Debt­watch 27 Octo­ber 08: The Fail­ure of Cen­tral Banks

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Just two years ago, Cen­tral Banks appeared tri­umphant. Infla­tion, the scourge of the 1970s and 80s, appeared dead, the finan­cial cri­sis of the Tech Wreck had been con­tained, economies world­wide were boom­ing, and stock mar­kets and house prices were spi­ralling ever upwards.

Then along came the Sub­prime Cri­sis, and we received a rude reminder of why Cen­tral Banks were cre­ated in the first place: to ensure that the world would never again expe­ri­ence a Great Depres­sion.

We are not in a Great Depression–not yet anyway–but a key pre-con­di­tion for one has devel­oped right under the noses of Cen­tral Banks: exces­sive pri­vate debt. In fact, debt lev­els today are twice as high as in 1929, which is why this finan­cial cri­sis is caus­ing far more car­nage than 1929 did.

At the time of the Stock Mar­ket Crash of Octo­ber 1929, the US’s debt ratio was 150%; today it is 290%. Australia’s ratio was 64%; today, it is 165%. The reg­u­la­tors who were sup­posed to keep us from the jaws of The Beast have instead led us closer towards its belly.

Figure One

USA and Australian Debt to Output Ratios 1920-2008

USA and Aus­tralian Debt to Out­put Ratios 1920–2008

This was not, of course, a con­scious deci­sion. It has hap­pened because Cen­tral Banks are run by econ­o­mists, and the dom­i­nant “Neo­clas­si­cal” fac­tion within eco­nom­ics ignored the real lessons of the Great Depres­sion.

The false les­son that Neo­clas­si­cal eco­nom­ics preaches is that the mar­ket econ­omy is fun­da­men­tally sta­ble, and the Great Depres­sion was caused by the mon­e­tary author­i­ties tight­en­ing credit in the after­math to the Stock Mar­ket Crash, rather than loos­en­ing it.

The real les­son of the 1930s is that a credit-dri­ven mar­ket econ­omy is fun­da­men­tally unsta­ble, and a Great Depres­sion occurs when debt-financed spec­u­la­tion results in exces­sive pri­vate debt at the same time as infla­tion is low.

Cen­tral Banks, under the mis­guid­ance of con­ven­tional eco­nomic the­ory, ignored the role of pri­vate debt in the eco­nomic sys­tem. They instead rein­ter­preted their charters–which empha­sised full employment–as a man­date to keep infla­tion low.

As the RBA put it in its most recent Annual Report, its:

duty … to ensure … the sta­bil­ity of the cur­rency… the main­te­nance of full employ­ment … and the eco­nomic pros­per­ity and wel­fare of the peo­ple of Aus­tralia… has found con­crete expres­sion in the form of a medium-term infla­tion tar­get. Mon­e­tary pol­icy aims to keep the rate of con­sumer price infla­tion at 2– 3 per cent, on aver­age, over the cycle.” (Annual Report 2008, page 5).

With its Neo­clas­si­cal eyes fix­ated on the rate of infla­tion, it ignored the expan­sion of pri­vate debt–as did its equiv­a­lents at Cen­tral Banks around the world, as did gov­ern­ment Trea­suries, and as did inter­na­tional eco­nomic agen­cies. This is why the sud­den col­lapse of the world eco­nomic order took econ­o­mists by sur­prise. They were look­ing at their math­e­mat­i­cal mod­els, which ignore pri­vate debt (and indeed money!), rather than at the real world, where debt is king.

Nowhere was this more obvi­ous than with the OECD–the organ­i­sa­tion whose impri­matur the Aus­tralian Trea­sury seeks. The fol­low­ing are the unabridged open­ing two para­graphs from the Edi­to­r­ial to the OECD Eco­nomic Out­look from May of 2007 (with the really funny bits in bold):

In its Eco­nomic Out­look last Autumn, the OECD took the view that the US slow­down was not herald­ing a period of world­wide eco­nomic weak­ness, unlike, for instance, in 2001. Rather, a “ smooth”  rebal­anc­ing was to be expected, with Europe tak­ing over the baton from the United States in dri­ving OECD growth.

Recent devel­op­ments have broadly con­firmed this prog­no­sis. Indeed, the cur­rent eco­nomic sit­u­a­tion is in many ways bet­ter than what we have expe­ri­enced in years. Against that back­ground, we have stuck to the rebal­anc­ing sce­nario. Our cen­tral fore­cast remains indeed quite benign: a soft land­ing in the United States, a strong and sus­tained recov­ery in Europe, a solid tra­jec­tory in Japan and buoy­ant activ­ity in China and India. In line with recent trends, sus­tained growth in OECD economies would be under­pinned by strong job cre­ation and falling unem­ploy­ment.”

Yeah, right. Just three months later, the finan­cial cri­sis began.

It should by now be painfully obvi­ous that con­ven­tional eco­nom­ics can­not be relied upon to explain where we are, how we got here, where we might end up, and what might work to avoid the worst con­se­quences. To under­stand it, we have to go back to the econ­o­mist who got it right, but was ignored by the eco­nom­ics pro­fes­sion: Irv­ing Fisher.

The Debt-Deflation Theory of Great Depressions

Fisher had been an aca­d­e­mic cheer­leader for the finan­cial bub­ble of the Roar­ing Twenties–his main claim to fame one can find on the Inter­net is that he uttered the fate­ful pre­dic­tion that “Stock prices have reached what looks like a per­ma­nently high plateau” the week before the Stock Mar­ket Crash of 1929.

Four years on, chas­tened and effec­tively bank­rupted, he reflected that a Great Depres­sion ensued when too much debt was accom­pa­nied by falling prices. He chris­tened the phe­nom­e­non a “debt-defla­tion”.

A key aspect of Fisher’s rea­son­ing was that, though econ­o­mists of his time mod­elled the econ­omy as if it were per­ma­nently in equi­lib­rium, the real econ­omy would always be in dis­e­qui­lib­rium. As he put it, even if the econ­omy did tend towards equi­lib­rium:

new dis­tur­bances are, humanly speak­ing, sure to occur, so that, in actual fact, any vari­able is almost always above or below the ideal equi­lib­rium”

He also argued that the forces that gave rise to a Depres­sion were innately dis­e­qui­lib­rium in nature. The two key fac­tors that caused a Depres­sion, he argued, were exces­sive debt and falling prices. Though other fac­tors might lead to a cri­sis (such as over­con­fi­dence or exces­sive spec­u­la­tion), debt and defla­tion were the two key forces that turned a gar­den-vari­ety down­turn into a Depres­sion. As he very poignantly put it (since he him­self was a vic­tim):

over-invest­ment and over-spec­u­la­tion are often impor­tant; but they would have far less seri­ous results were they not con­ducted with bor­rowed money. That is, over-indebt­ed­ness may lend impor­tance to over-invest­ment or to over-spec­u­la­tion. The same is true as to over-con­fi­dence. I fancy that over-con­fi­dence sel­dom does any great harm except when, as, and if, it beguiles its vic­tims into debt.”

Fisher then laid out the sequence of events that fol­lows when a finan­cial cri­sis ensues in the con­text of exces­sive debt and low infla­tion:

(1) Debt liq­ui­da­tion leads to dis­tress sell­ing and to

(2) Con­trac­tion of deposit cur­rency, as bank loans are paid off, and to a slow­ing down of veloc­ity of cir­cu­la­tion. This con­trac­tion of deposits and of their veloc­ity, pre­cip­i­tated by dis­tress sell­ing, causes

(3) A fall in the level of prices, in other words, a swelling of the dol­lar. Assum­ing, as above stated, that this fall of prices is not inter­fered with by refla­tion or oth­er­wise, there must be

(4) A still greater fall in the net worths of busi­ness, pre­cip­i­tat­ing bank­rupt­cies and

(5) A like fall in prof­its, which in a “cap­i­tal­is­tic,” that is, a pri­vate-profit soci­ety, leads the con­cerns which are run­ning at a loss to make

(6) A reduc­tion in out­put, in trade and in employ­ment of labor. These losses, bank­rupt­cies, and unem­ploy­ment, lead to

(7) Pes­simism and loss of con­fi­dence, which in turn lead to

(8) Hoard­ing and slow­ing down still more the veloc­ity of cir­cu­la­tion. The above eight changes cause

(9) Com­pli­cated dis­tur­bances in the rates of inter­est, in par­tic­u­lar, a fall in the nom­i­nal, or money, rates and a rise in the real, or com­mod­ity, rates of inter­est.” 

After the Crash of 1929, when busi­ness debt was dom­i­nant, many firms found them­selves with debt repay­ment com­mit­ments that they couldn’t meet out of cash flow. They under­took “ dis­tress sell­ing”  to try to raise the money they needed— and because every­one dropped their prices, prices fell across the board. Even firms that man­aged to pay their debts down in nom­i­nal terms found that their rev­enues fell even more than their debt, lead­ing to “ Fisher’s Para­dox” that:

the more debtors pay, the more they owe. The more the eco­nomic boat tips, the more it tends to tip. It is not tend­ing to right itself, but is cap­siz­ing.”

That phe­nom­e­non is strik­ingly obvi­ous in the his­tor­i­cal data, which shows the rate of infla­tion falling from triv­ial lev­els (of between 0.5% and 1% p.a.) to minus 10% p.a. between 1931 and 1933.

Figure Two

Inflation Rates 1920-40 USA and Australia

Infla­tion Rates 1920–40 USA and Aus­tralia

Eco­nomic growth also came to a shud­der­ing halt as the ensu­ing credit crunch cut spend­ing lev­els, and as cash-strapped busi­nesses sacked their work­force. That decline is also evi­dent in the data, with the rate of real eco­nomic growth falling from 6% before the crash to minus 8% after it–and as low as minus 13% in 1932.

Figure Three

Rate of Economic Growth 1920-40, USA and Australia

Rate of Eco­nomic Growth 1920–40, USA and Aus­tralia

The decline in both out­put and prices meant that the debt to GDP ratio con­tin­ued to rise after the Stock Mar­ket Crash of 1929–even though credit was tight, and any­one who was in debt was try­ing to reduce it. Notice on Fig­ure One that debt ratios con­tin­ued to rise until 1932–from 150% to 215% of GDP in Amer­ica, and from 64% to 77% of GDP in Aus­tralia.

The effect of this decline on employ­ment was so severe that it has remained etched into humanity’s psy­che. When the Stock Mar­ket began its col­lapse, the level of unem­ploy­ment in Amer­ica, as recorded by the National Bureau of Eco­nomic Research, was 0.04%–one 25th of one per­cent. Three years later, it reached 25%. Australia’s unem­ploy­ment rate blew out too, from a higher ini­tial level of 9% to a peak of 20% in 1932. The world had sud­denly moved from The Great Gatsby to They Shoot Horses, Don’t They?

Figure Four

Unemployment Rates 1920-40, USA and Australia

Unem­ploy­ment Rates 1920–40, USA and Aus­tralia

This calamity, which eco­nomic the­ory said could not hap­pen, both dis­cred­ited con­ven­tional eco­nomic thought, and gave cre­dence to the then unfash­ion­able views of John May­nard Keynes (Fisher, with his rep­u­ta­tion in tat­ters after his false assur­ances that noth­ing was amiss in 1929, was largely ignored–even though Fisher’s expla­na­tion of how Depres­sions occur was supe­rior to Keynes’s). When the world emerged from the World War that fol­lowed the Great Depres­sion, so-called Key­ne­sian Eco­nom­ics dom­i­nated the pro­fes­sion, and the once supreme Neo­clas­si­cals were ignored.

How­ever, one of the most prophetic obser­va­tions that Keynes ever made con­cerned the like­li­hood that his new ideas would fail to be truly accepted by the eco­nom­ics pro­fes­sion. In the Pref­ace to his Gen­eral The­ory of Employ­ment, Money and Wages, Keynes observed that:

The ideas which are here expressed so labo­ri­ously are extremely sim­ple and should be obvi­ous. The dif­fi­culty lies, not in the new ideas, but in escap­ing from the old ones, which ram­ify, for those brought up as most of us have been, into every cor­ner of our minds.”

So it proved to be. Though call­ing them­selves “Key­ne­sian”, most aca­d­e­mic econ­o­mists con­tin­ued to cling to the pre­ced­ing “Neo­clas­si­cal” ideas (espe­cially in the area of micro­eco­nom­ics, which Keynes did not address).

As the expe­ri­ence and the mem­ory of the Great Depres­sion receded, aca­d­e­mic eco­nom­ics pro­duced a hybrid of Keynes’s macro­eco­nomic ideas grafted on top of Neo­clas­si­cal micro­eco­nom­ics that they called “the Key­ne­sian-Neo­clas­si­cal Syn­the­sis”.

Unfor­tu­nately, the ideas were incompatible–and over time, wher­ever there was a con­flict, aca­d­e­mic eco­nom­ics rejected the Key­ne­sian graft, rather than the under­ly­ing Neo­clas­si­cal micro­eco­nom­ics. After fifty years of this, Keynes’s ideas were com­pletely ejected from the eco­nomic main­stream, the Neo­clas­si­cal belief that the econ­omy is self-cor­rect­ing became dom­i­nant once more, and econ­o­mists trained in this belief came to dom­i­nate Trea­suries and Cen­tral Banks around the world. They ignored lev­els of pri­vate debt, cham­pi­oned dereg­u­la­tion of finance,  and vir­tu­ally encour­aged asset price spec­u­la­tion.

Now we have twice as much debt as caused the Great Depres­sion, and infla­tion so low that, were it not for unprecented fac­tors (the rise of China, global warm­ing and peak oil), defla­tion would almost be a cer­tainty.

Hav­ing thus unlearnt the real lessons of the Great Depres­sion, the eco­nom­ics pro­fes­sion may yet make us relive it.

END OF COMMENTARY

Comments on the Data

It appears that Australia’s debt to GDP ratio has peaked at 165% of GDP. It could still turn up once again if defla­tion takes hold, but for the mean­time, this seems to be the top of the bub­ble.

Now as debt lev­els start to fall–firstly rel­a­tively to GDP and then, ulti­mately, in absolute terms as well–the macro­eco­nomic effect of the bubble’s burst­ing be felt.

This is because aggre­gate demand is the sum of income plus change in debt. For the last decade, the lat­ter fac­tor has been adding to demand–and aggre­gate sup­ply, asset prices, and our import bill have adjusted upwards to suit. But as the change in debt drops and ulti­mately turns neg­a­tive, it will sub­tract from demand–and sup­ply (read employ­ment), asset prices and imports will fol­low it down.

If Aus­tralians decided to reduce their debt to income ratio by 10% each year–to get back to the 25% level that applied back in the 1960s (before this long-term spec­u­la­tive bub­ble took off)–it would take roughly 15 years to get there.

Chart One

Monthly change in Debt, Australia

Monthly change in Debt, Aus­tralia

Chart Two

Contribution to Demand from Change in Debt, Australia

Con­tri­bu­tion to Demand from Change in Debt, Aus­tralia

Table One

Agggregate Debt Summary Australia

Agggre­gate Debt Sum­mary Aus­tralia

Disaggregated Debt Summary, Australia

Dis­ag­gre­gated Debt Sum­mary, Aus­tralia

Australias 1964-2008 Debt Bubble

Australia’s 1964–2008 Debt Bub­ble

Australias long term addiction to debt

Australia’s long term addic­tion to debt­Trends in Dis­ag­gre­gated Debt, Aus­tralia

Monthly changes in disaggregated debt, Australia

Monthly changes in dis­ag­gre­gated debt, Aus­tralia

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • BrightSpark

    Hello Out­back Ora­cle.

    Re the con­fer­ence at the GC.

    The CAD is a good thing because it gives us both the comodi­ties (car­goe) and a line of line of credit to pay for it! But for how long?

    This con­fer­ence sounds like a reli­gious con­ven­tion and prayer meet­ing held by the Chuch of the Car­goe Cult. Now I know where the con­cept of the “Four Pil­lars” comes from. The banks are the four pil­lars of the Great Tem­ple of the Car­goe Gods. At the con­ven­tion they no doubt prayed for the Pil­lars, more Car­goe, and Ekarg­nomic Groath. 

    The churches are no doubt chok­ing on the CAD right now, feel­ing a lit­tle weighed down by the need to raise $1Bn per week. They need all of our prayers not just those of the pil­grims at this horses, carts, and fools con­ven­tion.

  • j

    David:

    You’re mak­ing the same mis­take that a few other econ­o­mists are mak­ing in try­ing to com­pare this with 1929 (or 1873 as some have said).

    We don’t have the gold standard/link as that was bro­ken by Nixon in the early 70’s when the French came look­ing for gold.

    Since that time we have been run­ning paper money which mean the cen­tral banks can reflate at will.

    So com­ing up with a 1929 con­text isn’t accu­rate and it just scares the kids.

    the other thing to explain is since when can we avoid a reces­sion so lets have some per­spec­tive here.

  • James of FNQ, I agree with your con­cerns over neg­a­tive gear­ing (and I would add the dis­tor­tion of the cap­i­tal gains tax con­ces­sion). You stated there should be a tax­a­tion review — there actu­ally is — sub­mis­sions are due by 17 Octo­ber and I’d encour­age you to put in a sub­mis­sion with your con­cerns. The web­site is http://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm

    And to the guys voic­ing con­cerns about migra­tion and Australia’s car­ry­ing capac­ity, I find the argu­ments raised by green groups a lit­tle extreme. Var­i­ous groups are mak­ing these sug­ges­tions relat­ing to national, state or regional lev­els. At the Bris­bane pub­lic meet­ing of the Sen­ate Select Com­mit­tee on Hous­ing Afford­abil­ity, one group sug­gested a cap on the pop­u­la­tion of South East Queens­land. When a sen­a­tor asked about hav­ing some large scale devel­op­ments in north Queens­land instead, they were strongly opposed and asked the ques­tion of whether any­one would want to live there “with the weather and cyclones”. Com­ing from a four gen­er­a­tion North Queens­land fam­ily, I found it quite hilar­i­ous!

    Do you remem­ber the say­ing “a but­ter­fly flaps its wing.….”? For a start, I don’t think that Aus­tralia is any­where near it’s “car­ry­ing capac­ity”. Sec­ondly, if it some­how were, then how far beyond their’s is Indone­sia, Sin­ga­pore, and all of our neigh­bours. Because of the inter­con­nect­ed­ness of our ecosys­tem, effects of over­pop­u­la­tion on other land masses will also be felt here. The same goes for global warm­ing (and the sub­prime cri­sis!).

    In my view, the best thing for the global cli­mate is for the global pop­u­la­tion to be spread more evenly. Being a devel­oped coun­try with a (con­sis­tently) declin­ing birth rate, I think we can bio­log­i­cally sus­tain a rea­son­able level of migra­tion.

    Hav­ing said that, with our recent focus on skilled migra­tion, and with the eco­nomic tur­moil, my guess is that migra­tion will slow for a while. And I agree with ear­lier com­ments. Skilled migrants from Asia may well go back per­ma­nently or tem­porar­ily.

  • Arn­side

    Great to read the views of many and to know that I am not Robin­son Cru­soe.

    In my view Gov­ern­ments can pump prime the sys­tem until noth­ing is left in the cof­fers. The sys­tem will still not be fixed. Why? Because the com­mu­nity has no con­fi­dence left in the sys­tem. Why? Because the com­mu­nity are scep­tics and believe that pump prim­ing is a short term fix. 

    What will fix the sys­tem? Bet­ter reg­u­la­tion of lend­ing prac­tices, elim­i­na­tion of largesse in the form of out­landish remu­ner­a­tion (in all its forms), the elim­i­na­tion of doubt­ful deals behind closed doors and the removal of the sharks. 

    When will this occur? The sooner the bet­ter. Prob­a­bly not until we hit the bot­tom and expe­ri­ence more pain and actu­ally face the facts.

  • pre­dic­tor

    Hi Steve,

    my ques­tion would be do you have any his­tor­i­cal data on what hap­pens to rent prices if house prices are falling, surely sup­ply and demand would start to force rent prices up, so this would stim­u­late real estate as a good invest­ment again and because your returns would improve your thoughts ???

  • Many good points in Debt­watch.

    I won­der, fur­ther to your points: If the price of res­i­den­tial prop­erty were to be included in cal­cu­la­tion of the cpi, would that have some­how averted or reduced the debt deba­cle?

    It would be nice if we col­lec­tively actu­ally learn some­thing about debt from this mess.

  • Pre­dic­tor, I’ve got an alter­na­tive view on rents. I already note quite a range of rental value in the area that I look (where I rent). I would guess that a major issue is that the rental stock is owned by a mix of long term investors, new investors and spec­u­la­tors. See­ing as the bub­ble pro­duced a very strong spike in prices, my guess is that no more than half of the rental stock was pur­chased at bub­ble prices. That means that only half of the own­ers are being squeezed by costs (esp IRs) and are des­per­ate for every $ of rent.

    We all know that the RE agen­cies will work to have rea­son­ably level rents. But there will be many long term own­ers, with­out finan­cial pres­sures, that know the value of high qual­ity long term ten­ants, and will be happy with 10–20% below mar­ket rent for them.

    And here’s the kicker. As house prices drop, this dis­par­ity will show through even more. Peo­ple who buy for less and less, again will be less des­per­ate for the rent $s.

    More­over, eco­nomic tur­moil will prob­a­bly ulter demo­graph­ics relat­ing to hous­ing — net migra­tion will prob­a­bly drop and peo­ple will “bunch up”. And there may be more sup­ply — delever­ag­ing results in the sale of hol­i­day homes, etc, and the gov­ern­ments finally kick into gear and get more afford­able rentals on the mar­ket. So less demand and more sup­ply.

    The investors and spec­u­la­tors who bought at the top of the bub­ble, or near to it, will remain des­per­ate for rental $s — but even worse would be peri­ods with­out any rent com­ing in. So they will be forced to com­pete agres­sively on rent — with those that don’t need every $ any­way.

    So I expect rent increases to slow soon, and then to fall.

  • Keith

    Brett,
    I appre­ci­ate your com­ments. I’m not sure I’m a ‘greeny’ exactly. My com­ments were in rela­tion to the hard phys­i­cal lim­its within the world and the inabil­ity of the dis­mal sci­ence to com­pre­hend and sug­gest alter­na­tives to the ‘growth dynamic’. Cou­pled with the human race’s inabil­ity to com­pre­hend expo­nen­tial growth, we vir­tu­ally guar­an­teed that not only will we encounter a hard limit one day, but also at max­i­mum veloc­ity.

  • Peter W

    It looks like the cool­ing pump on the finan­cial nuclear reac­tor is fail­ing.

    A Min­sky moment

    The Aussie dol­lar is tak­ing up the slack by falling.

    The RBA may have to drop short term inter­est rates to prop up jobs and the econ­omy

    Infla­tion will accel­er­ate because of the falling AUD rais­ing import prices

    House prices will decline over the next 5 years but infla­tion will soften the blow.

    The Case Shiller and the Sta­ple­don index will nor­malise at 100 (cur­rency adjusted)

  • Mark W

    Steve,

    A really impor­tant ques­tion. How do we (the pub­lic) invest in long-term Aus gov­ern­ment debt (trea­suries)? Could you advise in your next post?

    Thanks Mark

  • Hi Mark!

    You can take a look at BUYING BONDS FROM THE RESERVE BANK at the RBA’s web page.

  • tomt

    Mike, now you are talk­ing the ‘real truth’!! We do not need these ‘for­eign debt hood­lums’!! We have our own “wealth for toil”!! who needs them?
    Let us aban­don the rub­bish ‘traders’ and go it alone! The switzer­land of Asia! “.….…for we are young and Free.…”.

  • Hi Steve,

    Is it pos­si­ble to apply your model to a no growth sit­u­a­tion (steady state econ­omy) or even an econ­omy in reces­sion?

    quote:
    My next major aca­d­e­mic work will be a book on debt-defla­tion. An essen­tial part of this will be an expla­na­tion of the cre­ation of money and debt. This paper and pre­sen­ta­tion explain the basic logic, which con­tra­dicts the stan­dard “deposits cause loans” the­ory of money that dom­i­nates con­ven­tional economics.unquote.

    Kind Regards

    Paul

  • Hi Steve

    this seems to me a very good pre­sen­ta­tion

    http://www.chrismartenson.com/crashcourse

    Kind regards

    Paul

  • James Haughton

    The New York Times today has an “inter­ac­tive pre­sen­ta­tion” on debt in amer­ica called “the debt trap”, includ­ing fig­ures over the entire cen­tury for house­hold debt and sav­ings lev­els.
    http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.html#

  • Bazza

    Hi Steve, great work. you have a huge fol­low­ing here. Keep expos­ing the myths. You are our myth­buster that is help­ing the masses break out of the debt trance. 

    quote from above arti­cle Debt­Watch Oct08
    “With its Neo­clas­si­cal eyes fix­ated on the rate of infla­tion, .……They were look­ing at their math­e­mat­i­cal mod­els, which ignore pri­vate debt (and indeed money!), rather than at the real world, where debt is king.”

    The other very impor­tant thing missed by most is that there are peo­ple involved in buy­ing and sell­ing and all the emo­tion that goes with it either pos­i­tive or neg­a­tive. They fail to take into account the social mood.

  • Jon­meboy

    G’day Steve,
    So you are dis­ap­pointed that you are going to have to buy gold!? I assume that your dis­ap­point­ment is related to the col­lapse or fail­ure of all schools of Eco­nomic The­ory belief sys­tems to which you are tied. Wel­come to the world of the Gold­smiths and bul­lion hold­ers. Very rich fam­i­lies have been buy­ing, hold­ing and con­trol­ling gold for cen­turies and that hasn’t occurred by acci­dent. They have held it tightly and have set the price of it for the past few hun­dred years. They have emp­tied the vaults of west­ern Cen­tral banks and have taken pos­ses­sion of it through var­i­ous means, the most obvi­ous being con­fis­ca­tion and by the more nefar­i­ous method of the print­ing press. As you have stated, the area of study called eco­nom­ics, is not a sci­ence but at best is a hodge­podge of math­e­mat­i­cal the­o­ries pre­sented as sci­ence but in essence an intel­lec­tual attempt at alchemy, through price fix­ing (Inter­est).
    Gold func­tions as money in a far more hon­est and iden­ti­fi­able man­ner. It acts as a store of ones labour, it holds its value over time, it is ever­last­ing, trans­portable, not sub­ject to whim­si­cal cre­ation, (as opposed to the con­trived paper deriv­a­tives of gold that we use today), is inter­na­tion­ally recog­nised as money and eas­ily assayed for authen­tic­ity.
    Most econ­o­mists have been mis­led in their search for the holy grail: the search for the credit note that requires no bond by the issuer, a credit note that requires no set­tle­ment on pre­sen­ta­tion to the issuer. A credit note that can be used as pay­ment for goods and ser­vices with unend­ing sup­ply. A credit note that hav­ing all these traits, still must be seen to have and hold value. You have your wish, you call it money and you expected it to thrive. You must be mad.
    Buy some gold Steve and wel­come your dis­ap­point­ment. It’s not a new idea, just a for­got­ten one.

  • Clinto

    Thank you, always a good read… keeps me on track with my thoughts about why I have not bought in the last cou­ple of years.

    hap­pily wait­ing for calmer days and cor­rected prices.

    Clinto the happy gen-X-er.

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