Dude! Where’s My Recov­ery?

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I ini­tially planned to call this post “Eco­nomic Growth, Asset Mar­kets and the Credit Accel­er­a­tor”, but recent neg­a­tive data out of Amer­ica makes me think that this title is more in line with con­ver­sa­tions cur­rently tak­ing place in the White House.

(Click here for this post in PDF)

Accord­ing to the NBER, the “Great Reces­sion” is now two years behind us, but the recov­ery that nor­mally fol­lows a reces­sion has not occurred. While growth did rise for a while, it has been anaemic com­pared to the norm after a reces­sion, and it is already trend­ing down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be sub­stan­tially higher than this to make seri­ous inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trend­ing down.

Fig­ure 1

Unem­ploy­ment is there­fore ris­ing once more, and with it, Obama’s chances of re-elec­tion are rapidly fad­ing.

Fig­ure 2

Obama was assured by his advi­sors that this wouldn’t hap­pen. Right from the first Eco­nomic Report of the Pres­i­dent that he received from Bush’s out­go­ing Chair­man of the Coun­cil of Eco­nomic Advis­ers Ed Lazear in Jan­u­ary 2009, he was assured that “the deeper the down­turn, the stronger the recov­ery”. On the basis of the regres­sion shown in Chart 1–9 of that report (on page 54), I am sure that Obama was told that real growth would prob­a­bly exceed 5 per cent per annum—because this is what Ed Lazear told me after my ses­sion at the Aus­tralian Con­fer­ence of Econ­o­mists in Sep­tem­ber 2009.

Fig­ure 3

I dis­puted this analy­sis then (see “In the Dark on Cause and Effect, Debt­watch Octo­ber 2009”), and events have cer­tainly borne out my analy­sis rather than the con­ven­tional wis­dom. To give an idea of how wrong this guid­ance was, the peak to trough decline in the Great Recession—the x-axis in Lazear’s Chart—was over 6 per­cent. His regres­sion equa­tion there­fore pre­dicted that GDP growth in the 2 years after the reces­sion ended would have been over 12 per­cent. If this equa­tion had born fruit, US Real GDP would be $14.37 tril­lion in June 2011, ver­sus the recorded $13.44 tril­lion in March 2011.

Fig­ure 4

So why has the con­ven­tional wis­dom been so wrong? Largely because it has ignored the role of pri­vate debt—which brings me back to my orig­i­nal title.


Economic Growth, Asset Markets and the Credit Accelerator


Neo­clas­si­cal econ­o­mists ignore the level of pri­vate debt, on the basis of the a pri­ori argu­ment that “one man’s lia­bil­ity is another man’s asset”, so that the aggre­gate level of debt has no macro­eco­nomic impact. They rea­son that the increase in the debtor’s spend­ing power is off­set by the fall in the lender’s spend­ing power, and there is there­fore no change to aggre­gate demand.

Lest it be said that I’m par­o­dy­ing neo­clas­si­cal eco­nom­ics, or rely­ing on what lesser lights believe when the lead­ers of the pro­fes­sion know bet­ter, here are two appo­site quotes from Ben Bernanke and Paul Krug­man.

Bernanke in his Essays on the Great Depres­sion, explain­ing why neo­clas­si­cal econ­o­mists didn’t take Fisher’s Debt Defla­tion The­ory of Great Depres­sions (Irv­ing Fisher, 1933) seri­ously:

Fisher’s idea was less influ­en­tial in aca­d­e­mic cir­cles, though, because of the coun­ter­ar­gu­ment that debt-defla­tion rep­re­sented no more than a redis­tri­b­u­tion from one group (debtors) to another (cred­i­tors). Absent implau­si­bly large dif­fer­ences in mar­ginal spend­ing propen­si­ties among the groups, it was sug­gested, pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-eco­nomic effects… (Ben S. Bernanke, 2000, p. 24)

Krug­man in his most recent draft aca­d­e­mic paper on the cri­sis:

Given both the promi­nence of debt in pop­u­lar dis­cus­sion of our cur­rent eco­nomic dif­fi­cul­ties and the long tra­di­tion of invok­ing debt as a key fac­tor in major eco­nomic con­trac­tions, one might have expected debt to be at the heart of most main­stream macro­eco­nomic models—especially the analy­sis of mon­e­tary and fis­cal pol­icy. Per­haps some­what sur­pris­ingly, how­ever, it is quite com­mon to abstract alto­gether from this fea­ture of the econ­omy. Even econ­o­mists try­ing to ana­lyze the prob­lems of mon­e­tary and fis­cal pol­icy at the zero lower bound—and yes, that includes the authors—have often adopted rep­re­sen­ta­tive-agent mod­els in which every­one is alike, and in which the shock that pushes the econ­omy into a sit­u­a­tion in which even a zero inter­est rate isn’t low enough takes the form of a shift in everyone’s pref­er­ences…

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all level of debt makes no dif­fer­ence to aggre­gate net worth — one person’s lia­bil­ity is another person’s asset. (Paul Krug­man and Gauti B. Eggerts­son, 2010, pp. 2–3; empha­sis added)

They are pro­foundly wrong on this point because neo­clas­si­cal econ­o­mists do not under­stand how money is cre­ated by the pri­vate bank­ing system—despite decades of empir­i­cal research to the con­trary, they con­tinue to cling to the text­book vision of banks as mere inter­me­di­aries between savers and bor­row­ers.

This is bizarre, since as long as 4 decades ago, the actual sit­u­a­tion was put very sim­ply by the then Senior Vice Pres­i­dent, Fed­eral Reserve Bank of New York, Alan Holmes. Holmes explained why the then fad­dish Mon­e­tarist pol­icy of con­trol­ling infla­tion by con­trol­ling the growth of Base Money had failed, say­ing that it suf­fered from “a naive assump­tion” that:

the bank­ing sys­tem only expands loans after the [Fed­eral Reserve] Sys­tem (or mar­ket fac­tors) have put reserves in the bank­ing sys­tem. In the real world, banks extend credit, cre­at­ing deposits in the process, and look for the reserves later. The ques­tion then becomes one of whether and how the Fed­eral Reserve will accom­mo­date the demand for reserves. In the very short run, the Fed­eral Reserve has lit­tle or no choice about accom­mo­dat­ing that demand; over time, its influ­ence can obvi­ously be felt. (Alan R. Holmes, 1969, p. 73; empha­sis added)

The empir­i­cal fact that “loans cre­ate deposits” means that the change in the level of pri­vate debt is matched by a change in the level of money, which boosts aggre­gate demand. The level of pri­vate debt there­fore can­not be ignored—and the fact that neo­clas­si­cal econ­o­mists did ignore it (and, with the likes of Greenspan run­ning the Fed, actively pro­moted its growth) is why this is no “gar­den vari­ety” down­turn.

In all the post-WWII reces­sions on which Lazear’s regres­sion was based, the down­turn ended when the growth of pri­vate debt turned pos­i­tive again and boosted aggre­gate demand. This of itself is not a bad thing: as Schum­peter argued decades ago, in a well-func­tion­ing cap­i­tal­ist sys­tem, the main recip­i­ents of credit are entre­pre­neurs who have an idea, but not the money needed to put it into action:

[I]n so far as credit can­not be given out of the results of past enter­prise … it can only con­sist of credit means of pay­ment cre­ated ad hoc, which can be backed nei­ther by money in the strict sense nor by prod­ucts already in exis­tence…

It pro­vides us with the con­nec­tion between lend­ing and credit means of pay­ment, and leads us to what I regard as the nature of the credit phe­nom­e­non… credit is essen­tially the cre­ation of pur­chas­ing power for the pur­pose of trans­fer­ring it to the entre­pre­neur, but not sim­ply the trans­fer of exist­ing pur­chas­ing power.” (Joseph Alois Schum­peter, 1934, pp. 106–107)

It becomes a bad thing when this addi­tional credit goes, not to entre­pre­neurs, but to Ponzi mer­chants in the finance sec­tor, who use it not to inno­vate or add to pro­duc­tive capac­ity, but to gam­ble on asset prices. This adds to debt lev­els with­out adding to the economy’s capac­ity to ser­vice them, lead­ing to a blowout in the ratio of pri­vate debt to GDP. Ulti­mately, this process leads to a cri­sis like the one we are now in, where so much debt has been taken on that the growth of debt comes to an end. The econ­omy then enters not a reces­sion, but a Depres­sion.

For a while though, it looked like a recov­ery was afoot: growth did rebound from the depths of the Great Reces­sion, and very quickly com­pared to the Great Depres­sion (though slowly when com­pared to Post-WWII reces­sions).

Clearly the scale of gov­ern­ment spend­ing, and the enor­mous increase in Base Money by Bernanke, had some impact—but nowhere near as much as they were hop­ing for. How­ever the main fac­tor that caused the brief recovery—and will also cause the dreaded “dou­ble dip”—is the Credit Accel­er­a­tor.

I’ve pre­vi­ously called this the “Credit Impulse” (using the name bestowed by Michael Biggs et al., 2010), but I think “Credit Accel­er­a­tor” is both move evoca­tive and more accu­rate. The Credit Accel­er­a­tor at any point in time is the change in the change in debt over pre­vi­ous year, divided by the GDP fig­ure for that point in time. From first prin­ci­ples, here is why it mat­ters.

Firstly, and con­trary to the neo­clas­si­cal model, a cap­i­tal­ist econ­omy is char­ac­ter­ized by excess sup­ply at vir­tu­ally all times: there is nor­mally excess labor and excess pro­duc­tive capac­ity, even dur­ing booms. This is not per se a bad thing but merely an inher­ent char­ac­ter­is­tic of capitalism—and it is one of the rea­sons that cap­i­tal­ist economies gen­er­ate a much higher rate of inno­va­tion than did social­ist economies (Janos Kor­nai, 1980). The main con­straint fac­ing cap­i­tal­ist economies is there­fore not sup­ply, but demand.

Sec­ondly, all demand is mon­e­tary, and there are two sources of money: incomes, and the change in debt. The sec­ond fac­tor is ignored by neo­clas­si­cal eco­nom­ics, but is vital to under­stand­ing a cap­i­tal­ist econ­omy. Aggre­gate demand is there­fore equal to Aggre­gate Sup­ply plus the change in debt.

Thirdly, this Aggre­gate Demand is expended not merely on new goods and ser­vices, but also on net sales of exist­ing assets. Wal­ras’ Law, that main­stay of neo­clas­si­cal eco­nom­ics, is thus false in a credit-based economy—which hap­pens to be the type of econ­omy in which we live. Its replace­ment is the fol­low­ing expres­sion, where the left hand is mon­e­tary demand and the right hand is the mon­e­tary value of pro­duc­tion and asset sales:

Income + Change in Debt = Out­put + Net Asset Sales;

In sym­bols (where I’m using an arrow to indi­cate the direc­tion of cau­sa­tion rather than an equals sign), this is:


This means that it is impos­si­ble to sep­a­rate the study of “Finance”—largely, the behav­iour of asset markets—from the study of macro­eco­nom­ics. Income and new credit are expended on both newly pro­duced goods and ser­vices, and the two are as entwined as a scram­bled egg.

Net Asset Sales can be bro­ken down into three com­po­nents:

  • The asset price Level; times
  • The frac­tion of assets sold; times
  • The quan­tity of assets

Putting this in sym­bols:


That cov­ers the lev­els of aggre­gate demand, aggre­gate sup­ply and net asset sales. To con­sider eco­nomic growth—and asset price change—we have to look at the rate of change. That leads to the expres­sion:


There­fore the rate of change of asset prices is related to the accel­er­a­tion of debt. It’s not the only fac­tor obviously—change in incomes is also a fac­tor, and as Schum­peter argued, there will be a link between accel­er­at­ing debt and ris­ing income if that debt is used to finance entre­pre­neur­ial activ­ity. Our great mis­for­tune is that accel­er­at­ing debt hasn’t been pri­mar­ily used for that pur­pose, but has instead financed asset price bub­bles.

There isn’t a one-to-one link between accel­er­at­ing debt and asset price rises: some of the bor­rowed money dri­ves up pro­duc­tion (think SUVs dur­ing the boom), con­sumer prices, the frac­tion of exist­ing assets sold, and the pro­duc­tion of new assets (think McMan­sions dur­ing the boom). But the more the econ­omy becomes a dis­guised Ponzi Scheme, the more the accel­er­a­tion of debt turns up in ris­ing asset prices.

As Schumpeter’s analy­sis shows, accel­er­at­ing debt should lead change in out­put in a well-func­tion­ing econ­omy; we unfor­tu­nately live in a Ponzi econ­omy where accel­er­at­ing debt leads to asset price bub­bles.

In a well-func­tion­ing econ­omy, peri­ods of accel­er­a­tion of debt would be fol­lowed by peri­ods of decel­er­a­tion, so that the ratio of debt to GDP cycled but did not rise over time. In a Ponzi econ­omy, the accel­er­a­tion of debt remains pos­i­tive most of the time, lead­ing not merely to cycles in the debt to GDP ratio, but a sec­u­lar trend towards ris­ing debt. When that trend exhausts itself, a Depres­sion ensues—which is where we are now. Delever­ag­ing replaces ris­ing debt, the debt to GDP ratio falls, and debt starts to reduce aggre­gate demand rather than increase it as hap­pens dur­ing a boom.

Even in that sit­u­a­tion, how­ever, the accel­er­a­tion of debt can still give the econ­omy a tem­po­rary boost—as Biggs, Meyer and Pick pointed out. A slow­down in the rate of decline of debt means that debt is accel­er­at­ing: there­fore even when aggre­gate pri­vate debt is falling—as it has since 2009—a slow­down in that rate of decline can give the econ­omy a boost.

That’s the major fac­tor that gen­er­ated the appar­ent recov­ery from the Great Reces­sion: a slow­down in the rate of decline of pri­vate debt gave the econ­omy a tem­po­rary boost. The same force caused the appar­ent boom of the Great Mod­er­a­tion: it wasn’t “improved mon­e­tary pol­icy” that caused the Great Mod­er­a­tion, as Bernanke once argued (Ben S. Bernanke, 2004), but bad mon­e­tary pol­icy that wrongly ignored the impact of ris­ing pri­vate debt upon the econ­omy.

Fig­ure 5

The fac­tor that makes the recent recov­ery phase dif­fer­ent to all pre­vi­ous ones—save the Great Depres­sion itself—is that this strong boost from the Credit Accel­er­a­tor has occurred while the change in pri­vate debt is still mas­sively neg­a­tive. I return to this point later when con­sid­er­ing why the recov­ery is now peter­ing out.

The last 20 years of eco­nomic data shows the impact that the Credit Accel­er­a­tor has on the econ­omy. The recent recov­ery in unem­ploy­ment was largely caused by the dra­matic rever­sal of the Credit Accelerator—from strongly neg­a­tive to strongly positive—since late 2009:

Fig­ure 6

The Credit Accel­er­a­tor also caused the tem­po­rary recov­ery in house prices:

Fig­ure 7

And it was the pri­mary fac­tor dri­ving the Bear Mar­ket rally in the stock mar­ket:

Fig­ure 8


Leads and Lags


I use the change in the change in debt over a year because the monthly and quar­terly data is sim­ply too volatile; the annual change data smooths out much of the noise. Con­se­quently the data shown for change in unem­ploy­ment, house prices and the stock mar­ket are also for the change the pre­vi­ous year.

How­ever the change in the change in debt oper­ates can impact rapidly on some markets—notably the Stock Mar­ket. So though the cor­re­la­tions in the above graphs are already high, they are higher still when we con­sider the causal role of the debt accel­er­a­tor in chang­ing the level of aggre­gate demand by lag­ging the data.

This shows that the annual Credit Accel­er­a­tor leads annual changes in unem­ploy­ment by roughly 5 months, and its max­i­mum cor­re­la­tion is a stag­ger­ing –0.85 (neg­a­tive because an accel­er­a­tion in debt causes a fall in unem­ploy­ment by boost­ing aggre­gate demand, while a decel­er­a­tion in debt causes a rise in unem­ploy­ment by reduc­ing aggre­gate demand).

Fig­ure 9

The cor­re­la­tion between the annual Credit Accel­er­a­tor and annual change in real house prices peaks at about 0.7 roughly 9 months ahead:

Fig­ure 10

And the Stock Mar­ket is also a crea­ture of the Credit Impulse, where the lead is about 10 months and the cor­re­la­tion peaks at just under 0.6:

Fig­ure 11

The causal rela­tion­ship between the accel­er­a­tion of debt and change in stock prices is more obvi­ous when the 10 month lag is taken into account:

Fig­ure 12

These cor­re­la­tions, which con­firm the causal argu­ment made between the accel­er­a­tion of debt and the change in asset prices, expose the dan­ger­ous pos­i­tive feed­back loop in which the econ­omy has been trapped. This is sim­i­lar to what George Soros calls a reflex­ive process: we bor­row money to gam­ble on ris­ing asset prices, and the accel­er­a­tion of debt causes asset prices to rise.

This is the basis of a Ponzi Scheme, and it is also why the Scheme must even­tu­ally fail. Because it relies not merely on grow­ing debt, but accel­er­at­ing debt, ulti­mately that accel­er­a­tion must end—because oth­er­wise debt would become infi­nite. When the accel­er­a­tion of debt ceases, asset prices col­lapse.

The annual Credit Accel­er­a­tor is still very strong right now—so why is unem­ploy­ment ris­ing and both hous­ing and stocks falling? Here we have to look at the more recent quar­terly changes in the Credit Accelerator—even though there is too much noise in the data to use it as a decent indi­ca­tor (the quar­terly lev­els show in Fig­ure 13 are from month to month—so that the bar for March 2011 indi­cates the accel­er­a­tion of debt between Jan­u­ary and March 2011). It’s appar­ent that the strong accel­er­a­tion of debt in mid to late 2010 is peter­ing out. Another quar­ter of that low a rate of accel­er­a­tion in debt—or a return to more deceleration—will drive the annual Credit Accel­er­a­tor down or even neg­a­tive again. The lead between the annual Credit Accel­er­a­tor and the annu­al­ized rates of change of unem­ploy­ment and asset prices means that this dimin­ished stim­u­lus from accel­er­at­ing debt is turn­ing up in the data now.

Fig­ure 13

This ten­dency for the Credit Accel­er­a­tor to turn neg­a­tive after a brief bout of being pos­i­tive is likely to be with us for some time. In a well-func­tion­ing econ­omy, the Credit Accel­er­a­tor would fluc­tu­ate around slightly above zero. It would be above zero when a Schum­peter­ian boom was in progress, below dur­ing a slump, and tend to exceed zero slightly over time because pos­i­tive credit growth is needed to sus­tain eco­nomic growth. This would result in a pri­vate debt to GDP level that fluc­tu­ated around a pos­i­tive level, as out­put grew cycli­cally in pro­por­tion to the ris­ing debt.

Instead, it has been kept pos­i­tive over an unprece­dented period by a Ponzi-ori­ented finan­cial sec­tor, which was allowed to get away with it by naïve neo­clas­si­cal econ­o­mists in posi­tions of author­ity. The con­se­quence was a sec­u­lar ten­dency for the debt to GDP ratio to rise. This was the dan­ger Min­sky tried to raise aware­ness of in his Finan­cial Insta­bil­ity Hypoth­e­sis (Hyman P. Min­sky, 1972)—which neo­clas­si­cal econ­o­mists like Bernanke ignored.

The false pros­per­ity this accel­er­at­ing debt caused led to the fan­tasy of “The Great Mod­er­a­tion” tak­ing hold amongst neo­clas­si­cal econ­o­mists. Ulti­mately, in 2008, this fan­tasy came crash­ing down when the impos­si­bil­ity of main­tain­ing a pos­i­tive accel­er­a­tion in debt for­ever hit—and the Great Reces­sion began.

Fig­ure 14

From now on, unless we do the sen­si­ble thing of abol­ish­ing debt that should never have been cre­ated in the first place, we are likely to be sub­ject to wild gyra­tions in the Credit Accel­er­a­tor, and a gen­eral ten­dency for it to be neg­a­tive rather than pos­i­tive. With debt still at lev­els that dwarf pre­vi­ous spec­u­la­tive peaks, the pos­i­tive feed­back between accel­er­at­ing debt and ris­ing asset prices can only last for a short time, since it if were to per­sist, debt lev­els would ulti­mately have to rise once more. Instead, what is likely to hap­pen is a a period of strong accel­er­a­tion in debt (caused by a slow­down in the rate of decline of debt) and ris­ing asset prices—followed by a decline in the accel­er­a­tion as the veloc­ity of debt approaches zero.

Fig­ure 15

Here Soros’s reflex­iv­ity starts to work in reverse. With the Credit Accel­er­a­tor going into reverse, asset prices plunge—which fur­ther reduces the public’s will­ing­ness to take on debt, which causes asset prices to fall even fur­ther.

The process even­tu­ally exhausts itself as the debt to GDP ratio falls. But given that the cur­rent pri­vate debt level is per­haps 170% of GDP above where it should be (the level that finances entre­pre­neur­ial invest­ment rather than Ponzi Schemes), the end game here will be many years in the future. The only sure road to recov­ery is debt abolition—but that will require defeat­ing the polit­i­cal power of the finance sec­tor, and end­ing the influ­ence of neo­clas­si­cal econ­o­mists on eco­nomic pol­icy. That day is still a long way off.

Fig­ure 16

Bernanke, Ben S. 2000. Essays on the Great Depres­sion. Prince­ton: Prince­ton Uni­ver­sity Press.

____. 2004. “The Great Mod­er­a­tion: Remarks by Gov­er­nor Ben S. Bernanke at the Meet­ings of the East­ern Eco­nomic Asso­ci­a­tion, Wash­ing­ton, Dc Feb­ru­ary 20, 2004,” East­ern Eco­nomic Asso­ci­a­tion. Wash­ing­ton, DC: Fed­eral Reserve Board,

Biggs, Michael; Thomas Mayer and Andreas Pick. 2010. “Credit and Eco­nomic Recov­ery: Demys­ti­fy­ing Phoenix Mir­a­cles.” SSRN eLi­brary.

Fisher, Irv­ing. 1933. “The Debt-Defla­tion The­ory of Great Depres­sions.” Econo­met­rica, 1(4), 337–57.

Holmes, Alan R. 1969. “Oper­a­tional Con­straints on the Sta­bi­liza­tion of Money Sup­ply Growth,” F. E. Mor­ris, Con­trol­ling Mon­e­tary Aggre­gates. Nan­tucket Island: The Fed­eral Reserve Bank of Boston, 65–77.

Kor­nai, Janos. 1980. “‘Hard’ and ‘Soft’ Bud­get Con­straint.” Acta Oeco­nom­ica, 25(3–4), 231–45.

Krug­man, Paul and Gauti B. Eggerts­son. 2010. “Debt, Delever­ag­ing, and the Liq­uid­ity Trap: A Fisher-Min­sky-Koo Approach [2nd Draft 2/14/2011],” New York: Fed­eral Reserve Bank of New York & Prince­ton Uni­ver­sity,

Min­sky, Hyman P. 1972. “Finan­cial Insta­bil­ity Revis­ited: The Eco­nom­ics of Dis­as­ter,” Board of Gov­er­nors of the Fed­eral Reserve Sys­tem, Reap­praisal of the Fed­eral Reserve Dis­count Mech­a­nism. Wash­ing­ton, D.C.: Board of Gov­er­nors of the Fed­eral Reserve Sys­tem,

Schum­peter, Joseph Alois. 1934. The The­ory of Eco­nomic Devel­op­ment : An Inquiry into Prof­its, Cap­i­tal, Credit, Inter­est and the Busi­ness Cycle. Cam­bridge, Mass­a­chu­setts: Har­vard Uni­ver­sity Press.



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 June 25, 2011 at 11:42 pm | #
    “I would be (espe­cially) wary of Bill Still’s motives and direc­tion (and “con­sider” Den­ninger care­fully).
    They want to return to what ? ”

    The func­tion of con­scious­ness is to acquire knowl­edge through a process of ulti­mate integrity (we crudely emu­late this process and call it sci­ence), which is the power of the divi­sion of all phe­nom­ena, from Unity to mul­ti­plic­ity.

    Con­scious­ness is a Uni­ver­sal tech­nol­ogy as well as an Uni­ver­sal strat­egy. Man has a sim­i­lar power which is ‘nega­tion’ (which but few uti­lize).

    My point is as fol­lows: There are gems of knowl­edge revealed by all (read: many) men, mainly by acci­dent, and it is these gems that we must seek for our own evo­ca­tion. No man holds per­fect knowl­edge or com­plete knowl­edge and the term “expert” was intro­duced, as was the term “excel­lence”, to mis­in­form and to mis­di­rect, as Ver­bal fraud, which has become Pol­icy.

    Still has some delight­ful lit­tle dit­ties, as does Den­ninger, but I would not even like to get to close, let along fol­low them any­where. But both can be relied upon to ‘divide’ the phe­nom­ena and syn­the­size their find­ings rather clearly and well, never mind the bias.

    Den­ninger appears to be a Con­sti­tu­tional Repub­li­can who is very pro the USA state of the Repub­lic and of this, is his entrenched atti­tude of — ‘USA or noth­ing’. He cer­tainly doesn’t have much of a world-view. But he epit­o­mizes the US trend of war-war­mon­ger­ing, a pri­ori, in order to project and pro­tect US com­mer­cial inter­ests — any­where and every­where — that is to say, the Uni­verse belongs to the USA, first and fore­most.

    And, do not expect the USA to slow their aggres­sive means and ways as they are ded­i­cated, intel­li­gent, cun­ning and the ulti­mate mil­i­tary power on the planet. That they have lit­tle intel­lect, integrity, hon­our and courage in those dri­vers of the ranks, has lit­tle con­se­quence. This is the biggest, bad­dest dog on the Planet. I have known many won­der­ful Amer­i­cans and have a few won­der­ful friends still left alive today and there are some real peo­ple still, in the USA.

    But, the USA have reached their socio-eco­nomic thresh­old, imo. They have no sin­cer­ity or humil­ity and lit­tle integrity: they lie; they steal, they kill, they mur­der, the eagerly com­mit geno­cide and they have no com­pas­sion, even for there own peo­ple. US Lead­er­ship appears to be com­prised now of pri­mar­ily Psychopath’s and sup­ported in the main by, bought and paid for grov­el­ling ghouls and cock­roaches, — at least, these are the attrib­utes and behav­iourism that they are reflecting(they are always and every­where found in the tents of the camp-fol­low­ers like mag­gots on dead meat). I speak of the gen­eral main­stream thrust that holds, dri­ves and sup­ports the Power-base of US Lead­er­ship.

    The World has seen this before but to see the USA go the way of Nazi Ger­many is a real eye opener that val­i­dates v. Hayek and oth­ers. One sin­gle stream of human­ity has cap­tured the whole econ­omy and this is what is now crum­bling, as it is now become inces­tu­ous; rot­ten and can­cer­ous. And when you have such a can­cer in your heart, one is well advised to pre­pare to seek your Maker.

    US now acts out the pains and throes of death in the bio­log­i­cal state of “extremis”. The fungi can­dida, metaphor­i­cally speak­ing, that holds and cements the US pop­u­la­tion is dying. And, soon. 

    Let the dead bury the dead.

  • mahaish

    ” The state­ment that the IMF is sug­gest­ing that the US increase the debt ceil­ing to pro­mote growth is such an obvi­ous straw man argu­ment, the US is on the brink of default, growth is a sec­ondary con­cern at the moment’

    as much as hate to say it, the IMF are right on this titint,

    and its of fun­da­men­tal impor­tance,

    any­way the debt ceil­ing is based on faulty neo con eco­nomic think­ing,

    that some­how cre­at­ing cur­rency with­out an attached debt oblig­a­tion in the form of a trea­sury secu­rity is highly infla­tion­ary, and that we run the risk of debt mon­eti­sa­tion oth­er­wise.

    well they are wrong,


    1 trea­sury secu­ri­ties are a proxy for the cur­rency, with only mar­gin­ally less liq­uid­ity than actual cur­rency, plus they can be cola­toralised and lever­aged

    so in terms of the spend­ing power they gen­er­ate, its highly debat­able if issu­ing trea­sury debt is any less infla­tion­ary than pure cur­rency cre­ation, given there power to cre­ate credit cur­rency any­way.

    2 and most funada­men­tally, we do not oper­ate in a world where there is a loan­able fund. bond sales are a liq­uid­ity swap between the cen­tral bank and non bank pri­vate sec­tor, where it is assummed by the loan­able fund apol­o­gists, that the removal of liq­uid­ity in the mar­lket place to bal­ance out the gov­ern­ment deficit, is going to be a check on infla­tion. because it removes more liq­uid sav­ings from the invest­ment pool.

    well , invest­ment cre­ates sav­ings, and loans cre­ate deposits, so whether we have infla­tion for any given level of the gov­ern­ment deficit or debt will depend on the inveestment and sav­ings desires of the pri­vate sec­tor, and that is dri­ven by their bal­ance sheet.

    and since we live in credit dri­ven econ­omy, credit is demand dri­ven , not sup­ply dri­ven

    under the old fed rate tar­get­ing frame­work, debt mon­eti­sa­tion was impos­si­ble, because the fed fund rate was above the sup­port rate for bank reserves, which was zero. so the fed couldnt go and print willy nilly if it wanted to main­tain its rate tar­get.

    under the cur­rent frame­work, they have tar­get­ing by decree, where the fed sup­port rate for reserves is the same as the tar­get rate, so essen­tially there is no need for debt issuance.

    so there is another rea­son for get­ting rid of the debt ceil­ing.

    get rid of it and start spend­ing in way that has some real impact on non bank bal­ance sheets,

  • TruthIs­ThereIs­NoTruth


    Not 100% sure I fol­low, but it’s inter­est­ing, I would like to under­stand your point 1 and 2 but it may be one of those things which is hard to explain in a forum.

    The point I was mak­ing, is that the IMF moti­va­tion is being mis­rep­re­sented in the inter­view. The moti­va­tion for rais­ing the debt ceil­ing is post­pon­ing a default sit­u­a­tion, not pro­mot­ing growth. I can for­give such mis­rep­re­sen­ta­tions on the basis that it is an enter­tain­ment show and there is a cap­tive ‘every­one else is an idiot, espe­cially those in power’ audi­ence, I am poten­tially one of those sym­pa­thetic to that view but I think that this view is hurt by mis­rep­re­sen­ta­tions.

    In regards to this state­ment:

    and since we live in credit dri­ven econ­omy, credit is demand dri­ven , not sup­ply dri­ven”

    I actu­ally believe that less and less as I have been fol­low­ing this blog for good part of 3–4 years. Par­tic­u­larly after this post which seems to have the causal­ity the wrong way around and I have not seen any clar­i­fi­ca­tion. Maybe ti could be the right way around if it’s defined in a way which is not so obvi­ous, I think it war­rants some clar­i­fi­ca­tion.

    A more accu­rate state­ment would be:

    and since we live in an econ­omy which at times is credit dri­ven, i.e a sig­nif­i­cant amount of credit is deter­mined by demand for that credit.”

    The rea­son for this view is a mech­a­nism which I see with my own 2 eyes. Fol­low­ing this blog I look for evi­dence of the pro­posed the­ory in the real­ity that I see. I can see at least one mech­a­nism which hap­pens in real­ity which sup­ports my view and it’s a pretty sim­ple and obvi­ous one. Yes credit is demand dri­ven, but demand for credit is quite sen­si­tive to the price of credit and the price of credit is deter­mined by liq­uid­ity which is effec­tively sup­ply. This has been very obvi­ous since 2007 and this for me is the the­o­rit­i­cal les­son com­ing out of the GFC, if you take an unbi­ased view of real­ity. Well you have to be recep­tive to real­ity in the first place.

  • ak


    credit is demand dri­ven, but demand for credit is quite sen­si­tive to the price of credit and the price of credit is deter­mined by liq­uid­ity which is effec­tively sup­ply”

    What you and Mahaish have writ­ten is very inter­est­ing because we might be finally able to leave the land of bold claims and start analysing some data what may lead to de-con­struct­ing the feed­back loop (as I believe the sup­ply of funds may depend on the demand of credit among other fac­tors as well).

    Could you illus­trate your the­sis, please? I tried to find some data but believe me or not I couldn’t find exactly what we’re talk­ing about. Yes I know I can cre­ate the graphs on my own but I have run out of time slots again. Would it be pos­si­ble to run the analy­sis for the US , Aus­tralia and also for Poland 1997–2003 when the infa­mous cool­ing down of the econ­omy took place? I believe that in the lat­ter case the inter­est rates brake was slammed so hard that the cor­re­la­tion should be pretty evi­dent.

    I under­stand that the fol­low­ing data sets need to be analysed:
    1. the flow of new loans cre­ated by the bank­ing sec­tor as a func­tion of the nom­i­nal inter­est rate on loans (it might be assumed that the credit rate depends on the inter­bank rate which is con­trolled by the reserve bank and the spread)
    2. the same as a func­tion of the real inter­est rate on loans

    If there is a sta­tion­ary func­tion deter­mined with high cor­re­la­tion coef­fi­cient (with­out hys­tere­sis) cov­er­ing both peri­ods let’s say 2001–2007 and 2007–2011 for the US then the claim that the price of credit deter­mines the demand for credit is true. If the cor­re­la­tion is low then there might be a weak depen­dency but other fac­tors (like the busi­ness con­fi­dence and demand for credit for Ponzi-like activ­i­ties) will pre­vail.

  • Lead­er­ship” sticks it to the Aus­tralian Vet­er­ans again:

    In 30 years as a mem­ber of the Labor Party, I con­tin­u­ally found greed, cor­rup­tion, self-inter­est, branch stack­ing and elected rep­re­sen­ta­tives who often scoffed at the plight of their con­stituents…” ~ For­mer NSW Labor politi­cian Ian McManus

    Our Dig­gers are at war.

    Not with the Tal­iban.

    Not with Al-Qaeda.

    But with the Aus­tralian Gov­ern­ment.

    Com­ment: I see com­ment that the Mem­bers are vot­ing accord­ing to the instruc­tion of that pit of filth and vile cor­rup­tion, the Cau­cus — and have no choice?

    These peo­ple fought, died and killed for Aus­tralia; they do not deserve to be shafted by the incom­pe­tent and dis­hon­est that we call “lead­er­ship”.

    If you feel so dis­gusted as I, visit Tess Lawrence, make com­ment and do some­thing: we can’t allow this as it is immoral, uneth­i­cal, inhu­man and down­right cow­ardly betrayal.


    Put it up on your Face­book — with a call to all Aus­tralians to rally to that which is right and hon­ourable,

  • TruthIs­ThereIs­NoTruth


    best to describe the time­line the way I saw it since the incep­tion of the GFC

    First thing that actu­ally hapenned before any­thing else was an increase in credit spread and decrease in liq­uid­ity. Spreads for whole­sale cap­i­tal drifted from a cruisy few points over LIBOR to over 50+, and it was increas­ingly harder to do deals. Once SHTF, some banks were forced to do deals at 200+. Also since liq­uid­ity in the cap­i­tal mar­kets was a con­cern, com­pe­ti­tion for retail deposits increased result­ing increas­ing costs in this area. So step 1 in Aus­tralia was an increase in the cost of cap­i­tal.

    The other thing that hap­pens is that banks fund them­selves well ahead of time (in Aus­tralia any­way), this was one the rea­sons why we sur­vived the cri­sis rel­a­tively unscathed. This is another lit­tle detail which is a bit hard to explain if you sub­scribe to the banks cre­ate credit before deposits ide­ol­ogy.

    RBAs quick reac­tion, gov­ern­ment stim­u­lus and increased incen­tive for home buy­ers gave boost to demand, coun­ter­act­ing increas­ing costs on the sup­ply side.

    But once things set­tled down and par­tic­u­larly as the stim­u­lus and incen­tive expired, the sup­ply dri­ven mech­a­nism became quite clear. The RBA started lift­ing rates as did the bank inde­pen­dantly to reflect the increase cost of cap­i­tal. Fol­low­ing is a cor­re­spond­ing drop in the demand for credit. If you want to quan­tify this, you can look at the cor­re­la­tion between home loan rates and the credit accel­er­a­tor (haven’t actu­ally done this myself). But how this is demand dri­ven beats the hell out of me.

    Now this is in Aus­tralia for the post 2007 period, how it works in the US or Poland I really don’t know. I sus­pect that Aus­tralia is more dri­ven by exter­nal fac­tors than the US, Poland sad to say I don’t know, but if you have any insights I would love to hear. Also how it worked in the past you also can’t say, it works dif­fer­ently in dif­fer­ent times. There is only lim­ited value in look­ing for cor­re­la­tion in his­tor­i­cal data and it can be quite mis­lead­ing. It might make you think you have all the answers and become unre­cep­tive to all the lit­tle details which form the actual eco­nomic sit­u­a­tion at each par­tic­u­lar point in time. 

    If you are look­ing to describe these things in func­tional form, the price of credit has to be in there as far as I am con­cerned.

  • Lyon­wiss

    Peter­jbolton June 26, 2011 at 5:59 pm

    Index­a­tion is another exam­ple of the stu­pid­ity of bureau­cracy. Mil­i­tary and Com­mon­wealth pen­sions are indexed to CPI infla­tion, which for the past 16 years (Mar 1995 to 2011) aver­aged 2.7 per­cent per year. On the other hand, aver­age wage for adults over the same period (Feb 1995 to 2011) aver­aged 4.3 per­cent per year, which is more reflec­tive of the change in the community’s stan­dard of liv­ing.

    So for the past 16 years, a retired dig­ger would suf­fer a 29 per­cent decline in the stan­dard of liv­ing rel­a­tive to the rest of the com­mu­nity. Why should this be accepted? The age pen­sion would have suf­fered the same decline, had it not for polit­i­cal agi­ta­tion, which was largely suc­cess­ful largely because the age pen­sion is already close to the poverty line and any rel­a­tive decline would be sorely felt and protested.

    This sug­gests CPI index­a­tion is largely a use­less con­cept, open to manip­u­la­tion and not reflec­tive of the true debase­ment of the cur­rency. All social secu­rity type of pay­ment should be indexed to the aver­age wage.

  • @ Lyon­wiss June 26, 2011 at 7:27 pm | #

    Thanks for your com­ment which I posted in full at the below link.


    Politi­cians never let suc­cess stand in the way of fail­ure.” Ancient sage

  • ak


    What you have described is one of the pos­si­ble descrip­tions of the closed feed­back loop. What I would like to get is to dis­sect it into the com­po­nents. I do not dis­agree that we may prove cau­sa­tion between the credit inter­est rates and the vol­ume of the new credit cre­ated. My ques­tion is to what extent. 

    I do not dis­agree that the banks have to com­pete for the deposits to get the right com­po­si­tion of both the assets and lia­bil­i­ties. What and indi­vid­ual bank X may not want to hap­pen is a sit­u­a­tion when a guy A takes a loan (what instantly leads to cre­at­ing a deposit) then uses that deposit to pay for some­thing (e.g. a house) to let’s say a guy B and then that guy B with­draws money from the bank X to deposit it in another bank Y. Then the bank X ends up effec­tively tak­ing a loan in the bank Y. The bank X has an incen­tive to get the guy B to hold his deposit there. Obvi­ously this is just a silly exam­ple as I am not very famil­iar with the details but I hope you know what I mean. 

    The offi­cial story is that the bank X has to source the money (the deposit) on the mar­ket before lend­ing out. But these are just inde­pen­dent processes — the com­pe­ti­tion on the lend­ing and bor­row­ing inter­faces of the bank. We may even include the cap­i­tal sourc­ing inter­face where banks do com­pete for the new cap­i­tal if they want to expand and retained prof­its are not grow­ing fast enough.

    NB a very sim­i­lar dis­cus­sion is tak­ing part now on Bill Mitchell’s blog but I obvi­ously have no time to wade into it. I would really appre­ci­ate if you could find this cor­re­la­tion I asked about in the pre­vi­ous post so that we can start talk­ing about the real num­bers rather than try to guess how the sys­tem works “from the first prin­ci­ples” like the Aus­tri­ans do.

  • TruthIs­ThereIs­NoTruth

    like you ak, my time is a bit lim­ited but I did a quick exer­cise to ver­ify what I am talk­ing about.

    If you look at the first sheet in the fol­low­ing ABS series, total hous­ing finance and cor­re­late to the rba cash rate (avail­able at RBA site) from jan-07 to now, you get –36%. That’s pretty strong for monthly data, no smooth­ing or lag analy­sis just raw data. 


    What is miss­ing is the actual home loan rates which were not quite in sync with RBA for the period. 

    What is inter­est­ing is that there are 3 dis­tinct phases.

    You have ris­ing rates until Mar-2008, in this period growth in credit starts going south around Nov-2007. This period is arguably as much dri­ven by a loss of con­fi­dence as well as ris­ing rates.

    First time rates are decreased are Aug-08, from 7.25 to 3 by Apr-09. Credit is back to 2007 highs even before Apr-09. It stays up there until we go into con­trac­tionary pol­icy with the Oct-09 rise, the phase we are still in.

    I’m not an econ­o­mist and this is my first go with eco­nomic data, not even sure I’m using the right series. But there is defi­nately a rela­tion­ship between price of credit and credit demand. Must be noted that lin­ear cor­re­la­tion assumes a very spe­cific rela­tion­ship, it’s a pretty basic under­grad­u­ate stuff, not that I have the time or the incli­na­tion to do any more with it. 

    So if you want a feed back loop it would go some­thing like this

    Demand -> Sup­ply -> Price — > Demand

    The first part Demand -> Sup­ply fits with credit as the dri­ves, and sure banks will lend out as much as they can, that’s how they make money.

    But credit sup­plied by a bank needs to be funded via deposits or cap­i­tal mar­kets. If more deposits are needed, rates are increased to increase the incen­tive to keep your money as deposits. If cap­i­tal mar­kets are used, I know first hand, the big­ger the fund­ing task, the more it is going to cost, there is sim­ply lim­ited liq­uid­ity in this space. This is more true post 2007 then pre 2007 when there was plenty of liq­uid­ity. So Sup­ply -> Price.

    The fact that Price -> Demand surely needs no expla­na­tion.

  • ak

    Thank you. I will have a go, too but it will take a few days to get organ­ised.

  • Lyon­wiss

    Peter­jbolton June 26, 2011 at 7:56 pm

    Age pen­sions “are indexed twice a year to the high­est increase of three mea­sures: the con­sumer price index (CPI), the pen­sioner liv­ing cost index, and growth in male total aver­age weekly earn­ings (MTAWE).”


    This method of index­a­tion only just man­ages to avoid poverty. For exam­ple, the max­i­mum pen­sion for a sin­gle per­son is “$701.10 a fort­night for sin­gles”, which is $18,229 per year. 

    If you con­sider Hen­der­son poverty line for a sin­gle per­son, not work­ing and need­ing hous­ing, then it is $360.60 per week, which is $18,751 per year:


    The age pen­sion is means tested, so only about 30 per­cent of retirees will totally depend on it. Even with com­pul­sory super­an­nu­a­tion, about 40 per­cent of retirees will par­tially depend on it. This implies about 70 per­cent of Aus­tralian retirees will live just above poverty. The gov­ern­ment is fond of mak­ing the claim that “Aus­tralia has the best super­an­nu­a­tion sys­tem in the world”.

  • sir­ius


    Den­ninger appears to be a Con­sti­tu­tional Repub­li­can who is very pro the USA state of the Repub­lic and of this, is his entrenched atti­tude of – ‘USA or noth­ing’.”

    This view­point is borne from scrutiny of words of Den­ninger and var­i­ous (not all though) posters.

    In essence…

    “We hold these truths to be sacred & unde­ni­able; that all men are cre­ated equal and inde­pen­dent, that from that equal cre­ation they derive rights inher­ent and inalien­able, among which are the preser­va­tion of life, & lib­erty, & the pur­suit of hap­pi­ness;””

    and as you say the “that all men are cre­ated equal and inde­pen­dent” is inter­preted to mean “that all men are cre­ated equal and inde­pen­dent as long as you are an ‘Amer­i­can’”.

  • sir­ius

    Because of rel­e­vance to Aus­tralia (and else­where)…

    Con­se­quently, we have a glob­al­ized machine that effi­ciently causes all valu­able resources to be extri­cated pre­ma­turely from the earth’s crust to sat­isfy the insa­tiable greed of this par­a­sitic top layer of human soci­ety. Through the issuance of thou­sands of long con­tracts, the appear­ance of robust and per­pet­ual future demand is dis­trib­uted, and bankers and min­ers duti­fully get in line to finance and explore for deposits, many of which will never see pro­duc­tion in our life­times. The prob­lem for these oth­er­wise intel­li­gent peo­ple is, the closer you get to the top of the food chain, the far­ther up the food chain you are dri­ven to go. Its equal parts greed and addic­tion. (Greed is really just the addic­tion to money and the sense of invin­ci­bil­ity hav­ing lots and lots of it gives).


    In my view there is no “fix” for this “eco­nomic prob­lem” (born from hours of pon­tif­i­ca­tion and study). Things have sim­ply devel­oped too far. Attempts to med­dle will not solve or save the sit­u­a­tion.

    Best to leave it alone than attempt to “fix” it since the “fix” will likely cause even more harm. 

    Recently I am becom­ing more and more to the view­point that “the fix” is to do noth­ing at all save that I sug­gest “the meek” try not to “profit” from the sit­u­a­tion. (As Den­ninger and oth­ers do with “trad­ing” and “buy gold” — much of the wealth that many are attempt­ing to pre­serve was stolen from oth­ers with a clever sys­tem to make the theft “anony­mous”).

    (This I started to realise some 20 years ago).

  • sir­ius

    as long as you are an ‘Amer­i­can’”.”

    quote from Karl Den­ninger…

    The Con­sti­tu­tion never did apply to for­eign nation­als.”


    Ref­er­ences to Mex­i­cans and oth­ers to be found in many places on his site and clearly show his “imbal­anced view” to other humans (whom the USA are happy to employ as “cheap labour” it seems).

  • sir­ius

    I am not into “con­spir­acy the­o­ries” (there is no need to be). Things are clear from sim­ply just tak­ing alook around.…

    While dis­miss­ing “con­spir­acy the­o­ries” that Bilder­berg “runs the world,” Ron­son did explain that the Bilder­berg mem­bers he inter­viewed admit­ted, “that inter­na­tional affairs had, from time to time, been influ­enced by these ses­sions.” As Denis Healey, a 30-year mem­ber of the Steer­ing Com­mit­tee, him­self point­edly explained:

    To say we were striv­ing for a one-world gov­ern­ment is exag­ger­ated, but not wholly unfair. Those of us in Bilder­berg felt we couldn’t go on for­ever fight­ing one another for noth­ing and killing peo­ple and ren­der­ing mil­lions home­less. So we felt that a sin­gle com­mu­nity through­out the world would be a good thing… Bilder­berg is a way of bring­ing together politi­cians, indus­tri­al­ists, financiers and jour­nal­ists. Pol­i­tics should involve peo­ple who aren’t politi­cians. We make a point of get­ting along younger politi­cians who are obvi­ously ris­ing, to bring them together with financiers and indus­tri­al­ists who offer them wise words. It increases the chance of hav­ing a sen­si­ble global pol­icy.

    Will Hut­ton, the for­mer edi­tor of the Observer, who had been invited to Bilder­berg meet­ings in the past, once famously referred to the group as “the high priests of glob­al­iza­tion.”

    I remem­ber Den­nis Healey and recog­nise Will Hut­ton.

    “The Wash­ing­ton Post reported that the IMF is poised to trans­form “into a ver­i­ta­ble United Nations for the global econ­omy”:

    It would have vastly expanded author­ity to act as a global banker to gov­ern­ments rich and poor. And with more flex­i­bil­ity to effec­tively print its own money, it would have the abil­ity to inject liq­uid­ity into global mar­kets in a way once lim­ited to major cen­tral banks, includ­ing the U.S. Fed­eral Reserve… the IMF is all but cer­tain to take a cen­tral role in man­ag­ing the world econ­omy. As a result, Wash­ing­ton is poised to become the power cen­ter for global finan­cial pol­icy, much as the United Nations has long made New York the world cen­ter for diplo­macy.

    Is it just me that finds the idea and sub­se­quent real­ity of YAB (Yet Another Bank) that is a kind of “super-bank” can exist at all really absurd ?

    I mean where did “this one” get its money and power from ?

    Much has been decided before we were ever born.


  • sir­ius


    In an under­cover inves­ti­ga­tion, Chan­nel 4?s flag­ship cur­rent affairs strand Dis­patches reveals that British con­sumers are being given incor­rect infor­ma­tion by some of the biggest high street jew­ellery shops when buy­ing gold. The pro­gramme reveals that gold is still being sourced uneth­i­cally by sec­tions of a gold-min­ing indus­try which is exploit­ing child min­ers, expos­ing chil­dren and com­mu­ni­ties who live near some mines to dan­ger­ously high lev­els of toxic poi­son­ing and destroy­ing the envi­ron­ment.”


    Just one more rea­son why I don’t “buy gold”.

  • wal­ter­rehm

    I have fol­lowed your posts for some years now and gen­er­ally agree with your views on the mechan­ics of debt but in draw­ing con­clu­sions, I think, you miss the boat.
    On page 16 you state: “From now on, unless we do the sen­si­ble thing of abol­ish­ing debt that should never have been cre­ated in the first place, we are likely to be sub­ject to wild gyra­tions in the Credit Accel­er­a­tor”
    Maybe your schooled aca­d­e­mic roots and trust in the effec­tive­ness of mon­e­tary mea­sures hold you back from get­ting a clearer view of the state of affairs.
    It is true that debt lev­els have climbed to unprece­dented and unsus­tain­able heights, but the res­o­lu­tion to this prob­lem will not come in the form of some con­trolled aus­tere finan­cial mea­sures, but in a sharp and sud­den snap in the form of cur­rency resets excluded from text­books.
    Com­ing from a coun­try which has had two such resets in the last cen­tury it is com­mon knowl­edge that asset hold­ers and debtors will ben­e­fit from such resets whereas cred­i­tors will be wiped out.
    So, in a nut­shell, in the cur­rent endgame phase it is para­mount for every par­tic­i­pant to acquire as much debt as he/she pos­si­bly can and put it into reset sur­viv­ing assets.
    Have a look at the fig­ures pre­ced­ing the Ger­man defaults of 1924/1948.

  • alain­ton

    Michael Hud­son has a good piece on his blog about why Greece should default and how it can recover rev­enues:

  • sir­ius


    I brisked through that pdf you posted…


    Pages 16 and 17 includ­ing bril­liant lines like “Advances in finan­cial engi­neer­ing…”


    Another relates to the advanced math­e­mat­i­cal mod­el­ling nec­es­sary to value these prod­ucts”.

    Syn­thetic ETFs are men­tioned etc etc.

    My response is that “God would be very angry to see what ‘we’ have become”

    All the text may have been replaced with one word and that word is quite sim­ply “Fraud”.

  • I agree with your argu­ment Wal­ter. I was propos­ing what might be done from a con­trolled pol­icy point of view, but real­is­ti­cally I have zero con­fi­dence that this will hap­pen. The wild, mar­ket gyra­tions you note are far more likely to be the end game. The trou­ble this times that so many Coun­tries are caught up in it.

  • kys

    From the lat­est Bal­ance of Pay­ments, we have had a total for­eign debt of $1,282 bil­lion, and a net for­eign debt of $677 bil­lion. Unal­lo­cated sources like inter­na­tional insti­tu­tions and inter­na­tional cap­i­tal mar­kets, U.S. and U.K. are the top three cred­i­tors.

    The dilemma we are fac­ing is U.S. and U.K. are our tra­di­tional allies, strate­gic part­ners, as well as the guar­an­tors of our national secu­rity. The “com­mon knowl­edge” that asset hold­ers and debtors will ben­e­fit from cur­rency resets whereas cred­i­tors will be wiped out may not hold quite well this time.

    The fig­ures pre­ced­ing the Ger­man defaults of 1924/1948” really scare the day­lights out of me. Aus­tralia dares to com­pare her­self to the pre-war Ger­man??

  • sir­ius


    but the res­o­lu­tion to this prob­lem will not come in the form of some con­trolled aus­tere finan­cial mea­sures, but in a sharp and sud­den snap in the form of cur­rency resets excluded from text­books.”

    That has to be the “thread win­ner”.

    I would write “excluded from text­books” but “included in his­tory text­books

    For the record I am aware that the value of the “money” that I have is a false value (hav­ing being stolen from oth­ers in the past and — to be stolen from peo­ple in the future).

    I am quite happy to see a lot of its value dis­ap­pear pro­vid­ing true jus­tice would pre­vail in the world.

    (At the moment the sys­tem is setup to divert any attempts to put “jus­tice” in place).

  • kys

    I would pretty much like to know how sud­den cur­rency resets would not cause more finan­cial stress to the debtors in the forms of higher infla­tion and higher inter­est rates that are sup­posed to com­pen­sate cred­i­tors? How a sharp and sud­den snap in cur­rency resets would not result in a shock and loss in con­fi­dence among investors (domes­tic and for­eign alike) and hence mass money exo­dus that fur­ther depresses assets val­ues?

    What dose his­tory say about cur­rency depre­ci­a­tion (defaults) by Mex­ico, Argentina, Thai­land, The Phillip­pines, Indone­sia and South Korea? Do they feel the longed-for jus­tice? Or they acturally feel exploited?

    I think cur­rency depre­ci­a­tion may be even­tu­ally inevitable for some debtor nations but that will not make their lives much eas­ier as their assets, labour and dig­nity are under­cut as well. Their for­eign debts on the other hand are much more expen­sive and hard to pay back. Aus­ter­ity will be needed no mat­ter what hap­pens to the exchange rates, as long as debtors are demanded to ser­vice debts.

  • alain­ton

    The evi­dence seems to sug­gest that high cap­i­tal out­flow pre­cedes default events, for obvi­ous rea­sons, but sub­se­quent deval­u­a­tion and hikes in inter­est rates can avoid a sud­den shock and lead to a pick up in invest­ment.

    New York and Lon­don banks have in frag­ile economies hedged against this, such as the Bank of Amer­i­cas forc­ing of default in Kahzak­stan banks in 2009. The prob­lem comes if a larger econ­omy defaults, the CDS lia­bil­i­ties on that would trig­ger prob­lems far greater in cred­i­tor nations than debtor nations