Saturday, March 6, 2010

The Great Lie

My apologies for the long time since I last posted. I have several three-quarter finished posts sitting waiting to be finished but, in each case, I struggled to find anything new to say, and want to avoid just commenting on 'events'.

I finally came around to writing this, due to a comment from one of the blog readers, who goes under the name of 'Death to Bubble Addicts' and who quoted another blogger (not named, sorry). It was actually a comment that was particularly interesting because it was such a succinct presentation of an argument that is at the heart of the blog. I will quote the relevant sections:
It’s astounding that people can’t grasp the simple concept that wealth (as opposed to money) does not grow on trees. We, individuals and governments, have consumed more than we produced, for a long time, or in simple terms we spent more than we earned. Now we, individuals and governments, must earn more than we spend, for a long time. Yes, that will cause a depression. It can’t be avoided because the consumption has already occurred and payment is due.

[and]

Our previous debt-bubble-fueled-overconsumption will be paid for, either by those who consumed, those who provided the goods, those who provided the credit, or the taxpayers. No matter which group pays, that group will consume less because they are paying for prior consumption. It doesn’t avoid anything if the government stimulates using more borrowed or printed money, just shifts the burden from one group to another. Creating future tax burdens by running large govt deficits just shifts the blame down the road a bit. Creating inflation is a tax on savers, which subsequently reduces their ability to consume. Defaulting on debt will be ruinous to creditors.
I read these two sections, and thought about the ongoing message of this blog, and found myself appalled at the amount of complexity - amongst commentators, economists, policy makers - that is used to hide these simple truths. I will repeat the points, just to make sure we can show how simple they are:

  • We have spent more than we have earned, and one day will have to pay back the borrowed money we spent.
  • Someone has to pay for the borrowing (unless we default), and those people will, at some point in the future, not have money to spend.
Much of the purpose of this blog has been about trying to take to pieces the complexity that is used to hide these simple and self-evident truths. In fact, everything we see in the actions of policy makers and the discussions of most economists, is actually an attempt to hide these basic realities. We can see the complexity in the way that they bury simple ideas under jargon (e.g. quantitative easing = printing money), or dense formulae. There is only one formula that is really important, and that is the one that calculates income vs. expenditure.

One way that the borrowing has been justified by policymakers and commentators has been the use of the word 'investment' and this word was widely used in the UK in particular. It is worth pausing and thinking about the word 'investment'. It seems that many governments have been pouring money into investment for many years. Despite that, income has just fallen, and the income is not enough to cover expenses, such that government needs to borrow more to 'invest'. In fact, it seems that, the more the government invests, the more it seems to need to borrow in the future for further 'investment'.

What kind of 'investment' is this? With this scale of borrowing for 'investment', at some point in the future our income should be going through the stratosphere. However, it seems that all this investment just means that, at some point in time, we will have to pay back ever larger amounts of money, and there is no prospect on the horizon of our income increasing.

Greece has led the way. Their government's position is the likely future position of the major debtor governments across the developed world. When the credit ran dry, they were faced with no choice but to implement austerity measures. They are now moving onto the road to paying back the gargantuan sums that they borrowed to bribe and delude their electorate. Likewise, in Ireland, and Lithuania, a similar story has unfolded.

Even with the stark reality of the consequences of excess government debt is placed in front of us, it still seems that the reality will not apply to us. Greece is different, as it can not become more competitive with a currency devaluation. Apparently, that solves the problems. We can all just devalue our currency, and all will be well with the world. I have read this so many times that I simply despair.

A currency devaluation is not a solution, it is simply an indirect form of impoverishment. It is a form of impoverishment that hurts savers, and creates a wage cut across an economy. If we think of an average person, who has a taste for imported Belgian beer, we can see why this is the case. He drinks ten bottles of the beer per week, at a price of £2 per bottle, thereby spending £20 of his income on Belgian beer. After the devaluation his cost for Belgian beer increases to £2.50 per bottle. This means that his expenditure for identical beer has increased by £5 per week, meaning that, in real terms, he is poorer. If we then think of his savings in Belgian beer terms, he might find that he is even poorer. If we imagine that he has £20,000 in savings, before the devaluation he held the equivalent of 10,000 bottles of Belgian beer. After the devaluation he only holds 8,000 bottles.

In the case of our Belgian beer drinker, he made the error of saving. He gets hurt on the real purchasing power of his wages, and gets hurt for being dumb enough to save money. In reality, a currency devaluation is just a wage cut over the economy, and a wage cut that hurts those who have been prudent enough to save (investors).

Devaluation also hurts the overseas investors who have been foolish enough to have put their money in the economy in which the devaluation takes place. In their case, we can think of their investment again in terms of Belgian beer. As with our domestic saver, they put in the equivalent of 10,000 bottles of Belgian beer, but when they take their money back out, they find it is only worth 8000. Sure, they can buy the same amount of English beer as before, but why should they endure being poorer in Belgian beer terms? They invested in good faith, and find that they are poorer.

Apparently, countries like the UK are 'lucky' that they have the freedom to devalue their currencies. I would suggest that the politicians are lucky that they have the freedom to devalue, as it is a method of cutting wages and paying for their past profligacy without actually having to admit that the fault is theirs. They do not have to face their people and tell them the truth, which is the (partly) case in the Euro countries.

I say 'partly', as even when confronted with reality, they instead blame 'speculators' and the evil money men in the markets. 'Yes', there are some who profit from the plight of countries like Greece, but that is not to say that the problem is their fault. It is only because the politicians spent like drunks that the speculators are in a position to profit. These 'evil' investors need the foolishness of governments, or their speculation will come to nothing. What happens is that cause and effect are rearranged. It is not the strength of the speculator's position that allows them to profit, but the weakness of the government's position. In other words, it is the government that is the cause, and the speculation that is the effect.

The trouble is that many analysts and commentators are apologists for this line from governments. In doing so, they distract from the real source of the problem, which is that governments have acted irresponsibly.

In practical terms it is very simple. As a contributing part of society, a worker pays taxes to pay for the activity of government, including benefits such as health care, social security, policing and so forth. All of these cost money, and the worker contributes a percentage of their taxation to pay for these. If the government provides a percentage of all of these activities through borrowing, then they are in effect subsidising the worker's purchasing power through borrowing. The individual worker has the same benefits, society has the same benefits, but the benefits are being paid in part by borrowing. The problem is that the government claims that it is the government that is borrowing the money, when in reality it is the worker who is borrowing the money.

The government will not have to pay back the money. The worker will. The government has no income except through the taxation system, and that means that the government is not really borrowing money, the worker is. What we are seeing in Greece is that the Greek people are trying to move to the position of paying back their own previous borrowing, which was undertaken in their name by their government.

This is what all of the complexity and dissembling is about. Governments borrowed the money in your name, and pretended that the debt was their own. They lied to you. They pretended that the debt was not yours, but it nevertheless belongs to you. It is not the government's debt, it is your debt. Whilst everyone talks in the abstract about government debt, as if it were something separate from the tax base, it is not something separate. Every penny of borrowing is, at some point in time, going to be paid back by people like you.

Sure, again we will see governments dissemble. They will try all kinds of methods to reallocate the debt, for example pouring high taxation onto corporations, or singling out group 'x' or group 'y'. All of this will be done to hide the fundamental problem, which is that they never should have been borrowing in the first place. If group 'x' or group 'y' are such good causes for higher taxation, why was it they were not taxed so highly before? They could have been taxed before, as there was no reason not to, and the debt would have been avoided. Instead, the government will now paint group 'x' or 'y' as deserving of higher taxation with populist rhetoric. At no point will the government ever explain why group 'x' is so deserving of taxation now, when they apparently were so undeserving of such taxation before.

And the commentators and the general public will eat it all up. The government will carry on as governments do, and the inevitable pain will nevertheless take place. In the end, the point of this post is simple. When the pain does come, do not be distracted. Put the blame where it lies. It lies with the government, and with the apologist commentators and economists who have sought to justify the great lie; that government owns the debt, not the taxpayers.

29 comments:

  1. I have just posted, took a look at the financial headlines, and what do I see:

    http://business.timesonline.co.uk/tol/business/economics/article7052224.ece

    "Angela Merkel, the German Chancellor, lashed out at speculators and called for curbs on the derivatives markets, which she said were being used to profit from the financial distress of Greece.

    The German Chancellor said that Europe must ensure that speculators were prevented from damaging Greece or other countries and said that she would discuss regulation of the credit defaults swaps (CDS) market with the United States. “We must succeed at putting a stop to the speculator’s game with sovereign states,” Mrs Merkel said. The Chancellor was speaking after a meeting with George Papandreou, the Prime Minister of Greece.

    The Chancellor said that there was no need for a bailout of Greece by fellow eurozone members and she rounded on speculators for betting against Greece. Hedge funds were excluded from participation in a €5 billion bond sale this week by the Greek Government."

    The small detail that the crisis is the fault of the lies, the rampant over-spending of Greece, is apparently not the issue. Greece was, no doubt, doing just fine and, if it wasn't for those nasty speculators, Greece could have just carried on with the same policy.

    In the case of Greece, this is particularly hypocritical, as the government actively lied to their creditors. They actually **defrauded** them, by misrepresenting their financial position. This is a definition of fraud from a dictionary:

    deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.

    http://dictionary.reference.com/browse/fraud

    Even more to the point, here is a legal definition:

    A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

    http://legal-dictionary.thefreedictionary.com/fraud

    I suggest that you read the full legal definition, and see how it compares to the behaviour of the Greek government. When you do so, think of the comments of Angela Merkel. I am no defender of CDSs where the purchaser does not hold the bond, but have even less sympathy with governments that defrauded their creditors (though regret the price will be paid by the Greek people).

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  2. Commonsense household budget-type analogies are branded as naive by most of the rose-tinted-spectacle commentators, for the reason that future "growth" will take care of our past debts. They have a point don't they? We always have had growth in the past, so it is reasonable to project perpetual growth into the future. And if we don't have future growth then our debt-based economy collapses and has to be completely ripped up and re-designed; so it cannot be contemplated, almost like a physicist doubting the physical laws of the universe.

    But how do we tell the difference between 'sustainable' growth and 'bubble' growth, or growth that has come about because of a one-off windfall e.g. oil, or globalisation tapping into vast pools of cheap (for now) labour?

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  3. Hi Cynicus - good to see you back in typical, sharp form with an excellent article as always.

    I thought you might like to see the following, albeit thoroughly depressing link, that in some respects touches on the issues that you raise in this thread. However, it expounds a more general theme about the UK which, although quite realistic in my view, will be particularly worrying for many contributors to this blog.

    http://matterhornassetmanagement.com/2010/02/11/sovereign-alchemy-will-fail/

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  4. GBP:

    Reserve Currency-->Industrial Currency--->Hard Currency--->Hedge Fund Currency--->????? Currency.

    -----

    It seems these are the options:

    A. Deflationary depression.

    B. Stagflation.

    C. Stagausflation (stagflation + austerity).

    D. Depflation (depression + inflation).

    A - would be the best as the creditors would take a haircut and the balance sheet would be viable for future growth, only Thatcher has taken this course in modern British history. Remember the whole elite came out against her, 364 economists wrote to the Times, including Mervyn King.

    B - is impossible because the deficit has to be cut. We are in this phase at the moment.

    C - is where we are going next, if the political elite start cutting then this will be our lot for years and years. It is a reverse parallel experience of the Irish.

    D - this the darkside where we will go if the political elite don't tackle the deficit. The Pound collapses and the UK is seen as a basket case.

    Death to Bubble Addicts

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  5. I’m a long lime reader of you blog and never deemed it necessary to post a reply. I find your analysis to be clear, well thought out and enlightening, and without (as you mention) the economic obstrufication found throughout the popular media.
    However, in this post you apportion the blame (seemingly) solely at the door of the politicians & government, as opposed to speculators & other players in the financial markets. As far as I can tell, when one gets to the top of the political or corporate power structure the difference between the two (at least in ideological terms, if not in direct ‘partnership’ terms) is absolutely nonexistent. I mean, this isn’t a controversial statement in the slightest, as you know.
    Obviously, the government is going to have the odd populist jibe at the bankers (just like the Obama admin did in the post Massachusetts senate election) and the bankers in return are perhaps going to even accept this in the full knowledge that the politicians ultimately have their best interests at heart – as they both come from, and represent the same top 1%. Oh, and (as your post shows) expect the msm to lap it up. And the politicians that don’t go along, well they can be ‘lobbied’ (something we hear very little about in UK politics btw).
    This is corporatism, oligopoly, sprinkled with a thin veneer of democratic propaganda. The government are clearly not representing the people – so who are they representing? As you say it’s our debt – but it’s clearly not for our benefit – unless you like the Stockholm syndrome-esq theory of trickledown economics anyway...
    I think the main problem here is simple, accurate information – like what you put on here, doesn’t get to the majority of the population. And when you try to explain it in simple terms to people (particularly people who do ok) they find it incredulous – after all, if it’s this fundamentally simple, and this serious, why haven’t I heard it on the bbc news, or on the front page of the sun, adjacent John Terry?
    The mind boggles. We need better media, then we need to reform politics to be as close to a direct democracy as is practicable, then rout the banking system – fiat currency, money as debt, abolish all of that. Then shrink government, again, as much as is practicable and finally regulate, with a fixed constitution – financial & political of a – ‘do no evil, with the least amount of government’ mentality. This is the killer, how can you eradicate government AND reign in private interests / corporatism? I would love to hear your thoughts.

    Regards,

    D

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  6. You wrote "Someone has to pay for the borrowing (unless we default), and those people will, at some point in the future, not have money to spend."


    To be precise, someone has to pay for the borrowing, *whether or not* we default. If we default, it's the lenders that pay.

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  7. Good to see another post CE - I always check your site and am always suitably impressed when one arrives!
    I have a comment about the Belgian Beer example. The devaluation also affects the importers of beer, who absorb lower margins or lower sales. The devaluation will also affect the brewer of the beer, assuming that the proportion of sales going to devalued countries is high enough. They will also have the problem of lower margins or lower sales.
    When the margins become so small for the importer, they don't have the option of cutting them, so sales drop and you are left with stagflation of beer sales. Volume is right down and the price goes up.
    This is why I think the BoEs attitude to inflation being a 'spike' is wrong. Their point would only be correct if the entire market (entire planet) is suffering as much as we are.
    Cheers,
    Ian

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  8. Some Thoughts 1

    We have spent more than we have earned, and one day will have to pay back the borrowed money we spent.

    There is a strong case that a lot of the mortgage lending was outright fraud (“Control Fraud and the Financial Crisis”)..

    The solution is indictment of fraudulent creditors, and writing off of loans.

    The effect of the additional deleveraging that needs to happen can be offset by government spending.

    Greece has led the way. Their government's position is the likely future position of the major debtor governments across the developed world.

    Greece, enslaved as it is to the ECB, is nothing like the UK or the US.

    Greece is different, as it cannot become more competitive with a currency devaluation. Apparently, that solves the problems. We can all just devalue our currency, and all will be well with the world.

    Currency devaluation is hardly the only solution. Financial regulation, currency sovereignty, your own central bank and the ability to fund government spending if necessary through direct money creation are also important.

    A currency devaluation is not a solution, it is simply an indirect form of impoverishment. It is a form of impoverishment that hurts savers, and creates a wage cut across an economy.

    Currency devaluation is more like a tariff on imports and an export subsidy for domestic producers. Your ability to consume domestic goods and services is largely unaffected by currency devaluation – in fact you are incentivised to buy domestic rather than imported goods. And during recession commodity prices tend to fall – so the rise in the cost of the input factors for domestic production through currency devaluation is probably offset by commodity price falls anyway. As for the Belgian beer lover, he should consume the next best domestic beer that’s similar to the Belgian one. If the country is running a trade deficit, then, by definition, it is importing too much. Far better to make imports more expensive and incentivise the consumption of domestic goods. Why would direct savage cuts to wages be a better way of doing it? That just reduces demand for domestic goods as well.


    Governments borrowed the money in your name, and pretended that the debt was their own. They lied to you. They pretended that the debt was not yours, but it nevertheless belongs to you. It is not the government's debt, it is your debt. Whilst everyone talks in the abstract about government debt, as if it were something separate from the tax base, it is not something separate. Every penny of borrowing is, at some point in time, going to be paid back by people like you.

    Actually, the central can buy back debt with newly created money when they control interest rates – nobody pays any tax money to pay back debt when this happens.

    Rolling over debt does not require any of my tax money, and with strong economic growth, the burden of repaying it is small over time (just as it was to the post-WWII generation who paid back debt-to-GDP ratios of over 120%, far larger than ours). The size of government debt is of little importance given the benefits that come from responsible government spending.

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  9. Some Thoughts 2

    If group 'x' or group 'y' are such good causes for higher taxation, why was it they were not taxed so highly before?

    Because previous governments were infected with neo-liberal thinking, with all of its absurd ideas like trickle down economics, supply side economics, monetarism etc.

    They could have been taxed before, as there was no reason not to, and the debt would have been avoided. Instead, the government will now paint group 'x' or 'y' as deserving of higher taxation with populist rhetoric.

    You seem to think that the government is monolithic – that political parties don’t have different ideologies and that great changes in economic policies can’t happen.

    The last 30 years have seen the world in the death grip of neo-liberalism – that’s why taxes were cut on the rich.

    The rich have seen their tax burden fall greatly, because of neoliberal ideology that said it was good. It isn’t good – and political parties of the left have never said it was good.

    Given that we live in a democracy, if the majority of the people vote to increase progressive taxes, then that is will of the people. You are free to leave the country and live in the Cayman Islands if you disagree that much with democracy and the way it works…
    I am not sure why “populist rhetoric” is somehow inherently bad – if it is want the majority of people want, then that is how democratic politics works.
    Given that rich (or really the banks) did virtually nothing with their money but gamble on asset bubbles and speculative non-productive investments, a tax hike on them would hardly hurt us – it would help.

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  10. Clear and correct, as ever.

    What worries me is that the banks will be crippled by legislation and regulation along the road to making them scapegoats.

    This is not good for countries, like Britain, who rely on that industry as one of the routes to future prosperity.

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  11. Reply To Anonymous on the “Options”

    A. Deflationary depression. ….

    A - would be the best as the creditors would take a haircut and the balance sheet would be viable for future growth, only Thatcher has taken this course in modern British history. Remember the whole elite came out against her, 364 economists wrote to the Times, including Mervyn King.



    A genuine deflationary depression would be the worst possible solution. Savage wage cuts and a collapse in demand just cause widespread bankruptcy for businesses and households. It would wipe out productive sectors of the economy that are perfectly profitable.
    It’s like taking someone with cancer and instead of just cutting the cancer out, cutting half of the internal organs out as well.

    You can give creditors a “haircut” by orderly write-offs and restructuring of debt – but with government stimulus to make sure the real economy does not tank.

    You are also wrong about Thatcher – there was no deflationary depression under Thatcher. In no year did the UK ever experience deflation under Thatcher,
    as you can see here.

    Thatcher caused a severe recession by disastrous monetarist policies. Following Milton Friedman, she promised to bring down inflation by cutting the money supply growth rate and promised there would be no significant loss of employment or output.
    Instead, the unemployment rate surged and she caused the worst post-WWII recession up to then, with terrible loss of manufacturing output.

    Not long after that in 1982 she abandoned monetarism and adopted a “discretionary” (i.e., basically a Keynesian) monetary policy – before monetarism was an utterly disastrous theory, as people in her own party like Ian Gilmour had argued.

    The current economy certainly doesn’t need a monetarist solution either.

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  12. An outstanding article by Krugman:

    To stabilize the real value of debt, all the government has to do is pay the real interest on it. So suppose that we add debt equal to 100 percent of GDP, which is much more than currently projected; servicing that debt should cost only 1.4 percent of GDP, or 7 percent of federal spending. Why should that be intolerable?

    Debt Is A Political Issue

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  13. Reply to Steve Tierney

    What worries me is that the banks will be crippled by legislation and regulation along the road to making them scapegoats. This is not good for countries, like Britain, who rely on that industry as one of the routes to future prosperity.

    The UK’s international banking sector has been a crippling burden on the economy. This crisis proves it beyond any shadow of a doubt. In particular, bankers want a currency with an overvalued exchange rate to attract overseas money – something which is poisonous if you want to export your tradable goods to the world and grow the output of them:

    For 10 years now the pound has been clearly overvalued according to its yardstick and is now some 12% above fair value. As with the overvaluations of the pound at the start of the 1980s and the 1990s, the exchange rate has proved a silent killer for British industry …. While the service sector, which is much less sensitive to the exchange rate, is enjoying a return on capital of more than 20%, the comparable figure for manufacturing is around 6%, the lowest since the recession of 14 years ago. The reason is simple: British industry is running into the equivalent of a stiff headwind, and must constantly look for new ways to cut costs. There is little left over to reinvest in new capital, let alone embark on the long-term research and development that ministers say is the key to modern manufacturing.

    How the strong pound killed British industry.

    Labour was guilty of failing to run a competent exchange rate and trade policy – don’t hold your breath waiting for the Tories to run it any better, as they are likely to be worse.

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  14. "They are now moving onto the road to paying back the gargantuan sums that they borrowed to bribe and delude their electorate. Likewise, in Ireland, and Lithuania, a similar story has unfolded."
    Ireland has been paying down Public debt since the early 90's, our public debt was very low leading into this crisis, our situation is quite different to Greece in this respect

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  15. Cynicus do you ever read Bill Gross's monthly letter from PIMCO? His latest has some choice quotes:

    "To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today: (1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn’t the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager. (2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy. In order to get us out of the sinkhole and avoid another Great Depression, the visible fist of government stepped in to replace the invisible hand of Adam Smith. Short-term interest rates headed to 0% and monetary policies of central banks incorporated new measures labeled “quantitative easing,” which essentially involved the writing of trillions of dollars of checks to replace the trillions of dollars of credit that disappeared after Lehman Brothers. In addition, government fiscal policies, in combination with declining revenues, led to double-digit deficits as a percentage of GDP in many countries, a condition unheard of since the Great Depression. (3) For awhile it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards. Risk markets returned to normal P/Es as did interest rate spreads, and GDP growth resumed; it was only a matter of time before job growth would assure the world that we could believe in the tooth fairy again. Capitalism based on asset price appreciation was back. It would only be a matter of time before home prices followed stock prices higher and those refis and second mortgages would stuff our wallets once again. (4) Ah, but Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves.

    But what if they didn’t? What if, as Carmen Reinhart and Kenneth Rogoff have pointed out in their book, “This Time is Different,” our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike. What if – to put it simply – you couldn’t get out of a debt crisis by creating more debt?

    A deficiency of global aggregate demand and the potential impotency of policymakers to close the gap are evolving into a life or death outcome for the weakest sovereigns, with consequences for credit and asset markets worldwide."

    Bill Gross

    -----

    Death to Bubble Addicts

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  16. From Evans-Pritchard's latest column:

    "The Bank for International Settlements says Britain needs a primary surplus of 5.8pc of GDP for a decade to stabilise debt at pre-crisis levels, given the ageing crunch as well. The figure is 6.4pc for Japan, 4.3pc for the US and France."

    Given China's increasing domination of oil and other crucial resources, these kind of figures are a pipe dream. In other words, a return to economic growth sufficient to service the debts of Western nations is IMPOSSIBLE.

    This startling fact has to force a radical rethink of everyone's life choices!

    Another excellent article on this subject here:

    http://www.forbes.com/forbes/2010/0208/debt-recession-worldwide-finances-global-debt-bomb.html

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  17. I agree with what DLT said above. The whole system is at fault and to suggest that JUST the government of the day is to blame would be to miss the problem entirely.

    Cynicus, you are I think often right in your analysis but your solutions are akin to correctly diagnosing someone as having a broken arm but suggesting that the cure is to simply use the other arm instead.

    The impression I have from reading your blog for sometime is that you ultimately fail to take the final leap and condemn the whole political and monetary establishment and instead blame the Government in office. Hinting that the problems can be sorted by simply removing them from power and electing someone else.

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  18. Reply to Lemming

    Hi Lemming, you said:

    "Commonsense household budget-type analogies are branded as naive by most of the rose-tinted-spectacle commentators, for the reason that future "growth" will take care of our past debts. They have a point don't they? We always have had growth in the past, so it is reasonable to project perpetual growth into the future."

    Perpetual growth is impossible, economics is NOT a closed system. We live on a planet with finite resources.

    Did you heart about the 3 economists locked in a basement with nothing to eat? They said to each other "don't worry the rumbling of our bellies will cause sandwiches to appear".

    Furthermore as the system is non-linear, we are not even faced with the prospect of satisfying today's demand for resources in perpetuity e.g.

    At a growth rate of say 7% China's oil use will double roughly every 10 years i.e. in each decade more oil will be consumed than in all of history up to that point.

    [Ref Dr. Albert Bartlett: Arithmetic, Population and Energy]

    The same applies to any resource you care to name copper, uranium, lithium etc.

    Perpetual growth is another 'great lie'!

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  19. Lord Keynes, that certainly is an interesting article you linked to from Krugman. However the key paragraph for me was :

    "So what’s the problem? Confidence. If bond investors start to lose confidence in a country’s eventual willingness to run even the small primary surpluses needed to service a large debt, they’ll demand higher rates, which requires much larger primary surpluses, and you can go into a death spiral."


    How close are we to being able, never mind willing, to run a "small primary surplus" ? Given the recent anaemic growth figures following the government's gargantuan fiscal stimulus, are you genuinely confident that more of the same will eventually stimulate enough growth to stabilise the real value of the debt (which in the meantime will have grown even further due to the additional stimulus borrowing)? What happens if the "eventually" takes rather too long for the bond market's liking, or, indeed, doesn't look like it will ever arrive ?

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  20. Hello Mark

    nice post!

    long time since I have visited your blog (shame on me)and even longer time since we have been in contact, must be almost a year...

    Thanks for promoting Belgian beers!

    I will write you an e-mail soon.

    regards
    Klaas

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  21. DLT,

    I was glad to see your post, it is reassuring to find someone else thinking along similar lines. I have also come to the conclusion that the fictional definition of popular sovereignty that is endlessly promoted by the elites for their benefit, is the root of our biggest problems. Governmental 'incompetence', financial systems out of control and popular media with massive blind spots are merely symptoms of the same underlying malaise, namely - we do not live in a democracy. Representation is a fiction extremely useful to the elites but detrimental to most. From first principles: for us to have democracy, we must be able collectively to exercise meaningful choices on individual issues. A necessary but not sufficient condition of making this a reality is to have instututions of direct democracy, the most important of which is initiative & referendum.

    Incidentally Switzerland is a running experiment of this, 150 years and counting. The results speak for themselves, though the Swiss have not yet progressed very far in recognising the essential nature of popular media to the democratic process. Thomas Jefferson is attributed the quote "I would rather live in a country without elections than in a country without newspapers". There is an important truth in this - that we cannot talk of popular sovereignty without adequate information on which to base our choices. Privately controlled, for-profit, advertising-driven media cannot supply adequate information.

    This is fundamental, the collection and dissemination of information must be a public service under popular control (so BBC does not qualify). One day this will seem as uncontroversial as free-at-the-point-of-need healthcare. One day..

    Btw, there are plenty of studies (rarely if at all reported in the mainstream of course) detailing the effects of direct democracy on government and society. These appear to confirm limiting effects on government: preventing unnecessary expansion of it and keeping it efficient. Additionally and contrary to orthodox view DD has a positive effect on business. Another study showed a link between DD and self-reported well-being in the population. Switzerland has the world's most developed and longest-standing institutions of DD and this certainly has not done it any harm. Competitive economy, consistently very low unemployment, a stable currency, low poverty levels - these all speak volumes. As for getting rid of fiat money, the Swiss have not judged this necessary yet. Instead their Constitution requires their Central Bank to pass onto the state 2/3 of profits made. I suppose this is making the best out of a rotten system.

    BR,
    Evgueni in Horley

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  22. Evgueni in HorleyMarch 9, 2010 at 7:04 AM

    Lord Keynes said:

    "Given that we live in a democracy,..". I do not normally find myself disagreeing with LK but cannot resist nit-picking here. "Democracy" is overly generous a term to apply to British society, unless you subscribe to the special elitist definition of the word. I suspect that you do not, so why help perpetuate this elitist fiction!

    BR,
    Evgueni in Horley

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  23. Evgueni in HorleyMarch 9, 2010 at 7:13 AM

    CE,

    in your analysis, how do you account for future productivity gains? My understanding, simplistic maybe, is that we are collectively (as society) constantly figuring out more efficient ways of producing the stuff we need. Hypothetically then, if money supply, population etc all remain stable then our currency ought to appreciate. In practice the government and the banking cartel inflate the money supply thus masking any productivity gains. But as the saying goes "necessity is the mother of invention", perhaps periods of severe economic downturn force additional productivity gains. Is this what the borrowing governments are counting on - ever-increasing productivity mitigating the effects of cuts in spending and increases in taxation?

    I cannot help the impression that much of the economic activity is superfluous to maintaining living standards and resources could be redirected away from such activity without materially affecting the standard of living. I mean, in the short term this can act as a buffer to shield society from the worst effects of a downturn. People put off new cars, consumer electronics purchases, house moves etc. But what are the longer term effects - are we also forced as society to expedite adoption of new more efficient ways of producing goods and services we need?

    BR,
    Evgueni in Horley

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  24. Evgueni in Horley....

    with respect the future productivity gains you are talking about are an academic fiction.

    Referring again to the example I gave above regarding the rate of increasing oil use in China, do you believe we are capable of doubling the efficiency of every oil based process every 10 years? There are hard limits to resource availability which no productivity gains are going to address. The same principle applies not just to oil but to most other resources too.

    We are facing an economic/environmental/energy predicament unprecedented in the history of mankind.

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  25. Everytime i read this blog, i find something that i 100% agree with. Its just like rome or other societies with a high energy consumption, Decadence and hubris cause collapse, when there is no need for it at all. This is a spiritual failure at its core.

    Greece is the first domino, and given the fact that the UK has a similar debt profile AND has been collecting taxes properly (??!!) makes me very sceptical that the time and the will is available to make a meaningful change in an orderly fashion. Elites never willingly step down.

    My main issue is that people will not have a clue how to survive a prolonged economic depression. Things like electricity and hot water might not be a guaranteed benefit if you don't have money to run the power station or pay for the coal to burn in it. I pray that people can discover some robustness for what may occur as everyone i know seems to think that someone is going to do the job for them, a potentially fatal mistake.

    Know where your water is
    know where your food is
    stay safe
    keep warm
    keep your spirit up
    Have some seeds to plant
    have a good knife to use as a survival tool(Falkniven F1 is the best)
    Be happy

    All the best and Chin up everyone, we will get through this and come out better:-)

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  26. I have followed this blog for a while. I think some of the analysis is spot on, where I differ is in the ideas for a resolution. As is often said we are facing a possible unprecedented crisis. But a lot of the solutions are tinkering around within the current capitalist system. Less welfare spending (Cynicus) more Keynsian spending (Lord Keynes) etc. Yet if we really face an unprecedent challenge on the economic and energy fronts as many contributors and the author believe then the capitalist system cannot be our saviour.

    Free market economics cannot be our saviour - even socialism (and it does seem more and more like the question is socialism or barbarism) cannot be our saviour because in a strange way it relies on growth - industrial growth just as much as capitalism does - just with the resources shared out in a different way.

    So what will be the way forward. I think the only way to survive will be a mixture of real socialist ideas - or if you prefer left wing libertarian ideas and green ideas (lets not forget that many misunderstood Marx and he envisaged a dynamic economy that was free, not state run and was owned by the people).

    Certainly we cannot carry on as we are but I fear it may be too late. I read the thoroughly chilling link - Sovereing Alchemy Will Fail. We cannot allow our modern form of capitalism to once again bring us to the brink of destruction through another world war.

    I do indeed have tins of food and packs of rice and water at home. But only enough for a few months. I have a high fence around my home and two good guard dogs, but I have a mortgage and no land other than a large yard and small garden to grow things on and I do fear for my and my families future.

    If I had the courage I would make them all move and buy a plot of land in a cheap part of Wales and build an eco lodge but they all moan about leaving school etc. So I have to hope that my feelings of real impending doom are wrong and that in a few years I will be glad I kept our life on track.

    Thanks for the always interesting debate.

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  27. We should drop anyone who suggests printing money is the answer onto a desert island with a wallet stuffed full of tenners and enjoy watching them slowly perish, remaining bemused to the bitter end as to why the cash they have to spend doesn't magically "stimulate" the production of food and shelter.

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  28. Have you read 13 bankers, by Johnson/Kwak?
    The point they make is mostly that the govt>corp. isn't one-way, but that corps actively lobbied to create an environment in which they could thrive (see http://www.youtube.com/watch?v=itFl9MEHXzo ) for a 55min intro into the themes)

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  29. Also, what I still have trouble seeing is to what extent you need wealth creation in order to have a "viable" economy. Is it just that you need to have exp>=imp & net international money flow=0?
    That is, the difference between value-added work and value-neutral work is kind of vague to me. What if this value-addition isn't exported, but does depend on imports insofar as one needs to base materials to work with? (japan comes to mind here, although they also export a lot, which probably makes up for it.)
    My point being (I am not trained in economics, so I don't really know what the rote answers as to this, as I only know bits of the different dogmas): You seem to be arguing that economies can only grow at the cost of others (when exp > imp), and that money that leaves larger, highly interconnected systems anywhere (e.g., Spain in case of the Euro) will mean trouble down the road for that entire currency zone.
    Also, countries like China (i.e., with a meaningful impact on the world econ) artificially keep down the value of their currency, which, combined with the fact that they're buying bonds with the money without increasing imports, creates a situation in which future earnings will be going solely to that country. And this is problematic because they're unavoidable (due to the fact that they produce most of the world's consumable goods).

    What I don't really get, though, is why service economy is bad. As I understand it, all it does is redistribute the same money among more people, so that more people can work. While this is being paid for by saving less (UK,US), this need not be so (DE,NL), so that it is only problematic insofar as the services provided are highly costly, when those people don't spend the same amount in the economy again (Lawyers, bankers), but instead spend it abroad, or whatever.
    Yet I can't really figure out the balance between 'wealth creation' and this type of redistribution. It seems fine so long as current/PromiseOfFuture money isn't leaving altogether.. What am I missing?

    P.S. I'm sorry my posting isn't particularly coherent; I wrote the second paragraph mostly to indicate the background against which I'm trying to understand it, but I don't see the links myself yet.

    ReplyDelete

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