Mish Mashes the WEF

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My com­rade-in-out­rage Mish Shed­lock has also taken a swipe at the World Eco­nomic Forum report More Credit with Fewer Crises, and pointed out a key weak­ness that I omit­ted ref­er­ence to: their inabil­ity to under­stand expo­nen­tial growth.

Mish’s post is here:

World Economic Forum Endorses Fraud; Steve Keen Mocks the WEF Report, So Do I; The Purported “Need to Double Credit in 10 Years”

Mish attacks the report on many fronts, but the one that I’ll high­light here is the fol­low­ing: its state­ment that:

This means that the world’s stock of credit out­paced GDP growth by less than 2 per­cent­age points a year – not a wide mar­gin. In the­ory, there is noth­ing unsus­tain­able about this pic­ture: as long as credit grows broadly in line with eco­nomic growth, the credit is put to good use and bor­row­ers can meet inter­est oblig­a­tions and repay prin­ci­pal.”

The Amer­i­can math­e­mati­cian Andrew Bartlett claims that “The great­est short­com­ing of the human race is our inabil­ity to under­stand the expo­nen­tial func­tion”, to which I’d add that that short­com­ing almost defines neo­clas­si­cal eco­nom­ics. 2 per­cent per annum doesn’t sound like a lot, but over 36 years that means the ratio dou­bles, over 72 it quadru­ples, over 144 it becomes 8 times what it was, and so on.

Mish pro­vides some nice graphs to illus­trate this process:

For the record, the actual rate of growth of the pri­vate US debt to GDP ratio was roughly 2.9% p.a. from 1945 till 2008. That means that the ratio dou­bled every 25 years, from 45% in 1945 to 90% in 1970, 180% in 1995, and if it had kept going, it would have been 360% in 2020.

Instead it fell over in 2008, and is now going back­ward at a rate of knots. Here’s an extrap­o­la­tion of the trend that the WEF says is “noth­ing unsus­tain­able about”, from the time period they should have started their analysis—not 2000 but 1945—and focus­ing on the key problem—private debt:

Noth­ing unsus­tain­able about” it, eh?  This naivety by neo­clas­si­cal econ­o­mists about growth and expo­nen­tial processes in gen­eral is pos­i­tively dan­ger­ous for the human race. I’ll let Mish take over from here.

About Steve Keen

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

    I was just talk­ing about how the banks, after hav­ing pushed up the price of assets every­where they can and hav­ing pushed these “waves” of credit issuance to the max in each of those sec­tors they now get more free money. But what do they do? 

    They have maxxed out “Joe Six Pack” and so now in order to replen­ish their bal­ance sheets and bonuses they use the free money (in huge amounts) to spec­u­late on food and com­modi­ties. Result is some peo­ple get a bit “naffed off”…

    Egypt any­one ?

    http://www.ukwirednews.com/news.php/49796-Egypt-riot-police-break-up-pro-democracy-rally
    Some­one else say­ing some­thing sim­i­lar.

    It is these “forces” which we must model ? (and pub­li­cise)

    And yes I realise it is not just “the banks” that are play­ing this game with this “liq­uid­ity”.

    http://market-ticker.org/akcs-www?post=178559

  • sir­ius

    Missed a link out

    Some­one else say­ing some­thing sim­i­lar.

    http://market-ticker.org/akcs-www?post=178559

  • sir­ius

    The Bernank..
    ””
    “Not all banks needed that TARP. Not all banks would have failed,” Dimon said at the ear­lier ses­sion. “A lot of banks were sta­bi­liz­ing the prob­lem — JP Mor­gan bought Bear Stearns because the U.S. asked us to.”

    How­ever, Fed­eral Reserve Chair­man Ben Bernanke told a U.S. inves­tiga­tive panel last year that the credit cri­sis sur­passed the Great Depres­sion of the 1930s in sever­ity and put 12 of the 13 most impor­tant U.S. finan­cial firms at risk of fail­ure.

    If you look at the firms that came under pres­sure in that period … only one … was not at seri­ous risk of fail­ure,” he said in com­ments dis­closed ear­lier on Thurs­day.

    Even Gold­man Sachs (GS.N), we thought there was a real chance that they would go under,” he said.
    ””

    from that same link
    http://www.reuters.com/article/2011/01/27/us-davos-jpmorgan-idUSTRE70Q5HB20110127?pageNumber=2

    Either the banks are allowed to fail or soci­ety fails. One has to go. Which do you choose ?

  • @ WEF
    “The WEF and the credit rat­ing agen­cies need to start being hon­est, ”

    If you had ever worked for an inter­na­tional agency and such like, you would know that no remarks, reports or state­ments are every made which are hon­est… it just doesn’t hap­pen,

    as for rat­ing agen­cies, I have no expe­ri­ence but like all just organ­i­sa­tions, I would expect that all call­ings are couched and struc­tured to their bot­tom line, a pri­ori. In today’s World, hon­esty has been struck from the dic­tio­nary.

    But, the “spirit of truth” is the one thing that keeps all things bound to opti­mism.

  • @ Derek
    “New tax pro­pos­als don’t nec­es­sar­ily mean more taxes.”

    You must be kid­ding? In Aus­tralia? How­ever I agree with the need for Tax ratio­nal­ity and it is a few hun­dred years more or less over­due. But, so is the ratio­nal­ity of Australia’s whole future and socio-eco­nomic agenda.

    But “lead­er­ship 1”, while on photo-shoots and strug­gling for Prime Press 24/7 cov­er­age with oppo­si­tion, state hot-shots and those unfor­tu­nate ones suf­fer­ing, to dream up a tax levy, on the rise, is a bit too much, espe­cially whilst wal­low­ing in a mag­nif­i­cent oppor­tu­nity to blur recent mem­o­ries of pol­icy and polit­i­cal dis­as­ters at ones own hand and fur­ther com­ing cli­matic upsets which will wrought havoc right across the whole con­ti­nent cum island. A Nation with­out Risk through tax­a­tion?

    It would have been far more worth­while to have placed those errant Insur­ance Com­pa­nies on the mat, and this is and always has been a major prob­lem in Aus­tralia which has never been con­fronted by “lead­er­ship”. Why? This indus­try is too pow­er­ful and emanates from Europe… so, its the cost of being and remain­ing a colony of far more self directed “lead­er­ship”.

    I trust that you real­ize that Aus­tralia is still pay­ing inter­est on the Syd­ney Har­bour Bridge to our colo­nial mas­ters, the UK, and will never stop pay­ing this inter­est until we get some “lead­er­ship” that doesn’t get their orders from a For­eign Power (any For­eign Power it would seem, those that pay well, per­haps).

    If we be hon­est, the Tax Levy for Queens­land will be just another start of a GST gone feral brought about by “lead­er­ship” that have their first pri­or­ity as longevity of hon­est through the job def­i­n­i­tion of a Colo­nial Sec­re­tary super­vised by the res­i­dent Gov­er­nor Gen­eral.

    The level of “lead­er­ship” in Aus­tralia is a dis­grace to man and beast where impromptu tax­a­tion on dulled senses is hier­ar­chi­cally supe­rior to respon­si­ble intel­lec­tual thought and action.

  • We do an Ice­land and pros­e­cute Bankers and Politi­cians despite if they fled Juris­dic­tion. And there appears that there are already a few instances that have been brought up that would merit a good begin­ning.

    I choose: An inde­pen­dent Aus­tralia con­sti­tuted by Laws as a Repub­lic and free of med­dling and manip­u­la­tion and free of Mil­i­tary Occu­pa­tion — by For­eign Pow­ers.

    I choose that we put the all banks imme­di­ately under bank­ruptcy pro­tec­tion, Yes, here in Aus­tralia, restruc­ture the banks and the bank­ing sys­tem, replace man­age­ment and develop ratio­nal­ized Pol­icy to retain a bank­ing sys­tem that serve Aus­tralia forth­with.

    Then, my choice is that nei­ther needs to fail, but, Aus­tralian soci­ety will fail, and soon, unless we do not do this. Believe me, we do not want the IMF here.

  • peck­ster­is­m101

    I’m sorry but that arti­cle is pure techno-opti­mist vapour­ware — there is no exist­ing tech­nol­ogy to store hydro­gen in the den­sity and quan­ti­ties needed for com­mer­i­cal trans­port of any kind. What is crit­i­cal is the high energy con­tent per volume/mass of the petro­leum-derived liq­uid fuels which enable long dis­tance road, air and sea trans­porta­tion.

  • peck­ster­is­m101

    Fur­ther to my pre­vi­ous com­ment, Jacob­son & Deluc­chi state:
    “The remain­ing, non-elec­tric uses can be sup­plied by hydro­gen, which we assume would be com­pressed for use in fuel cells in remain­ing non-avi­a­tion trans­porta­tion, liq­ue­fied and com­busted in avi­a­tion, and com­busted to pro­vide heat directly in the indus­trial sec­tor. The hydro­gen would be pro­duced using
    WWS power to split water; thus, directly or indi­rectly, WWS
    pow­ers the world.” — the key words being “which we assume would be com­pressed.” I do not dis­pute that renew­ables can sup­ply an amount of energy equal or indeed greater than that cur­rently pro­vided by fos­sil fuels. The key issue for heavy trans­porta­tion — and in par­tic­u­lar avi­a­tion and ship­ping — is stor­ing hydro­gen in suf­fi­cient quan­ti­ties — a tech­no­log­i­cal feat merely assumed away in their paper.

  • This is out­side my tech­ni­cal area, but I have friends inside it and they sec­ond Peckster’s com­ments: hydro­gen stor­age is an insur­mount­able prob­lem and bat­tery tech­nol­ogy has a higher poten­tial for energy den­sity and lim­ited energy losses in usage than has hydro­gen.

  • Abused Fun­da­men­tals and Fake Mar­kets:
    Another inter­est­ing and rea­son­ably valid sum­mary of events and, onto ‘The Quiet Rebel­lion”
    http://charleshughsmith.blogspot.com/

  • Tel

    Well when com­modi­ties and food both go up in price, that’s more com­monly known as “infla­tion” and it’s a fairly direct result of recent QE money print­ing being done by US cen­tral bank. Of course, dump­ing waves of cheap credit into the mar­ket also has an infla­tion­ary effect, which once again leads back to the US Fed­eral Reserve.

    Cen­tral bank­ing really is the fun­da­men­tal prob­lem. The solu­tion is small banks, large num­bers of banks, diver­sity, real money based on pre­cious metal, and the polit­i­cal willpower to allow banks to fail now and then, clean­ing up the mess with suit­able bank­ruptcy pro­ceed­ings. In sum­mary: rule of law is good, and the fun­da­men­tal of law is respon­si­bil­ity for one’s actions. Get those basics work­ing again and the prob­lem will go away.

  • Tel

    There’s a per­fectly good way to store hydro­gen — you stick it together with some car­bon. And there’s a per­fectly good place to get the car­bon, from great piles of coal which we are still sit­ting on.

    The process requires heat, but we already have an answer to that one too — it’s called Ura­nium.

    This rather obvi­ous tech­nol­ogy will remain dor­mant until peo­ple finally accept that they can’t think of any­thing bet­ter and they start get­ting hun­gry. Prob­a­bly the Chi­nese will already be well ahead of us by then. *SIGH*.

  • mahaish

    depos­i­tors shouldnt be allowed to fail sir­ius,

    equity and bond hold­ers should suf­fer the con­se­quences.

    tem­po­rary nation­al­i­sa­tion, the only way to go, so we find out just how insol­vent some of those big amer­i­can banks are, espe­cially when it comes to those sec­ond tier mort­gage based deriv­a­tives

  • mahaish

    that’s more com­monly known as “infla­tion” and it’s a fairly direct result of recent QE money print­ing being done by US cen­tral bank. Of course, dump­ing waves of cheap credit into the mar­ket also has an infla­tion­ary effect, which once again leads back to the US Fed­eral Reserve.”

    sorry to quib­ble tel

    but QE does noth­ing of the kind, 

    and thats the prob­lem.

    the yanks would give their right arm for a bit of infla­tion­ary pres­sure,

    QE didnt work in japan and its not going to work in the US

    its basi­cally an assett swap between the fed and the banks. secu­ri­ties for reserves. it can effect domes­tic demand in terms of low­er­ing the yield curve and hence the inter­est bur­den on the econ­omy, but not much else,

    since credit is demand dri­ven not sup­ply dri­ven

    we have to dis­tin­guish between QE mk1 and mk2, since mk1 was about repair­ing the assett base of the bank­ing sys­tem, and the fed mak­ing a liq­uid mar­ket for the bank­ing sys­tem. mk2 was about the yield curve, and reduc­ing inter­est rates across a whole range of finan­cial prod­ucts

    but i do agree with the intent behind whats been said, since QE is one of many ways the cen­tral bank and the gov­ern­ment can put off account­ing for the bank­ing indus­tries sins

  • mahaish

    but i do agree with your point about hav­ing more smaller banks, tel,

    allthought the sav­ings and loans col­lapse in the US , tells us it aint a panacea.

    i always thought a two tierd model of cur­rency cre­ation was the way to go, with good reg­u­la­tion.

    large scale projects should be done by using pure fiat cur­rency. we could still have pri­vate inter­me­di­aries decid­ing resource allo­ca­tion, but the gov­ern­ment pro­vides the fund­ing, hence greater abil­ity to direct national pri­or­i­ties.

    pub­lic /private part­ner­ship enti­ties, finan­cial inter­me­di­aries but not neses­sar­illy large banks

    what the cut offs are we can debate,

    and the sec­ond tier credit based cur­rency sys­tem, small region­ally based banks, lots of them, with lim­ited fran­chise rights, and very tightly reg­u­lated

    the big debate will be about what gov­ern­ment fiat cur­rency should pro­vide for the cit­i­zenry, and what resources pri­vate credit mar­kets should be allowed allo­cate.

    prob­a­bly more holes in it than a slice of swiss cheese, just think­ing out aloud

  • geo­cal

    Steve,

    I’ve been an ardent fol­lower and sup­porter for a long time hav­ing realised some 20 years ago that the eco­nom­ics pro­fes­sion had no real pre­dic­tive power. It was accom­pa­nied by a real­i­sa­tion that some­thing was very wrong in the Syd­ney prop­erty mar­ket as it diverged from earn­ing capac­ity.

    Recently, how­ever, a span­ner was thrown in the works for me when I came across a video called “The Money Mas­ters” (http://www.youtube.com/watch?v=50SmpAAKtQU) which puts a whole new per­spec­tive on the his­tory on the cen­tral bank­ing sys­tem and frac­tional reserves. The impli­ca­tions of the video are enor­mous!

    If its asser­tions are cor­rect then per­haps what you and other econ­o­mists are try­ing to model is not in fact the blun­ders of gov­ern­ments and cen­tral banks but the delib­er­ate actions of the cen­tral banks on behalf of their pri­vate unknown share­hold­ers? Can you please com­ment on its asser­tions. Do they con­tain some fun­da­men­tal flaw?

    Regards,

    geo­cal.

  • sir­ius

    @mahaish
    ”“depos­i­tors shouldnt be allowed to fail sir­ius,

    equity and bond hold­ers should suf­fer the con­se­quences.
    ””
    I never detailed what should hap­pen. Please do not assume that which I have not writ­ten.

    Let me leave you with this thought though…
    ”“A huge per­cent­age of what you thought was “your wealth” was in fact loot­ing. If you were mak­ing mort­gages, for exam­ple, and made $200,000 a few years ago doing it, it’s a near-cer­tainty that half or more of your income was unjustly-earned — whether you did the steal­ing of not.

    Ditto for real estate and many — but not all — other fields
    ””
    http://market-ticker.org/akcs-www?post=174591&page=5

    @peterjbolton
    I think we share much in the way of “wave­lengths”.

    I do not see how things can get bet­ter for the major­ity of the peo­ple on Earth if we sim­ply allow more theft by the “finan­cial class”. Unfor­tu­nately his­tory and human behav­iour tells us that this will con­tinue.

    Expect more riots and not one word in the MSM as to the real rea­sons why things are unfold­ing as they are. (This abil­ity to hide what is a sim­ple process still astounds me).

    I think we are ask­ing the wrong ques­tions.

  • sir­ius


    that’s more com­monly known as “infla­tion”
    ””

    This is an “old chest­nut”. There are many ways to con­jure infla­tion. Using “infla­tion” with­out specifics is used as a hid­ing place for the finan­cial elite and econ­o­mists.

    The word needs to be banned from eco­nom­ics.

  • sir­ius


    real money based on pre­cious metal
    ””
    Mmmmm ?

    We need to define money.

  • sir­ius


    Believe me, we do not want the IMF here.
    ””

    The same peo­ple in a dif­fer­ent suit.

  • sir­ius

    from a link I believe was pre­vi­ously posted here.
    2008 2010
    Bank prof­its 128 bil­lion 367 bil­lion*
    Cor­po­rate prof­its 1.25 tril­lion 1.66 tril­lion*
    Under­em­ployed peo­ple
    21 mil­lion 25.7 mil­lion
    Fore­clo­sures since 2009 — 3.4 mil­lion
    * annu­al­ized from Q3 2010

    A telling sign from what once was a sim­ple par­a­sitic process and the wave of a pen.

    http://blog.littlesis.org/2011/01/10/evidence-of-an-american-plutocracy-the-larry-summers-story/

  • sir­ius

    Egypt wants “democ­racy” ?

    Iraq given “democ­racy”

    Pres­i­dent Obama on TV last night say­ing the Egypt­ian leader should make good on his promises to the peo­ple. Prob­lem Reac­tion Solu­tion. Watch out !!!

    Some telling points here…
    http://market-ticker.org/akcs-www?post=178581

  • @ sir­ius
    “I do not see how things can get bet­ter for the major­ity of the peo­ple on Earth if we sim­ply allow more theft by the “finan­cial class”. Unfor­tu­nately his­tory and human behav­iour tells us that this will con­tinue.”

    I do but it will take more time but it has started. I watch the 1st. Global Rev­o­lu­tion live from Egypt and Tunisia as well as the stir­ring in numer­ous other coun­tries. No, not the same ones doing the same things; their days are done. The future socio-eco­nomic affairs will be shifted dra­mat­i­cally as in major dif­fer­en­ti­a­tion and assisted with a new “eco­nomic-the­ory”.

    I think we are ask­ing the wrong ques­tions.” Indeed, we need to effect a totally new sys­tem founded in sci­ence; not some faith based the­ory that can­not be chal­lenged but a the­ory that will with­stand con­stant hon­est attacks from phi­los­o­phy, math­e­mat­ics, human behav­iours and ‘the spirit of truth’ as well as learned expe­ri­en­tial knowl­edge; tacit knowl­edge.

    For­tu­nately, his­tory and human behav­iour does tell us, that it doesn’t have to con­tinue as the Benank et al, want it to — you just need to know where!

    Do not mis­un­der­stand, this global rev­o­lu­tion will spill blood bot only because, the old guard do not, a pri­ori, want to accept change and hence they will throw every­thing they have in oppo­si­tion, alas, to lit­tle avail except unnec­es­sary death and waste. Such is the ways of fools and morons.

    Rea­son and integrity is the way for­ward — in terms of the sci­ences.

  • With respect but you are think­ing in patches applied to the exist­ing sys­tem.

    Real “lead­er­ship” will bring a tar­get and a vision of 100 more years of build­ing the future backed by solid edu­ca­tion and human rights that per­mit free­dom at every level, what­ever that hap­pens to be. Real “lead­er­ship” will write the human des­tiny and with real “lead­er­ship” the many func­tions of all men will be nat­u­rally fruited to real­iza­tion.

    We have never been so advanced tech­ni­cally nor expe­ri­en­tially; the rest is easy if we can agree embrace respon­si­bil­ity, integrity, com­pas­sion and respect of all things, beliefs and each other.

    Let us reach into the heav­ens with our feet and minds firmly planted in cool delib­er­a­tion.

  • Hi geo­cal,

    I watched a bit of Money Mas­ters some time ago, and to be polite it didn’t exactly excite me. One of the rea­sons I am not a con­spir­acy the­o­rist is that I live amongst and know the peo­ple who are sup­posed to be part of this conspiracy–not Greenspan or Bernanke per­son­ally of course, but the aca­d­e­mic eco­nomic depart­ments from which such ulti­mate lead­ers emerge.

    They all share a delu­sion about how a mar­ket econ­omy works (and how it can be made to work bet­ter), and the lead­ers are nor­mally cho­sen because they’re more delu­sional than the fol­low­ers, not less.

    A fun­da­men­tal pre­req­ui­site for a suc­cess­ful con­spir­acy is that you have to know what you are doing, and what its myr­iad indi­rect con­se­quences will be. These peo­ple don’t have a clue about either.