and "drain end" points on the chart are being misinterpreted. Since the chart uses year-over-year change, the apparent "drains" are actually mirror image artifacts created one year after the crisis when comparing relatively normal reserve levels to the crisis levels.
However this does not affect the core thesis of the article. Great stuff.
Jimmy
I think that the misperception caused is important though.
It makes us think that "normally", as in the past two occasions, reserves are not withdrawn untll almost a year later. But that is not the case.
The "infusion spike" from zero and back ot zero is really an infusion AND withdrawal all in one. And the past two cases the reserves were in and back out again in just a couple of months (ok, the y2k ramp up took longer, but that was a planned event and it started out gradually).
So, if we see a drop in that y-to-y growth in the next couple of months or so, then that would be a very important sign and we might all cry Hallelujah. (I mean, we don't have to wait to see the line go negative to see draining of reserves - that's an artifact of charting y-on-y change, as you point out.)
But, if it is CDS that is the problem, we won't all be betting on a rapid slide down to zero!
But if the chart levels off and flat lines, that's an important sign too since it would seem to imply that those reserves are there to stay a while, it perhaps suggests that maybe a stable situation has been reached. (Those reserves might then better be likened to formaldehyde rather than blood?)
But while the thing keeps goes up and up .... Oy!
How far can it go before the Fed goes completely Weimar?
ThePythonicCow
12-02-08, 04:02 AM
So what insulates small banks from falling real estate prices?
The big guys bought the crap real estate mortgage paper, and used CDS's to spread the risk amongst themselves. The little guys sold the crap paper to the big guys as soon as the mortgage closed. The big guys ended up with massive counter-party risk on each other; the little guys don't have that.
Metaphorically, it is as if the big banks are swimming at sea, and each roped themselves to the others, thinking that this reduced their individual risk of drowning. Having thought that, they each took on a much greater load of risky debt, because they were calculating the risk of bankruptcy (drowning) too low, by not adequately accounting for the systemic risk of mutual counter party collapse in a major downturn.
The smaller banks avoided direct involvement in this Jonestown suicide pact, by not using CDS's to rope themselves in too tightly, and by not then using the resulting "collective (in)security" to justify carrying massively more risky debt than they could safely manage individually.
A massive economic downturn will take out some smaller banks, just as it takes out some other businesses, individuals and governments. But some small banks will survive as well. The collective suicide pact of the worlds largest banks is however awe inspiring. The mutually assured destruction that we risked with nuclear weapons of war has been revisited with CDS weapons of finance.
I've been hearing this from a lot of people, the question is where it will lead or what can be done
Larouche said it and he thinks its back to the 13th centry
The patient is dying; we're at a bedside death-watch. The patient is the US economy. We don't know exactly when it will die, but it will be very soon. In principle, the patient is dead already.
Mandelbrot & Taleb mentioned the revolution which is 18th century or so
http://www.youtube.com/watch?v=H3zZ6qNWeGw
And than we have a lot of people comparing it to 1931
Chief Tomahawk
12-02-08, 07:12 AM
Yes, I don't see how the little guys avoid getting sucked down the liquidity whirlpool short of having a massive stash of gold in the vault to support themselves.
Chief Tomahawk
12-02-08, 07:17 AM
Nice metaphor. And you managed to work in Jonestown as well! I though think the big banks will hog the remaining oxygen on their way out. Little banks will have to watch out for the collapsing carcases as gravity works it's natural effect.
steveaustin2006
12-02-08, 07:43 AM
If the big banks are dead and the Fed knows it, why not turn the small banks into big banks by giving them the money -- turn them into bigger and bigger banks to spur massive new lending? and all the while the gov't extends direct credit during the transition period?
The other option is what was done before in Europe - create bad banks - that is separate all the toxic assets and place them in new 'bad banks' thereby leaving the healthy old name entity in place. Then the bad banks are run by specialists who work to maximize what little value is left there while the old banks are healthy again and resume lending.
jimmygu3
12-02-08, 07:47 AM
So what insulates small banks from falling real estate prices? Is the assumption their mortgages were sold off to Wall St. and thereby their exposure is manageable? What if the "walking dead" flood the market with foreclosed homes and cut prices for quick sale purposes? At the least the volume of loan writing should drop off, and with that, a small bank's staff. Perhaps the small bank survives, albeit, with one employee working the teller window and lots of empty desks.
I spoke recently with the CEO of a small (5 branch) local bank my family has held stock in for many years. He said that they had no exposure to "exotic" products like MBS & CDS, and issued no mortgages at all, much less subprime ones. Their problem is with construction loans to developers for projects that have been halted and/or are failing to sell through to the consumer.
Bankrate.com gives them the worst rating (1 star), largely because of the Nonperforming Asset Ratio. Their loss reserves are high, but nonperforming assets are climbing fast. The thing he said that made some sense is that many of the nonperforming assets are still making some payment. The bank could foreclose and sell the assets off at a loss to improve the ratio, but it sees more value in restructuring payments. He also has no interest in receiving TARP funds in exchange for equity.
Chief T's idea of loan issuance dropping off seems a sure thing. Wonder how many banks are in the same predicament?
Jimmy
we_are_toast
12-02-08, 07:53 AM
Dr. B: Correct, and that means that central banks cannot wave a magic wand and declare all CDS contracts null and void because if they do loans that were made in the US by the largest banks only because they were insured by CDS will have to be declared null and void, too. No one knows exactly the total loan value is of these CDS-dependent loans but it must be high enough to call their solvency into question because these banks refuse to lend to each other no matter how much the Fed increases reserves.I don't understand this. Why would "loans that were made... only because they were insured by CDS will have to be declared null and void"? Why?
These loans could be insured by the government. The defaults on these loans would be FAR less than trying to pay off the CDS gambling debts.
We're talking about economic Armageddon here with the CDS, we're talking about what might be a huge but manageable debt for the government to insure loans that exceed the banks reserve requirements.
I know there are legal ramifications but in this desperate situation and they can be taken care of.
So I'm still looking for a good explanation as to why it isn't better to cancel the CDS than to let the world slip into a deep depression?
due_indigence
12-02-08, 08:18 AM
We need a Devil's Dictionary for the New Economics.
Globalism: the consolidation of incompetency set atop massive complexity while awaiting epic catastrophe.
Cronyism is the greatest impediment to a reasoned prescription. The attempt to rescusitate Wall Street while Main Street burns is a huge tragedy. It makes you want to cry 'cause it ain't gonna happen. I think the economy is crying out for simplification. By supporting small regional banks, we reduce the network effect and break the risk into manageable bite-sized pieces. The food chain is tied to small-time, regional lines of credit. Who needs Manhattan?
Obama's no Huey Long. He's not even FDR. He's Clinton/Blair.
Chris Coles
12-02-08, 10:13 AM
The one thing that stands out to me is that all the leading individuals within the banks in question have at last met up with the utter brutality of having to face the realities that negative cash flow brings in its wake, something every small business owner has had to face from the other side of the counter. Sublime is a word that comes to mind.
The very best solution will be to stop the payments and let them go to the wall. The first week afterwards will be the worst, but afterwards, everyone will be working towards a fresh start and making plans for a future revival.
If they leave the patients hitched up to the drip for several years, all they will do is put off the inevitable and by then the general economy will be in a far far worse state than today.
Treat this like any other business decision, get it over and done with.
jimmygu3
12-02-08, 10:27 AM
I think that the misperception caused is important though. It makes us think that "normally", as in the past two occasions, reserves are not withdrawn untll almost a year later. But that is not the case.
You're right. Here's a graph of the nominal level of reserves during the 2001 spike. Levels were essentially back to normal in about 3 months.
https://research.stlouisfed.org/fred2/fredgraphfile/?graph_id=10867
Here's another chart I created that tracks the ratio of Fed reserves to the total monetary base. The ratio has declined fairly steadily from 27% in 1959 to 5% in recent years. The current spike puts us at 28%, retracing 50 years of relative reserve reductions in 2 months (and the most recent data is from October 1!)
http://i275.photobucket.com/albums/jj317/jimmygu3/reserve_mb_ratio.png
Charles Mackay
12-02-08, 11:18 AM
As others have noted above, I would also like to give credit to JS Sinclair for stating unequivocally for the last 2 years that the $52 trillion in credit default swaps is what broke the financial system and that it was unfixable "in any practical way" which is what Dr. Banker is confirming... not fixable in any practical way.
Which sort of brings us back to the inevitable fact that a forced dollar revaluation has become almost certain. Are we past the feasiblity threshold of EJ's "ratchet down" theory? ... or not? :confused:
The incredible gold backwardation of the last two months is telegraphing to all that will listen that a currency crisis is imminent. The cash market for gold is several hundred dollars over the near futures month. Silver is even worse at a 50% premium over near contract. JP Morgan is shorting silver at $9.50/oz that has a market value of $14 - $15/oz!!! That is telling you that the system has already gone belly up.
Those holding US dollars and hoping to perfectly time your exit in 2009 are taking a hell of a risk IMHO.
due_indigence
12-02-08, 11:49 AM
"If the big banks are dead and the Fed knows it, why not turn the small banks into big banks by giving them the money -- turn them into bigger and bigger banks to spur massive new lending? and all the while the gov't extends direct credit during the transition period?"
Sorry Mr. Austin, but your suggestion betrays a meritocratic impulse. Are you an assembly-line worker by chance? Nah, they have decided to save Wall Street which is to say, they have decided to hang Main Street out to dry. Even if they could express an honest impulse, crony capitalism is so entrenched that rational merit-based (or market-based) processes would be subverted.
London Banker has called it 'survivor bias':
"Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: "No provision in the legislation that mandates re-lending.") What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come."
http://londonbanker.blogspot.com/2008/10/financial-eugenics-paulson-plan-for.html
I'm thinking the Paulson-Wall Street axis has decided that a collapse on Main Street may be in their long-term best interests as they will be able to cherry-pick distressed businesses and assets at sale of the century prices. Then the whole lending scheme can begin anew --or not. The US may just become a static feudal state hostile to capital formation and suspicious of entrepreneurism. Gold will become the coin of the realm. The particularly galling aspect of this is that they will do this via the $700 billion TARP laundramat i.e. with Main Street's money. We are in the process of reseating the elites. If we can put the messianc rhetoric aside for a minute, St. Obama voted for the TARP and was silent on the AIG bail-out. There's no Robin Hood on the horizon. Sometime in very near future, a bunch of lame-brained progressives are going to realize that they got seduced. Obama was 'symbolically transformative' but not 'substantively transformative'. Yes his packaging is novel alright. But he's one big more-of-the-same. Unfair to judge a President-elect? Look at his roster!
With no manufacturing base and the collapse of the 'service-sector economy' myth, I'm trying to imagine an American middle class. Who's going to re-stock this pond? The realtor and mortgage broker community? I could well imagine a Brazilian style plutocracy, a small constellation of well-heeled Manhattan families, sort of like the movie 'Escape from New York', but in reverse. Manhattan will become a gated, gilded community with regular helicopter shuttle runs to the Hamptons. Our children will be rummaging through dumpsters like Rio street urchins.
How fortuitous. The average American can't be much better educated than the average Brazilian. Ignorance is malleable. Perfect! If you accept the re-industrialization theme for the US, don't we have to start ascending this ladder from about mid-rung? Again, this has to put a re-invigorated middle class a couple generations away.
due_indigence
12-02-08, 12:00 PM
I guess my point is Chris, isn't Wall Street well on the way to solving its problem via TARP? Of course there have been and will be casualties. It'll be a smaller, more concentrated Wall Street. But in some ways it'll be more powerful too like a noble class. Isn't that what TARP is...a blatant system of tribute for the privilege of sitting on the nobleman's lands?
If the big banks are dead and the Fed knows it, why not turn the small banks into big banks by giving them the money -- turn them into bigger and bigger banks to spur massive new lending? and all the while the gov't extends direct credit during the transition period?
The other option is what was done before in Europe - create bad banks - that is separate all the toxic assets and place them in new 'bad banks' thereby leaving the healthy old name entity in place. Then the bad banks are run by specialists who work to maximize what little value is left there while the old banks are healthy again and resume lending.
Both are good points.
I think the big bad banks have a very tight grip on the fed policy, "rescue" strategies and on the public opinion.
If the needed functions of the bad ones would be provided otherwise - the bad ones should be let fail - finally.
I think the bad banks hide behind the horror story of systemic risk.
Chris Coles
12-02-08, 01:40 PM
I guess my point is Chris, isn't Wall Street well on the way to solving its problem via TARP? Of course there have been and will be casualties. It'll be a smaller, more concentrated Wall Street. But in some ways it'll be more powerful too like a noble class. Isn't that what TARP is...a blatant system of tribute for the privilege of sitting on the nobleman's lands?
Yes DG, in one sense you are correct, but if this is truly as bad as we believe, then there is another vested interest beneath the gloss of a fallen feudal empire, pure survival. The point I was trying to get across is that if the nobleman has no idea of what to do next, then might it be as much in their interest to bring the whole thing to a quick stop as ours?
labasta
12-02-08, 03:28 PM
I think most itulipers knew by Oct that it was CDS that was the problem.
This is unfortunately more confirmation.
Gosh they are really in a jam, aren't they?
How do they let the big banks fail? They can't let them fail and disappear, shut the doors and say thanks for all your business over the years.
How many business/current/savings accounts are in these banks? What happens to them if the banks go under? Surely these businesses die, right there, right then. That means gold coins and chickens before you can say "Will you give me 6 eggs for this t-shirt?". That's an instant Argentina/Zimbabwe. No thanks.
So, they'll have to fail these banks without the accounts disappearing. I have no experience in this. How could they do this? Complete nationalisation? Will nationalisation create hyper-inflation?
I don't understand the true connection between bad loans and the CDS which were used to create them to warrant a knowledgable response.
As others have noted above, I would also like to give credit to JS Sinclair for stating unequivocally for the last 2 years that the $52 trillion in credit default swaps is what broke the financial system and that it was unfixable "in any practical way" which is what Dr. Banker is confirming... not fixable in any practical way.
Which sort of brings us back to the inevitable fact that a forced dollar revaluation has become almost certain. Are we past the feasiblity threshold of EJ's "ratchet down" theory? ... or not? :confused:
The incredible gold backwardation of the last two months is telegraphing to all that will listen that a currency crisis is imminent. The cash market for gold is several hundred dollars over the near futures month. Silver is even worse at a 50% premium over near contract. JP Morgan is shorting silver at $9.50/oz that has a market value of $14 - $15/oz!!! That is telling you that the system has already gone belly up.
Those holding US dollars and hoping to perfectly time your exit in 2009 are taking a hell of a risk IMHO.
This is going to go down to the wire, the last possible second. At 11:59:59 you look safe in dollar cash, at 12:00:00 you are destroyed by currency "revaluation". You can only make people hold dollars by scareing the absolute shit out of them. Once what's done is done and EVERYONE is wrongfooted, it will be time to pull out that rug that everyone is standing on.
When that happens, I don't honestly know. Does it happen? I'm pretty damn sure it does.
I call it the motivational study of economics, if you can understand the motives, you can determine the course of action, but NOT unfortunately, the timing.
This is going to be the biggest ride of all of our financial lives.
Hang on! (and hope you have a parachute or a bunker, but hopefully not a cement parachute)
ThePythonicCow
12-02-08, 04:02 PM
but hopefully not a cement parachuteNor a silk bunker ;).
Chris Coles
12-02-08, 04:03 PM
I think most itulipers knew by Oct that it was CDS that was the problem.
This is unfortunately more confirmation.
Gosh they are really in a jam, aren't they?
How do they let the big banks fail? They can't let them fail and disappear, shut the doors and say thanks for all your business over the years.
How many business/current/savings accounts are in these banks? What happens to them if the banks go under? Surely these businesses die, right there, right then. That means gold coins and chickens before you can say "Will you give me 6 eggs for this t-shirt?". That's an instant Argentina/Zimbabwe. No thanks.
So, they'll have to fail these banks without the accounts disappearing. I have no experience in this. How could they do this? Complete nationalisation? Will nationalisation create hyper-inflation?
I don't understand the true connection between bad loans and the CDS which were used to create them to warrant a knowledgable response.
It doesn't work like that at all. Sweden is a very good example. They fired all the top management. And yes I do mean fired them. Gone, out the door.
They appointed their own people who had a very clear mandate. The banks depositors were safe and the core staff at all the branches were still in place. So all you do is reopen the doors a few days later and act as if nothing has happened.
The dodgy stuff gets swept away under the carpet and the good is allowed to flourish. No problem.
It simply takes courage to act positively and make clear decisions under pressure and, particularly, not to pay any heed to the whimpering executives that caused the problems in the first place. Job done.
Down Under
12-02-08, 04:45 PM
Sweden is a very good example. They fired all the top management. And yes I do mean fired them. Gone, out the door.
Yes, firing all the top management would be a good start. But, will it happen? It would be a sure fire bet if one could trade it.
Sidewinder
12-02-08, 09:17 PM
"...With no manufacturing base and the collapse of the 'service-sector economy' myth, I'm trying to imagine an American middle class."
D_I - there are a few of us out here - we are the survivors just like the lesser number of peasants in Europe after the plagues. Assuming there is anything left at all, some of us will exist to pick up the pieces. Why do we exist? We did not fall prey to leverage and we have stores of raw materials.
Charles Mackay
12-02-08, 09:24 PM
This is going to go down to the wire, the last possible second. At 11:59:59 you look safe in dollar cash, at 12:00:00 you are destroyed by currency "revaluation". You can only make people hold dollars by scareing the absolute shit out of them. Once what's done is done and EVERYONE is wrongfooted, it will be time to pull out that rug that everyone is standing on.
When that happens, I don't honestly know. Does it happen? I'm pretty damn sure it does.
I call it the motivational study of economics, if you can understand the motives, you can determine the course of action, but NOT unfortunately, the timing.
This is going to be the biggest ride of all of our financial lives.
Hang on! (and hope you have a parachute or a bunker, but hopefully not a cement parachute)
jtabeb, did you happen to see the Steve Kroft interview of Obama on 60 minutes last week? He asked Obama what he was currently reading. Obama said he was reading about FDR's first 100 days!!!! :eek::eek::eek:
jtabeb, did you happen to see the Steve Kroft interview of Obama on 60 minutes last week? He asked Obama what he was currently reading. Obama said he was reading about FDR's first 100 days!!!! :eek::eek::eek:
Given the current historical analogue, that implies he will be able to advise China on exactly what they should do...:rolleyes:
jayers4647
12-03-08, 04:19 AM
iTulip: That implies a loss of, if not all of the banks' assets, a portion of the aggregate value at distressed sale prices. Best case, what, 50% or $10 trillion?
Dr. B: For a $10 trillion loss.
A month ago Hank and Ben talked about what they were doing might actually make them money and then they can return it to the taxpayer. Is it by dollar depreciation, reflation, nominal increases in real estate and with that credible loan to value real estate loans in their portfolio. Then when things are working again people sell their homes or refinance this off the govt books.
Is this part of the signal of what has to come in the near future.
iTulip: That implies a loss of, if not all of the banks' assets, a portion of the aggregate value at distressed sale prices. Best case, what, 50% or $10 trillion?
Dr. B: For a $10 trillion loss.
A month ago Hank and Ben talked about what they were doing might actually make them money and then they can return it to the taxpayer. Is it by dollar depreciation, reflation, nominal increases in real estate and with that credible loan to value real estate loans in their portfolio. Then when things are working again people sell their homes or refinance this off the govt books.
Is this part of the signal of what has to come in the near future.
There are many dots, but they are not simple to connect. For example, when Dr. Peter Warburton was recently interviewed by EJ in Inside the Whirlpool: Interview with Dr. Peter Warburton (http://itulip.com/forums/showthread.php?t=5669) he expressed the belief that the bailouts are unlikely to make money:EJ: We have a massive credibility crisis here. No one believes our treasury secretary or head central banker because of a series of flip-flops and misstatements. Only two months ago both were claiming that the crisis was contained. Paulson should recuse himself at the start of the crisis to avoid the appearance of conflicts of interest. Now we're supposed to believe that the $700 billion bailout will result in a profit.
PW: That is an incredible assertion. Never in history has a bailout returned a profit.
Then there is the appearance of the Treasury to try to discourage the buying of TIPS:Treasury's future inflation fears topple TIPS (http://www.itulip.com/forums/showthread.php?p=45890)
But the Treasury’s marketing push ended in 2003. The fixed rate dropped from a juice teaser rate of 3.6% to a lousy 2%. I wasn’t buying. Then in 2007 the Treasury lowered the maximum annual purchase from $30,000 to $5,000, cutting the opportunity to earn inflation tax back from the government by 83% – fun while it lasted. Then this May they set the fixed rate at a heart pounding 0%. With a $5,000 annual limit and a fixed rate dropped to 0% as inflation hits new highs, rest assured that Series I bonds will soon be directed at the financially uneducated where the government, and the FIRE Economy interests that fund it, aim all of the high powered marketing of bogus financial products, public or private. Now it appears that the TIPS market is broken completely.
`Broken' TIPS Cheapest U.S. Debt as Inflation Slows (http://www.bloomberg.com/apps/news?pid=20601103&sid=atV9Ioht2Buo&refer=news)
Oct. 20 (Bloomberg) -- Bonds that protect against faster inflation may be the biggest bargain in the Treasury market even as gains in consumer prices slow.
Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.
BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.
``There is something broken here,'' said William Chepolis (http://search.bloomberg.com/search?q=William+Chepolis&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), who oversees more than $9 billion of bonds as a fixed-income fund manager in New York at DWS Investment, a unit of Frankfurt- based Deutsche Bank AG. ``At some point the market will figure out that it has overcorrected and will come back.''
The TIPS market is starting to show signs that it has recently become unbroken.
http://www.itulip.com/images/TIPS010103-120208.gif
The 10 year TIPS have stopped rocketing and leveled off. What does it mean? If they level off at these higher yields can it mean that the bond market believes that across the yield curve inflation rates even higher than we experienced in early 2007 are coming back over the next five to ten years?
labasta
12-03-08, 10:21 AM
It doesn't work like that at all. Sweden is a very good example. They fired all the top management. And yes I do mean fired them. Gone, out the door.
They appointed their own people who had a very clear mandate. The banks depositors were safe and the core staff at all the branches were still in place. So all you do is reopen the doors a few days later and act as if nothing has happened.
The dodgy stuff gets swept away under the carpet and the good is allowed to flourish. No problem.
It simply takes courage to act positively and make clear decisions under pressure and, particularly, not to pay any heed to the whimpering executives that caused the problems in the first place. Job done.
It sounds good, but too simple. It's basically the government taking over the banks, isn't it? Involving CDSs and the like, would this make it different this time round? Also, the solution would have to be global. All governments would have to nationalise at the same time I think.
I have a feeling it's more desperate today, than it was for Sweden in 1992. How many bad debts were built up for how long? Today, we could be looking at a wealth reset back 30 years. That could be too much for the system to take all at once.
I have an inclining that the government is between a rock and a hard place, each option being equally as bad as the other. It's just a feeling though and nothing more.
Hopefully not. Maybe they'll just nationalise them and that's that. If they can, then the sooner the better.
Charles Mackay
12-03-08, 02:43 PM
Ran across this today on Sudden Debt Blog. Could those CDS banks still be alive according to Schrodinger's Cat?
http://suddendebt.blogspot.com/
http://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s1600-h/quantum-suicide-7.gifhttp://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s400/quantum-suicide-7.gif
http://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s1600-h/quantum-suicide-7.gif
smandelbaum
12-03-08, 03:04 PM
It appears that Dr. B has quoted the NY Fed Staff Report completely out of context. In the paragraphs immediately following those quoted above, the report concludes:
We find limited evidence supporting the idea that banks increase the supply of credit as they obtain additional credit protection through credit derivatives, with the strongest results for large term borrowers. Commitment borrowers do not appear to benefit greatly from increased use of credit derivatives by their lenders. These results suggest that the benefits of increased credit derivatives protection are relatively narrow, in the sense that they accrue mainly to the type of borrower most likely to be a “named credit” in a credit derivatives transaction.
It is further interesting to note that the impact of credit derivatives protection for these borrowers is primarily on the terms of lending – longer loan maturity and lower spreads – rather than on loan volume.
You can see for yourself on page 28 at http://www.newyorkfed.org/research/staff_reports/sr276.pdf.
The NY Fed Staff Report concludes that credit derivatives have not caused lending to increase, in contrast with prior financial innovations like loan sales and securitizations.
Andreuccio
12-03-08, 04:05 PM
Ran across this today on Sudden Debt Blog. Could those CDS banks still be alive according to Schrodinger's Cat?
http://suddendebt.blogspot.com/
http://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s1600-h/quantum-suicide-7.gifhttp://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s400/quantum-suicide-7.gif
http://2.bp.blogspot.com/_2fuk3iGxQxM/STWGNkSk_EI/AAAAAAAACMI/-tprtTlWbXw/s1600-h/quantum-suicide-7.gif
If you were to drop Schrodinger's cat, would it do what the stock market has been doing the last few days?
jimmygu3
12-03-08, 04:38 PM
There are many dots, but they are not simple to connect. For example, when Dr. Peter Warburton was recently interviewed by EJ in Inside the Whirlpool: Interview with Dr. Peter Warburton (http://itulip.com/forums/showthread.php?t=5669) he expressed the belief that the bailouts are unlikely to make money:EJ: We have a massive credibility crisis here. No one believes our treasury secretary or head central banker because of a series of flip-flops and misstatements. Only two months ago both were claiming that the crisis was contained. Paulson should recuse himself at the start of the crisis to avoid the appearance of conflicts of interest. Now we're supposed to believe that the $700 billion bailout will result in a profit.
PW: That is an incredible assertion. Never in history has a bailout returned a profit.
Then there is the appearance of the Treasury to try to discourage the buying of TIPS:Treasury's future inflation fears topple TIPS (http://www.itulip.com/forums/showthread.php?p=45890)
But the Treasury’s marketing push ended in 2003. The fixed rate dropped from a juice teaser rate of 3.6% to a lousy 2%. I wasn’t buying. Then in 2007 the Treasury lowered the maximum annual purchase from $30,000 to $5,000, cutting the opportunity to earn inflation tax back from the government by 83% – fun while it lasted. Then this May they set the fixed rate at a heart pounding 0%. With a $5,000 annual limit and a fixed rate dropped to 0% as inflation hits new highs, rest assured that Series I bonds will soon be directed at the financially uneducated where the government, and the FIRE Economy interests that fund it, aim all of the high powered marketing of bogus financial products, public or private. Now it appears that the TIPS market is broken completely.`Broken' TIPS Cheapest U.S. Debt as Inflation Slows (http://www.bloomberg.com/apps/news?pid=20601103&sid=atV9Ioht2Buo&refer=news)
Oct. 20 (Bloomberg) -- Bonds that protect against faster inflation may be the biggest bargain in the Treasury market even as gains in consumer prices slow.
Treasury Inflation-Protected Securities fell 8 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.12 percent, according to Merrill Lynch & Co. indexes.
BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Consumer prices, unchanged in September, may increase 4.5 percent this year and 2.65 percent in 2009, according to the median estimate of 69 forecasters surveyed by Bloomberg.
``There is something broken here,'' said William Chepolis (http://search.bloomberg.com/search?q=William+Chepolis&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), who oversees more than $9 billion of bonds as a fixed-income fund manager in New York at DWS Investment, a unit of Frankfurt- based Deutsche Bank AG. ``At some point the market will figure out that it has overcorrected and will come back.''
The TIPS market is starting to show signs that it has recently become unbroken.
http://www.itulip.com/images/TIPS010103-120208.gif
The 10 year TIPS have stopped rocketing and leveled off. What does it mean? If they level off at these higher yields can it mean that the bond market believes that across the yield curve inflation rates even higher than we experienced in early 2007 are coming back over the next five to ten years?
No, if the spread between Treasurys and TIPS were growing that might be the case, but the spread continues to tank. The spread stayed very stable at 2.2 to 2.5 through '07 and the first 3/4 of this year. Then it nosedived to its current value of .34. The TIPS market is expecting .34% CPI for the next 10 years!?!
http://i275.photobucket.com/albums/jj317/jimmygu3/TIPSSpread.png
Here's an alternate take on it. All TIPS are not created equal. The yield to maturity curve for TIPS is steeply inverted, indicating short term deflation expectations. The 5 year TIPS due 4/15/10 is yielding 6.45%. With 1-2 year Treasurys under 1%, this implies expected CPI DEFLATION of 5.5% over the next 16 months. The 10 year TIPS due 1/15/11 is currently yielding 5.2%, indicating an expected resumption of positive CPI at some point in 2010.
Jimmy
Why is Dr. B assuming a 100% loss rate (i.e. $10T)? The default by the insurance provider does not necessarily mean that the loan is worth nothing. It certainly means it is worth less than 100% because the default loss risk to the bank has increased - but won't some of the borrowers pay regardless of what happens on the CDS?
hugh_lawson
12-03-08, 07:18 PM
Although others here disagree, I cannot see how gold [& commodities] will not rise significantly over the next few years, as the governments of the world attempt to reflate.
Down Under's was the first reply to EJ's latest. It also seems his is the only one to ask the most important question. Throughout the article EJ is describing a deflationary meltdown. The Fed is responding just the way iTulip has been predicting it would--massive cash injections into the banking system.
But EJ also points out, for the first time as far as I know, that the cash injections are not working. Banks are hoarding the cash and consumers along with the economy in general are not getting access to the green. Unless the cash gets to the real economy, it can never be inflationary, can it? The treasure might just as well print trillions of dollar bills and store them in the Utah salt mines. That would not be any more (or less) inflationary than what is happening.
So what should we conclude? Is EJ hedging his bets, preparing us for the possibility that he might be wrong? Or maybe he expects us to conclude that all those dollars sitting in the Fed's own reserves will eventually cause China, Japan, OPEC, etc. to start dumping their T-Bills/Bonds. I have trouble seeing that. Unless real money hits the markets, what reason is there for the world to panic out of their dollars?
So what gives EJ? Granted we are in uncharted waters. But you are the prognosticator here. Lay out some scenarios for us and give us your best guess for how likely each one is to occur.
Or at least come back and explain how this most recent post fits into the Ka-Poom scenario. Because for now, I'm not getting it.:confused:
Down Under's was the first reply to EJ's latest. It also seems his is the only one to ask the most important question. Throughout the article EJ is describing a deflationary meltdown. The Fed is responding just the way iTulip has been predicting it would--massive cash injections into the banking system.
But EJ also points out, for the first time as far as I know, that the cash injections are not working. Banks are hoarding the cash and consumers along with the economy in general are not getting access to the green. Unless the cash gets to the real economy, it can never be inflationary, can it? The treasure might just as well print trillions of dollar bills and store them in the Utah salt mines. That would not be any more (or less) inflationary than what is happening.
So what should we conclude? Is EJ hedging his bets, preparing us for the possibility that he might be wrong? Or maybe he expects us to conclude that all those dollars sitting in the Fed's own reserves will eventually cause China, Japan, OPEC, etc. to start dumping their T-Bills/Bonds. I have trouble seeing that. Unless real money hits the markets, what reason is there for the world to panic out of their dollars?
So what gives EJ? Granted we are in uncharted waters. But you are the prognosticator here. Lay out some scenarios for us and give us your best guess for how likely each one is to occur.
Or at least come back and explain how this most recent post fits into the Ka-Poom scenario. Because for now, I'm not getting it.:confused:
We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis. We realize that most sites don't do that and some readers find this practice confusing. But we feel we owe it to our readers to be rigorous.
Dr. B seems to think that the banks are incapable of reflating. We believe that when push comes to shove, politically speaking, governments can always inflate.
Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.
We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.
The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
If think this discussion ties in with a comment EJ made in one of his recent articles...
How much pain has to be inflicted (EJ referenced unemployment rates of 10-20% IIRC) before the political pain of killing off the FIRE economy rents with high inflation is less than the political pain of really high unemployment.
According to Eric the government still thinks it can avoid the choice between crushing unemployment and rampant inflation, and so continues to try and revive the banks.
At least that's how I read it.
hugh_lawson
12-04-08, 04:09 AM
Here is a good article which deals with what happens to all those reserves once things settle down a bit. It also makes a pretty good case for letting deflation happen. http://mises.org/story/3236
Chris Coles
12-04-08, 04:48 AM
Here is a good article which deals with what happens to all those reserves once things settle down a bit. It also makes a pretty good case for letting deflation happen. http://mises.org/story/3236
The further down the road marked "more borrowings" we travel, the further we are away from a capital based economy. Capital investment is not inflationary. Indeed, there are very clear reasons why equity investment is always non inflationary. Until everyone becomes dis-enamoured with banks and borrowing as a solution, nothing will change. So my viewpoint is that we must permit the existing paradigm to continue until it completely collapses. Then, and only then; will reality intrude and the renewal begin.
So my viewpoint is that we must permit the existing paradigm to continue until it completely collapses. Then, and only then; will reality intrude and the renewal begin.
Very True. Ayn Rand called it, about 60 years or so ago
Chris Coles
12-04-08, 07:54 AM
Very True. Ayn Rand called it, about 60 years or so ago
I am sorry, but Ayn Rand is at the heart of the problems in the US as her overall message has a very deep flaw in it and it is that deep flaw that drives the underlying currents that have brought us all to where we are today.
Andreuccio
12-04-08, 11:00 AM
We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis.
Great practice. Keep it up.
We realize that most sites don't do that and some readers find this practice confusing.
That would be me. On another thread you said you had 10,000 smart businesspeople to bounce ideas off of. I'm thinking it's more like 9,999 smart businesspeople and me. Maybe we could develop some type of a code so I know when you agree or disagree with whatever you're posting, like a wink, or brushing your nose (a la The Sting).
Seriously, it would be helpful if you would add a small commentary, much like the post I'm responding to, whenever you post something you disagree with. A couple of sentences explaining why and everybody's happy, and those of us who aren't smart businesspeople aren't (as) confused. :)
Charles Mackay
12-04-08, 11:57 AM
Seriously, it would be helpful if you would add a small commentary, much like the post I'm responding to, whenever you post something you disagree with. A couple of sentences explaining why and everybody's happy, and those of us who aren't smart businesspeople aren't (as) confused. :)
He probably wouldn't get as valuable of feedback if he did that.
I see the spreads on CDS are really blowing out.
http://www.creditresearch.com/cdrweb/indexchart.jsp?width=300&height=155&indexid=Global084&dispavg=no&hist=365
I am sorry, but Ayn Rand is at the heart of the problems in the US as her overall message has a very deep flaw in it and it is that deep flaw that drives the underlying currents that have brought us all to where we are today.
I would respectfully disagree, most people that berate her work have never read it. I have and I find it illuminating. I think she pretty much nails it except for the the lack of incorperating a superior being in her schema.
babbittd
12-04-08, 01:03 PM
Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.
We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.
The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
Fred, you are referring to something along the lines of the Fed picking winners and losers, a la AIG?
New Entity Buys $46.1 Billion In CDOs, Cancels AIG's CDS Contracts (http://money.cnn.com/news/newsfeeds/articles/djf500/200812021853DOWJONESDJONLINE000671_FORTUNE5.htm)
So far, <MONEY>$46.1 billion</MONEY> of such CDOs have been purchased, canceling the CDS contracts and relieving some pressure on AIG's liquidity.
An AIG spokesman said the CDOs were purchased for fair-market value, which is far less than their original value, and the CDO holders are keeping the cash collateral already paid by AIG. The deals essentially have made the CDO holders whole.
The entity was created by the Federal Reserve Bank of New York last month to mitigate AIG's liquidity issues in connection with its CDS contracts. The Fed said then that it would lend up to <MONEY>$30 billion</MONEY> to the facility and AIG would lend <MONEY>$5 billion</MONEY>.
The additional purchases of <MONEY>$7.4 billion</MONEY> in CDOs are expected to be concluded by the end of the year.
The entity will collect cash flows from the CDOs and pay a distribution to AIG for its equity interest once principal and interest owed to the Fed have been paid in full. After payment of the Fed's senior loan and AIG's equity interest, all remaining amounts received by the entity will be paid 67% to the Fed and 33% to AIG.
Andreuccio
12-04-08, 01:29 PM
He probably wouldn't get as valuable of feedback if he did that.
That's true. If I were a smart businessperson, I would have known that. Maybe we can try the wink, then. ;)
due_indigence
12-04-08, 01:58 PM
When Higgs says "the likelihood that the banks will sit on $268 billion of excess reserves forever is nil" in what context are these reserves 'excess'? Yes, they are not being deployed for fresh loan activity. But aren't they being hoarded as liquidity against CDS obligations?
Perhaps someone who understands the balance sheet machinations between the Fed and the banks can define excess reserves in the appropriate context?
When Higgs says "the likelihood that the banks will sit on $268 billion of excess reserves forever is nil" in what context are these reserves 'excess'? Yes, they are not being deployed for fresh loan activity. But aren't they being hoarded as liquidity against CDS obligations?
Perhaps someone who understands the balance sheet machinations between the Fed and the banks can define excess reserves in the appropriate context?
Excess reserves is that amount that's above the statutory limits from the Fed, aka required reserves. Required reserves in the most recent week was about $46 billion. Total reserves was about $650 billion, which makes excess about $604 billion.
All figures exclude non-borrowed reserves, which last week were about -$74 billion.
Chris Coles
12-04-08, 02:43 PM
I would respectfully disagree, most people that berate her work have never read it. I have and I find it illuminating. I think she pretty much nails it except for the the lack of incorperating a superior being in her schema.
It is, I readily admit, a subtlety, but she expounds a concept of the individual being totally responsible for and to themselves. There are many individuals that believe she is absolutely correct to say that. Indeed, in many respects she is correct. But I disagree in only one small way and it is this small disparity that makes the difference between a wholly dog eat dog society and one where a true community is created that will succeed.
The difference comes from my belief that everyone with a good mind and who makes a success of themselves carries a responsibility to everyone less able to succeed. If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves. Yes, that is a tiny action, putting out the helping hand, but it makes the difference between a primitive and a civilised society.
In the United States, you cannot pay, your society turns its collective back and says, "it was your choice", tough! But take a look at the World Health Authority and their assessment of the risks to your economy from a flu pandemic. Your health system is so stratified that they believe that you will lose out in a very big way, simply because of the way you treat the poor.
What Ayn Rand has created is a society that does not care and turns its back. No, by a long margin, not everyone. In some ways you have the friendliest people imaginable, but under the veneer of civilisation, of those that get right to the top, many turn their backs and cite Ayn Rand as their example and turn their back on any responsibility for those less successful. I happen to believe that is a flaw that holds back the United States and creates an unnecessary impediment to your long term success as a nation.
And I do know for a fact, I am not alone in that perception. The United States has an embedded perception that as long as the end result succeeds, the road to the result is always correct. THAT is, in my humble opinion; the fatal flaw in Ayn Rand's teachings.
I disagree in only one small way and it is this small disparity that makes the difference between a wholly dog eat dog society and one where a true community is created that will succeed.
The difference comes from my belief that everyone with a good mind and who makes a success of themselves carries a responsibility to everyone less able to succeed. If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves. Yes, that is a tiny action, putting out the helping hand, but it makes the difference between a primitive and a civilised society.
Correct, elegantly and precisely put. I would rather live in a society of 'we' than 'I' because there is only enough if we share. And the act of reaching out ennobles the soul. Of course it is true we must take responsibility for ourselves, but this not the same as forsaking others' needs.
grapejelly
12-05-08, 05:01 AM
Correct, elegantly and precisely put. I would rather live in a society of 'we' than 'I' because there is only enough if we share. And the act of reaching out ennobles the soul. Of course it is true we must take responsibility for ourselves, but this not the same as forsaking others' needs.
you live in that society if you want. Don't tell me to live in it. The trouble with people who think they way you do is that they want to compel me, control me, steal from me, for their own schemes. There is no difference between this and the subject of this thread, the bankrupt banks, except some would steal from me or compel me for different purposes, what they perceive are loftier ideals.
You live in a society of we but do it voluntarily. Don't tell me where to live. I want to keep all my money and I don't want you telling me what o do with it or who to spend it on.
The horror of collectivism today is how it is clothed in high sounding ideals. But there is no difference between the powers that be spending trillions of our money on bailing out their buddies, and, say, mandatory health insurance.
It all amounts to theft, stealing, fraud, force, no different than mugging me in a dark alley.
Why do you live here then Grape?
I lived somewhere where they routinely mug me in a dark alley I think I'd move.
grapejelly
12-05-08, 05:45 AM
Why do you live here then Grape?
I lived somewhere where they routinely mug me in a dark alley I think I'd move.
This is my home for now.
But it's that way just about everywhere to one degree or another.
Things that are nearly universal across all human societies happened for a very good reason IMO - they helped that society survive. And societies that don't adopt those universal things tend to fail - natural selection style.
due_indigence
12-05-08, 06:58 AM
To the uncultivated few who think of society and culure more as a theft and expropriation than a privilege, I say stay off our roads and don't call out fire department. However libertarianism tends to evaporate in a FEMA rescue.
The Greeks understood than man becomes man only through his interactions in the polis. Boarded up in your house with tuna and bullets is not a human existence. Frankly it's an Omega Man fantasy.
ThePythonicCow
12-05-08, 07:45 AM
you live in that society if you want. Don't tell me to live in it. To me, the question is not so much whether it is good for us to help our neighbor, but whether the Federal government should coercively extract taxes and regulatory obedience from all of us for the supposed purpose of providing this help, or whether it is better for that help to be mostly voluntarilly provided, by a mixture of community groups, churches, families, neighbors, municipal and state governments, and just plain strangers watching out for each other because they can.
Too often, the argument that "people have a right to such aid" is a ruse for "we're from the government and we're here to help you", which basically just serves to redistribute wealth and power by forceful means.
I'm willing in my better moments to offer such help when I can, and grateful when it is offered in my times of need, but those power hungry bureaucrats and politicians in Washington, D.C. should not be co-opting this vital aspect of a healthy society to feed their own greed.
Chris Coles
12-05-08, 07:50 AM
you live in that society if you want. Don't tell me to live in it. The trouble with people who think they way you do is that they want to compel me, control me, steal from me, for their own schemes. There is no difference between this and the subject of this thread, the bankrupt banks, except some would steal from me or compel me for different purposes, what they perceive are loftier ideals.
You live in a society of we but do it voluntarily. Don't tell me where to live. I want to keep all my money and I don't want you telling me what o do with it or who to spend it on.
The horror of collectivism today is how it is clothed in high sounding ideals. But there is no difference between the powers that be spending trillions of our money on bailing out their buddies, and, say, mandatory health insurance.
It all amounts to theft, stealing, fraud, force, no different than mugging me in a dark alley.
You make my point for me, you see I am not, absolutely not, talking about some form of bureaucratic action, (an aspect of todays world I totally agree is abhorrent), I am talking about your own self motivation. Your own recognition of responsibility towards others. That is a quite different matter.
I know of people that will give charity, yet assume that fulfils their responsibility towards the rest of society, it does nothing of the sort. In that particular case they give yet turn away. A sort of $ thrown on the ground but do not ask me to actually look in the direction I threw the money. That does not fulfil the function of that responsibility.
In a free market capital based society, someone has to ensure that the necessary capital is placed into the economy to enable the economy to succeed. It is that responsibility that I am talking about. That has nothing to do with any bureaucratic mechanism, it has everything to do with those that succeed have to ensure the means for others to also succeed are made available.
Stuffing it into your pockets and saying it is mine I can do what I like with it does not reflect an acceptance of any responsibility for anyone other than yourself. But look very carefully indeed at how you got to where you are and you will be forced to recognise that you got there on the efforts of many others in your society. No One Does It Alone.
Chris Coles
12-05-08, 08:18 AM
To me, the question is not so much whether it is good for us to help our neighbor, but whether the Federal government should coercively extract taxes and regulatory obedience from all of us for the supposed purpose of providing this help, or whether it is better for that help to be mostly voluntarilly provided, by a mixture of community groups, churches, families, neighbors, municipal and state governments, and just plain strangers watching out for each other because they can.
Too often, the argument that "people have a right to such aid" is a ruse for "we're from the government and we're here to help you", which basically just serves to redistribute wealth and power by forceful means.
I'm willing in my better moments to offer such help when I can, and grateful when it is offered in my times of need, but those power hungry bureaucrats and politicians in Washington, D.C. should not be co-opting this vital aspect of a healthy society to feed their own greed.
And in your own way, you very clearly highlight why we have reached the present impasse; we are surrounded by "government employees" that make it their business to force measures upon us by the rule of law. Forgetting that by so doing, they remove the responsibility from society in general who, in turn, permanently attach themselves to the government teat rather than look up and try and see where THEY should make their mark. Thus do the government employees take as their message, that they can, and often do, take any action to force citizens into action.
And that, is the mirror image of the failure of the Ayn Rand teachings. legislative force is no different to personal indifference, it is the same thing, but from another viewpoint.
We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis. We realize that most sites don't do that and some readers find this practice confusing. But we feel we owe it to our readers to be rigorous.
Dr. B seems to think that the banks are incapable of reflating. We believe that when push comes to shove, politically speaking, governments can always inflate.
Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.
We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.
The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
The government is clearly trying to reflate, as it has in every downturn for 50+ years. It's not working this time because we are in a liquidity trap. Obama and his economic advisors are Keynesians - when conventional monetary policy fails they will, I think correctly, use government as the demand supplier of last resort. The questions become:
(1) how long will it take for stimulus and make work programs to get money circulating through the system again?
(2) will it be enough to pull the economy out of the liquidity trap?
(2) if so, just how inflationary will this be?
grapejelly
12-05-08, 10:36 AM
The government is clearly trying to reflate, as it has in every downturn for 50+ years. It's not working this time because we are in a liquidity trap. Obama and his economic advisors are Keynesians - when conventional monetary policy fails they will, I think correctly, use government as the demand supplier of last resort. The questions become:
(1) how long will it take for stimulus and make work programs to get money circulating through the system again?
(2) will it be enough to pull the economy out of the liquidity trap?
(2) if so, just how inflationary will this be?
Reflation never "worked". I believe the Austrians were correct although they get very little respect here on iTulip. Each stimulus that "worked" simply created a worse problem down the line.
Because elected representatives are temporary caretakers, their incentives are to pass the buck to the next guy and give away as much as possible of the taxpayer's own money while still in office.
The chickens do come home to roost. As Mises said, the worse the booms, the worse the bust.
Reflation takes money from productive uses and mis-appropriates it to political ends. It steals from people who work and save, and pays it to profligate and irresponsible people who made money through financial engineering, inflation on the backs of those same savers and workers and retirees.
You are entirely wrong, and so is EJ, about the supposed benefits of "stimulus." Couldn't be more wrong.
It makes the depression WORSE. The Great Depression was a depression because of the New Deal. The New Deal made unemployment and inflation worse in 1937 than they were going into it.
Stimulus is another word for MORE DEBT and that is exactly the wrong medicine.
And, beyond that, the stimulus is an immoral, reprehensible joke and the taxpayers don't realize it.
They are against the bailout of GM/Ford/Chrysler, when they are responsible (through Pension Benefity Guaranty, a public entity) for the major costs of those firms going belly up...and they don't squawk with trillions of dollars surreptitiously spent by the Fed on bailing out the worst creators of this mess, the big banks (in league with the US government of course.)
And I'm not defending a bailout of the auto companies, just pointing out how messed up the lumpen's thinking is on anything economic and how remarkably stoopid people are...
And yet again, this is EXACTLY what made a brief sharp recession into the Great Depression.
If you want to stimulate,
1. Remove all capital gains taxes
2. Remove all taxes on dividends
3. Start raising interest rates so savers get a return
THAT would stimulate the economy. We need LESS debt, LESS deficit spending, MORE saving, MORE investment.
Charles Mackay
12-05-08, 01:32 PM
The incredible gold backwardation of the last two months is telegraphing to all that will listen that a currency crisis is imminent. The cash market for gold is several hundred dollars over the near futures month. Silver is even worse at a 50% premium over near contract. JP Morgan is shorting silver at $9.50/oz that has a market value of $14 - $15/oz!!! That is telling you that the system has already gone belly up.
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RED ALERT: GOLD BACKWARDATION!!!
Antal E. Fekete
12/4/08
Gold Standard University Live
December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2nd, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.) The condition got worse on December 3rd, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours. I am writing this in the wee hours of December 4th, when trading of gold futures has not yet started in New York.
According to the December 3rd Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31st. Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.
Already there was a slight backwardation in gold at the expiry of a previous active contract month, but it never spilled over to the next active contract month, as it does now: backwardation in the December contract is spilling over to the February contract which at last reading was 0.36%. Silver is also in backwardation, with the discount on silver futures being about twice that on gold futures.
As those who attended my seminar on the gold basis in Canberra last month know, the gold basis is a pristine, incorruptible measure of trust, or the lack of it in case it turns negative, in paper money. Of course, it is too early to say whether gold has gone to permanent backwardation, or whether the condition will rectify itself (it probably will). Be that as it may, it does not matter. The fact that it has happened is the coup de grâce for the regime of irredeemable currency. It will bleed to death, maybe rather slowly, even if no other hits, blows, or shocks are dealt to the system. Very few people realize what is going on and, of course, official sources and the news media won’t be helpful to them to explain the significance of all this. I am trying to be helpful to the discriminating reader.
Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located. This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market.
I founded Gold Standard University Live (GSUL) two years ago and dedicated it to research of monetary issues that are pointedly ignored by universities, government think-tanks, and the financial press, centered around the question of long-term viability of the regime of irredeemable currency. Historical experiments with that type of currency were many but all of them, without exception, have ended in ignominious failure accompanied with great economic pain, unless the experiment was called off in good time and the authorities returned to monetary rectitude, that is, to a metallic monetary standard. It is also worth pointing out that the present experiment is unique in that all countries of the world indulge in it. Not one country is on a metallic monetary standard, under which the Treasury and the Central Bank are subject to the same contract law as ordinary citizens. They cannot issue irredeemable promises to pay and keep them in monetary circulation through a conspiracy known as check-kiting. Not one country will be spared from the fire and brimstone that once rained on the cities of Sodom and Gomorrah as a punishment of God for immoral behavior.
In all previous episodes there were some countries around that did not listen to the siren song and stayed on the gold standard. They could give a helping hand to the deviant ones, thus limiting economic pain. Today there are no such countries. If you want to be saved, you must be prepared to save yourself.
You cannot understand the process whereby a fiat money system self-destructs without understanding the gold and silver basis. The Quantity Theory of Money does not provide an explanation, because deflation may well precede hyperinflation, as it appears to be the case right now.
For these reasons I placed the study of the gold and silver basis on the top of the list of research topics for GSUL. These can serve as an early warning system that will signal the beginning of the end. The end is approaching with the inevitability of the climax in a Greek tragedy, as the heroes and heroines are drawn to their own destruction. The present reactionary experiment with paper money is entering its death-throes. GSUL has had five sessions and could have established itself as an important, and even the only, source of information about this cataclysmic event: the confrontation of the Titanic (representing the international monetary system) with the iceberg (representing gold and its vanishing basis) as the latter is emerging from the fog too late to avoid collision.
Unfortunately, this was not meant to be: GSUL has to terminate its operations due to a decision made by Mr. Eric Sprott, of Sprott Asset Management, to terminate sponsoring GSUL, saying that “results do not justify the expense.”
I sincerely regret that our activities did not live up to the expectations of Mr. Sprott, but I am very proud of the fact that our research is still the only source of information on the vanishing gold basis and its corollary, the seizing up of the paper money system that threatens the world, as it does, with a Great Depression eclipsing that of the 1930’s.
Let me summarize the salient points of discussion during the last two sessions of GSUL for the benefit of those who wanted to attend but couldn’t. The gold basis is the difference between the futures and the cash price of gold. More precisely it is the price of the nearby active futures contract in the gold futures market minus the cash price of physical gold in the spot market. Historically it has been positive ever since gold futures trading started at the Winnipeg Commodity Exchange in 1972 (except for some rare hiccups at the triple-witching hour. Such deviations have been called ‘logistical’ in nature, having to do with the simultaneous expiry of gold futures and the put and call option contracts on them. In all these instances the anomaly of a negative basis resolved itself in a matter of a few hours.)
In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation. Contango implies the existence of a healthy supply of the commodity in the warehouses available for immediate delivery, while backwardation implies shortages and conjures up the scraping of the bottom of the barrel. The basis is limited on the upside by the carrying charges; but there is no limit on the downside as it can fall to any negative value (meaning that the cash price may exceed the futures price by any amount, however large).
Contango whereby the futures price of gold is quoted at a premium to the spot price is the normal condition for the gold market, and for a very good reason, too. The supply of monetary gold in the world is very large relatively speaking. Babbling about the ‘scarcity of gold’ reflects the opinion of uninformed or badly informed people. In terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity. Silver is second only to gold. It is this fact that makes the two of them the only monetary metals. The impact on the gold price of a discovery of an extremely rich gold field, or the coming on stream of an extremely rich gold mine, is minimal in view of the large existing stocks. Paradoxically, what makes gold valuable is not its scarcity but its relative abundance, which evokes that superb confidence in the steadiness of the value of gold that will not be decreased by a banner production year, nor can it be increased by withdrawing gold coins from circulation. For this reason there is no better fly-wheel regulator for the value of currency than gold. The same goes, albeit to a lesser degree, for silver.
Here is the fundamental difference between the monetary metal, gold, and other commodities. Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation. For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.
Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.
Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?
Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.
December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel.
I have often been told that the U.S. Mint is already open to gold, witness the Eagle and Buffalo gold coins. But these issues were neither unlimited, nor were they coined free of seigniorage. They were sold at a premium over bullion content. They were a red herring, dropped to make people believe that gold coins can always be obtained from the U.S. Mint, and from other government mints of the world. However, as the experience of the past two or three months shows, one mint after another stopped taking orders for gold coins and suspended their gold operations. The reason is that the flow of gold to the mints has become erratic. It may dry up altogether. This shows that the foreboding has been evoked by the looming gold backwardation, way ahead of the event. Now the truth is out: you can no longer coax gold out of hiding with paper profits.
If the governments of the great trading nations had really wanted to save the world from a catastrophic collapse of world trade, then they should have opened their mints to gold. Now gold backwardation has caught up with us and shut down the free flow of gold in the system. This will have catastrophic consequences. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade. This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.
References
By the same author:
The Rise and Fall of the Gold Basis, June 23, 2006
Monetary and Non-Monetary Commodities, June 25, 2006
The Last Contango in Washington, June 30, 2006
Gold, Interest, Basis, March,7, 2007
Gold Vanishing into private Hoards, May 31, 2007
Opening the Mint to Gold and Silver, February 5, 2008
These and other articles of the author can be accessed at the website
www.professorfekete.com (http://www.professorfekete.com)
Note: the author is coming out with a follow-up piece:
Has the Curtain Fallen on the Last Contango in Washington?
Stay tuned.
Calendar of events
Szombathely, Martineum Academy, Hungary, March 28-29, 2009
Encore Session of Gold Standard University Live.
Topics: When Will the Gold Standard Be Released from Quarantine?
The Vaporization of the Derivatives Tower
Labor and the Unfolding Great Depression
Gold and Silver in Backwardation: What Does It All Mean?
San Francisco School of Economics, June-August, 2009
Money and Banking, a ten-week course based on the work of Professor Fekete.
The Syllabus of this course is can be seen on the website:
www.professorfekete.com (http://www.professorfekete.com)
December 4, 2008
[quote=Chris Coles;64202] If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves.
many turn their backs and cite Ayn Rand as their example and turn their back on any responsibility for those less successful.
quote]
R.E. "If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves. "
You and I are in total agreement!:)
But I myself make that choice because I see that I can do what others can not. I take it upon myself vs. having that thrust upon me by others REQUIRING me to do so. That's is my view of RAND. I CHOOSE this (and I would argue anyone of sound mind and conscience would choose this). But that is not the same as SOMEONE else assigning it to me. Very small point as we are in agreement on substance, but just wanted to explain my thoughts to you.
R.E. many turn their backs and cite Ayn Rand as their example and turn their back on any responsibility for those less successful.
I'm Muslim and as you know there are quite a few people out there that claim this religious ideolgy as their justification to do whatever god-awful things they want to innocent people. Do I find fault with the religion or the person? I find it with the person (and the people who preach this shit). Same with Extreemists that hijack whatever ideology they want to suit their purposes and their agenda.
That's why I personally don't fault Rand anymore than Jesus or Mohammed. (I would fault UBL or David Koresh any day of the week and twice on Friday)
V/R
JT
Chris Coles
12-05-08, 03:24 PM
[quote=Chris Coles;64202] If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves.
many turn their backs and cite Ayn Rand as their example and turn their back on any responsibility for those less successful.
quote]
R.E. "If you like; ability carries a responsibility to lean forward and put out a hand of help to those less able than ourselves. "
You and I are in total agreement!:)
But I myself make that choice because I see that I can do what others can not. I take it upon myself vs. having that thrust upon me by others REQUIRING me to do so. That's is my view of RAND. I CHOOSE this (and I would argue anyone of sound mind and conscience would choose this). But that is not the same as SOMEONE else assigning it to me. Very small point as we are in agreement on substance, but just wanted to explain my thoughts to you.
R.E. many turn their backs and cite Ayn Rand as their example and turn their back on any responsibility for those less successful.
I'm Muslim and as you know there are quite a few people out there that claim this religious ideolgy as their justification to do whatever god-awful things they want to innocent people. Do I find fault with the religion or the person? I find it with the person (and the people who preach this shit). Same with Extreemists that hijack whatever ideology they want to suit their purposes and their agenda.
That's why I personally don't fault Rand anymore than Jesus or Mohammed. (I would fault UBL or David Koresh any day of the week and twice on Friday)
V/R
JT
JT, I was born into a deeply divided family, brought up as a Roman catholic and from the age of 17, realising I was attending church to keep my father happy, turned my back on the idea of a "god". Yes, I see religion having a place in any society, but I do not believe in any such deity.
I can see we would have some great conversations, but sadly, as you are Muslim; not with some wonderful music in the background or a fine wine in our hands.
grapejelly
12-05-08, 03:43 PM
[quote=Chris Coles;64202] I take it upon myself vs. having that thrust upon me by others REQUIRING me to do so. That's is my view of RAND. I CHOOSE this (and I would argue anyone of sound mind and conscience would choose this). But that is not the same as SOMEONE else assigning it to me. Very small point as we are in agreement on substance, but just wanted to explain my thoughts to you.
right now, when they "stimulate" the economy, they steal your money and my money. That's the immoral thing about fiat. They can steal your money and there is nothing you can do about it.
It's all about choice versus coercion and compulsion. I am for choice. I am against force. Why I hate political solutions. They involve force.
Commercial solutions involve voluntary behavior making both buyer and seller better off. Political solutions involve forcing people to do things, taking away what belongs to them. It's horrible.
The Outback Oracle
12-05-08, 04:05 PM
GJ the worst thing about it is that they steal your money and dress it up as some great virtuous thing they are doing for society. They assume some sort of great moral issue that now allows any evil as a "solution".
You , who have husbanded your resources carefully, been prudent, cautious, and have not over-consumed in a mad greed, are now portrayed as some sort of 'evil' that will need to be eliminated one way or another.
(...a 'usurer' I think is now the popular term around this site)
[quote=jtabeb;64466]
JT, I was born into a deeply divided family, brought up as a Roman catholic and from the age of 17, realising I was attending church to keep my father happy, turned my back on the idea of a "god". Yes, I see religion having a place in any society, but I do not believe in any such deity.
I can see we would have some great conversations, but sadly, as you are Muslim; not with some wonderful music in the background or a fine wine in our hands.
I'm a Diest (distant god type). You should hear my Pathos Acoustic TTRR, best sounding amp in the world, while I'm spinning my vinyl collection through it. And have you had the Orin Swift Cabernet Sauvignon Mercury Head 2002? Great GREAT wine, my fav. I also like Negro Modello, quite a few beers actually, you should see the stock that we maintain in the fridge in our flight room.
A Military Pilot that claims to have never had a drink is either
A. Mormon
B. Lying
C. Both A and B (that's a military joke from one of my mormon friends who's a fellow pilot, you'll just have to guess at the context);)
I mean no offense to mormons out there nor fellow muslims who may be reading this.
Chris Coles
12-06-08, 01:04 AM
[quote=jtabeb;64466]
right now, when they "stimulate" the economy, they steal your money and my money. That's the immoral thing about fiat. They can steal your money and there is nothing you can do about it.
It's all about choice versus coercion and compulsion. I am for choice. I am against force. Why I hate political solutions. They involve force.
Commercial solutions involve voluntary behavior making both buyer and seller better off. Political solutions involve forcing people to do things, taking away what belongs to them. It's horrible.
Just to make the small point to any other reader that you are passing on an "interpretation" of what I said as a direct quote. The interpretation was reasonable.
Chris Coles
12-06-08, 01:08 AM
[quote=Chris Coles;64498]
I'm a Diest (distant god type). You should hear my Pathos Acoustic TTRR, best sounding amp in the world, while I'm spinning my vinyl collection through it. And have you had the Orin Swift Cabernet Sauvignon Mercury Head 2002? Great GREAT wine, my fav. I also like Negro Modello, quite a few beers actually, you should see the stock that we maintain in the fridge in our flight room.
A Military Pilot that claims to have never had a drink is either
A. Mormon
B. Lying
C. Both A and B (that's a military joke from one of my mormon friends who's a fellow pilot, you'll just have to guess at the context);)
I mean no offense to mormons out there nor fellow muslims who may be reading this.
Same here, but this time, my actual quote was atributed to yourself. Again, no problem.
In a very real way, JT, you show how wonderful the full range of the human mind is when it finds a way of "Being" for itself. You are much too human, in the widest sense, to call yourself a Muslim. I look forward to the conversations even more.
Just to confirm, when we use "Quote", it takes the "quotation" and attributes it to the other iTulip member. I will pass on a private message to Fred.
you live in that society if you want. Don't tell me to live in it. The trouble with people who think they way you do is that they want to compel me, control me, steal from me, for their own schemes. There is no difference between this and the subject of this thread, the bankrupt banks, except some would steal from me or compel me for different purposes, what they perceive are loftier ideals.
You live in a society of we but do it voluntarily. Don't tell me where to live. I want to keep all my money and I don't want you telling me what o do with it or who to spend it on.
The horror of collectivism today is how it is clothed in high sounding ideals. But there is no difference between the powers that be spending trillions of our money on bailing out their buddies, and, say, mandatory health insurance.
It all amounts to theft, stealing, fraud, force, no different than mugging me in a dark alley.
It isn't voluntary. Take the concept of ownership. Owning anything and asserting that right is itself a social interaction. Asserting ownership over something denies another the use of it. That is what ownership is. You only have that right of property ownership because society - other people - grant you that privilege by convention. This is the essence of the responsibility to help others that comes with ownership. You say societal living is theft. Equally, to abuse a phrase, property is theft.
In any case, "we" does not necessarily mean government. Pre-government societies were/are by and large collective. I did not advocate government in my statement.
I am all for self-reliance though. If you want to live truly as an island, become a mendicant philosopher, wandering the earth without possessions. Then you would be truly free. I would commend you for it.
[quote=jtabeb;64553]
Same here, but this time, my actual quote was atributed to yourself. Again, no problem.
In a very real way, JT, you show how wonderful the full range of the human mind is when it finds a way of "Being" for itself. You are much too human, in the widest sense, to call yourself a Muslim. I look forward to the conversations even more.
Just to confirm, when we use "Quote", it takes the "quotation" and attributes it to the other iTulip member. I will pass on a private message to Fred.
This is the reason why I identify as muslim.
Sura 3 The Family of Imraan
verse 199
Direct quote in its entirety
(199) And some there are of the People of the Book who believe in God, and what has been sent down unto you, and what has been sent down unto them, men humble to God, not selling the signs of God for a small price; those -- their wage is with their Lord; God is swift at the reckoning.
I'll let you all interpret that verse on your own, it is sufficient to stand by itself alone and be judged by you without my commentary.
(People of book = Christians and Jews (there is much debate about buddism also, but there is no debate about "People of the Book" specifically referring to Christians and Jews.)
I think this quote best illustrates the concept of humanity that is central to the entire concept of the Islamic Religion.
It's also the reason why I care not what faith my children are raised in (because God also does not deem it central in valuing a life that has been led). There are many keys that open the doors of heaven. To be picky about the size, shape or color of the key, would be a great disservice to the larger import of the material impact a person's life has on improving the lives of their fellow man.
How perverse would be god to allow a person like Mahatmas Ghandi to reside in an afterlife of hell for a life led in sacrifice for the betterment of all men merely for failing the litmus test of possessing the correct entry key. If you view this as I do, then many possible paths lead to the creator. It would seem that the surest path away from God is the straight and narrow one that excludes people STRICTLY because the path they choose towards finding God is not the same one that somebody else chooses.
(IMHO)
Reflation never "worked". I believe the Austrians were correct although they get very little respect here on iTulip. Each stimulus that "worked" simply created a worse problem down the line.
Because elected representatives are temporary caretakers, their incentives are to pass the buck to the next guy and give away as much as possible of the taxpayer's own money while still in office.
The chickens do come home to roost. As Mises said, the worse the booms, the worse the bust.
Reflation takes money from productive uses and mis-appropriates it to political ends. It steals from people who work and save, and pays it to profligate and irresponsible people who made money through financial engineering, inflation on the backs of those same savers and workers and retirees.
You are entirely wrong, and so is EJ, about the supposed benefits of "stimulus." Couldn't be more wrong.
It makes the depression WORSE. The Great Depression was a depression because of the New Deal. The New Deal made unemployment and inflation worse in 1937 than they were going into it.
Stimulus is another word for MORE DEBT and that is exactly the wrong medicine.
And, beyond that, the stimulus is an immoral, reprehensible joke and the taxpayers don't realize it.
They are against the bailout of GM/Ford/Chrysler, when they are responsible (through Pension Benefity Guaranty, a public entity) for the major costs of those firms going belly up...and they don't squawk with trillions of dollars surreptitiously spent by the Fed on bailing out the worst creators of this mess, the big banks (in league with the US government of course.)
And I'm not defending a bailout of the auto companies, just pointing out how messed up the lumpen's thinking is on anything economic and how remarkably stoopid people are...
And yet again, this is EXACTLY what made a brief sharp recession into the Great Depression.
If you want to stimulate,
1. Remove all capital gains taxes
2. Remove all taxes on dividends
3. Start raising interest rates so savers get a return
THAT would stimulate the economy. We need LESS debt, LESS deficit spending, MORE saving, MORE investment.
Evidence please?
Thought experiment: what if everyone saved tons of money and decided to retire at the same time. By your logic, the economy would be in ship shape.
There is a reason Mises at al get no traction in academic circles. And no, the reason is not some vast conspiracy.
Look at the analogue between an ecosystem and an economic system -- where are the "savers" "producers" and "consumers" in each system
From Energy Flow Through the Ecosystem (http://www.marietta.edu/~biol/102/ecosystem.html#Energyflowthroughtheecosystem3)
http://www.marietta.edu/~biol/102/ecycle.gif
The diagram above shows how both energy and inorganic nutrients flow through the ecosystem. We need to define some terminology first. Energy "flows" through the ecosystem in the form of carbon-carbon bonds. When respiration occurs, the carbon-carbon bonds are broken and the carbon is combined with oxygen to form carbon dioxide. This process releases the energy, which is either used by the organism (to move its muscles, digest food, excrete wastes, think, etc.) or the energy may be lost as heat. The dark arrows represent the movement of this energy. Note that all energy comes from the sun, and that the ultimate fate of all energy in ecosystems is to be lost as heat. Energy does not recycle!!
Chris Coles
12-06-08, 03:29 PM
(199) And some there are of the People of the Book who believe in God, and what has been sent down unto you, and what has been sent down unto them, men humble to God, not selling the signs of God for a small price; those -- their wage is with their Lord; God is swift at the reckoning.
I'll let you all interpret that verse on your own, it is sufficient to stand by itself alone and be judged by you without my commentary.
May I suggest that you watch this TV program from the UK BBC2. This is tonights program http://www.bbc.co.uk/programmes/b00g222s
And I recommend the first installment. After Rome: Holy War and Conquest (http://www.bbc.co.uk/programmes/b00g1fp1) http://www.bbc.co.uk/iplayer/episode/b00fy48j
But I warn you, you only have a week left to watch this first episode.
By the by, the presenter is Boris Johnson, who is the newly elected Mayor of London. They are both hour long with NO adverts. Enjoy!
I must add this series is by far the best I have ever seen on the subject of the clash between Christianity and the Muslim world in ancient times. A Magnus Opus.
you live in that society if you want. Don't tell me to live in it. The trouble with people who think they way you do is that they want to compel me, control me, steal from me, for their own schemes. There is no difference between this and the subject of this thread, the bankrupt banks, except some would steal from me or compel me for different purposes, what they perceive are loftier ideals.
You live in a society of we but do it voluntarily. Don't tell me where to live. I want to keep all my money and I don't want you telling me what o do with it or who to spend it on.
The horror of collectivism today is how it is clothed in high sounding ideals. But there is no difference between the powers that be spending trillions of our money on bailing out their buddies, and, say, mandatory health insurance.
It all amounts to theft, stealing, fraud, force, no different than mugging me in a dark alley.
You want to keep all your money and want no one to interfere. Fine. What would you do with your money if totally cut off from others? You would have no way to spend it without the goods and services others provide. You want to live in a not-very-well-thought-out fantasy land. You take part in the social contract, like it or not.
Ayn's main flaw is not incorporating others' interests into one's own self-interest. For example, it may be in the bourgeoisie's (naive) best interests to not share their wealth with the less fortunate. If this is carried on for too long they will be eventually be guillotined by the proletariat. Appeasing the masses is a necessity that needs be considered.
grapejelly
12-06-08, 04:40 PM
You want to keep all your money and want no one to interfere. Fine. What would you do with your money if totally cut off from others? You would have no way to spend it without the goods and services others provide. You want to live in a not-very-well-thought-out fantasy land. You take part in the social contract, like it or not.
You ask a question that is a red herring. All I want to do is be free of having some government entity spending my money without my permission.
The "stimulus" is all about depreciating the value of my property, and I have no say so in any of it.
Ayn's main flaw is not incorporating others' interests into one's own self-interest. For example, it may be in the bourgeoisie's (naive) best interests to not share their wealth with the less fortunate. If this is carried on for too long they will be eventually be guillotined by the proletariat. Appeasing the masses is a necessity that needs be considered.
Who is the arbiter of everyone's interests? Is there a God-like entity above the fray who can fairly decide by weighing each other's interests?
Of course not. There is only each of our self-interests.
There are two ways to allocate scarce resources amongst competing self interests:
Voluntarily through trade.
Or through coercion and compulsion, e.g. the political means.
One is good, the other is bad.
One enhances both parties in the trade. The other has a winner (the stronger party who has the power) and a loser (the retiree, the wage earner, the saver, the investor.)
Ayn's main flaw is not incorporating others' interests into one's own self-interest.
That is the central point of the WHOLE WORK and I would very respectfully argue that the above quote misses the meaning of the book by a country mile.
It's there, all over the book
It's called the win-win situation and she (rightly) puts this up on a pedastal as the most elevated form of human interaction. Mutually agreed upon Fair Exchange for Fair Value. It is that simple.
That includes many forms of transactions from cash for goods, goods for goods, goods or cash for ideas. etc. you get the point.
Everytime "charity" is berated, it's because it's charity for the underserving.
The "powerplayers", The "leaches" and the people who increase their lack of productivity to collect more money.
I think it is a very detailed examination of the political economy and with that amount of substance comes subtlety.
I find that the biggest critiques of her work totally ignore the subtlety, and can only exist as generalizations. Which defeats the whole point, if you ask me because if you don't understand and accept the subtlety, then you CHANGE the entire meaning of the work.
That last part is the only critique I can offer intelectually of her work and still maintain my integrity.
V/R
JT
May I suggest that you watch this TV program from the UK BBC2. This is tonights program http://www.bbc.co.uk/programmes/b00g222s
And I recommend the first installment. After Rome: Holy War and Conquest (http://www.bbc.co.uk/programmes/b00g1fp1) http://www.bbc.co.uk/iplayer/episode/b00fy48j
But I warn you, you only have a week left to watch this first episode.
By the by, the presenter is Boris Johnson, who is the newly elected Mayor of London. They are both hour long with NO adverts. Enjoy!
I must add this series is by far the best I have ever seen on the subject of the clash between Christianity and the Muslim world in ancient times. A Magnus Opus.
I just tried. Apparently BBC tv programs are only available for download in the UK (they Geo ref your IP address). Talk about suck!
well people living in the UK pay the taxes that make BBC possible and commercial free -- so I presume they are entitled to a bit extra!
That is the central point of the WHOLE WORK and I would very respectfully argue that the above quote misses the meaning of the book by a country mile.
It's there, all over the book
It's called the win-win situation and she (rightly) puts this up on a pedastal as the most elevated form of human interaction. Mutually agreed upon Fair Exchange for Fair Value. It is that simple.
That includes many forms of transactions from cash for goods, goods for goods, goods or cash for ideas. etc. you get the point.
Everytime "charity" is berated, it's because it's charity for the underserving.
The "powerplayers", The "leaches" and the people who increase their lack of productivity to collect more money.
I think it is a very detailed examination of the political economy and with that amount of substance comes subtlety.
I find that the biggest critiques of her work totally ignore the subtlety, and can only exist as generalizations. Which defeats the whole point, if you ask me because if you don't understand and accept the subtlety, then you CHANGE the entire meaning of the work.
That last part is the only critique I can offer intelectually of her work and still maintain my integrity.
V/R
JT
So in your view Ayn's philosophy supports the existence of a welfare state so long as it keeps the bourgeoisie from being overthrown? I must admit I haven't heard that before.
marvenger
12-06-08, 11:13 PM
We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.
I'm confused. The above statement seems to be advocating large scale bank failures and clearing debts and assets. I thought iTulip was arguing for the necessity of the bailouts because allowing failures and deflation was apparantly a worse outcome than bailouts and reflation despite its oligarchical implications.
Has the iTulip position changed? I'm all for changing of positions, I do it all the time.
Steve Keen has recently posted analysis of a minsky model showing that in a debt backed fiat currency system there comes a point where reflation through issuance of more debt will not work. This happens when there has been too much debt financed speculation in unproductive assets and the interest overhang is too great to support new debt and reflation; this scenario is exactly what the world now finds itself in.
Therefore it seems the only way for the markets to clear is for failures and deflation; is this what you are now advocating?
Or the government can literally print non debt backed fiat currency to reflate and provide for debt repayment and market clearing, which means the Fed sponsored banking cartel will lose control of issuance of money and it will therfore only be resorted to once we're on the brink of total societal breakdown.
In summary
Are you suggesting that the markets can be cleared by the issuance of more debt backed fiat currency? the quote above makes me believe iTulip does not think this is possible.
If debt backed currency issuance cannot clear the markets, do you see clearing though failures and deflation or through printing with no debt to back the issuance and inflation. The quote to me implies failures and deflation, but obviously most of iTulip is about how inflation will be achieved, hence the confusion.
Below is Steve keen's analysis
DebtWatch No 29 December 2008 (http://www.debtdeflation.com/blogs/2008/11/30/debtwatch-no-29-december-2008/)
Published in November 30th, 2008
Posted by Steve Keen (http://www.debtdeflation.com/blogs/author/admin/) in Australia (http://www.debtdeflation.com/blogs/category/australia/), Debtwatch (http://www.debtdeflation.com/blogs/category/debtwatch/), USA (http://www.debtdeflation.com/blogs/category/usa/)
43 Comments (http://www.debtdeflation.com/blogs/2008/11/30/debtwatch-no-29-december-2008/#comments)
What’s Really Going On? or…
Why Did I See it Coming and “They” Didn’t?
Part 2: The Models
“But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” (Keynes, A Tract on Monetary Reform, 1924)
In last month’s Debtwatch, I explained why the data side of why the “Financial Instability Hypothesis” enabled me to predict this crisis, long before conventional “neoclassical” economists had any idea it was approaching.
This month I explain why the models neoclassical economists build are hopelessly inadequate–as models of the economy in general, as guides to what is likely to happen in the future, and as sources of policy recommendations to end this crisis.
In particular, the Australian Treasury’s prediction that Australia will avoid recession simply cannot be trusted.
Neoclassical Models: Crisis? What Crisis?
The focus of neoclassical economists on misleading indicators is compounded by the models they build, which–as well as omitting crucial data like the debt to GDP ratio–are congenitally incapable of identifying serious turning points in the economy.
This are several reasons for this, but first and foremost is their belief that the economy is fundamentally stable, and will always return to a long-run equilibrium growth path after any shock. The models they construct have this expectation of a return to long-term growth paths after any short term divergence from trend “hard wired” into their results.
An instance of this for the Australian Treasury’s macroeconomic model (TRYM) is shown in Figure One, which shows the impact on business investment in the model of a simulated monetary shock in 2010. The shock initially pushes business investment above the long term trend, to which it then returns after eight years.
This is not a prediction by the model as such, but a product of its structure, which assumes that the economy will always return to a supply-side driven equilibrium in a relatively short time frame.
Figure One
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0004_41473437.PNG
TRYM’s supply-side behaviour is determined simply by the assumption that, in the long run, the economy will return to an equilibrium rate of growth, given by the sum of assumed trends in population growth and labour productivity, at an assumed equilibrium rate of unemployment called “NAIRU” (”Non-Accelerating Inflation Rate of Unemployment”). As the Treasury’s documentation of TRYM puts it (see http://www.treasury.gov.au/contentitem.asp?NavId=016&ContentID=235):
“The model could be described as broadly new Keynesian in its dynamic structure but with an equilibrating long run. Activity is demand determined in the short run but supply determined in the long run… The model will eventually return to a supply determined equilibrium growth path in the absence of demand or other shocks.” (THE MACROECONOMICS OF THE TRYM MODEL OF THE AUSTRALIAN ECONOMY, p. 6; emphasis added)
and
“the aggregate supply curve is vertical in the long term at a level of employment and production consistent with the NAIRU. (Or more precisely the economy grows along a steady state growth path consistent with the NAIRU.)” [AN INTRODUCTION TO THE TRYM MODEL APPLICATIONS AND LIMITATIONS p. 6]
Neoclassical models like TRYM are thus variable in the present–and have some capacity to predict the very short term, if their guesses about the size of any shock are reasonably accurate. But they are anchored to some point in the (not too distant) future when it is assumed that “equilibrium” will once again apply, and they are therefore useless as guides in the medium term.
They are also useless for long term prediction because the model’s long run equilibrium is unaffected by the short term disturbance: if the figure assumed for the NAIRU in the model remains unchanged, along with the estimates for population and productivity growth, then the model will average the rate of growth those assumptions imply, regardless of how severe a shock the short-term disturbance causes.
In the case of the RBA’s main model, this is a real growth rate of 3.25 percent per annum (see Tables 7 & 8 of RDP2005-11)–so the economy is assumed to converge to a tranquil future path after any disturbance, with no residue from the shock itself (apart from a change in the price level for permanent increases in the money supply).
Ironically, this means that models like TRYM produce medium term predictions of an acceleration in growth after the impact of a shock like this financial crisis–otherwise the model could not get back to its “long run equilibrium growth path”.
There was thus no prospect that Neoclassical models could predict the crisis, and their guidance on what will happen–with or without policy intervention–are irrelevant. Unlike these models, the actual economy does not have a point of balance in the future to which it is tethered. It is therefore no wonder that these models gave no warning of the impending crisis–indeed the wonder would be if they had done so!
This is why supposedly authoritative bodies like the OECD could claim “our central forecast remains indeed quite benign” just two months before all hell broke loose (as noted in my last Debtwatch). If economic data have been apparently tranquil, these models will predict tranquility ahead; if the data have been depressed, they will predict a bit of a downturn, followed by a return to equilibrium some years hence.
Neither prediction is worth a pinch of salt.
To have any hope of predicting the future using an economic model, it has to be one with genuine dynamics–not a model that simply assumes that “when the storm is long past the ocean is flat again”, as Keynes satirically remarked. Such a model has to specify what it sees as the main causal factors in the economy, and then let those factors interact. The medium and long term outcomes are thus a product of the interaction of the causal variables in the model, just as the short term is.
Models of this nature are commonplace outside economics, and scientists, mathematicians and engineers have designed an impressive range and variety of computer simulation programs to support this genuinely dynamic approach to modelling.
I developed such a model of Minsky’s Financial Instability Hypothesis in the early 1990s.
A Minsky Model: Finance and Economic Breakdown
The basic principles in Minsky’s financial instability hypothesis are extremely simple. A capitalist economy is necessarly cyclical. During a boom, investors will take on debt to finance investment, but because the economy is cyclical, they will later find themselves in a recession when they have to repay that debt.
Therefore their repayments don’t quite cancel all the extra debt, and debt levels tend to ratchet up over time. These debt cycles with an overall secular trend towards increasing debt can lead to an ultimate crisis where the debt overwhelms the economy–a Depression.
This is not an inevitable outcome of Minsky’s theory, but he emphasises that since market economies have experienced Depressions in the past, to be valid a model of the economy must…
“ make great depressions one of the possible states in which our type of capitalisteconomy can find itself” (Minsky, 1982, Inflation, Recession and Economic Policy, p. xi)
In the model I developed in 1993, under some circumstances, the economy could taper to equilibrium; but under others, a series of debt-driven financial cycles would lead to an eventual crisis where debt overwhelmed the economy. The following graphics set out the model in flowchart format. It can also be summarised in three very simple propositions:
Firms borrow to invest during booms;
Workers’ capacity to secure wages rises is affected by the rate of employment; and
Banks lend money to finance investment;
and four very simple “stylised facts”:
Wages share of output will rise if wage rises exceed productivity;
The employment rate will rise if the rate of growth exceeds the sum of population and productivity growth;
The debt to GDP ratio will rise if investment exceeds profits; and
an increased rate of economic growth will reduce the debt to GDP ratio.
As a flowchart, the model is as shown in Figure Two (the blue boxes contain mathematical sub-systems).
The simulation below and in Figure Three are with no debt in the model–in which case the model generates simple cyclical growth.
Figure Two
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0006_41473453.PNG
Figure Three explodes the “Graph” subsystem of the model. The same set of graphs is used in subsequent Figures to display the behaviour of the more complete models, where debt and Ponzi investing are added.
Figure Three
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0008_41473468.PNG
When the debt switch” is flicked to include borrowing to finance productive investment only–so all borrowed money leads to an increase in the capacity to produce output–then one of two situations will apply.
Figure Four shows the first such situation: when the model begins close to its equilibrium values, it continues to converge towards it. Employment and income distribution (proxied here by the wages share of output) taper to equilibrium values, as does the debt to output ratio (which is negative, implying positive net financial assets for firms).
Figure Four
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0010_41473562.PNG
However, if the system starts further away from equilibrium, then the system’s behaviour is rather like that described by Fisher in his Debt Deflation Theory of Great Depressions:
“There may be equilibrium which, though stable, is so delicately poised that, after departure from it beyond certain limits, instability ensues, just as, at first, a stick may bend under strain, ready all the time to bend back, until a certain point is reached, when it breaks.
This simile probably applies when a debtor gets “ broke,” or when the breaking of many debtors constitutes a “ crash,” after which there is no coming back to the original equilibrium.
To take another simile, such a disaster is somewhat like the “ capsizing” of a ship which, under ordinary conditions, is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but, instead, a tendency to depart further from it.” (Fisher, 1933)
With this far from equilibrium starting point, the system goes through a series of cycles in which the debt to output ratio ratchets up, as Minsky surmised, until such time that the next boom leads to such an accumulation of debt that it cannot be repaid–debt service consumes all available revenues–and the economy falls into a permanent slump.
Figure Five
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0012_41473562.PNG
I have commented frequently that economists are prisoners of their models–rather than seeing the economy, they see their model of it. Though I differ from the neoclassical mainstream in the type of model I see, on this front I was not very different. I therefore expected to find a pattern like that shown for the debt to output ratio in Figure Five in the Australian data, when I prepared an expert witness case for the NSW Legal Aid in December 2005: a gradual hump-like increase in debt to output ratios.
Instead what I saw was the pattern shown in Figure Six.
Figure Six
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0014_41473578.PNG
That was an almost purely exponential increase in the debt to GDP ratio over time–disturbed only by the growth and bursting of two obvious super-bubbles (one in the early 1970s that was associated with the demise of the Whitlam government, and the other that drove Keating’s “recession we had to have” in the early 1990s).
It was obvious that a key aspect of Minsky’s theory that my model omitted had to be introduced: Ponzi investing, in which individuals take out debt to speculate on asset prices, but don’t actually build any assets in the process. I introduced this into the model by adding a speculative debt component, where borrowing for speculation rose whenever the rate of growth exceeded a minimum level. With that modification, the pattern shown in Figure Seven resulted.
Figure Seven
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0016_41473578.PNG
This model generates a generally exponential increase in debt levels, with super-bubbles in speculative borrowing occurring regularly, and borrowing to finance speculation gradually accelerates to ultimately dwarf borrowing for productive investment.
At some point the debt burden becomes too great for the economy to finance, and debt accumulates faster than it is repaid, leading to a secular crisis and not merely a financial cycle. Guided both by Minsky’s hypothesis and my mathematical models, I felt that we were at such a secular turning point in the real world when I saw the data in Figure Six (three years ago, in December 2005).
I feared that Australia–and probably the rest of the world–was in for a serious debt-induced downturn. Knowing that there was little if any likelihood that this danger would be perceived by the neoclassically-trained economists who dominate Treasuries and Central Banks (and University Economics Departments) around the world. I decided to go public with my analysis
This was more than confirmed when RBA Deputy Governor Ric Battellino published a graph showing Australia’s long term debt to GDP ratio during a speech in September 2007 (see Figure 8, which is augmented to include estimates of non-bank credit prior to 1953).
Figure Eight
http://www.debtdeflation.com/blogs/wp-content/uploads/2008/12/IMG0018_41473578.PNG
The model I’ve outlined above is extremely simple, and would need to be substantially embellished to capture the main dynamics of a market economy. But it is already streets ahead of neoclassical models by not making an artificial distinction between the short and long term. To paraphrase Keynes, “in the long run we are still in the short run”.
The Outback Oracle
12-07-08, 06:46 AM
Evidence please?
Thought experiment: what if everyone saved tons of money and decided to retire at the same time. By your logic, the economy would be in ship shape.
There is a reason Mises at al get no traction in academic circles. And no, the reason is not some vast conspiracy.
Fan
Ok so Academic circles still cannot explain why we have the mess we have. They still propose solutions that have not yet worked and will never work other than to pass on the troubles to the next generation. Academis circles and the Economists they have trained have brought us to this unbalanced mess.
According to you we have no need to save. We can just go into more and more debt forever! That is modern academic theory. The practical result of that idea is clearly evident.
Your "thought experiment" is just rubbish. Austrians are about "balance". So using some ultra extreme impossible example to try to negate Austrian thinking is pointless.
In the Austriab's favour at the moment is that all the neo-classical models used in the modern day have recently been proven to be useles. So exactly how could their theories be less useful.
I am not arguing that everything published by Austrian adherents is 100% correct. Even the most ardent Austrian owuls say he/she gets things wrong from time to time....which is a little more than can be said for the Academia you quote and whose approval you seem to think we should all seek.
The Outback Oracle
12-07-08, 06:51 AM
Look at the analogue between an ecosystem and an economic system -- where are the "savers" "producers" and "consumers" in each system
From Energy Flow Through the Ecosystem (http://www.marietta.edu/~biol/102/ecosystem.html#Energyflowthroughtheecosystem3)
http://www.marietta.edu/~biol/102/ecycle.gif
Sorry rajiv...your point is?
As an old biological scientist....I'd have to take great exception to the use of such a child's drawing to represent complex biological systems.
As an old biological scientist....I'd have to take great exception to the use of such a child's drawing to represent complex biological systems.
Then take issue with Marietta University Department of Environmental Biology, and not with me. Why don't you write them an e-mail, stating your objections as to how they explain ecosystems to their undergraduates. I think you could fruitfully spend some time on that endeavour. I do believe that the savers are the nurient(money) recyclers.
And yes I agree with you that in reality, ecological systems are much more complex than as depicted -- just as economic systems are much more complex than EJs simplified FIRE/PC economy depiction.
However, my point was to think of the parallels between the economic system, and the ecosystem and to identify what is being recycled and what is not being recycled. Clearly, in a gold based money system, where the amount of gold is more or less fixed, money represents the inorganic nutrients. And this nutrient pool cannot be enlarged in a limited ecosystem. Then where do savers, consumers and producers lie in this diagram.
BTW, I am not disagreeing with you there -- I was just getting to the point that the quantity of money in the society has to be fixed to avoid the problems we are having, and the paradigm of infinite growth is not feasible.
The Outback Oracle
12-07-08, 07:48 AM
Thanks Rajiv for the explanation. Truthfully i was worried you were arguing that there is no need for savers in a dynamic system.
:) I ought have more faith in your intellectual and economic prowess which is reasonably obvious.
So in your view Ayn's philosophy supports the existence of a welfare state so long as it keeps the bourgeoisie from being overthrown? I must admit I haven't heard that before.
No, not quite:D
I just tried. Apparently BBC tv programs are only available for download in the UK (they Geo ref your IP address). Talk about suck!
Try using a UK based free proxy service, so that it looks like you are in the UK. Eg
http://www.xroxy.com/proxy-country-GB.htm
The series is quite good, by the way.
Chris Coles
12-07-08, 09:57 AM
Try using a UK based free proxy service, so that it looks like you are in the UK. Eg
http://www.xroxy.com/proxy-country-GB.htm
The series is quite good, by the way.
Thanks *T*, I was also going to suggest they go to the appropriate page and when it opens the player, and you hover your arrow over "Share" it will give you the potential to email it to a friend, so email it to yourself...
http://www.bbc.co.uk/programmes/b00g1fp1
Chris Coles
12-07-08, 10:48 AM
Who is the arbiter of everyone's interests? Is there a God-like entity above the fray who can fairly decide by weighing each other's interests?
Of course not. There is only each of our self-interests.
There are two ways to allocate scarce resources amongst competing self interests:
Voluntarily through trade.
Or through coercion and compulsion, e.g. the political means.
One is good, the other is bad.
One enhances both parties in the trade. The other has a winner (the stronger party who has the power) and a loser (the retiree, the wage earner, the saver, the investor.)
There are two separate responsibilities.
The first is that the stronger party has no right to impose a deal upon any other. The right not to accept the deal is very much the foundation of the contract. If you refuse to sign, you cannot be forced to sign.
The second responsibility is in fact split both ways in equal parts. You have to invest in others to receive a benefit for yourself.
Let me give you a real example from how I lost my first business repairing Freight containers in Southampton docks in the 1970's. We had been pushed beyond our ability to pay interest on a loan by the Eastern Seaboard of the US closing down because of a strike for more than three months; that left us with no work and no income. But the final straw was afterwards when our bankers were on site and they suggested we increase our hourly rate by a small amount to demonstrate we had control over our marketplace. But our largest customer, to demonstrate their power over us, immediately pulled all their work out of our yard. Our bankers pulled the plug. Afterwards, I heard the customer admitted they had made a mistake and that their decision caused them a lot of problems because we provided a very good service they could not replace. But by then it was too late. They saw their need for power, more than they saw the long term effect of exercising that power.
Long term investment comes under exactly the same heading. You all hold the power to refuse to invest for the long term in others. Some say such investment is a form of charity. (Why should I give you any of my money, free capital, when you can make the choice to struggle yourselves without that investment). But that is exactly the point, it is not in your long term interest to refuse to invest, but you will only be able to see any return from the investment at some indeterminate point a long way over the horizon.
Investment for the long term is not charity, it is common sense, but sadly, a common sense that is too easily forgotten. You cannot possibly see the benefit in the near term, you have to be able to put your prejudice aside and accept that, at some point in the future, the benefit will arrive.
But today, we budding entrepreneurs have to constantly face a refusal to invest based upon the concept that, somehow, such investment into us is a form of charity. I once had someone say I was asking for something for nothing. Another came up with the phrase, "Research & Development old boy? Bottomless pit, never touch it with a barge pole."
What Ayn Rand embedded into the psychology of the United States is the idea that if you make it to the top, you did it all yourself and thus have no responsibility to those behind you. She constantly passed that back to the idea of charity being something not acceptable while forgetting that the greatest charity is to yourself through the investment for the long term in others.
A nation must invest for the long term without any certainty of a return. But it is not the nation as government, it is the nation as individual holders of the capital of the nation - investing for the long term in the free enterprise efforts of everyone else. Not as charity, but as a long term input to the overall success of the free nation; without any near term certainty of success. To be able to do that, you need a vision of the potential, not a certainty.
Fan
Ok so Academic circles still cannot explain why we have the mess we have. They still propose solutions that have not yet worked and will never work other than to pass on the troubles to the next generation. Academis circles and the Economists they have trained have brought us to this unbalanced mess.
According to you we have no need to save. We can just go into more and more debt forever! That is modern academic theory. The practical result of that idea is clearly evident.
Your "thought experiment" is just rubbish. Austrians are about "balance". So using some ultra extreme impossible example to try to negate Austrian thinking is pointless.
In the Austriab's favour at the moment is that all the neo-classical models used in the modern day have recently been proven to be useles. So exactly how could their theories be less useful.
I am not arguing that everything published by Austrian adherents is 100% correct. Even the most ardent Austrian owuls say he/she gets things wrong from time to time....which is a little more than can be said for the Academia you quote and whose approval you seem to think we should all seek.
I have not suggested there is no need to save. I am suggesting that saving is not the short-term answer to the current crisis. Purporting sans evidence and ad nauseam that the problem is "LACK of saving LACK of investing" etc is starting to bother me.
And yes, I also dislike the demonizing of modern economists. For whatever your rhetoric, Bernanke, Stiglitz, Summers, Barro, etc are smarter than you and me and have spent significant time studying and thinking about these topics. They are familiar with Austrian economics and do not find it compelling. I apologize that I feel similarly about the common practice around here of amateurs parroting the Von Mises institute and asserting that they know the solution and that it is more savings.
Finally, I would make a point: we can indeed go into more and more debt forever. All that is required is that the monetary supply be increased at a similar rate as debt. Sure, at some point the value of monetary notes may need to be designated by scientific notation. Please note that I am not arguing problems may not come out of this. But you made another unsupported blanket assertion.
[Milton Friedman] has always hated the fragmentation and bickering between schools of economics, which has occurred ever since Marx detached himself from the "classical" school of Smith and Ricardo. In 1974, when vacationing at his summer home in Vermont, Friedman spoke informally at a nearby conference about Austrian economics. He bluntly told the audience, "There is no Austrian economics--only good economics and bad economics".. (Dolan 1976: 4). His point was that any useful concepts coming out of Austrian economics (he specifically had reference to Hayek's contributions) should be incorporated into the body of mainstream economic theory. In 1982, he made the same point at a conference on supply-side economics. "I am not a supply-side economist. I am not a monetarist economist. I am an economist".
-- Mark Skousen, The Making of Modern Economics, pg 432
[Milton Friedman] has always hated the fragmentation and bickering between schools of economics, which has occurred ever since Marx detached himself from the "classical" school of Smith and Ricardo. In 1974, when vacationing at his summer home in Vermont, Friedman spoke informally at a nearby conference about Austrian economics. He bluntly told the audience, "There is no Austrian economics--only good economics and bad economics".. (Dolan 1976: 4). His point was that any useful concepts coming out of Austrian economics (he specifically had reference to Hayek's contributions) should be incorporated into the body of mainstream economic theory. In 1982, he made the same point at a conference on supply-side economics. "I am not a supply-side economist. I am not a monetarist economist. I am an economist".
-- Mark Skousen, The Making of Modern Economics, pg 432
I agree completely. A question worth asking is why more Austrian concepts have not made it into mainstream economic study. I do not feel it is due to lack of understanding. Is it that academics are too bound up in their thought structures to fairly entertain the ideas? Is it that they have examined them with open minds but find the ideas to be without merit? This may be a discussion worth having.
grapejelly
12-07-08, 11:34 AM
[Milton Friedman] has always hated the fragmentation and bickering between schools of economics, which has occurred ever since Marx detached himself from the "classical" school of Smith and Ricardo. In 1974, when vacationing at his summer home in Vermont, Friedman spoke informally at a nearby conference about Austrian economics. He bluntly told the audience, "There is no Austrian economics--only good economics and bad economics".. (Dolan 1976: 4). His point was that any useful concepts coming out of Austrian economics (he specifically had reference to Hayek's contributions) should be incorporated into the body of mainstream economic theory. In 1982, he made the same point at a conference on supply-side economics. "I am not a supply-side economist. I am not a monetarist economist. I am an economist".
-- Mark Skousen, The Making of Modern Economics, pg 432
Milton Friedman is/was from the Chicago School which is against the gold standard, pro-inflation and, like Keynes, bent to the agenda of big government and the corporatist state.
Hayek, Mises et al are towering figures in economics but their teachings are antithetical to the government-employee economists we have today.
grapejelly
12-07-08, 11:38 AM
I am suggesting that saving is not the short-term answer to the current crisis. Purporting sans evidence and ad nauseam that the problem is "LACK of saving LACK of investing" etc is starting to bother me.
And yes, I also dislike the demonizing of modern economists. For whatever your rhetoric, Bernanke, Stiglitz, Summers, Barro, etc are smarter than you and me and have spent significant time studying and thinking about these topics. They are familiar with Austrian economics and do not find it compelling. I apologize that I feel similarly about the common practice around here of amateurs parroting the Von Mises institute and asserting that they know the solution and that it is more savings.
Finally, I would make a point: we can indeed go into more and more debt forever. All that is required is that the monetary supply be increased at a similar rate as debt. Sure, at some point the value of monetary notes may need to be designated by scientific notation. Please note that I am not arguing problems may not come out of this. But you made another unsupported blanket assertion.
Today's problems are predicted quite nicely by the Austrian School. They explain the boom-bust cycle quite well. And the solution indeed is to stop penalizing production and savings, and stop incentivizing consumption.
The exact reverse is the policy of the day. And it was in FDR's time. And it was responsible for the Great Depression.
Just as it will be responsible for a long drawn out depression today.
The solution is to reward savings, reward production, reward investment...which would be easily done by eliminating all taxes on dividends, interest income, and business income. Then just step back and let the market go to work.
Right now, interest rates are too low to encourage savings. And the government's limitless appetite for borrowing crowds out all private investment. It is the opposite of what is needed.
And 99% of the economists are what I call government-employee economists, completely brainwashed and blindsided by what has happened today. And supportive of utterly destructive policies and nonsensical ideas such as "stimulus".
Chris Coles
12-07-08, 11:47 AM
I have not suggested there is no need to save. I am suggesting that saving is not the short-term answer to the current crisis. Purporting sans evidence and ad nauseam that the problem is "LACK of saving LACK of investing" etc is starting to bother me.
And yes, I also dislike the demonizing of modern economists. For whatever your rhetoric, Bernanke, Stiglitz, Summers, Barro, etc are smarter than you and me and have spent significant time studying and thinking about these topics. They are familiar with Austrian economics and do not find it compelling. I apologize that I feel similarly about the common practice around here of amateurs parroting the Von Mises institute and asserting that they know the solution and that it is more savings.
Finally, I would make a point: we can indeed go into more and more debt forever. All that is required is that the monetary supply be increased at a similar rate as debt. Sure, at some point the value of monetary notes may need to be designated by scientific notation. Please note that I am not arguing problems may not come out of this. But you made another unsupported blanket assertion.
As an outsider and an admitted amateur, I am amazed at the audacity of so called "professionals" that have overseen the greatest financial disaster with all their professional input, (underpinned by all those certificates of approbation from their teachers), into all those failed financial institutions and governments and still we see, they accept no responsibility for the failure.
I am truly not amused. Certainly not impressed at all.
I agree completely. A question worth asking is why more Austrian concepts have not made it into mainstream economic study. I do not feel it is due to lack of understanding. Is it that academics are too bound up in their thought structures to fairly entertain the ideas? Is it that they have examined them with open minds but find the ideas to be without merit? This may be a discussion worth having.
It should be somewhat obvious. In my opinion, it's partly its because there are major problems with the theories and partly because it is anti big government. Many of Friedman's ideas and concepts never made it in because he also is anti big government.
Milton Friedman is/was from the Chicago School which is against the gold standard, pro-inflation and, like Keynes, bent to the agenda of big government and the corporatist state.
Hayek, Mises et al are towering figures in economics but their teachings are antithetical to the government-employee economists we have today.
Just plain wrong, you obviously have bought into the Austrian propaganda and false data and spin and have never read and studied Friedman.
Today's problems are predicted quite nicely by the Austrian School.
And by every other major school too, when they are truly studied and understood in full. For example, Keynesian theory requires that any stimulus during bad times be paid back during recoveries or booms... but I have as yet to hear an Austrian take that into account when criticizing Keynes.
And just so I'm not misunderstood, there are problems with every existing school of economics. In my opinion, that is one of the things that Friedman was implying in those quotes.
As long as the money supply is fixed -- that is by a gold standard or otherwise, Income taxes are not necessary -- but as soon as we get into the realm of an expandable money supply, and give bankers or the government the power to expand it, and allow the bankers to get interest income on "money created from thin air" then income tax on that "interest income" becomes an absolute necessity otherwise there is a shift of wealth from the producers/savers to the bankers.
This was the primary reason that the creation of the FED and the passage of income tax took place in the same year 1913. However, I believe, that the income tax really was implemented after the Great War in 1918.
In 1918, the top bracket was taxed at 77%, and the bottom bracket of 6% began after an exemption of $2000 (1918$.) The 77% came on at an income of $1,000,000 and the 35% bracket came on at $48,000
So what does that mean in 2008$
<table cellpadding="2" cellspacing="2" border = "1">
<tr><td> </td><td>Official CPI</td><td>Shadowstats CPI</td></tr>
<tr><td>0%</td><td>$28,000</td><td>$88,000</td></tr>
<tr><td>35%</td><td>$675,000</td><td>$2,150,000</td></tr>
<tr><td>77%</td><td>$14,100,000</td><td>$44,400,000</td></tr>
</table>
This is what you would have gotten if income tax brackets had been pegged to inflation.
If you take the shadowstat cpi number, then I do not think that most people would have an issue with paying the income tax
Today's problems are predicted quite nicely by the Austrian School. They explain the boom-bust cycle quite well. And the solution indeed is to stop penalizing production and savings, and stop incentivizing consumption.
Again - and not as a comment on what might actually happen but as an exercise to examine your thinking - what is the logical consequence of having all savers/investors and no consumers? After you've thought that through, what are the logical consequences of having more saving/investing than consumption? What happens to the value of one's savings if everyone saves the same amount? What happens to the value of the savings if 1000 people save enough to retire and the world is left with one laborer?
The exact reverse is the policy of the day. And it was in FDR's time. And it was responsible for the Great Depression.
(Beating a dead horse) Evidence please?
http://krugman.blogs.nytimes.com/2008/11/08/new-deal-economics/ (http://krugman.blogs.nytimes.com/tag/fdr/)
(please rebut)
Just as it will be responsible for a long drawn out depression today.
/bald assertion sans evidence
The solution is to reward savings, reward production, reward investment...which would be easily done by eliminating all taxes on dividends, interest income, and business income. Then just step back and let the market go to work.
It's just so simple!
Milton Friedman on the size of the government:
Milton Friedman on Libertarianism (Part 4 of 4)
http://www.youtube.com/watch?v=64mr-cjxZfU
grapejelly
12-07-08, 01:18 PM
Milton Friedman advocated a controlled but elastic money supply but was against the gold standard.
Just the doctrine that is perfect for government that wants to inflate instead of tax, to pay for foreign wars and buy votes domestically.
As a practical matter, the end of the gold standard ushered in the era of unlimited warfare in the 20th century and the death of stable money in any way, shape or form.
It's like communism. Friedman may have been right in an ideal world. But in the real world, governments inflate until there is no value left. They inflate to build empires and fight wars instead of taxing. There is no real control over the amount of inflation. Money is too important to leave to government. That is why he was so wrong, in my opinion.
Again - and not as a comment on what might actually happen but as an exercise to examine your thinking - what is the logical consequence of having all savers/investors and no consumers? After you've thought that through, what are the logical consequences of having more saving/investing than consumption? What happens to the value of one's savings if everyone saves the same amount? What happens to the value of the savings if 1000 people save enough to retire and the world is left with one laborer?I have two responses. First, Keynsian economics seems very preoccupied with this question of too much savings and not enough consumption.
Don't all people who produce also consume?
How can you have it any other way?
So your question is a bit nonsensical, no?
Most people consume but save only a small amount. If it weren't for very high taxes today, people would save maybe 10 - 20% of their wages.
Because taxes are so high, people are forced to pay 40% of their income or more in tax. And they expect the government to take care of those functions formerly left to their own devices.
I am forced to pay for government schools whether I send my kids there or not, so it makes it uneconomic not to send my kids there since I am paying anyway.
There are few or no savings because the economic surplus is all being consumed by government. And government is a poor substitute for private actors doing what is in their best self-interests, negotiating for health care and education with willing sellers in a free market.
The crux of the problem today is no savings, too much consumption, and inadequate investment.
But due to the poor education in a fiat world, economists are mistakenly obsessed with nonsensical Keynsian problems of too much savings.
In a like vein, Bernanke used to talk about the world being awash in savings, the so-called savings glut. (Does he still talk about that anymore? I wonder why not.)
Models of thinking that posit a savings glut do not create good explanations of events, nor the appropriate responses to those events.
It is a mistake of thinking of credit/debt as money. They are of course not the same. But in a world of all-fiat, we have run out of money and only have debt and credit left.
That is why I come back to the simplest of solutions. Not government appropriating what little surplus is left, and spending it willy nilly for political ends. But leaving it to people who own the property in the first place to spend it as they see fit.
Reward investment and savings by not taxing it to death.
Milton Friedman advocated a controlled but elastic money supply but was against the gold standard.
Milton Friedman was against an elastic money supply and wanted an approx. even 3% money supply growth per year.
He was against a pure gold standard since it is deflationary, by definition, in any economy which grows significantly. What is the average gold supply growth per year over the last 25, 50 or 100 years?
Just the doctrine that is perfect for government that wants to inflate instead of tax, to pay for foreign wars and buy votes domestically.
Since you got his basic views wrong, asserting and assigning views to him that he did not support is not a surprise.
Money is too important to leave to government. That is why he was so wrong, in my opinion.
An uncontolled money supply is not supported by any Austrian of which I'm aware.
Unfortunately you and Austrians in general also offer no valid alternatives that have stood the test of time, and that is and always has been my basic point in this area. Its extremely unpopular, especially amongst gold bugs and most gold bulls, but the actual historical facts show that neither a gold nor a fiat standard stands the test of time... which should show that the real problem has virtually nothing to do with the actual monetary standard, but somehow almost always comes back to the religious (in the sense of "a cause, a principle, or an activity pursued with zeal or conscientious devotion") area of some economic school and its teachings, rather than just dealing with the actual facts and history.
I have two responses. First, Keynsian economics seems very preoccupied with this question of too much savings and not enough consumption.
Don't all people who produce also consume?
How can you have it any other way?
So your question is a bit nonsensical, no?
You not only misunderstand my basic points, but now assign me a view that I not only don't support or agree with, but also set up a contradiction in terms that I'm supposed to comment on?
Most people consume but save only a small amount. If it weren't for very high taxes today, people would save maybe 10 - 20% of their wages.
So tell me then, what tax rate did Friedman support?
Did you even view that video about his actual views on government?
But due to the poor education in a fiat world, economists are mistakenly obsessed with nonsensical Keynsian problems of too much savings.
We're in partial agreement here, but I note that you follow in the footsteps of most other Austrians and completely ignore that Keynesian theory includes running a surplus during better economic times.
That is why I come back to the simplest of solutions. Not government appropriating what little surplus is left, and spending it willy nilly for political ends. But leaving it to people who own the property in the first place to spend it as they see fit.
Reward investment and savings by not taxing it to death.
Which is roughly also what Friedman supported, as well as decrying the incessant bickering amongst economic schools - all of which to one degree or another are incorrect.
(Milton Friedman) has always hated the fragmentation and bickering between schools of economics, which has occurred ever since Marx detached himself from the "classical" school of Smith and Ricardo. In 1974, when vacationing at his summer home in Vermont, Friedman spoke informally at a nearby conference about Austrian economics. He bluntly told the audience, "There is no Austrian economics--only good economics and bad economics".. (Dolan 1976: 4). His point was that any useful concepts coming out of Austrian economics (he specifically had reference to Hayek's contributions) should be incorporated into the body of mainstream economic theory. In 1982, he made the same point at a conference on supply-side economics. "I am not a supply-side economist. I am not a monetarist economist. I am an economist".
-- Mark Skousen, The Making of Modern Economics, pg 432
The Outback Oracle
12-07-08, 02:55 PM
The number of Economists of any note who saw this coming you can count on one hand.
Fan, you accuse us of trying to prove ourselves right by saying the same thing over and over. Please apply the same type of yardstick to your own argument. So far, your sole argument has been to create a scenario so far removed from what is possible and extrpolate a conclusion from that, which we are all then expected to hold as true and bow to your superior logic!Then, tou simply state that Bernanke et al are smarter than I am, therefore they must be right! Everyting they do or say, must be right. On the other hand, it occurs to me that there are some damned smart Economists, who disagree quite vehemently with Bernanke, so why is it that Bernanke must be right over such people?
At the time i started studying Economics, oh so long ago, the current type of thinking was filtering through the Economic world. I argued then, at some academic expense, that it was a form of madness. Indeed a bit of an analysis of what has happened in Australia wouold indicate that the whole thing started going wrong here in the late 1950's. I can't speak for the US. Maybe, Bernanke has a brain size three times mine, but maybe he has not had my experiences. Maybe, in his intellectual prowess he doesn't have his two feet so firmly planted in reality as I have. Maybe he has a self-interest in the pepuation of current thinking that blinds him. It's a common factor these days in those who rule over us. Now, despite what you claim to know about how superior he is to me, just show me one place where he warned the American people, indeed the people of the world. Is there a person anywhere that he told to be damned cautious about what was going on or they might lose their life savings in this debacle?
I have a son who is intellectually the equal of anyone i have ever met...and I HAVE met some damned smart people. There are a few objective measures which indicate that. in the intellectual stakes, he is way up there with some elite. He is an Economist. Unfortunately he was educated in a 'modern school' here in Aus. It is an education that blinded him to the reality of the world and what was coming. The Economic academia have let us down badly in the last 40 to 50 years.
For the record, I don't know a heck of a lot about "Schools of Economics" and i don't care much for any damned label. I haven't "studied" Friedman but certainly I read a few books on the topic just from the point of view of my own interest. I'm just a bloke who has a bit of an insatiable curiousity about everything. So i'm no Bart or Finster around here. However, Marvenger posted a bit of a treatise by Steve Keen around here somewhere that I'd think is worth a read. I don't much go with Steve's 'solutions', but he has a train of thought which has made him a damned side closer to the mark than Bernanke Paulson et al. I'm not sure how one then measures who is smarter ...Keen or Bernanke? Nevertheless i am sure you can restate the opinion that Bernanke is the smartest bloke living and therefore Keen is wrong. That ought to safely win you the argument.
Sorry, but about the time you say we can go into more and more debt ad infinitum...as far as I'm concerned, I won't bother arguing further. I know that aligns you with geniuses with whom i could never compare.
Hell's bleedin' bells!
The number of Economists of any note who saw this coming you can count on one hand.
Fan, you accuse us of trying to prove ourselves right by saying the same thing over and over. Please apply the same type of yardstick to your own argument.
No one can be sure of being right before solutions are applied and tested. I was expressing displeasure with some, particularly grape, who repeat the same "save more" medicine without addressing the criticisms while at the same time disparaging 50 years of economics with the wave of the hand.
So far, your sole argument has been to create a scenario so far removed from what is possible and extrpolate a conclusion from that, which we are all then expected to hold as true and bow to your superior logic!
The thought experiments are not meant to prove that I am correct; I am quite sure I do not fully understand the present situation. The thought experiments are provided to illustrate possible scenarios in which the simple "save more" solutions would not work. So far the only refutation I have heard is "but that's not realistic!" I have given you that point. I am putting them out there to focus our thinking.
Then, tou simply state that Bernanke et al are smarter than I am, therefore they must be right! Everyting they do or say, must be right. On the other hand, it occurs to me that there are some damned smart Economists, who disagree quite vehemently with Bernanke, so why is it that Bernanke must be right over such people?
I did not say he was right. I said that it strikes me as silly to dismiss him and others so quickly.
At the time i started studying Economics, oh so long ago, the current type of thinking was filtering through the Economic world. I argued then, at some academic expense, that it was a form of madness. Indeed a bit of an analysis of what has happened in Australia wouold indicate that the whole thing started going wrong here in the late 1950's. I can't speak for the US. Maybe, Bernanke has a brain size three times mine, but maybe he has not had my experiences. Maybe, in his intellectual prowess he doesn't have his two feet so firmly planted in reality as I have. Maybe he has a self-interest in the pepuation of current thinking that blinds him. It's a common factor these days in those who rule over us. Now, despite what you claim to know about how superior he is to me, just show me one place where he warned the American people, indeed the people of the world. Is there a person anywhere that he told to be damned cautious about what was going on or they might lose their life savings in this debacle?
Fair enough. However, saying that Austrian school predicted this is a little like saying the doomsayer on the street waving the bible around predicted this: a broken clock is correct twice a day.
I haven't "studied" Friedman but certainly I read a few books on the topic just from the point of view of my own interest. I'm just a bloke who has a bit of an insatiable curiousity about everything. So i'm no Bart or Finster around here. However, Marvenger posted a bit of a treatise by Steve Keen around here somewhere that I'd think is worth a read. I don't much go with Steve's 'solutions', but he has a train of thought which has made him a damned side closer to the mark than Bernanke Paulson et al. I'm not sure how one then measures who is smarter ...Keen or Bernanke? Nevertheless i am sure you can restate the opinion that Bernanke is the smartest bloke living and therefore Keen is wrong. That ought to safely win you the argument.
I am well aware of the fallacy of the appeal to authority argument. I never claimed he must be correct. He is smart and more learned than probably anyone on this forum - dismissing him and others so offhandedly strikes me as cocksure, that is all.
Sorry, but about the time you say we can go into more and more debt ad infinitum...as far as I'm concerned, I won't bother arguing further. I know that aligns you with geniuses with whom i could never compare.
Hell's bleedin' bells!Again, as I stated, merely a simple illustration that refutes what is bandied about here as true beyond question.
I have two responses. First, Keynsian economics seems very preoccupied with this question of too much savings and not enough consumption.
Don't all people who produce also consume?
How can you have it any other way?
Increasing inventories and decrease in aggregate demand. Look into it.
Chris Coles
12-07-08, 05:18 PM
No one can be sure of being right before solutions are applied and tested.
I may be an amateur at economics, but I have in the past employed world class scientists from other disciplines. Take as an example a metallurgist and ask one to provide a solution to a breakage of a metal component. You would disregard their report and be forced to question their professional status if they came back with such an answer as yours above.
A competent metallurgist will tell you precisely why, when and how the component broke down. Their answer will be precise and completely repeatable in every way. Totally backed up with solid scientific evidence leaving you in no doubt whatsoever as to the cause and the remedy.
By comparison, economics is riven with debate about every aspect of their "science" and offers nothing that would be recognised as a solid professional solution in the world of engineering. If economists built bridges their product would keep collapsing and the designers would all be standing around, arrogantly claiming they were right all along regardless that they were the designer.
In my world, you have to deliver repeatable solutions that are totally recognised as being of world standard, safe, solid and certificated.
No one in their right mind would fly an aeroplane designed by an economist. The regulations already forbid it. I fly aircraft that everyone, everyone - believes are safe to fly. No debate, no arguments about which "school" the designer attended or posturing about qualifications. The designers are recognised world wide for the quality of their work.
ThePythonicCow
12-07-08, 05:46 PM
As a newbie to economics, I observe what seems to be much bickering going on, over periods of decades or centuries, between some supposedly very bright people. Perhaps economists are spending too much time studying money, and not enough time studying the basics of production and consumption, such as the changes over time in the availability and costs of labor, commodities, transportation, retail product delivery and information processing.
It's as if those trying to understand Global Climate Changes (warming, cooling or whatever) spent too much time studying thermometers, and not enough time studying the thermodynamics of the Earth and the Sun.
For examples:
The Depression that began in 1873 might be said to have been caused by the disruptions resulting from the more efficient farming in the American heartland coming online, disrupting agricultural production in Europe.
The Depression that began in 1929 might be said to have been caused by the disruptions resulting from the more efficient industrial capacity in the American heartland coming online.
The Depression that began in 2007 might be said to have been caused by the disruptions resulting from the more efficient (lower labor costs) manufacturing capacity in the Far East (Japan, Korean, then China) coming online.
The American Civil War certainly involved in part disruptions in the cost of labor due to the waning of slave labor, which had been an essential element of the economy of the American Southern States.
There are likely other examples, such as wealth to the British Isles from their Empire in the 1800's, increases in information processing capacity from the Computer Revolution to which I just spent my last 30 years contributing, the impact of Railroads and subsequently Eisenhower's Interstate Highway system on American Transportation, the world-wide buildout of the Internet this last decade, the abundance of petro-energy from the Middle East and other places this last half century, ... There seems to be a Panic associated with many of these examples.
In many, not all, of the above examples, enormous new capacities at lower costs came online. Typically, to enable the buildout of these new capacities and to facilitate their consumption, great amounts of credit are extended. For example, the Chinese bought U.S. debt paper by the trillions, so that their factories would have customers.
This can result in a world economy awash in too easily gotten capital, that promotes an escalation of greed and corruption and pyramiding financial schemes, until the bubble collapses into a depression. After a period of time, that depression not having really destroyed the broken structures, but rather just left them sputtering and broken, leads to a great war, which destroys the broken and gives birth to a new structure.
Wealth that is not disciplined by those who have a stake in it turns sour. Nations, as children, can be spoiled rotten. Perhaps even human civilization can be so spoiled?
As Mises studies the mechanisms by which excess money turns sour, so also must we study the means by which excess productive capacity turns sour.
ThePythonicCow
12-07-08, 05:55 PM
If economists built bridges their product would keep collapsing and the designers would all be standing around, arrogantly claiming they were right all along regardless that they were the designer.Heck ... it wouldn't be much better if computer "scientists" built bridges. I doubt that travelers would be amused if every bridge they traversed had a prominently displayed "Rebuild" button, and most county highway departments had a crew that went out each morning to press these buttons, in hopes that the bridges would more likely stay up the day if freshly Rebuilt each morning.
It's not just humans that push the envelope. I hear tell some cats have been killed by their curiosity as well.
Not every study is as well behaved as mechanical engineering. Nor should we ever expect such.
...
No one in their right mind would fly an aeroplane designed by an economist. The regulations already forbid it. I fly aircraft that everyone, everyone - believes are safe to fly. No debate, no arguments about which "school" the designer attended or posturing about qualifications. The designers are recognised world wide for the quality of their work.
Great point. The only economists I pay much attention to are the econometricians or ones usually not from larger firms - in other words, the ones who need to demonstrate real competence and forecasting ability, and are not "encouraged" to spin any of the data.
Amongst those few are people like John Williams at shadowstats.com and Paul Kasriel at ntrs.com. I'm an amateur compared to them... although I did beat John Williams to an M3 reconstruction by months... ;)
The Outback Oracle
12-07-08, 06:19 PM
Fair enough. However, saying that Austrian school predicted this is a little like saying the doomsayer on the street waving the bible around predicted this: a broken clock is correct twice a day.
Fan, thank you for your replies.
To be fair to the Austrianshere, this dismissal in a little unfair. It is a question of time frame. Sure, "Austrians' have been predicting the downfall for some time. That is more a misjudgement about how far this thing could be distorted before reaching a breaking point. However i am certain that an Austrian Economist would never have led us to this particular juncture. The Austrian recognition of the perils of debt, and unbalanced economies, would have called a stop to the madness a long time ago. Here, in this regard, i suppose I need to admit that I am aligned with Austrian thinking (as well as i understand it, and have been disturbed at the trend of the Western world and its economic thinking for some 40 years. As I think i have already said here, Aus started going off the rails in the late 50's. The problem has been instead of making corrections at that time, the solutions have always been to lever the whole thing up a bit more each time. more and more debt, more and more debt, until now we have so much damned debt that good policy cannot be implemented. (Labour prime minister Paul Keating did have a bit of a crack at the problem in the early 70's but, even then, the dislocation caused was immense and the project was quickly abandoned. I have a belief there are some fundamental flaws in the assumptions of modern day theory. Keating was stuck with a foot in each camp and therefore the result was havoc.) IMHO we are just doing the same thing again except now the stakes are so high that any thought of trying to sort out the mess is so horrific the PTB, even if they did have the integrity to act properly, quite literally look in horror at the outcome. However, my life experience tells me that to ignore a problem does not mean you have fixed it.
I think it was Stephen Roach who said a couple of years ago, when asked what is the solution to the problem, his answer was (approx) "The solution lies somewhere back in time". I'm also reminded of some other wit, when asked what he would do about the problems answered "Well, i wouldn't start from here"
Recently here in Aus there has been some progress in Economic thinking! It's all still so mind bogglingly stupid but at least there is some notion, from Nicholas Gruen at least, that what we are doing, and some things he is recommending in trying to fix this problem for ourselves, is simply passing the problem on to those younger than us. Noone is quite answering what fundamental changes we are making that will result in a future so prosperous, that paying off all this already massive and exponentially increasing debt, will be a relatively painless experience.
Unfortunately, and certainly history is an excellent guide in these things, the problem will be then magnified.
Cheers
One small note....you speak of "cocksure' etc. I don't think any of us are that, neither you nor i nor GJ. My problem is i'm sure bernanke can build Economic sophisticated economic models that none of us here can do. However, if you have incorrect assumptions about the structure of society and how that structure responds to various changes and stimuli, then the model is worthless. Clearly, the evidence is that the models are worthless and therefore the underlying assumptions must be incorrect.
So we are arguing really about the way people behave and the outcomes that result. it's not about 'cocksure'.
Cheers
I may be an amateur at economics, but I have in the past employed world class scientists from other disciplines. Take as an example a metallurgist and ask one to provide a solution to a breakage of a metal component. You would disregard their report and be forced to question their professional status if they came back with such an answer as yours above.
A competent metallurgist will tell you precisely why, when and how the component broke down. Their answer will be precise and completely repeatable in every way. Totally backed up with solid scientific evidence leaving you in no doubt whatsoever as to the cause and the remedy.
By comparison, economics is riven with debate about every aspect of their "science" and offers nothing that would be recognised as a solid professional solution in the world of engineering. If economists built bridges their product would keep collapsing and the designers would all be standing around, arrogantly claiming they were right all along regardless that they were the designer.
In my world, you have to deliver repeatable solutions that are totally recognised as being of world standard, safe, solid and certificated.
No one in their right mind would fly an aeroplane designed by an economist. The regulations already forbid it. I fly aircraft that everyone, everyone - believes are safe to fly. No debate, no arguments about which "school" the designer attended or posturing about qualifications. The designers are recognised world wide for the quality of their work.
You note the difficulty in the testability of certain areas of knowledge. Is climate science unworthy of study because it may take decades or centuries to accumulate validating data? Are loop quantum gravity physicists less skilled than industrial metallurgists because they cannot be sure of being right instantly? Relativity took over a decade to be tested. Perhaps your demand of instant and certain answers stems from being immersed in well-behaved domains. It is certainly not reflective of an understanding of the scientific process.
Fair enough. However, saying that Austrian school predicted this is a little like saying the doomsayer on the street waving the bible around predicted this: a broken clock is correct twice a day.
Fan, thank you for your replies.
To be fair to the Austrianshere, this dismissal in a little unfair. It is a question of time frame. Sure, "Austrians' have been predicting the downfall for some time. That is more a misjudgement about how far this thing could be distorted before reaching a breaking point. However i am certain that an Austrian Economist would never have led us to this particular juncture. The Austrian recognition of the perils of debt, and unbalanced economies, would have called a stop to the madness a long time ago. Here, in this regard, i suppose I need to admit that I am aligned with Austrian thinking (as well as i understand it, and have been disturbed at the trend of the Western world and its economic thinking for some 40 years. As I think i have already said here, Aus started going off the rails in the late 50's. The problem has been instead of making corrections at that time, the solutions have always been to lever the whole thing up a bit more each time. more and more debt, more and more debt, until now we have so much damned debt that good policy cannot be implemented. (Labour prime minister Paul Keating did have a bit of a crack at the problem in the early 70's but, even then, the dislocation caused was immense and the project was quickly abandoned. I have a belief there are some fundamental flaws in the assumptions of modern day theory. Keating was stuck with a foot in each camp and therefore the result was havoc.) IMHO we are just doing the same thing again except now the stakes are so high that any thought of trying to sort out the mess is so horrific the PTB, even if they did have the integrity to act properly, quite literally look in horror at the outcome. However, my life experience tells me that to ignore a problem does not mean you have fixed it.
I think it was Stephen Roach who said a couple of years ago, when asked what is the solution to the problem, his answer was (approx) "The solution lies somewhere back in time". I'm also reminded of some other wit, when asked what he would do about the problems answered "Well, i wouldn't start from here"
Recently here in Aus there has been some progress in Economic thinking! It's all still so mind bogglingly stupid but at least there is some notion, from Nicholas Gruen at least, that what we are doing, and some things he is recommending in trying to fix this problem for ourselves, is simply passing the problem on to those younger than us. Noone is quite answering what fundamental changes we are making that will result in a future so prosperous, that paying off all this already massive and exponentially increasing debt, will be a relatively painless experience.
Unfortunately, and certainly history is an excellent guide in these things, the problem will be then magnified.
Cheers
One small note....you speak of "cocksure' etc. I don't think any of us are that, neither you nor i nor GJ. My problem is i'm sure bernanke can build Economic sophisticated economic models that none of us here can do. However, if you have incorrect assumptions about the structure of society and how that structure responds to various changes and stimuli, then the model is worthless. Clearly, the evidence is that the models are worthless and therefore the underlying assumptions must be incorrect.
So we are arguing really about the way people behave and the outcomes that result. it's not about 'cocksure'.
Cheers
Well put. It would certainly by interesting to give the Austrians free-reign for a few decades and see if business cycles ceased to be or if the ups and downs were moderated.
ThePythonicCow
12-07-08, 07:50 PM
Recently here in Aus there has been some progress in Economic thinking! It's all still so mind bogglingly stupid but at least there is some notion, from Nicholas Gruen at least, that what we are doing, and some things he is recommending in trying to fix this problem for ourselves, is simply passing the problem on to those younger than us. Noone is quite answering what fundamental changes we are making that will result in a future so prosperous, that paying off all this already massive and exponentially increasing debt, will be a relatively painless experienceThis will be a tad offtopic, but I've been meaning to ask you, Outback, if what I see posted at http://www.howestreet.com/articles/index.php?article_id=8113 fits what you see on the ground down under. That post "The Wealth of Nations" (Mike Hewitt, December 4, 2008) presents estimates of the wealth of each nation (befitting the title), and shows for instance that the United States and Japan owes the most, and that China and United Arab Empirates own the most.
The surprising thing to me is that it shows Australia as almost even - just slightly in debt, and in quite a bit better shape than the other European or former British colonies.
Does that match your perceptions?
Here's a more complete picture of public debt vs. GDP, as of end of 2007. It does include the G7.
http://www.nowandfutures.com/d2/debt_gdp_countries2007.png
What Ayn Rand embedded into the psychology of the United States is the idea that if you make it to the top, you did it all yourself and thus have no responsibility to those behind you. She constantly passed that back to the idea of charity being something not acceptable while forgetting that the greatest charity is to yourself through the investment for the long term in others.
Now THAT, I would find, is a valid critique.
:)
Bart,
Is the US number before or after the $8.5T in stimulus and various other ABCDEFG things are paid out? :rolleyes:
ThePythonicCow
12-08-08, 02:26 AM
Above I wrote:
3. The Depression that began in 2007 might be said to have been caused by the disruptions resulting from the more efficient (lower labor costs) manufacturing capacity in the Far East (Japan, Korean, then China) coming online.Just now I am reading a post at http://www.freebuck.com/articles/afield/081112afield.htm "Crisis Cogitations" by Alf Field, in which he states that the essential cause of the current financial crisis is the trade deficit between the United States and China. Essentially this trade deficit of one-half to one trillion dollars per year over the last several years introduced a similar amount of new debt paper, such as the U.S. GSE and Treasury debt held by China, Japan and OPEC.
Since we have a debt-based monetary system, that fraction of a trillion dollars of new debt led to five to ten trillion dollars per year of new money being flooded into the worlds financial system over the last five or ten years.
As Alf explains, the bankers did their best to create new loans from that money, as bankers will do with extra money.
What Alf writes is consistent with my conjecture above that major Panics happen as a delayed response to major new sources of lower cost or more accessible labor or commodities come online. First Boom, then Bust. It's rather like spoiling a teenage son with too much allowance (please don't ask if I speak from personal experience ;).)
Alf further seems consistent with iTulip's Ka-Poom position. In this Panic, we will see first some deflation (in order to default or nationalize such as we can manage of the bad paper) then some serious inflation, in order to soak up the remaining enormous debt with cheaper currency.
Chris Coles
12-08-08, 04:21 AM
You note the difficulty in the testability of certain areas of knowledge. Is climate science unworthy of study because it may take decades or centuries to accumulate validating data? Are loop quantum gravity physicists less skilled than industrial metallurgists because they cannot be sure of being right instantly? Relativity took over a decade to be tested. Perhaps your demand of instant and certain answers stems from being immersed in well-behaved domains. It is certainly not reflective of an understanding of the scientific process.
How long do you need to validate economic theory? You are still debating the possible cause of events that occurred more than a century ago.
The easy route for a weak argument is always through disdain.
"The man cannot be taken seriously because he does not reflect an understanding of scientific process"
To which I can only remark that I am out in the open, you may look me up in the Science Reference Library in the United Kingdom, Europe, Particularly France, United States and Japan. My thoughts are my own, not rehashed quotations of others work.
If you have such a grand opinion of your own endeavours, show yourself so we can verify.
Bart,
Is the US number before or after the $8.5T in stimulus and various other ABCDEFG things are paid out? :rolleyes:
Before, and best guess on the current debt to GDP ratio in the US is 74%. Lots of other countries have gone up significantly too due to their own stimulus packages.
How long do you need to validate economic theory? You are still debating the possible cause of events that occurred more than a century ago.
The easy route for a weak argument is always through disdain.
"The man cannot be taken seriously because he does not reflect an understanding of scientific process"
To which I can only remark that I am out in the open, you may look me up in the Science Reference Library in the United Kingdom, Europe, Particularly France, United States and Japan. My thoughts are my own, not rehashed quotations of others work.
If you have such a grand opinion of your own endeavours, show yourself so we can verify.
I do not doubt your credentials. The study of complex systems is not analogous to metallurgy, however.
Chris Coles
12-08-08, 08:13 AM
I do not doubt your credentials. The study of complex systems is not analogous to metallurgy, however.
I am sorry, but that is the argument, (the systems are too complex to be understandable by mere ..... whomever might argue otherwise), that has been and continues to be made by economics for more than a century; does not cut any ice with me at all.
This web site does not aim to present all the answers, instead, we are permitted to debate, and to the founders credit, right across the spectrum, from one end to the other.
You will discover there are very wide ranging views here. But one is not so acceptable, to try and make out the debate is unsound from the viewpoint that somehow, we who contribute, are somehow ........ unable to understand the complexity. You may very well be, I freely admit, but have no reference to provide any proof, one of finest economists on the planet, but you still have a lot to learn about open, free, respectful - debate.
Bart,
So, 20% jump in debt in a mere few months? Can't wait until the rest of the stimulus package actually winds up as Treasuries...
I saw somewhere that only $2T of the $8.5T is actually 'spent' so far, is that what you're basing your 20% delta on?
quigleydoor
12-08-08, 11:30 AM
I see the spreads on CDS are really blowing out.
http://www.creditresearch.com/cdrweb/indexchart.jsp?width=300&height=155&indexid=Global084&dispavg=no&hist=365
What do we think the CDS spread index really indicates now? It cannot be simply the risk of underlying bonds defaulting. Does the spread now also embed the risk of CDS issuers defaulting? Or systemic risks?
ThePythonicCow
12-08-08, 11:38 AM
You will discover there are very wide ranging views here. But one is not so acceptable, to try and make out the debate is unsound from the viewpoint that somehow, we who contribute, are somehow ........ unable to understand the complexity. You may very well be, I freely admit, but have no reference to provide any proof, one of finest economists on the planet, but you still have a lot to learn about open, free, respectful - debate.
Good grief, sir. I don't recall anyone claiming that you could not understand, nor do I recall anyone anyone above engaging in closed or disrespectful debate.
I just saw someone claim that the study of some more complex systems is different than the study of metallurgy, which is a reasonable claim, in my view.
Bart,
So, 20% jump in debt in a mere few months? Can't wait until the rest of the stimulus package actually winds up as Treasuries...
I saw somewhere that only $2T of the $8.5T is actually 'spent' so far, is that what you're basing your 20% delta on?
My 20% delta was based on the most recent debt figure ($10.67 trillion) from 12/1 and an estimate of $14.5 trillion for current GDP (likely too high).
My own tracking of how much has been spent is far higher than $2 trillion - it's closer to $4.
http://www.nowandfutures.com/images/fed_all_short_stacked.png
I am sorry, but that is the argument, (the systems are too complex to be understandable by mere .....
by mere [everyone]. That is the point. Many systems have this property. Turbulence has been studied for centuries and is not fully understood ... by anyone. The distribution of prime numbers has been studied for millennia... I never claimed that I understand, or that anyone does. I think some knowledge-areas do not lend themselves to quick answers. If they did we would not be on itulip discussing them. I am not claiming metallurgy is easy, mind you. It's just different.
What I object to are statements such as this: "These 'scientists' have been studying primes numbers for 100 years yet for all their work and prizes they still know NOTHING about prime numbers! The answer is obvious - MORE multiplication, MORE addition - we have had TOO MUCH subtraction and TOO MUCH division. When will they learn!"
It seems silly to me to dismiss elite economists so quickly as if they hadn't heard of Mises and Hayek. This is not a claim that Terence Tao understands prime numbers completely. Does he understand them more than the lay people sending him proofs of the Riemann hypothesis using only high school algebra? Probably. Does that mean the lay men are wrong? Not necessarily. Don't dismiss Terence so easily though. And don't say the study of prime numbers isn't up to your standards because the Riemann hypothesis hasn't been solved yet. It's just a difficult problem.
My 20% delta was based on the most recent debt figure ($10.67 trillion) from 12/1 and an estimate of $14.5 trillion for current GDP (likely too high).
My own tracking of how much has been spent is far higher than $2 trillion - it's closer to $4.
I see - thanks for the insight.
Of course, any good work is punished by more: what's your projection on peak of the US debt ratio?
I was originally thinking the US would shoot way past Japan, but now I think a merely doubling of pre-crisis debt levels (130%) would be enough to precipitate a new world order.
I see - thanks for the insight.
Of course, any good work is punished by more: what's your projection on peak of the US debt ratio?
I was originally thinking the US would shoot way past Japan, but now I think a merely doubling of pre-crisis debt levels (130%) would be enough to precipitate a new world order.
I'm very wary of underestimating the stupidity of politicians and "financial wizards".
I'm loathe to do any guesstimate but debt to GDP was up over 2.5x from 1929-1939, and that would make it well over 150%. It was about 17% in August 1929, for what its worth.
It did hit 120% at the end of WWII also - food for thought.
Chris Coles
12-08-08, 05:53 PM
Good grief, sir. I don't recall anyone claiming that you could not understand, nor do I recall anyone anyone above engaging in closed or disrespectful debate.
I just saw someone claim that the study of some more complex systems is different than the study of metallurgy, which is a reasonable claim, in my view.
And I do stand corrected and offer my most humble apologies to CharlesTMungerFan and everyone else for any offence which was not intended.
And I do stand corrected and offer my most humble apologies to CharlesTMungerFan and everyone else for any offence which was not intended.
It's all in good debate. I too apologize if I offended you or anyone else. The conversations on here tend to get a bit heated, and I think many of us get carried away.
I'm very wary of underestimating the stupidity of politicians and "financial wizards".
I'm loathe to do any guesstimate but debt to GDP was up over 2.5x from 1929-1939, and that would make it well over 150%. It was about 17% in August 1929, for what its worth.
Caveat emptor'd and understood!
It did hit 120% at the end of WWII also - food for thought.
So we're going through WW III now - at least from a fiscal perspective.
Who's going to win this one since the two sides are both us?
So we're going through WW III now - at least from a fiscal perspective.
Who's going to win this one since the two sides are both us?
I think its pretty safe to say that you're having fun, but do be careful not to get that tongue permanently caught in your cheek... ;)
Chris Coles
12-09-08, 04:52 AM
It's all in good debate. I too apologise if I offended you or anyone else. The conversations on here tend to get a bit heated, and I think many of us get carried away.
You have nothing to apologise for at all. It was entirely my fault. I have been in deep thought for several weeks and my sleep patterns have become disrupted causing my irritability. Signals the need for a rest which I will take over Christmas.
BiscayneSunrise
12-09-08, 07:38 AM
By comparison, economics is riven with debate about every aspect of their "science" and offers nothing that would be recognised as a solid professional solution in the world of engineering. If economists built bridges their product would keep collapsing and the designers would all be standing around, arrogantly claiming they were right all along regardless that they were the designer.
In my world, you have to deliver repeatable solutions that are totally recognised as being of world standard, safe, solid and certificated.
Reminds me of the line: "Well, it looks good in practice but it would never work on paper" :p
santafe2
12-14-08, 02:17 AM
I am sorry, but Ayn Rand is at the heart of the problems in the US as her overall message has a very deep flaw in it and it is that deep flaw that drives the underlying currents that have brought us all to where we are today.
I thought my post to this thread was important but I'd nominate this post as most relevant. Rand begot Greenspan begot modern 21 century fascism. Only British civility would allow a reference to her thinking as a 'deep flaw'.
Tonight I was reviewing the ECRI Weekly Leading Index, (WLI), and this position helps me understand what I'm seeing there. The economy is dying. It's still breathing shallowly but business activity has fallen off a cliff.
I keep thinking of the scene in The Day After Tomorrow where the RAF helicopter pilots realize their fuel lines are freezing and never understand that the temperature has fallen to -100C.
The chart below is a 40 year business cycle chart representing year-over-year percent of change.
851
The chart below is a 20 year business cycle chart representing business activity level.
852
Comments welcome.
Those charts are completely consistent with our analysis. Take-aways:
Unprecedented rate of change
No apparent brake on the collapse
Only the government is expanding
Down Under
12-25-08, 01:52 AM
Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.
We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.
The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
Okay, so iTulip's position is that the market can be cleared, and cleared quickly. But, presumbably, iTulip would agree that the market has not been cleared to date, correct?
If the assertion "that the market has not been cleared to date" is correct, and iTulip's belief that it can be cleared quickly, why has it not in fact been cleared?
And, as stated "if the banking system remains uncleared long enough, it does die", does iTulip have a position on what constitutes "long enough"? In other words, what sense of urgency is there, for the banking system to clear? Are we talking months or years? Presumbably, years.
ThePythonicCow
12-25-08, 02:34 AM
Fred quoting santafe2:The economy is dying.Is it dying, or is it just that the economy has gone into coronary arrest? That is, one does not die when ones heart stops, just so long as the medics can get it restarted quickly enough
We just (October 2008) had a major heart attack. Ben and Hank and team are yelling "Clear" and repeatedly applying the defibrillator as we write.
I'm optimistic they will succeed, though I expect some lasting damage to the patients heart muscle and some other oxygen deprived essential organs. The mental state of the patient will be imbued with a fear not previously present, and the patients love life will be diminished past the ability of a little Viagra (another economic stimulus package) to restore to previous vigor.
The patient will fearfully and obediently entrust far more of his daily life to the dictates of authoritarian doctors than he would have before. Some of us lunatic fringe conspiracy nuts will be jumping up and down, protesting that it was these very same doctors who administered the earlier regimen of unhealthy financial steroids that led to the heart attack, but no one will listen to us.
Fred quoting santafe2:Is it dying, or is it just that the economy has gone into coronary arrest? That is, one does not die when ones heart stops, just so long as the medics can get it restarted quickly enough
We just (October 2008) had a major heart attack. Ben and Hank and team are yelling "Clear" and repeatedly applying the defibrillator as we write.
I'm optimistic they will succeed, though I expect some lasting damage to the patients heart muscle and some other oxygen deprived essential organs. The mental state of the patient will be imbued with a fear not previously present, and the patients love life will be diminished past the ability of a little Viagra (another economic stimulus package) to restore to previous vigor.
The patient will fearfully and obediently entrust far more of his daily life to the dictates of authoritarian doctors than he would have before. Some of us lunatic fringe conspiracy nuts will be jumping up and down, protesting that it was these very same doctors who administered the earlier regimen of unhealthy financial steroids that led to the heart attack, but no one will listen to us.
When this process is over we will have learned how much GDP growth since 1980 was FIRE Economy (debt based) and how much was real (productivity based).
http://www.itulip.com/images/firegdpvsmzm.gif
Sans FIRE Economy, GDP not $13 trillion in 2007 but 9.5 trillion? MZM $2 trillion not $9 trillion?
I thought my post to this thread was important but I'd nominate this post as most relevant. Rand begot Greenspan begot modern 21 century fascism. Only British civility would allow a reference to her thinking as a 'deep flaw'.
I am I the only one that sees greenspan living up to his monkier as the "undertaker"?
Am I the only one that thinks his staring role is as Francisco?
Does it strike anyone else as ODD that someone would become a gold bug and then when they are older and wiser, they would choose to reject that?
Can an Idealist REALLY become a realist?
Am I really reading that much into today's events or are we watching a castrophic collapse of the financial system along the exact same lines as outlined in Atlas Shrugged?
I see something in all of the above. But am I just seeing a mirage?
When this process is over we will have learned how much GDP growth since 1980 was FIRE Economy (debt based) and how much was real (productivity based).
http://www.itulip.com/images/firegdpvsmzm.gif
Sans FIRE Economy, GDP not $13 trillion in 2007 but 9.5 trillion? MZM $2 trillion not $9 trillion?
Merry Christmas, FRED.:rolleyes:
V/R
JT
ThePythonicCow
12-25-08, 11:32 PM
When this process is over we will have learned how much GDP growth since 1980 was FIRE Economy (debt based) and how much was real (productivity based).
Though I feel a little queasy nitpicking the Tulip Masters :D, I choose not to let that stop me.
I doubt that we will actually learn how much growth was real when this is over, for the reason that the ravages of a disease usually overshoot on the downside, taking out what would otherwise have been healthy tissue were it not for the disease.
Thus we will only have a lower bound estimate on how much was real.
Here are some alternate takes on how much of the growth was real.
Same data and corrections, just different charting methods.
http://www.nowandfutures.com/images/real_gdp_williams.png
http://www.nowandfutures.com/images/real_gdp.png
ThePythonicCow
12-26-08, 12:58 AM
Here are some alternate takes on how much of the growth was real.
Same data and corrections, just different charting methods.
That helps. Thanks, Bart.
Now I realize that Fred's mention of "what was real" could have had the particular meaning of "the inflation adjusted growth." as opposed to "the nominal growth."
For what little I know, the following might all be different values:
The nominal growth that did occur.
The inflation adjusted growth that did occur.
What productivity would have been, had there been no bubble.
What productivity will be, when this crash is over.
I had been presuming that Fred was referring to (3). Your alternative takes display (1) and (2).
Value (3) is a particularly slippery concept. Not only will we never know the actual value, I doubt we can even come to a concensus on just what it means. It's too hypothetical.
... eh nevermind ... this post is getting harder to read than is worth the effort ... I'd better quit writing.
swgprop
12-26-08, 09:20 AM
With respect to the role of the FIRE economy on GDP figures, I found this to be rather telling ..
http://www.wikinvest.com/images/1/12/GDP_growth_with_MEW.png
http://www.wikinvest.com/image/GDP_growth_with_MEW.png
we_are_toast
12-26-08, 10:14 AM
Well, since everyone is posting numbers that imply were going back to the future to about 1998, might as well look at some employment numbers.
ESTABLISHMENT DATA ESTABLISHMENT DATA
HISTORICAL EMPLOYMENT HISTORICAL EMPLOYMENT
B-1. Employees on nonfarm payrolls by major industry sector, 1958 to date
(In thousands)
service- transpor- Infor- Financial Professional Education Leisure Other Govern
Annual Averages
1970...... 71,006 58,318 22,179 677 3,654 17,848
1971...... 71,335 58,323 21,602 658 3,770 17,174
1972...... 73,798 60,333 22,299 672 3,957 17,669
1973...... 76,912 63,050 23,450 693 4,167 18,589
1974...... 78,389 64,086 23,364 755 4,095 18,514
1975...... 77,069 62,250 21,318 802 3,608 16,909
1976...... 79,502 64,501 22,025 832 3,662 17,531
1977...... 82,593 67,334 22,972 865 3,940 18,167
1978...... 86,826 71,014 24,156 902 4,322 18,932
1979...... 89,932 73,864 24,997 1,008 4,562 19,426
1980...... 90,528 74,154 24,263 1,077 4,454 18,733
1981...... 91,289 75,109 24,118 1,180 4,304 18,634
1982...... 89,677 73,695 22,550 1,163 4,024 17,363
1983...... 90,280 74,269 22,110 997 4,065 17,048
1984...... 94,530 78,371 23,435 1,014 4,501 17,920
1985...... 97,511 80,978 23,585 974 4,793 17,819
1986...... 99,474 82,636 23,318 829 4,937 17,552
1987...... 102,088 84,932 23,470 771 5,090 17,609
1988...... 105,345 87,806 23,909 770 5,233 17,906
1989...... 108,014 90,087 24,045 750 5,309 17,985
1990...... 109,487 91,072 23,723 765 5,263 17,695
1991...... 108,375 89,829 22,588 739 4,780 17,068
1992...... 108,726 89,940 22,095 689 4,608 16,799
1993...... 110,844 91,855 22,219 666 4,779 16,774
1994...... 114,291 95,016 22,774 659 5,095 17,020
1995...... 117,298 97,865 23,156 641 5,274 17,241
1996...... 119,708 100,169 23,409 637 5,536 17,237
1997...... 122,776 103,113 23,886 654 5,813 17,419
1998...... 125,930 106,021 24,354 645 6,149 17,560
1999...... 128,993 108,686 24,465 598 6,545 17,322
2000...... 131,785 110,995 24,649 599 6,787 17,263
2001...... 131,826 110,708 23,873 606 6,826 16,441
2002...... 130,341 108,828 22,557 583 6,716 15,259
2003...... 129,999 108,416 21,816 572 6,735 14,510
2004...... 131,435 109,814 21,882 591 6,976 14,315
2005...... 133,703 111,899 22,190 628 7,336 14,226
2006...... 136,086 114,113 22,531 684 7,691 14,155
2007...... 137,623 115,420 22,221
Monthly data, seasonally adjusted
2007
November.... 138,037 115,759 22,049 735 7,520 13,794
December.... 138,078 115,745 21,976 739 7,465 13,772
2008
January..... 138,002 115,666 21,907 744 7,426 13,737
February.... 137,919 115,557 21,816 744 7,382 13,690
March....... 137,831 115,454 21,737 750 7,343 13,644
April....... 137,764 115,363 21,628 752 7,284 13,592
May......... 137,717 115,264 21,577 760 7,246 13,571
June........ 137,617 115,154 21,491 768 7,196 13,527
July........ 137,550 115,048 21,437 777 7,173 13,487
August...... 137,423 114,909 21,367 788 7,153 13,426
September... 137,020 114,525 21,250 795 7,098 13,357
October(p).. 136,700 114,163 21,083 796 7,034 13,253
November(p). 136,167 113,623 20,920 800 6,952 13,168
If we reset to 1998, we're looking at a peak to trough loss of about 13 million jobs. With some overshoot, 15-20 million. Pretty much in line with iTulip projections.
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