Niall Ferguson has just made the first call for widespread debt rescheduling that I have seen published in a major newspaper–today’s Australian, and I am sure it is reproduced in many newspapers around the world (if your local paper is owned by News Limited, there’s a good chance that you will find it there).
The article is linked here–The great repression–and some excerpts are shown below. Read it and refer your friends to it. Finally the call has gone out that what is needed to get out of this crisis is not more debt, but less.
“There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes’s General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.
The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness…”
“The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as conversion. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
No doubt those who lose by such measures will not suffer in silence. But the benefits of macro-economic stabilisation will surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Churchill once remarked, will always do the right thing – after they have exhausted all the other alternatives. But if we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.”
I don’t see how I participated in the current Ponzi debt bubble at all – I have had no sustained debt for 30 years and my super was taken against my will. I would much rather not have paid super. Let greedy capitalists and capitalism fall. Save the workers, but speculators can suffer in their market collapse. I too have a (very) small experience of communism from visiting countries in the 80′s and from tales of friends. The quality of life advantage of the West has been highly overrated. A few ‘glamorous stars’ do not represent the majority and consumer goods are poor substitutes for a rewarding life.
The fact is though that side by side capitalism is by far more efficient. Also the feel of perceived freedom is an important one as well. Truth is people weren’t that happy under communism, not that their happy now. It was good for kids who don’t worry about materialism, as long as all the other kids are in exactly the same boat.
Just so I’m not misunderstood with my previous post, people are free to walk into banks and ask for home loans, they are free to use their credit cards. Banks simply assess what the chances are of getting their money back at a profit.
Deflationist
>What led to the eventual recovery was…surprise surprise…
>massive debt repudiation that was going on since 1929
You have taken a very simplistic political view of what’s going on which is dangeruous and represetns only half the story. The rich you are talking about is the 1% that took 50% of the new wealth created over the past 6 years, or the top 1% is worth 23% of the total wealth in the US. Many, but not all, of this 1% committed outright fraud and existing laws can and should be used to prosecute. Of course the political elite were amongst the enablers and looking at the money trail confirms this; ie. who are the biggest contributors to the US congress.
Compounding the situation is that the entitlement class of the masses figured out how to vote for the public purse. This is something the Greeks, Romans and the writers of the American constitution knew about and it represents a fundamental flaw in democracy; I would add that democracy it is still probably the best system but its failures needs to be understood.
What you are suggesting now is that the political elite needs to rob from the productive middle class to clean up the mess made by the 1% and the entitlement class who believed in FREE money. You need to remember that Rome fell in part due to the destruction of the productive middle class. This path leads only to civil conflict and is not recommended.
In essence politics in our present left/right form is a distraction that we the people seem to fall for it every time. The real game is being played out behind the scenes at banks around the world. If only we the people were tuned in as to what money and coin is.
I don’t think Niall Ferguson addressed the moral hazard/fairness question very well, but that I’m sure would take longer than a press article.
I would support his proposal if the pain incurred (by the reckless) on the prudent was in line with the benefit, if any, previously received. That is hard to measure though.
Hey Ftoomsh
What about this one
Over population!
Just simple maths to see what the world pop is going to be in 2050.
It’s Interesting many people can see that the worlds pop is heading towards 10 bil in forty or fifty years time. But they fail to see that an 11 percent growth in financial terms in China is unsustainable.
Niall Ferguson got it right on ‘Lateline’ when he said most people don’t even understand basic finance.
It does not fit here, but in the lack of a discussion forum, I put it in anyway.
I found an interesting article. It’s a speech by Warren Buffet’s sidekick Charlie Munger.
In it, he sums up everything that he see as wrong with the economic profession.
http://www.marketfolly.com/2009/02/charlie-munger-speech.html
I think he is spot on. I can sum of very fast his main points:
1. Fatal unconnectedness, leading to a man with a hammer syndrome, often overweighting what can be counted.
2. Failure to follow the fundamental full attribution of hard science.
3. Psysics Envy.
(false hope for reliable formulas)
4. To much emphasis on macroeconomics
5. To little Synthesis in economics
6. Extreme and counterproductive psychological ignorance.
7. To little attention to second and higher order effects
8. Not enough attention to the concept of febezzlement
9. Not enough attention to virtue and vice effects.
His conclusion: clinging to failed ideas. It’s all there, I think he does a good job slaughtering economics as a “science”. It’s interesting, certainly worth a read.
Another thing Ferguson said was that he doubted china’s growth would better 3 percent. If he’s right and I believe he is, some of the local financial commentators will have got it wrong again. Things just don’t stack that well for us with our two largest trading partners spiralling down fast.
Not sure about Buffet or his sidekick prudentsaver. Buffets a good bull but not a great bear.
Berkshire Profit Plunges 96% on Stock Market Bets
http://www.bloomberg.com/apps/news?pid=20601087&sid=aO.dAwhtKlAw&refer=home
I think Buffet’s record speak for itself, it’s not luck. Now the mantra is that this time it’s different. maybe it’s not. What I think is very interesting is to compare these things:
Emerging market stocks of high quality, fertilizer stocks, and food prices.
The two first of these have been 100 % the same, meaning that fertilizer prices have went through the roof, and is just not backing off, having the identical performance to emerging market stocks. Fertilizer stocks are hot, and it appears to me, that they are a hedge against treasuries. I think treasuries is in a huge bubble if you put them against fertilizer stocks.
http://finance.yahoo.com/echarts?s=POT#chart1:symbol=pot;range=my;compare=^tnx;indicator=volume;charttype=line;crosshair=cross;ohlcvalues=0;logscale=on;source=undefined
Prices are set on the margin, i think we are close to a major shift in food prices, when the supply and demand finally go out of whack. I have looked at the M3 money supply for the US, amazingly enough it’s going up, and guess what. It’s going into fertilizer stocks, and that kind of things, but not into the US market in any way, however, it’s still dollar getting pumped.
“Stephen S. Roach, chairman of Morgan Stanley in Asia, noted that China’s GDP growth in the first quarter this year might not escape its sluggish situation experienced quarter four 2008, and the GDP growth this year could be lower than 5.5 percent.
Roach noted that the 6.8 percent GDP growth in the fourth quarter last year was calculated year on year, and month on month growth was close to zero. The situation would remain during the first quarter this year.”
http://www.tradingmarkets.com/.site/news/Stock%20News/2194458/
” month on month close to zero”- that was China in December.
And if ever we in Australia need to understand that point, it is certainly now.Close to zero growth in any qtr in China is a disaster for Aussie.The impact that such a contraction has to our mining sector and capital investment plans will be felt for much more than 12 months, if not several years. Queensland and WA will feel the fullest weight of the GDP collapse in China.
Worse, protectionism is on the increase. And with leftwing Govts well entrenched in the US, Europe, UK and Australia as unemployment rises, the power of the unions has not been so high since the 80′s.
“The Coming China Meltdown
If China continues to force excess capacity onto a struggling world, it could result in a trade war.”
http://www.newsweek.com/id/186971
These are the realities of Australia’s terms of trade going forward. Banks and businesses will respond accordingly, restructuring their businesses and workforces to re-align with a lower level and more riskier environment of commerce.
Govts are hurtling their taxpayers deeply into debt endeavouring to take up this GDP gap, especially Leftwing Govts’ with “make work” programs that benefit their union dominated supporters. The offset will be exponential increases in national debt (just what we need??) to be followed by higher rates of tax (been there, done that,failed miserably) as ameans of “redistributing” wealth towrds the lowest common denominator. Or debt downgrades which Qld, the “boom state” has so recently been rewarded with, exacerbating those sky rocketing borrowing costs.(Yes, left wing Govt here too).
We risk throwing out the baby with the bathwater if this is allowed to continue. Our way of life is distictly under threat. The failures of bank regulation, accounting rules,excessive leverage and criminal lending prectices were all US conditions that enabled the GFC. They are NOT Australian mistakes. Australia however suffers mainly due its trading profile where exports so significantly dominate our economy- we fundamentally cannot escape the fallout.
The Australian mistake was to allow so much debt and credit and household wealth to be anchored in what essentially is an unproductive asset- housing. That is where we need to address our concerns, efforts and solutions. NOT is socialism’s; one size fits the proletariat.
What is clear though is that the Left will use the GFC as a generational opportunity to enact wholesale all those socialistic dogeared theories of social engineering, now that they have their Socialist Govts to listen to them and a population already weaned onto the Govt teat.
We can all get ready to have Govt play a much bigger and more intrusive (costly?) part in our lives.We will rack up yet again debt mountains for future generations of young Australians to enjoy all because the bulk of current voters were caught out in their greed and speculative failures , unwilling to shoulder the hard graft of living within their means.
The Nanny state is back again.
GSM,
This statement “the power of the unions has not been so high since the 80’s” could not be further from the truth. Since the advent of AWA’s union membership has declined drastically. I know for a fact in my industry the unions have been decimated. When I started working there was very close to 100% union membership, now I can think of but a handful of people I know of in the industry who have retained their membership. I can honestly say it would be 10% or less in the area I work and probably more like 25% industry wide.
It seems that Post-war economics became increasingly aligned to the American ethos where freedom is the dominant paradigm. Hence we see the freeing up export markets, freeing up of labour markets and the deregulation of financial and capital markets as attributes of some idealised freedom.
Academic economists went along with this because it was rewarded, first intellectually by their peers, then financially by the captains of industry and finance and finally politically through neo-liberal governments around the world. While it may seem odd that a model tailored to a social paradigm should work, the reality was that for many years the model defined the real world economy, so that the whole system appeared to be working like a charm.
It was only as it started to disintegrate from its internal inconsistencies (that the excess of freedom in the regulatory dimension inadvertently led to bondage of debt for the great majority) that it became apparent how naked the emperor really was.
While the history needs to be sorted out, the important question is where to from here. I agree with SK that a better academic understanding of economics will emerge with a move to non-linear dynamic modelling.
However, the political will to manage the freedoms of the few for the benefit of the many is a much more difficult task, and more unlikely to happen. To this end, regulation of itself will not ‘stabilise’ the economy, only the dynamic management of all resources available to our society for the overall benefit of society will resolve these issues.
In this we do not want to lose the freedoms and benefits that come with ‘free markets’, including financial markets. The question is whether this strongly contested management will be possible under our form of democracy, and whether the voices of the rich and powerful continue to dictate rewards and costs.
Ned,
I’ll accept that INFLUENCE would be a more apt substitute for “power” in the discussion before.
And that influence is being brought to bear in the area of protectionism – which in some areas of the Australian economy would actually be helpful. It is however a reality and it will have it’s own set of consequences , often unintended.
Thanks for the link ‘prudentsaver’. Jim Rogers has also been very bullish on agriculture.
GSM I’m not so sure whether it would matter if it’s Turnbull or Rudd both would use the keynesian approach so as to be seen to be doing something rather that nothing. I believe the reality is what Steve and Niall Ferguson have said that eventually they will just have to drop the debt. This won’t make me happy as I see myself as a calculated risk taker that’s seen enough bubbles burst not to get caught up in the euphoria. Now I guess we will all be paying for others mistakes or in some cases their plain old greed or stupidity.
Well put ‘notthinking’
steve is right-
the problem is treasury officials and central bankers around the world think they can beat this using current thinking, or the current paradime.
to them, just because the results dont support or conform to their paradime, doesnt mean that the paradime is broken. its just a mis application of current thinking.
they are still trying to solve the conundrum so to speak.
the economists at the pointy end of this problem may think of this problem as a scientific endeavour, but as we have seen there are layer upon layer of value judgments involved
these value judgements will play a significant role in delaying any transformation in thinking and policy.
we will have to wait until we are positively drowning in anomolies and crisies before we get the paradime shift or new thinking that is required to fix this mess
and another thing
debt forgiveness will require a globally co ordinated financial architecture.
history has taught us that tribalism always runs rife in times of economic and political breakdown.
this will be an intersting test of how far we have come down the evolutionary road from our cousins in the jungle. is all of this going to develope into sabotage and internecine warfare , or are we going to put our heads together and hunt this problem down as a pack
has anybody given any thought to how the mechanics of a debt restructuring could look like. would be good to hear some points of view
I think there is a real risk, that the “dollar pump”, could restart, even private debt is at such astronomical levels, only the dollar will go out of the US. To speculation.
I’m with you Nanks.
Who has really gained from the economic system we live under? The rich! By rich I don’t mean those who own a couple of rental properties and a boat. The rich are those who are worth millions upon millions or even billions. They run the world and the governments are just hired puppets of these people. The governments of the world have supported this warped free market capitalism, precisely because that’s what the rich have demanded. The rich give hundreds of millions of dollars to political campaigns, so they can dictate to politicians what they want.
Why should the working class bail out the rich? Tell me where are the calls for debt rescheduling when the workers and the poor are burdened with debt? Oh but now that the rich are in trouble, lets reschedule. Then when the system is propped back up, the rich can get back to the business of exploiting the planet.
Stuff the rich! No bail out! No rescheduling!
Let capitalism fall.
Nationalise the banks and the finance industry.
Lets follow the lead set by President Chevez in Venezuela. Nationalise industry and use the wealth for the people.
http://sixtyminutes.ninemsn.com.au/article.aspx?id=757649
So here we have a group of inexperienced and greedy speculators (actually retirees) who leveraged up into the many millions with advice from Storm Financial. Mortgaging out their homes and pouring in life savings to buy more property and shares on margin, in order to realize undreamed of wealth. Sucked in by their own greed.
And they were all slaughtered financially. Now facing financial ruin. Judging by the footage, they all revelled in their windfalls while the scam went in their favour. Overseas trips, lavish parties etc. But now that their greedy plans have gone pear shape, they cry their innocence as victims, wanting…yes you guessed it…a BAILOUT.
A number of commenters on this blog have stated their belief taxpayers should make good on the losses brought on by the stupidity and greed of these and other similarly minded property speculators.I do not. These people, those who advised them and those that loaned money to them, should be bound by and subjected to common law and contract.Just like me and any other Australian citizen.They are not entitled to any special treatment other than what is provided under law.
Let the chips fall where they may.
I hope that all of Australia watched that 60 Minutes episode. It is painful and destructive experiences such as this that bring about true and lasting change. Where it is necessary- at the kitchen tables of Australian homes.
hello “ickers”, the “time frame” is speculative, what I was referring to was that europe has a ‘revolutionary’ history ‘oz’ does not being a young country.Europeans are already(greece) in action mode! the political groupings are ready, all it needs is the starters ‘gun’!
clive,
I fear that you are probably right. The numbers here seem to suggest that. It’s delusional however to think that debt write down will be a painless experience, free from fallout and substantial economic and financial harm. Or that it will solve all ills.
If asset values were to decline substantially, any significant write down in debt principal will immediately give rise to bank solvency problems, then precipitating re-capitalizion probably by the Govt. That then brings into question sovereign credit rating and potential capital flight with a currency crisis. Interest rates and or taxes would need to rise, possibly significantly just to stabilize our financial system. Just one scenario.
There are no free lunches with debt.
Hi GSM
I saw some of the 60 Minutes segment about Storm Financial. What struck me was that one of the investors had an income of $20,000 p.a yet the Commonwealth Bank approved a loan of $2millon!
Another said she just signed the forms and left Storm Financial to fill the details. I wonder if these investors were more ignorant and gullible than greedy.
I thought ‘The Barefoot Investor’ had some good ideas in one of the Sunday papers today:
http://blogs.news.com.au/heraldsun/barefootinvestor/index.php/heraldsun/comments/the_japanese_mistake/
‘So, as someone who doesn’t qualify for the government gravy, here’s my two bobs’ worth on the best way the Australian Government can improve the confidence of consumers. Stop spending our money like confetti. Start making a real investment in our nation’s future by providing government-subsidised independent financial planning to the masses.’
‘The people who email me don’t have a financial plan. Without a basic understanding of where they stand financially, they can’t possibly have any confidence in the future. When you’re scared you make irrational decisions. While the rich can afford good advice, the masses – who wade at the shallow end of the economic pool – tend to attract the sharks.’
‘While I understand that having the Government run anything means they might balls it up in some way, it’s a risk worth taking. This is one of the only ways to ensure the masses can access truly independent, fee-for-service financial advice.’
‘I did some research this week and found that there was a grand total of 11 financial planners in the entire country that fit this bill.’
‘Let’s talk numbers: even if the government-funded financial planners cost taxpayers $180 an hour (five hours equals $900), it’s still a good investment for the future of our economy. Here’s why: A family could spend five hours getting personal advice, learning basic budgeting, ensuring they have the lowest mortgage and debt servicing possible, evaluating their super, projecting what they’re likely to retire with, and learning some strategies on how to boost it long before they pull on the sandals and socks.’
‘This would not only inspire confidence (which will eventually lead to increased consumer spending), but it would also lead to smarter money decisions. More dough would find its way into productive places like savings and investments and less towards feeding the plastic monster.’
‘Just like in Japan, the economic boom we experienced masked many mistakes – a failure to save, to diversify and to plan for the future. Now our day of reckoning has arrived, the best thing the Government can do is help people to help themselves.’
hi,
this is a fascinating thread. thank you to all of you for your generosity with sharing ideas and information. i watched chris martensens’s videos – very interesting. I’d like to be in a position where my dependence on “the system” is as low as possible but i am really stuck on the gold issue – can someone point me in the right direction for some research on that aspect of diversification and future security (possibly). I am not looking for advice – I’ll make the decision myself – but I am confused about the idea of buying gold and then asking the bank (which i am trying to be less engaged with) to look after it – it may be a very naive question but could someone tell me, do people actually keep it at home in the freezer or do they buy shares in a mine or do they wear it or what?? and how can it be “used” in a currency crisis?
thank you.