I first heard the best joke about economics in 1975. The teller was the nuclear physicist (and nuclear power advocate) Sir Phillip Baxter, and he told it in answer to a question I had asked at a public forum.
The joke is:
A physicist, a chemist and an economist are shipwrecked on a desert isle, along with a container full of cans of baked beans.
The chemist says that if they can start a fire, he can calculate the temperature at which a can will explode.
The physicist says that she can work out the trajectory of the baked beans after the explosion, so that they can gather the baked beans and eat them.
The economist looks at them in disdain, and finally says Guys, you’re going about it the hard way. Let’s assume we have a can opener.
The can opener that was the centrepiece of today’s budget was the assumption that the Down Under version of the Global Financial Crisis will end in 2011-12, and that after it, the economy will experience above-trend growth of 4.5 percent a year for at least two years. Armed with this can opener, The Treasury can easily get out of the deficit jam it is now in: corporate tax revenues will grow by a quarter, unemployment will fall 1% a year from its 8.5% peak, and the budget can eke its way back to surplus by 2016.
This is a modified version of the can opener that Treasury has been using for the last decade, where its forecasts for the future were based simply on the assumption that the economy will always return to 3 percent growth after any short term disturbance. Normally they assume that the short term disturbance only lasts for the current year, and that the long run trend will reassert itself the following year.
The Treasury’s one concession to reality in this Budget was to add an additional year where growth was expected to be below average–so rather than forecasting 3% growth in 2010-11 as it would normally do, it assumed growth of 2.5% for that year. But it then assumed growth of 4.5% for the next two years.
Overall, Treasury is assuming that the deepest global recession since the Great Depression (its words) will reduce growth over a 4 year period by a mere 0.25 percent per annum.
Isn’t it marvellous what you can do with a can opener?
Reality is rather harder to cope with. Though I’ve had many years to get used to this, I still find it bizarre to read statements like the worst global recession since the Great Depression and see this juxtaposed with expectations of a shorter, shallower recession than that of the 1990s.
At least there’s a sense of give us a break, what else could we do? to the way Treasury attempts to justify its assumptions in this document:
The approach is also in line with that taken in budgets in the early 1990s when above-trend rates of growth were assumed as the economy recovered from recession.
Other countries are also assuming above trend growth in their forward estimates as their economies are expected to recover. The US, UK, New Zealand and Sweden are all adopting such an approach. (Budget Overview page 29)
That’s cold comfort to the rest of us however–all it really means is that most OECD Treasuries are hoping that the crisis just blows over, just as are our alleged economic managers.
And we are asked to trust a projection based on the experience of the 1990s, when this is the worst global recession since the Great Depression? Wouldn’t that mean that recent experience should be a misleading guide as to what to expect? Why not instead show us what happened back then?:
Oops. 4 years of falling output with the economy shrinking by 10 percent in 1930 alone? Even 1990 doesn’t look quite as good in the data as the Treasury describes it:
Then output fell by more than 1 percent in 1992, and though growth returned to trend levels after 3 years of below trend growth, it certainly didn’t bound up to 1.5 times the pre-recession average.
The Treasury, like the RBA, didn’t see this crisis coming–have a quick read of the 2008 Budget Overview and look for the word crisis; you’ll find it once in relation to housing. The Treasury’s prognoses on how long this recession might last, and how deep it will be, are no more than wishful thinking.
Unfortunately, guided by neoclassical economics, there’s little else that The Treasury can do: according to standard neoclassical theory, this crisis shouldn’t be happening. Only when they throw away the textbooks will they have any hope of understanding how the economy actually works.
Until that day, make sure your own can opener is working–and maybe even set aside a stock of baked beans.
BrightSpark said
“That the idiots saw no harm in the exponential growth of debt illustrates their (particularly for people with PhDs) profound ignorance and lack of mathematical cognition.”
I wouldn’t call our ancestors idiots. Debt does not have to grow exponentially as shown historicall in the years following WWII; Steve has also mentioned this.
If one had no system and one then thought of fractional banking then many would find it quite inspiring.
Have you a better idea; do you know of another system that works.
I will go as far as to say that the neoclassicals do know that too much debt is bad. Its a fallacy to say they dont. Why then would they have had depression era laws; we know that these have been circumnavigated but that does not mean that they dont know – its just too much like common knowledge.
Just had a quick look at the end of the Money as Debt video. It is certainly is conspiratorial – more than I remembered when I first saw it. Good Tin as one would say.
The video is very much slanted against bankers and banking. Well I’m no friend of bankers that are corrupt but I do think that the video is over the top. There a 8000 banks in the US and only the top few dozen very big baks are of the corrupt type.
To make the system fair I propose that at birth a citizen should be given a proportional amount of bank shares (a rights issue would need some though). At age 18 they can then do whatever they like with those shares. In such a regime there can be no complaints about banks ruling the world.
More on printing,
I said, If the Oz government starts printing to fund consumption, I’ll march in the streets.
Should governments be allowed to “create money” or banks?
Before answering this we need to know if the money will be created and lent out (current system) or if the money will be created and simply handed out.
When loans are created, there is an inbuilt system/analysis that leads money to the most productive ventures. This mechanism has been distorted in the last 30 years because social mood has been so positive, such that virtually all ventures and speculation looked like a good investment. Had government been in charge of these decision the same conclusions would likely have been reached. Investing/production success lead to more risk and more success until the system overshot to the optimistic extreme.
If the money is simply created and handed out, there is no incentive to reward productivity or success. The money will naturally go to those who are most influential or persuasive. Not those who are most productive. Plus with no need to repay the money or no interest building up to force action, there is no incentive to produce quickly or at all.
A further benefit of the loan based system is that failure leads to efficiency. Those that fail lose their money and those that succeed are rewarded with the right to borrow more money. Under the handout system failure can continue to be rewarded.
But how do we deal with a system that is failing on such a large scale?
Should we now hand out free money to prop up failure? Or should we allow failure to correct the out of control extreme positivity the market became infected with?
If we allow the failure to occur. (a very painful process) In the aftermath we get what we all believed we needed in the first place. That is, Much less easy money, funding going only to profitable production, the end of risky speculation and the end of excessive debt fueled consumption.
If all we do is reflate, no lessons will be learned. The failed behaviour will be allowed to continue.
We need a monetary deflation to reset the system at a lower more sustainable level. But we also need to deflate all those millions of egos (mine included) that believed we all became healthy, wealthy and wise because of our own cleverness.
Let me deliver the final drop of intellectual poison before I ban myself due to popular demand.
There is an alternative banking system, quite old but still alive and kicking:
http://en.wikipedia.org/wiki/Islamic_banking
Apparently it is doing quite well recently:
http://www.asharq-e.com/news.asp?section=6&id=14245
This is also a proof that you can build society on different principles. Even if I am not a follower of that religion I think that these guys are right regarding not charging interests but making profit in a fairer way.
ak,
You said “Let me deliver the final drop of intellectual poison before I ban myself due to popular demand.”
There is nothing wrong with letting known your views, though others may not like it. That’s the purpose of this blog as it is heterodox in nature. As long as personal attacks and vitriol are kept in check (this applies to a couple of other members), then anyone is welcome to comment. As mahaish put it, everyone has to approach this with a sense of humor.
Hello Aac
I was not calling our ancestors idiots, I was describing neo classical economists as such. This because they saw no harm in the exponential increase in debt (household and national but not government) that has been occuring for the last 30 plus years. The idiots thought the “private debt” would not matter; why then are governments taking over this debt to save the private creditors mainly banks. These stupid people need to understand that debt does matter and it should not be allowed to grow exponentially. They need to understand that time is the most important parameter. The current batch of turkeys has allowed this just as their ancestors did in the 1880s and 1920s.
About finding all this inspirational the fools were crowing about the “great moderation” caused by their marvellous banking system only two years ago now look at it!
I do have a better idea; sack the idiots and get people (like Professor Keen), who have a better understanding of economics and mathematical principals to analyse the system and recommend solutions. These solutions would consist of feedback mechanisms which can be implimented by elected governments and which would ensure free and economically as well as environmentally sustainable markets.
You said
“I will go as far as to say that the neoclassicals do know that too much debt is bad. Its a fallacy to say they dont. Why then would they have had depression era laws; we know that these have been circumnavigated but that does not mean that they dont know – its just too much like common knowledge.”
If they were able to understand the consequences of debt rising (for thirty years) why didn’t the recommend doing something about! After all they had thirty years to do so. The depression era laws were not implimented by neo-classicals but by others trying to fix the mess. If they do understand and let this happen they are dishonest, do you suggest that they have been effectively “inside trading” on the world economy as a whole; that is, defrauding us all?.
BTB
I think this explosion of credit is just as bad as money printing by the governments. The credit has inflated asset prices without adding any value or real creative investment in productive areas. The opposite has occured it has destroyed national productive abilities.
The difference is that printing money has an immediate but relativeler milder effect while the unfettered credit system causes eventual economic catastrophe!
Aac & Pragmatist:
Full-reserve banking implies no central bank and no monetary policy.
Brightspark is right Aac,
Neoclassical economists were really blind to the importance of private debt. The Depression era laws were introduced after Keynes took command of the profession, and dismantled as neoclassicals reasserted themselves. I have had numerous meetings with neoclassical economists at all levels and they start of perplexed by the very idea that the level of debt should matter.
But rather than sacking them, I’d simply propose something they have a hard time arguing against: abolish the monopoly they currently have on the teaching of economics, and let engineering, physics, sociology and history departments etc. give courses on economics.
Second that Philip,
I wouldn’t want anyone to feel themselves driven away from discussions here. The one reason I’d be willing to see someone leave was if they started spraying vitriol around rather than argument. So far, most of the time, that hasn’t been an issue here. I’d ask everyone to keep in mind Mahaish’s attitude that we have to keep our humour about us as well as our wits. Even if you think someone has said a dingbat thing, please continue finding more humourous (and more empirically grounded) ways to say that, rather than calling someone a dingbat, which seems to be the nature of discourse on many other blogs.
The idea of QE/money printing in Australia has sparked a lot of anger (justifiably in my opinion but that’s another matter). But in a fiat based money system is there any difference between:
1) The government actively printing money
2) An investment bank selling trillions of CDSs with zero collatoral?
It appears to me that both have the exact same impact – new money created completely out of thin air (as opposed to partially out of thin air as in standard fractional reserve banking or even rampant securitisation). The second case represents the perfect privatisation of money supply creation.
No one was marching in the streets when Glass Steagal was revoked by Clinton in Jan 2000 or when Bush/Paulson flattened the reserve requirements of Wall St banks in 2004 (from 10:1 to 30:1 or more). Yet both decisions led to the dramatic expansion of global credit money, the equivalent of goverment money printing. This seems to me a good example of the business class trumping the government with zero involvement by the public (in line with Philip’s excellent post above).
If my logic is out of whack I’d appreciate it if someone could correct me.
Marvenger – thanks for posting the latest Michael Hudson article (the guy is a standout). Here it is again if anyone who missed:
http://www.counterpunch.org/hudson05142009.html
I had a mini-epiphany when I read:
“The global financial crisis has ended the real estate bubble that enabled many countries to cover their trade deficits by selling off their real estate or simply taking out foreign-currency mortgages against it.”
So here in Australia the banks, government and the property spruikers have marshalled all their resources to convince the public that the dollar “value” of their family home has tripled since the mid-90s. Also their superannuation has skyrocketed through the magic of compound interest. Yet the marginal finance used to pump up the bubbles came from foreign sources utilising credit money largely based on fraud.
A perfect way to plunder a country:
– Convince the middle class that they’re becoming wealthier by pumping up dual real estate and stock market bubbles with make-believe, fraudulent credit money
– Promote extreme leverage and then cut off lending which crashes the ponzi scheme
– Foreclose and shazam! foreign entities and a tiny domestic elite own a huge chunk of Australian real estate and productive stocks.
This is what happened to Russia in the early 90s and again in 1998, SE Asia in 1997, Eastern Europe and Iceland in 2008. With Australia’s huge reliance on foreign ponzi finance could it be our turn sometime in the next few years?
Evan – I completely agree with your logic. While I don’t claim to have any idea how much money should be in circulation, I strongly believe that this total amount should be calculated and controlled by a democratically-elected government rather than a profit-seeking private banking system. Democracy might not be perfect but it’s a lot better than corporations having all the power.
Contrarian Investors’ Journal – I agree that a full-reserve banking system would do away with the need for a reserve bank and I’m comfortable with that. As far as I can tell, reserve banks were originally set up as a lender of last resort. This isn’t needed in a full-reserve system as the individual banks would have enough money to satisfy withdrawal requests so a run on the bank is no longer a risk.
I disagree that there would also be no monetary policy. Certainly it would not target interest rates any more (these would be set by the market). Instead, monetary policy would be based around the calculation of the required amount of money in circulation. Governments then have various options to increase and decrease this amount (as they do now).
If only the broader public actually understood how the current system works, maybe we could have a proper community-wide debate about it instead of such discussions being limited to forums such as this one.
Hi Evan,
As far as I can see I think it depends whether it is theoretical or reality.
In theory companies that wrote the bets (or “swaps”) they couldn’t cover go bankrupt and the counter party takes the haircut along with bond and shareholders of the company in question. So the imaginary money that was created stays imaginary.
But in reality the government is borrowing and printing to cover these bad bets their buddies made, making the imaginary money real. Lucky the government is doing it for our own good!!
Philip, re your post dated May 16th, 2009 at 10:59 pm
“The great problem with politics is external to it: the business class….”
I have recently begun to see that this crisis is as much a crisis of democracy as an economic crisis.
A belated thank you for expressing my concerns far more eloquently than I could.
Contrarian Investors’ Journal said
“Aac & Pragmatist:
Full-reserve banking implies no central bank and no monetary policy.”
Got it, I didnt realize that Full Reserve Banking was a defined term meaning loans are fully backed by a resource as in gold for example.
Coincidently Karl Dinninger has done an excellent piece IMO on fractional banking:
http://market-ticker.org/archives/1045-Making-Sure-It-Never-Happens-Again.html
Steve Keen said
“Brightspark is right Aac,
Neoclassical economists were really blind to the importance of private debt.”
Ok then but I visit a number of blogs and they all point to debt/leverage as one of the main problems. The feeling I get is that anyone outside of the MSM knows why we are in this mess. But I guess everyone outside of the MSM amounts to maybe 10% of the voting public.
Also, Steve I recommend Denninger’s link in my previous post. We all know how busy your are but I would love to hear your thoughts on his work.
They might point to it as a problem, but their theories led to them ignoring it as an issue until after the fact. A key component here was the “Modigliani Miller” theorem, which argued that the amount of debt a firm held had no impact on its value–and in its simple form that where there was corporate tax, a 100% debt, 0% equity structure was the most efficient due to the tax deductibility of interest payments. That crap is still being taught in finance courses today (by the way, it’s amusing to see how Miller tried to excuse himself from any responsibility for the 80′s phenomenon of leveraged buyouts at his Nobel Prize accepting speech in 1990).
I’ll take a quick look at Denninger.
Denninger is working from the “fractional banking” model of how credit is created. As I explain in the Roving Cavaliers of Credit post, this model can’t explain the actual data on credit.
The dilemma also goes far deeper than his proposition that all we need is security to back loans and everything will be OK. The problem is that this accepts the valuation of assets as accurate–but that will fall down when bank credit is itself used to buy assets.
He also proposes changes to regulation as the cure. My point from Minsky’s point of view is that if these regulations did succeed for a while, they would be undermined by later “regulatory reform”, which is how the similar Depression-era regulations were unwound.
Steve,
there is a new information tool that has just been released which is good at showing all kinds of stats as well as graphing them. Take this example search of GDP and Debt for example:
http://www61.wolframalpha.com/input/?i=gdp+debt
I have yet to fiddle with it in detail (as it only just debuted on the weekend), but I think that it may yet be useful.
Philip,
Thank you for your in depth description of the issues facing our current system and taking the time to respond in at such length to my post. You described the systemic problems in more forensic detail than I did and expanded on the subject but I can see your sentiment is the same as mine…Maybe your expertise is related to Politics? Mine is the dark arts of Media and Communications Strategy…with a strong focus on digital technology. (So in some ways Bullturnedbear was right about my position in his imaginary Aussie government!! ?…NOTE: the smiley face indicates the tonal intent of this comment and continues the tradition of approaching these blogs with a sense of humour)
You talked about Control (by the Business Class and Economic Intelligentsia) through the Manipulation of Information. In the past this was commonly achieved through ownership of media assets such as newspapers and radios and TV stations. Now, EVERYONE with internet access is a potential media mogul. Although democracy has been distorted and changed beyond recognition, this point in time also happens to be a moment when the people enmasse can begin using the strength of the Internet to restore the balance of power in an unprecedented way. If society does this it will again act as the ultimate check and balance to government policy decision-making, rectifying imbalances brought about by minority influences and interests. As connected individuals without boundaries our capacity to elicit positive change is more dramatic than ever before. The Internet and other digital mediums like mobile phones have not leveled the democratic playing field they’ve tipped it to the advantage of the people. Those concerned with the health of democracy need to not only let everyone on the team know they have a huge advantage playing on this field, but lead them onto the field and encourage them to play.
Lyonwiss – Mentioned that he agrees with my assessment of the POWER of the internet as a democratic tool. He said ‘…your idea of creating a movement to “keep the bastards honest” may now be more feasible and effective than before because of technology…’ I would boldly take that further and say it WILL be more feasible and effective. We have the means to end this – as Rookess called it – ‘Crisis of Democracy ‘ and I will continue to promote action and organization around this to enable effective social, political, economic and environmental activism that results in positive and fundamental change in our society. Thanks to all for feedback, much appreciated.
digitalchris,
My expertise is in ICT and business, though politics and economics are what concern me now.
Digital communication can offer alternative forms of information that bypass the usual corporate consensus. In fact, we have access to too much information. In Australia, information is not hidden and can be accessed easily, whether in libraries or over the Internet. The problem is sifting through a great deal of it to find information that we consider accurate and timely.
We are all familiar with the concept of authoritarian states omitting and manipulating information for their interests against the public. In Western liberal democracies, such as Australia, the state doesn’t do this to the extent found outside of the West. But the problem of information in our society is that of the institutions who create and sell information: the mass media, marketing, advertising, and public relations industries. Do they have an incentive to manipulate information?
In short, the best explanation as to why the mass mainstream media don’t play the role that they claim of being a check and balance that I’ve found is the Propaganda Model. http://en.wikipedia.org/wiki/Propaganda_model
The other industries of marketing, advertising and public relations are dedicated to undermining consumers and the public. Just look at the enormous amount of dis- and mis-information that people are bombarded with in order to promote the disease of consumerism (as opposed to typical consumption) and to present corporations with an unblemished image.
It is unfortunate that economists do not denounce this mass information asymmetry, but the reason is obvious: big business is doing it so by definition it is correct and representative of how markets work.
“Rather than provide information, professionals design much advertising to do nothing more than to delude and to confuse people in order to get an edge on their competitors without serving consumers’ needs in any way. True, some advertising is ‘constructive,’ but surely most is merely ‘combative,’ having nothing to do with conveying information. In fact, we could do better treating such activities as disinformation.” (p. 16)
Perelman, Michael. 1999. Class Warfare In The Information Age (New York: St. Martin’s Press)
That’s right Philip,
the problem is becoming one of information saturation. with so many sources of information, how does a person know which one(s) to rely on and which to discount?
One way is put a lot of effort into reading the information source and carefully balance the views found within it against other sources, but this takes time, effort and no small amount of analytical skill.
Naturally, people without the time (or inclination) to go to this effort will turn to larger news sources (like the MSM) because they are considered credible.
Philip,
yes – putting raw organic (unadulterated and accurate) information in front of people and making it easily accessible by ACTIVELY PROMOTING THE ONLINE DESTINATION is the key to building a genuine check and balance to mainstream media. We see this happening online in some forms already but each time it comes across as slightly ‘conspiratorial’ or the skewed views of extremists since although truthful it’s marginal information because of the simple fact that it’s not promoted in a mainstream channel like a newspaper or on Tv news. And who knows of these sites anyway? Not your neighbour I’d bet. Or mine. Promotion becomes a key factor as well. But before that,the big question is one of Sourcing:
Where do you get the information and how do you prove it to be unbiased and truthful?
The other top points on the Propaganda Model made by Herman and Chomsky would also need to be addressed:
Funding and Ownership.
The information portal (if that’s what it is to be) would have to be independent of busines influence and funding sources. That’s kind of the easy bit. The first hard bit is sourcing – not getting the info, but proving it to be the truth against a tide of mass media dis-information. The second hard bit is getting the masses interested and engaged. I figure if you know how the media machine works, particularly the digital one, then you can do that…
One way I can see to do this is to begin slowly – first by simply revealing strategy behind news articles; revealing government strategy for what it is for example while demystifying / translating economic and potitical terminology for the public. The public don’t know what ‘Quantitiative Easing’ is or ‘Debt Deflation’ for that matter and it bores them. A website devoted to telling people why they showed this news article above that and what the President talked about and why – in plain language with an entetaining spin, could be a start. Like the Gruen Transfer but about NEWS. The end goal of this is to get people QUESTIONING THE MOTIVES OF EVERY NEWS ARTICLE THEY READ AND EVERY NEWS STORY THEY SEE. Who wants me to see that or read that? And why? People need to realise that the news isn’t always the news, its an agenda. It’s what someone rich or powerful wants you to hear or see. Once the questioning begins then people will look for hard for answers. A new Movement might be what they find.
digitalchris,
The idea of the information portal sounds good to me.
What about a wikipedia-like model regarding financing and sourcing?
Maybe with a stronger emphasis on a collective control of editors. Something like wikileaks more than crickey.
The only problem is that the news will not be “real time” since the information has to be digested by authors – it will always be second hand. However this is not a problem as long as you are not interested in using this news site to make short-term investments decisions. A good source of independent commentary coming from different angles is very much needed.
If this movement becomes “vertical” to the current political parties and can exercise some rational influence from the near outside of the system then it may make a difference. Otherwise I’m afraid it will be immediately bogged down in horse-trading or will be hijacked by existing interest groups.
Just one more thing – you might not be aware that there is a lot of information about global events which are only marginally mentioned in English-speaking media – even unofficial. So having people speaking multiple languages on board would be a benefit.
For example the sombre tone of Polish media is dramatically different than anything available locally in Australia – even if the crisis is not as bad in Poland as in some other European countries. The funny thing is that I read about events happening in the US in Polish and only then when I know what to look for I can find the original story on an American website.
My French-speaking colleague said exactly the same about the French media. Their tone is absolutely different than what’s available in the “Anglophone” zone.