What a load of Bol­locks

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Two promi­nent eco­nom­ics text­book writ­ers have recently writ­ten that the Global Finan­cial Cri­sis (GFC) shows that the world needs more eco­nom­ics rather than less.

Writ­ing in the New York Times, Gre­gory Mankiw could see some need to mod­ify eco­nom­ics courses a bit in response to the GFC, but over­all he felt that:

Despite the enor­mity of recent events, the prin­ci­ples of eco­nom­ics are largely unchanged. Stu­dents still need to learn about the gains from trade, sup­ply and demand, the effi­ciency prop­er­ties of mar­ket out­comes, and so on. These top­ics will remain the bread-and-but­ter of intro­duc­tory courses.” (That Fresh­man Course Won’t Be Quite the Same, New York Times May 23 2009)

Writ­ing on a blog The East Asia Forum, authors Doug McTag­gart, Christo­pher Find­lay and Michael Parkin wrote that:

The cri­sis has also brought calls for the heads of econ­o­mists for fail­ing to antic­i­pate and avoid it. That idea, too, is wrong: much eco­nomic research pointed to the emerg­ing prob­lem.

More eco­nomic research (and teach­ing), not less, is the best hope of both emerg­ing from the cur­rent cri­sis and of avoid­ing future ones.” (The state of eco­nom­ics, East Asia Forum, May 21 2009)

What a load of bol­locks.

The “prin­ci­ples of eco­nom­ics” that Mankiw cham­pi­ons, and the “More eco­nomic research (and teach­ing)” that McTag­gart et al are call­ing for, are the major rea­son why econ­o­mists in gen­eral were obliv­i­ous to this cri­sis until well after it had bro­ken out.

If they meant “Prin­ci­ples of Hyman Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis”, or “More Post Key­ne­sian and Evo­lu­tion­ary eco­nomic research”, there might be some valid­ity to their claims. But what they really mean is “prin­ci­ples of neo­clas­si­cal eco­nom­ics” and “More neo­clas­si­cal eco­nomic research (and teaching)”–precisely the stuff that led to this cri­sis in the first place.

Neo­clas­si­cal eco­nomic the­ory sup­ported the dereg­u­la­tion of the finan­cial sys­tem that helped set this cri­sis in train. See for exam­ple this New York Times report on the abo­li­tion of the Glass-Stea­gall Act in 1999 “CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS” (New York Times Novem­ber 5th 1999).  The reporter Stephem Laba­ton noted that:

The oppo­nents of the mea­sure gloomily pre­dicted that by unshack­ling banks and enabling them to move more freely into new kinds of finan­cial activ­i­ties, the new law could lead to an eco­nomic cri­sis down the road when the mar­ket­place is no longer grow­ing briskly…

Then he observed that

Sup­port­ers of the leg­is­la­tion rejected those argu­ments. They responded that his­to­ri­ans and econ­o­mists have con­cluded that the Glass-Stea­gall Act was not the cor­rect response to the bank­ing cri­sis because it was the fail­ure of the Fed­eral Reserve in car­ry­ing out mon­e­tary pol­icy, not spec­u­la­tion in the stock mar­ket, that caused the col­lapse of 11,000 banks. If any­thing, the sup­port­ers said, the new law will give finan­cial com­pa­nies the abil­ity to diver­sify and there­fore reduce their risks. The new law, they said, will also give reg­u­la­tors new tools to super­vise shaky insti­tu­tions.

This is a very apt descrip­tion of the role of neo­clas­si­cal econ­o­mists over the last 40 years: every step of the way, they have argued for dereg­u­la­tion of the finan­cial sys­tem. Now we have McTag­gart and col­leagues mak­ing the self-serv­ing claim that:

The cur­rent cri­sis is a fail­ure of reg­u­la­tion that calls for not more reg­u­la­tion, but the right reg­u­la­tion.

So the same eco­nomic the­ory that sup­ported the abo­li­tion of Glass-Stea­gall, amongst many other Depres­sion-inspired con­trols, is sud­denly going to be able to do a volte-face and tell us what “the right reg­u­la­tion” might be? Garbage.

What is really needed is a thor­ough rev­o­lu­tion in eco­nomic thought. First and fore­most this has to be based on empir­i­cal real­ity, and from this per­spec­tive almost every­thing that cur­rent text­books treat as gospel truth will end up in the dust­bin.

Coin­ci­den­tally, many non-neo­clas­si­cal econ­o­mists whose writ­ings have been put into the dust­bin by today’s eco­nom­ics ortho­doxy will be back on the shelves once more. Min­sky, Schum­peter, Keynes, Veblen and Marx don’t rate a men­tion in in most cur­rent eco­nomic text­books; they had bet­ter fea­ture in future texts, or by 2060 or so we’ll be back here again.

Though I’m clearly annoyed at Mankiw’s and McTaggart’s dri­vel, I’m not sur­prised by it–in fact I pre­dicted it (I doubt that they can point to any­thing they wrote prior to the GFC that pre­dicted it!). I said the fol­low­ing in an arti­cle “Mad, bad, and dan­ger­ous to know” pub­lished on March 12 2009 in issue 49 of the Real World Eco­nom­ics Review:

Despite the sever­ity of the cri­sis in the real world, aca­d­e­mic neo­clas­si­cal econ­o­mists will con­tinue to teach from the same text­books in 2009 and 2010 that they used in 2008 and ear­lier…

they will inter­pret the cri­sis as due to poor reg­u­la­tion,…

They will seri­ously believe that the cri­sis calls not for the abo­li­tion of neo­clas­si­cal eco­nom­ics, but for its teach­ings to be more widely known. The very thought that this finan­cial cri­sis should require any change in what they do, let alone neces­si­tate the rejec­tion of neo­clas­si­cal the­ory com­pletely, will strike them as incred­i­ble.

Some­times, I would like to be wrong…

Finally, what les­son did neo­clas­si­cal econ­o­mists take from the Great Depres­sion? That the Fed­eral Reserve caused it via poor eco­nomic pol­icy. Who do cur­rent neo­clas­si­cal econ­o­mists blame for this cri­sis? The Fed­eral Reserve of course, for poor eco­nomic pol­icy: 

By 2007, fuelled by the Fed­eral Reserve’s egre­gious pol­icy errors, mar­kets were mov­ing into unsus­tain­able bub­ble ter­ri­tory. The Fed by this time had real­ized the prob­lem was get­ting out of hand and had moved inter­est rates up sharply—too sharply—and burst the house price bub­ble. (McTag­gart et al).

But who staffs the Fed­eral Reserve? Neo­clas­si­cal econ­o­mists of course…

Please, let’s not fall for this non­sense a sec­ond time. Keynes tried to free us from neo­clas­si­cal eco­nomic think­ing back in the 1930s, only to have neo­clas­si­cal econ­o­mists like John Hicks and Paul Samuel­son evis­cer­ate Keynes’s thought and re-estab­lish a revi­talised neo­clas­si­cal eco­nom­ics after the Depres­sion was over. This time, let’s do it right and get rid of neo­clas­si­cal eco­nom­ics once and for all.

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  • For what its worth, I agree that unfi­nanced deficits (i.e. print­ing money or bor­row­ing direct from the cen­tral bank) are infla­tion­ary. If faced with defla­tion, that is actu­ally the point of it.

  • Tel

    I know in the area I am in (Gold Coast) this is true and not only in the ritzy areas this arti­cle sug­gests. It’s hap­pen­ing across the board. 

    Believe me, I live in the very unritzy sub­urb of Granville in West­ern Syd­ney and prices have gone pre­cisely nowhere in the last 12 months. An old prop­erty (fixer-upper) on a large block was on the mar­ket for about three weeks and now shows a SOLD sign, (ask­ing price was around $450k). Some­one out there has money because that place isn’t fit to rent out, so they obvi­ously bought it in mind to invest fur­ther money into it. I’m guess­ing they bought it mostly for the land, and are not expect­ing a quick return. I won’t be in the least sur­prised to see a block of flats go up 🙂

    In the USA, bit of a dif­fer­ent story… they still have a few years of sub­prime resets to geth through before they even know where the bot­tom is.

  • Tel
    your post is the sen­si­ble face of the argu­ment that aac and steveZ are mak­ing. I don’t think there is any­thing wrong with what you are say­ing, I just won­der­ing whether you realise how extreme the cir­cum­stances are today.

  • Tel

    I just won­der­ing whether you realise how extreme the cir­cum­stances are today. 

    I hear the end of the world is nigh, come to think of it, been hear­ing that for some time. The GFC is a cri­sis of paper shuf­fling, and yeah inno­cent peo­ple get hurt by paper shuf­fling, but only until the rest of us start to wise up and start remem­ber­ing that the finan­cial world fol­lows the phys­i­cal world rather than the other way around. If bankers and econ­o­mists lose cred­i­bil­ity, that will not be a back­ward step for soci­ety.

    To be fair, the USA has had it awfully good for a long time, so a few steps down for them will still leave them above the world aver­age. Amer­i­cans are very clever at rein­vent­ing them­selves so I’m sure they will see the glass as half full even when there are a cracks run­ning down the sides.

  • BrightSpark1

    Tel

    You men­tioned “a very pecu­liar type of spread-spec­trum delay where some par­tic­i­pants react faster than oth­ers, a type of delay that does not exist in any con­trol engi­neer­ing that I know”.

    This is quit com­mon in very high speed elec­tronic feed­back loops (phase lock loop con­trol) and it called the leading/lagging effect. It can be mod­elled it both in com­puter sim­u­la­tion and using phys­i­cal elec­tron­ics. It can be used to intro­duce suf­fi­cient phase change to pre­vent oscila­tion as part of a com­pen­sa­tion net­work. In try­ing to under­stand feed­back in the econ­omy I sus­pect that the neg­a­tive feed­back which is inci­den­tal to secu­ri­ti­sa­tion is just like that but instead of caus­ing sta­bil­ity in this case it has caused insta­bil­ity and trig­gered the cur­rent col­lapse before the effects of non lin­ear­i­ties took over.

    I will still con­tend that with­out this approach which is the only way to analyse the real world in which time in con­tin­u­ally chang­ing, most con­jec­ture will prove fruit­less. Time warp neo­clas­si­cal eco­nom­ics will mainly result in unex­pected con­se­quences and peo­ple know­ing of no-one who is able to pre­dict any­thing. Neo clas­si­cal eco­nom­ics is a waste of (cyber) space.

  • Philip

    … a lot of very intel­li­gent peo­ple have spent a lot of time pro­duc­ing some quite impres­sive math­e­mat­i­cal mod­els in eco­nom­ics. It is a shame that they are utterly irrel­e­vant to real­ity. Iron­i­cally, for a the­ory claims to be so con­cerned about allo­cat­ing scarce resources effi­ciently, eco­nom­ics has used a lot of time and energy refin­ing the analy­ses of economies which have not, do not, and will not ever exist. In other words, scare resources have been inef­fi­ciently allo­cated to pro­duce waste.”

    http://anarchism.pageabode.com/afaq/secC1.html

  • Aac

    rea­son said
    “Stop try­ing to make mat­ters of con­di­tional pol­icy into ques­tions of prin­ci­ple.”

    Stop try­ing to set your­self up as judge, jury and exe­cu­tioner. You made your bed when you sug­gested to “Short aac”. If you think peo­ple come on this blog to have some sort of word game with delu­sional intel­lects then think again. 

    A stated tru­ism with an implied false hood can mean one of two things:

    i) that that per­son does not know, or
    ii) that that per­son does know but have an ulte­rior motive – an agenda

    Some­one like icon­o­clast who seems well versed claims that deficits are an “account­ing arte­fact”. What are peo­ple sup­posed to think; my bet is there­fore that he/she is in the sec­ond camp and it’s impor­tant for peo­ple to know what that agenda is. Indeed delib­er­ate mis­in­for­ma­tion should be shown up for what it is.

  • It sim­ply cred­its the accounts of the banks/etc. from which it buys the secu­ri­ties Aac. As the clear­ing house bank of the sys­tem it has a lim­it­less capac­ity to do so. If you’d like to see the tech­ni­cal­i­ties of the inter­bank mar­ket explained fully then read this the­sis by my Hon­ours stu­dent Liam O’Hara.

  • Ernest

    The mate­r­ial in your hon­ours stu­dent the­sis applies to the U.S., cor­rect?

  • No. It’s based on Aus­tralian prac­tice, but sim­i­lar con­cepts apply in the USA and all other OECD nations .

  • Aac

    Thanks Steve for the link to O’Hara’s the­sis.

    When the RBA buys secu­ri­ties from a bank the secu­ri­ties them­selves are the col­lat­eral. In the case of buy­ing gov secu­ri­ties the back­ing is indeed the tax payer not an “account­ing arte­fact”. In the case of bank notes the bank is the col­lat­eral. In the case of repur­chase agree­ments (repos) the agree­ment is the back­ing – accord­ing to the the­sis 96% of OMO is repos. Thus the RBA extend­ing credit to com­mer­cial banks which in effect is like any other bank except its clients are com­mer­cial banks.

    In the case of the US (and I assume Aus­tralia ) there are strict rules gov­ern­ing what secu­ri­ties can be bought. Were the rule adhered to then it would not be pos­si­ble for the RBA to buy secu­ri­ties if there were no eli­gi­ble secu­ri­ties. These rules how­ever are in recent times being ignored and the Fed is buy­ing toxic assets. I believe Aus­tralia is doing the same but on a smaller scale so far. It is this buy­ing of toxic assets peo­ple should be mad as hell about because it is the tax payer, instead of the banks, that will end up foot­ing the bill. 

    From Wikki http://en.wikipedia.org/wiki/Deficit
    “If investors antic­i­pate future infla­tion, how­ever, they will demand higher inter­est rates on gov­ern­ment debt, mak­ing pub­lic bor­row­ing more expen­sive.”

    This is being played out in real time in the US with the yield on their long bonds going up. With enough QE the Fed would own all of the long dated trea­suries and we get a dol­lar cri­sis. Thus not even the most pow­er­ful nation on earth can ignore its deficit. 

    The choice for the US is whether to have an infla­tion­ary depres­sion or a defla­tion­ary one – deficits do mat­ter. Gold bugs and peo­ple like Max Keiser, Marc Faber, Peter Schiff are lean­ing towards infla­tion – time will tell.

  • icon­o­clast

    I have been some­what occu­pied by other mat­ters delay­ing my retort.

    Aac,

    you assert:

    Let me guess, you have been read­ing ‘open mar­ket oper­a­tion’ from Wikki http://en.wikipedia.org/wiki/Open_market_operations.”

    You’re pre­sump­tion, is true *only* in your exem­plar of the world. 

    The real­ity is that my rea­son­ing is founded on the gems of knowl­edge that have been dis­tilled from read­ing mate­r­ial pub­lished by such authors as:

    Karl Pop­per, Schopen­hauer, Spin­oza, Voltaire, Her­bet Spencer, Friedrich Niet­zsche, Thomas Samuel Kuhn, Clif­ford Geertz, Emmanuel Kant, René Descartes, David Hume,Socrates, Plato, Aris­to­tle, Noam Chom­sky, Mar­tin Hei­deg­ger, John Dewey, W. V. Hum­boldt, Pierre Joseph Proud­hon, G. W. F. Hegel, Karl Marx, Pierre Joseph Proud­hon, Hil­fer­d­ing, Boudin, Adolph Wag­ner, Paul Sweezy, John May­nard Keynes, Irv­ing Fisher, Hyman Min­sky, Joseph Schum­peter, Benoit B. Man­del­brot, Nas­sim Nico­las Taleb, and of course Steve, and through my own DaSein.

    Aac,

    you are exhibit­ing what Thomas Kuhn suc­cinctly cap­tured in the fol­low­ing state­ment:

    What is said in rival par­a­digms is untrans­lat­able and incomen­su­rable in the other par­a­digm”

    — Thomas Kuhn

    and, so Aac,

    Firstly don’t fool your­self because you’re the best per­son at doing that.”

    — (attrib­uted to) Richard Feyn­man

  • icon­o­clast

    Aac,

    you assert:

    You already got 1 point for stat­ing that the gov can cre­ate new money to ser­vice it debt. That is infla­tion­ary. You may think that that’s fine oth­ers would dis­agree.”

    Again, the above con­sists of a non sequitur. More­over, in this case you employ the fal­lacy of false cause, then you pro­ceed to a straw man fal­lacy, and, finally to top it off, with an ad hominem.

    You fail to com­pre­hend, that the mod­ern mon­e­tary sys­tem is based on a fiat cur­rency and not a com­mod­ity cur­rency, and thus the gov­ern­ment does not “print money”. 

    You fail to realise, and com­pre­hend the mean­ing, that the sov­er­eign gov­ern­ment has a monop­oly in the issuance of it’s sov­er­eign cur­rency of a state.

    You fail to realise that the sov­er­eign gov­ern­ment can move into deficit, under the cir­cum­stance that the non-gov­ern­ment sec­tor is not will­ing or able to sus­tain eco­nomic activ­ity at its max­i­mal pro­duc­tive capac­ity, and that a pri­ori fact is a non-infla­tion­ary mea­sure.

    You do not seem to under­stand that fis­cal pol­icy has the prop­erty of being able to allow the gov­ern­ment to tar­get spe­cific areas of the econ­omy and demo­graph­ics in soci­ety that may be affected by eco­nomic con­trac­tion.

    You appear to believe that the gov­ern­ment has no means avail­able to it to drain base money that is injected into the eco­nomic sys­tem.

    You sim­plify the eco­nomic sys­tem down to some­thing that has no resem­blance to what exists in the real­ity.

    You sim­ply fail to think crit­i­cally.

  • icon­o­clast

    Aac,

    you assert:

    You just said that the gov prob­a­bly does not know that it does not have to pay back its debt. You have con­firmed that how I say it works is indeed how it does work. But of course you know bet­ter, bet­ter than every sin­gle gov on the planet.”

    Aac, you really are a glut­ton for pun­ish­ment aren’t you :-).

    Your sub-prime argu­ment, which again is based on so many log­i­cal fal­lac­ies, I don’t know where to begin. Diough, suf­fice to say, it is iron­i­cal that you assert that on this site which attempts to expose the idiocy of the main­stream eco­nomic thought, and the rea­son why peo­ple like Steve Keen, Robert Shiller, Dean Baker, Nouriel Roubini saw what all the other clown econ­o­mists’ did not see, does not seem to con­cern your good self!

    So please tell us that our taxes going up in order to ser­vice the debt or inter­est rates going up in order to ser­vice a loan or infla­tion as in the 80s is just a fig­ment of our imag­i­na­tion. You obvi­ously believe that it ok for CBs/gov’s to inflate money at will. Of course you do know that all of the extra reserves is just sit­ting there.”

    Aac,

    the gov­ern­ment does is *not* required to pay back the deficit, since it is an account­ing arti­fact, the monies spent by the gov­ern­ment *may be required* to be drained out of the econ­omy when the econ­omy recov­ers and com­mences to exhibit infla­tion­ary ten­den­cies. Take note, the above states *may be required*, since this will depend on fac­tors, some of which are not in the hands of the sov­er­eign gov­ern­ment, some of which are:

    1. do the eco­nomic agents revert back to their sec­u­lar sav­ings rate, which appears to be what is hap­pen­ing.

    2. deple­tion of input com­modies, in par­tic­u­lar the energy com­modi­ties, that is a sup­ply side shock, as in the 1970s’ oil shock.

    3. export com­pet­i­tive­ness.

    4. Fis­cal and mon­e­tary poli­cies fol­lowed.

    Tax­a­tion and inter­est rate man­age­ment are the mech­a­nisms avail­able to gov­ern­ment for the pur­pose of drain­ing excess base money when the econ­omy in a state of full employ­ment and is strik­ing the enve­lope of the full pro­duc­tive capac­ity of the econ­omy.

    In addi­tion, tax­a­tion, or rather fis­cal poli­cies to be more com­plete, is also a tool used by gov­ern­ments for rea­sons of social engi­neer­ing. That is it is a mech­a­nism used by gov­ern­ment to alter human behav­iour.

    Since, the neo-lib­eral clowns have dom­i­nated eco­nomic thought and have had the ear of gov­ern­ment, they have per­pet­u­ated fis­cal pol­icy objec­tives that have ensured that the wealth elite through insti­tu­tion­alised cor­po­rate wel­fare have ensured that a larger and larger dis­par­ity exists within soci­ety. That is the elite have skewed the sys­tem, via neo-lib­eral eco­nomic poli­cies, to lay greater and greater claim to the out­put of the eco­nomic sys­tem, forc­ing the mid­dle and low eco­nomic strata of soci­ety to be forced to take on fur­ther and fur­ther debt as an attempt to main­tain their liv­ing stan­dards.

    Aac, know­ing how the dynam­ics of mod­ern mon­e­tary sys­tem actu­ally oper­ates, one can then begin to do some “puz­zle solv­ing”. One can then begin to ascer­tain how the econ­omy will actu­ally respond, to what the neo-clas­si­cal clown econ­o­mists will per­ceive, in their exm­plar of the eco­nomic world, to be the cor­rec­tive course of action, but in real­ity be dis­mal fail­ures.

    You have a lit­tle mechan­i­cal paper knowl­edge of CBs work but you admit that the way they actu­ally work is dif­fer­ent in prac­tice. You then state that gov­ern­ments are fools for not tak­ing the chance to rip peo­ple off. No won­der peo­ple are scream­ing for the gold stan­dard and for the abol­ish­ment of CBs. It would then make non-pro­duc­tive pre­ten­tious peo­ple irrel­e­vant.”

    Aac,

    you really do not seem to be able to keep away from your ad hominem argu­ments, do you?

    Gold, what a joke, that would be a com­plete dis­as­ter.

    Aac,

    I am still wait­ing on the fol­low­ing from you:

    Can you pro­vide evi­dence, as opposed to fac­toids, of your asser­tion that the gov­ern­ment of the PRC has indi­cated this to the USG, and not what some clown in the msm might be pon­tif­i­cat­ing?

    With ref­er­ence to my ques­tion on you’re asser­tion the “2/3 num­ber”, as you put, you state:

    I heard the 2/3 num­ber (bonds going to for­eign­ers) on the ABC Q&A which was not dis­agreed with. Oz, oh that’s short­hand for Aus­tralia, does not pub­lish who it sells bonds to as the US does.”

    Your answer appears to be founded on a rhetor­i­cal device of appeal­ing to a higher author­ity, how­ever, I do not con­sider what is said by some on the ABC Q&A as sound evi­dence.

    I will respond to the other parts of your asser­tions later, gotta go…

  • icon­o­clast

    I have a few more min­utes, so I will expose the next of your fal­lac­ies Aac. You assert:

    I guess also that the spread between cor­po­rate and gov bonds is another unre­al­ity. The logic does not add up. The only way for deficits not to affect cor­po­rate bonds is for banks then loan cor­po­ra­tions money. But that means that the banks deter­mine which com­pa­nies get money which doesn’t.”

    The spread between IG cor­po­rate and gov­ern­ment trea­sury paper is rightly due to the risk pre­mium, not because of this b*s crowd­ing out neo-lib­eral garbage.

  • icon­o­clast

    Next episode.

    Aac, you assert:

    I guess also that the spread between cor­po­rate and gov bonds is another unre­al­ity. The logic does not add up. The only way for deficits not to affect cor­po­rate bonds is for banks then loan cor­po­ra­tions money. But that means that the banks deter­mine which com­pa­nies get money which doesn’t.

    Acc,

    I do not under­stand your logic, please explain how you con­clude the fol­low­ing:

    The only way for deficits not to affect cor­po­rate bonds is for banks then loan cor­po­ra­tions money. But that means that the banks deter­mine which com­pa­nies get money which doesn’t.”

    Again the argu­ment boils down to those who believe in big government/banks and removes the right of the peo­ple to decide who and whom gets money.

    Again, admit your agenda – what is it — are you for more gov­ern­ment or less.”

    Aac,

    the neo-lib­eral ide­ol­ogy and brain­wash­ing has been so effec­tive and so well entrenched that soci­ety, save the elite strata, has bifur­cated into what appears to be two cohorts, these being:

    1. the group of don’t know, don’t care.
    2. the group of care, but don’t think crit­i­cally enough to recog­nise that the wealthy elite are screw­ing us to the hilt and we begin to fight amongst our­selves, rather than ensur­ing that the actual tar­get of our dis­plea­sure is the wealthy elite. I would also say, if you are read­ing this, you are not in the cohort of the wealthy elite.

    Take for exam­ple, the USG bailout of the elites in the bank­ing and finance indus­tries, started by the Bush admin­is­tra­tion and then *per­pet­u­ated* by the Obama admin­is­tra­tion is to re-liquify, and thus save, the wealthy elite fools, with the sup­port of the neo-lib­eral clowns, from their gam­bling for­ays of the recent past, whilst leav­ing the mid­dle class to “eat dust”. 

    In a cap­atilist econ­omy the wealthy elite should now have been wiped out, stock hold­ers, bond hold­ers in these finan­cial insti­tu­tions, they should all be head­ing for the poor house. The gov­ern­ment would only be required to guar­an­tee bank deposits and nation­alise the bank, and that is it.

    The remain­ing eco­nomic agents that are the real entre­pre­neurs, who would sup­plant the fail­ured cohorts, occupy the void that would have been left by these fail­ured thieves, if they were left to wal­low in their own fail­ures.

    Aac, you ask: 

    Again, admit your agenda – what is it — are you for more gov­ern­ment or less.”

    Aac, I am for just gov­ern­ment, that allow a true cap­atal­ist sys­tem under a fiat mod­ern mon­e­tary sys­tem to oper­ate. Cur­rently we do not have this, what we have is a oli­garchic klep­tochracy. I am against unjust enrich­ment, which is exactly what is hap­pen­ing under our noses.

    In short:

    Pol­i­tics is the shadow cast by big busi­ness over soci­ety, and if you do things that atten­u­ate the shadow, you really won’t affect the sub­stance, you won’t really do much.”

    — John Dewey

    The man who gets angry at the right things and with the right peo­ple, and in the right way and at the right time and for the right length of time, is com­mended.”

    — Aris­to­tle (384 BC — 322 BC)

    We need to get really angry, and make sure that these clowns in gov­ern­ment and the wealthy elite do not get away with this.

    The politi­cians and the wealthy elite, which are just the obverse of the same coin, can only get away with this, if the masses remain igno­rant and insist on being obscu­ran­tist of what is hap­pen­ing in the world around them!

    This is what Aris­to­tle stated 2000 plus years ago:

    Where some peo­ple are very wealthy and oth­ers have noth­ing the result will be either extreme democ­racy or absolute oli­garchy, or despo­tism will come from either of those excesses.”

    - Aris­to­tle (384 BC — 322 BC)

    We are being screwed and most of us don’t even know it.

  • Philip

    icon­o­clast,

    It is good to see you are pas­sion­ate, but keep in mind that polit­i­cal and eco­nomic beliefs are sim­i­lar to that of reli­gious beliefs: the right, cen­ter, lib­eral and pro­gres­sive sec­tors are unlikely to con­vince each other that they are cor­rect.

  • icon­o­clast

    Aac, you ask:

    Where does the RBA get the money to buy/sell gov/bank secu­rites in order to defend an inter­est rate tar­get.”

    The gov­ern­ment being the sov­er­eign of the state (poli­tia) is a monop­oly in the issuance of it’s sov­er­eign cur­rency.

    Save the above tru­ism, the impor­tant point to recog­nise is that it is the abil­ity of the gov­ern­ment to inject and drain, that is, cre­ate and destroy base money and thus influ­ence eco­nomic activ­ity by inter­ven­ing when nec­es­sary through fis­cal and mon­e­tary pol­icy to spend money, and thus, pur­chase goods and ser­vices avail­able in the econ­omy.

    As rea­son has sug­gested, the require­ment is to replace debt money with more base money. The only way for this to hap­pen is for the sov­er­eign gov­ern­ment to spend on goods and ser­vices and thus allow exist­ing debt to be extin­guished. How­ever, the issue how will this money be dis­trib­uted to ensure that there is not unjust enrich­ment. Fur­ther­more, the pre­scient point that Steve has made is that the amount of debt in the sys­tem is so great that it is a viable approach, when a Min­sky moment is trig­gered, since the rate of debt destruc­tion is asym­met­ric to that of debt cre­ation. More­over, the rate at which base money is being expanded is insuf­fi­cient to off­set the rate of destruc­tion of debt money.

    Cur­rently, the neo-lib­eral clowns, thought that they could com­bat defla­tion by merely expand­ing base money and thus pre­vent­ing the veloc­ity of money from col­laps­ing, using their the­o­ries based on the quan­tity of money. 

    As Steve has shown they failed to realise that the trans­mis­sion chan­nel, via their frac­tional reserve the­ory of bank­ing and the money mul­ti­plier, is not work­ing, for rea­sons obvi­ous to those who under­stand what is occur­ring.

    Fis­cal pol­icy is the only other alter­na­tive, but this has a time con­stant which is much greater than the time con­stant exhib­ited by the process of debt destruc­tion.

    For us Engi­neers, it’s like hav­ing a tran­sis­tor for­ward biased across the base-emit­ter junc­tion, with­out hav­ing the col­lec­tor-emit­ter appro­pri­ately biased, so even if we inject base cur­rent, we’re not going to get an ampli­fi­ca­tion of col­lec­tor cur­rent, ie, Ic=Hfe.Ib will not occur.

  • icon­o­clast

    Cor­rec­tion to the fol­low­ing:

    Fur­ther­more, the pre­scient point that Steve has made is that the amount of debt in the sys­tem is so great that it is a viable approach, when a Min­sky moment is trig­gered, since the rate of debt destruc­tion is asym­met­ric to that of debt cre­ation. More­over, the rate at which base money is being expanded is insuf­fi­cient to off­set the rate of destruc­tion of debt money.”

    Fur­ther­more, the pre­scient point that Steve has made is that the amount of debt in the sys­tem is so great that it is *not* a viable approach, when a Min­sky moment is trig­gered, since the rate of debt destruc­tion is asym­met­ric to that of debt cre­ation. More­over, the rate at which base money is being expanded is insuf­fi­cient to off­set the rate of destruc­tion of debt money.

  • Icon­o­clast,

    I’m sec­ond­ing Phillip’s com­ment about how you refer to peo­ple with dif­fer­ent polit­i­cal posi­tions to you on this list. I enjoy the fact that dis­cus­sion on this list is gen­er­ally civil, com­pared to what I have wit­nessed on other lists, includ­ing for exam­ple the Mises list where I have been engag­ing in debate recently.

    By all means engage in debate here, but refrain from flour­ishes that are insult­ing to other list mem­bers.

  • icon­o­clast

    Sure Philip, Steve, I accept your point.

    I do get pas­sion­ate, when I lis­ten to the argu­ments put for­ward by politi­cians, who enrich the wealthy, whilst the vul­ner­a­ble demo­graph­ics of soci­ety are being left to twist in the wind.

  • icon­o­clast

    Tel, you state:

    China will merely diver­sify their cus­tomer base, work on some inter­nal infra­struc­ture projects and mildly raise their stan­dard of liv­ing (then gather together for group cussing at those das­tardly Amer­i­cans who don’t keep promises)”

    I would say the Asian devel­op­ment model, based on Asian coun­tries sup­press­ing domes­tic demand, whilst expand­ing their export pro­duc­tion base to achieve and main­tain sig­nif­i­cant cur­rent account sur­pluses is dead. 

    The obverse side of this coin, that is, the cur­rent account deficit coun­tries have now shut down that com­po­nent of the cap­i­tal flow cir­cuit. This will force a sig­nif­i­cant read­just­ment and dent the abil­ity of the cur­rent account sur­plus coun­tries to con­tinue with this model.

    The Chi­nese have pro­duc­tive capac­ity in excess of their domes­tic demand, they will have to go through the painful path of read­just­ing their econ­omy from a heav­ily export ori­ented econ­omy to that of a more bal­anced domestic/export based econ­omy. How­ever, it appears, based on cur­rent anec­do­tal evi­dence (see Michael Pet­tis site, http://mpettis.com/) that the Chi­nese are resist­ing this adjust­ment.

  • icon­o­clast

    Tel you have put for­ward the fol­low­ing to retort my pre­vi­ous argu­ment:

    Just briefly, as a pri­vate cit­i­zen I can eas­ily escape bank­ruptcy. I do the very sim­ple thing of writ­ing I.O.U. on a piece of paper and sign­ing it. I can make an unlim­ited sup­ply of these IOU papers and use them to cover any and all of my debts. EXCEPT, some day might come where some­one does not want my IOU and refuses to take it. I can’t force them to accept it so they turn to the law to demand some­thing bet­ter.

    When a gov­ern­ment prints money (or goes into deficit, or any way you want to shuf­fle it) they are writ­ing IOU on a piece of paper, just the same way I can do as a pri­vate cit­i­zen. The ONLY dif­fer­ence being that gov­ern­ment has the power to force the local cit­i­zens to accept the IOU and local cit­i­zens have no where else to turn for jus­tice.”

    The par­a­digm you have put for­ward, of putting your­self up as an exam­ple to that of a sov­er­eign gov­ern­ment is incon­gru­ous.

    You pre­sume that oth­ers within soci­ety would have a desire to accept your iou, over the alter­na­tive, which is the cur­rency issued by the state. 

    Sec­ondly, the cur­rency issued by the state has a use value, being its abil­ity to be used to extin­guish lia­bil­i­ties brought against eco­nomic agents by the sov­er­eign gov­ern­ment and its agen­cies, that is taxes, fines, levies, rates etc., which only accept the cur­rency of the state as the form of pay­ment, your iou does not.

    The gov­ern­ment has the right to issue cur­rency, but also has the right to drain money from the eco­nomic sys­tem, you do not.

    These lim­i­ta­tions, in which you have also pointed out, makes your argu­ment log­i­cally unsound and thus is an enthymeme argu­ment.

    Our gov­ern­ment does not have the power to force for­eign cit­i­zens to accept their IOU, so for­eign­ers will only accept our cur­rency if and when they believe there is some value in doing so. Money print­ing must ulti­mately cause deval­u­a­tion of the money being printed and then cause infla­tion for the locals.”

    Tel,

    If Aus­tralia con­tin­ues to sup­ply and expand the trad­able goods that it can offer to the global mar­ket, and that these goods con­tinue to be in demand, then it’s cur­rency will main­tain its sta­bil­ity or pos­si­bly even appre­ci­ate. If not then its cur­rency will depre­ci­ate accord­ingly. This is the pur­pose of a float­ing cur­rency exchange sys­tem.

    The read­just­ment of AUD is a pos­si­ble out­come, if Aus­tralia is not able to suc­cess­fully com­pete on a fair basis. The lat­ter, how­ever, is premised on coun­tries that are cur­rency manip­u­la­tors and have poor labor stan­dards be sanc­tioned in a man­ner that is a dis­in­cen­tive for them to con­tinue to do exhibit these ten­den­cies. Empir­i­cal evi­dence, to date, demon­strates that such a mech­a­nism, through the WTO, has been impo­tent.

    As a nation, we could eas­ily default on for­eign loans (regard­less of the denom­i­na­tion), all we need is a decent defense force, and to be will­ing to have peo­ple grum­ble in future (but they will still buy iron, zinc and food). They prob­a­bly won’t lend to us any more.”

    A gov­ern­ment would default on loans to for­eign­ers if it has irre­spon­si­bly bor­rowed in for­eign denom­i­nated cur­rency. The non-gov­ern­ment sec­tor default­ing on for­eign loans is called bank­ruptcy, the cred­i­tor should have been more cau­tious in the first place.

    If foreigner’s lend to us, in excess to us lend­ing to them, then our cap­i­tal account is in sur­plus, which thus infers, our cur­rent account is in deficit. So if they stop lend­ing to us, is actu­ally a really, really good thing, this will force our cur­rent account deficit to begin to fall rather than con­tinue to rise.

    As I’ve said before, I’m buy­ing gold and run­ning a debt with a home loan and I’m 100% sure that the Labor gov­ern­ment and QE money-print­ers will not just bail me out but leave me rea­son­ably well off in the process. Buy hey, by all means knock me off my stool, I dare you… run a giant deficit and show me how it does not result in infla­tion.”

    Tel, good luck mate, you’ll need it. BTW, notice that gold has not been going any­where, and has only been sup­ported by unin­formed ratio­nal fear.

  • icon­o­clast

    Aac, you say:

    When the RBA buys secu­ri­ties from a bank the secu­ri­ties them­selves are the col­lat­eral. In the case of buy­ing gov secu­ri­ties the back­ing is indeed the tax payer not an “account­ing arte­fact”. In the case of bank notes the bank is the col­lat­eral. In the case of repur­chase agree­ments (repos) the agree­ment is the back­ing – accord­ing to the the­sis 96% of OMO is repos. Thus the RBA extend­ing credit to com­mer­cial banks which in effect is like any other bank except its clients are com­mer­cial banks.

    In the case of the US (and I assume Aus­tralia ) there are strict rules gov­ern­ing what secu­ri­ties can be bought. Were the rule adhered to then it would not be pos­si­ble for the RBA to buy secu­ri­ties if there were no eli­gi­ble secu­ri­ties. These rules how­ever are in recent times being ignored and the Fed is buy­ing toxic assets. I believe Aus­tralia is doing the same but on a smaller scale so far. It is this buy­ing of toxic assets peo­ple should be mad as hell about because it is the tax payer, instead of the banks, that will end up foot­ing the bill.”

    Prior to the cur­rent finan­cial calamity, the RBA, the Fed. Reserve, and other cen­tral banks had very strict require­ments, with regards to the col­lat­eral they accepted before for­ward­ing credit to banks that have reserve accounts with their respec­tive cen­tral banks. But recently, the RBA has broad­ened what they con­sider accept­able. The Fed. has cre­ated all man­ner of lines of credit, under TARP, PDCF, TLSF, CPFF, MMIF etc. that are being used to pro­vide liq­uid­ity and to throw a life-line to essen­tially keep these insol­vent finan­cial & banks from col­laps­ing, and sav­ing the stock hold­ers and bond hold­ers from their gam­bling for­ays, and thus essen­tially being able to unjustly lay claim to the future out­put of the eco­nomic sys­tem, which there­fore means that the rest will not have that claim.

    Geit­ner, with his lau­gable stress tests, is attempt­ing to pre­tend that these zom­bies are sol­vent, what a joke!

    Aac you say:

    It is this buy­ing of toxic assets peo­ple should be mad as hell about because it is the tax payer, instead of the banks, that will end up foot­ing the bill.”

    See, in my pre­vi­ous post, what Aris­to­tle has to say about get­ting angry!

  • Aac

    icon­o­clast said
    “the gov­ern­ment does is *not* required to pay back the deficit, since it is an account­ing arti­fact”

    Maybe I’m just a sim­ple­ton but if I bought Aus­tralain gov­ern­ment 2 year bonds and sat on it for 2 years whilst receiv­ing the coupon rate that the gov­ern­ment is within it’s right to not pay the prin­ci­ple. This is the mean­ing I am get­ting from your words — can you con­firm please.