European Tribune - Community, Politics & Progress.

Is the second 1% finally realizing it's been had?

by Jerome a Paris
Fri Dec 26th, 2008 at 05:50:05 AM EST

This is what an unexpectedly bolshie editorial in the FT tonight [Xmas Eve] suggests:

Goodbye and good riddance to all that
It really is "the end of an era". The over-used phrase is justified this year: 2008 marked the official finish to an age of financial excess. A new age of austerity is beckoning in 2009. It seems, alas, that we must bid farewell to open-handedness and a carefree attitude while shopping. They will be missed. But there are aspects of this year that we will be very happy not to see again.
The roll-call of those we are delighted to see depart the world's political stage is strong but short - quite a bit shorter than we would have liked, in fact. At its head is George W. Bush, who, reports suggest, is still president. He leaves the US bruised, battered and weakened. His place in history is assured, albeit perhaps not where he intended; few little boys dream of one day becoming the Shoe Magnet of Baghdad.
We were glad to see Sarah Palin resuming her day job as Alaskan governor. For a brief moment, there seemed a chilling possibility that she might end up a heartbeat from the Oval Office. We can now laugh about her claims to foreign policy experience - Alaska is near Russia, y'know - and her understanding of economics. Like all good pantomime characters, however, she will be back for an encore.
Beyond America, there is relief not only at the election of Barack Obama, but at the ending of the campaign. Next time around, if we are to experience wall-to-wall coverage of all stages of the presidential contest, we would like the chance to vote. No saturation without representation.

Heh. Heh. Heh. So far, so funny, but not really rocking the boat.

front-paged with an edit by afew

Individuals will have their own favourite farewells: perhaps the departure of the Olympic torch from Beijing after Games in which China tried but failed to disguise its authoritarianism; or the closure of the soulless concrete Yankee stadium in New York. But the year's central event - the credit crunch - has given us some changes everyone can applaud.
The humbling of the financial sector should put an end to a bonus culture that rewards recklessness. It should also bring to a close the two decades in which investment banking and its associated industries have absorbed disproportionate numbers of skilled graduates. From now on, those who wish to package expensive products that they do not fully understand can work at the gift-wrapping department in Harrods.

All I can say is: ouch!

As for those of real talent, we can but hope to see some of them seek careers in research, teaching, healthcare and even manufacturing - the sector whose economic contribution is so often overshadowed by financial services.

Now they tell us. Better later than never, I suppose. But the fact that it took a crash of this magnitude to get the point across is, quite possibly, too much to forgive.

Nor will we miss the automatic deference accorded to titans of investment banking. The senior executives of banks used to command great respect; it is now clear that many of them did not deserve it. It would be invidious to mention individuals, but Lex's "overpaid CEO of the year" shortlist included Daniel Mudd of Fannie Mae, Sir Fred Goodwin of RBS, and the inevitable winner, Dick Fuld of Lehman. Far be it from us to dissent.

Hmmm... who provided that "automatic deference", mister anonymous editorial write of the FT? Do you only now realise they played YOU? Barf.

The Anglo-Saxon capitalist model has been sorely tested in the past 12 months. Governments have been forced to prop up the banks and tempted to erect scaffolding around industrial titans. We may come to miss some of the dynamism and inventiveness of unfettered capitalism, but we will not miss glib free-market fundamentalism.

A condemanation of the Anglo Saxon model without a snide word for the French? You know, I'm actually disappointed not to be mentioned? Where are your professional standards? You're slipping!

We bid a hearty farewell to the lack of discrimination that characterises the height of a boom. When even conscientious investors are happy to hand their money over to a man with inexplicable returns, a peculiar business model and whose name is pronounced "Made-off", something is awry.
Finally, we are pleased that it looks like the end of a casually unsympathetic attitude towards society's walking wounded. When even the highest in the financial land have been forced to seek assistance from the great mass of ordinary taxpayers, a humbler approach from all of us must be in order.

Well, we'll see about the walking wounded, given that most of the "effort" and "reform" now underway seems to be putting a disproportionate weight on them, as usual. It's nice to see you care, suddenly. Do you suddenly feel like it could happen to you too?

Poor thing.

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Is the second 1% finally realizing it's been had? | 49 comments (49 topical, 0 editorial, 0 hidden)

Re: Is the second 1% finally realizing... (4.00 / 5)

Once again, the FT leads from the rear.

I've just had an interesting conversation with my mother. After suggesting forcefully a year ago that she dump all her investments and move the cash to building society accounts - advice which, being over 80, she ignored - she's just realised that she's lost anywhere up to £25k this year.

She wants to give me some of the nearly worthless shares now. Which is nice.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Dec 23rd, 2008 at 07:29:13 PM EST

Re: Is the second 1% finally realizing... (4.00 / 4)

I finally got both my parents to listen to me about July of last year.

It's a good thing.

Mais c'est un scandâââle!!

by redstar on Wed Dec 24th, 2008 at 04:24:51 AM EST
[ Parent ]

Re: Is the second 1% (none / 1)

Got my family to listen a while ago, but everybody's a big fan of Jerome and bonddad in the Jones clan, so they didn't need too much convincing. They've been in cash for a while watching those yields sink, and all got out around the peak in the S&P, fortunately.

Lotta people didn't. And now they've watched half their 401(k)s go up in smoke.

All proof that we should privatize Social Security, as you know.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Fri Dec 26th, 2008 at 12:17:22 AM EST
[ Parent ]

Re: Is the second 1% finally realizing it's been h (4.00 / 4)

Recommended reading: The early work of George Goodman, who wrote as "Adam Smith"--The Money Game, Supermoney, Paper Money.

They were recommended to me by an old Wall Street hand when I first went to work in the hallowed halls and provided salutary eye-opening and reality-grounding.

The numbers have gotten much bigger, and the names of the deals are fancier, but the same kinds of wheeling-dealing, scams and grifting are still being done, along with a good bit of legitimate financing.

I'm always amazed when it seems that august personages such as the editorial board of the FT seem not to have read about those.

by Mnemosyne on Tue Dec 23rd, 2008 at 09:10:41 PM EST

Martin Wolf has an earnest column (4.00 / 12)

this day as well, trying to sum up the best parts of keynesianism. But he still refuses to assign blame for what's been happening (that's just for ideologues)

Now, 62 years after Keynes' death, in another era of financial crisis and threatened economic slump, it is easier for us to understand what remains relevant in his teaching.
I see three broad lessons.
The first, which was taken forward by Minsky, is that we should not take the pretensions of financiers seriously. "A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him." Not for him, then, was the notion of "efficient markets".

(I have often repeated that same notion, not realizing that it was initially staed by Minsky. It's always been obvious to me, from the inside, seeing the incentives we had as bankers.) But not trusting financiers is a good lesson to remember now. How about not quoting "financial analysts" only in the FT, and bring in labor analysts or other specialists, then, on a systematic basis?

The second lesson is that the economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand. An individual may not spend all his income. But the world must do so.

And the difference between the sum of individual behaviors and collective behavior is what the State does.

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians - Ludwig von Mises and Friedrich von Hayek - argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis.
Keynes's genius - a very English one - was to insist we should approach an economic system not as a morality play but as a technical challenge.
(...)
This same moralistic debate is with us, once again. Contemporary "liquidationists" insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.
Yet Keynes would have insisted that such approaches are foolish.

While there is a real argument (repeated, indirectly, by redstar) that this moment should not be used to punish bankers if it ends up hurting workers more - or that we should do public spending even if it helps bankers too much, I think there has to be a moment of accountability.

Just like with torture and other breaches of law in the US, the fact that the financial abuses of recent years may not be punished will create a horrible precedent that we will pay for even more violently in the future.

Thus "pragmatism" means puttng the medium term above the long term, which I'm still not convinced is a good idea, despite my well known sigline...

(And I love how he opposes the British and the ideologues. Where is ValentinD when we need him ;))

The shorter-term challenge is to sustain aggregate demand, as Keynes would have recommended. Also important will be direct central-bank finance of borrowers. It is evident that much of the load will fall on the US, largely because the Europeans, Japanese and even the Chinese are too inert, too complacent, or too weak.

The core lesson still has not been learnt here: demand can only come from real income, not from debt. This is my point of disagreement with redstar: demand that does not come from real income (via income increases for the majority, or via confiscation in the form of higher taxes on the wealthy) will not solve the problem os not enough solvent demand

Blaming Europe or Asia is pointless: the problem came initially from too much unfunded demand. It is not ideology to make that point.

The longer-term challenge is to force a rebalancing of global demand. Deficit countries cannot be expected to spend their way into bankruptcy, while surplus countries condemn as profligacy the spending from which their exporters benefit so much.

No, deficit countries need to learn to live within their means, because debt-fuelled demand does not create prosperity, it creates bubbles and crises. As long as this is not recognsed, there will be no solution. Surplus countries cannot be surplus countires if the deficits do not exist on the other side in the first place.

So Martin Wolf is still not acepting that the whole economy of the past years was a giant con rather than an "imbalance."

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Dec 24th, 2008 at 10:56:35 AM EST

But all income comes from debt ... (4.00 / 3)

demand can only come from real income, not from debt

On the other hand, all income originates as debt.

In a closed economy, income can only increase because spending that is not financed by income occurs. That finance is debt.

Now, open up the economy. A trade surplus one place, with its extra injections, is matched by an equal trade deficit distributed across the system, with an equivalent drain on injections, so the only way that the system of open economies expands as a whole is as above for a closed economy.

The issue is not whether there is debt finance or not, but whether the debt finance is sustainable or not. Injections based on ever shrinking down payments and ever lengthening terms and every expanding second and third mortgages based on ever growing real estate prices ... are clearly not sustainable.

Debt finance to buy productive assets that, under economic conditions, are put to use to produce goods and services that are purchased ... that is sustainable.

Taxing the rich as such under current conditions will simply increase leakage rates and reduce incomes. On the other hand, shifting a given tax burden to the rich, given current neutral or regressive overall tax structures, should be beneficial, since those who are paying higher taxes on income include much of the financial wealth accumulation and those who will be paying lower taxes will be tend to spend it.

Indeed, note how hard the economic sophists have worked to denigrate a cut in the UK's goods and services tax for being ineffective because people will not notice the price change. Obviously, people won't notice the price cut, the question is whether the people who pay the bulk of the goods and services tax will spend the extra money that is there when they have it. And the answer is, of course they will.

The problem with the cut in the goods and services tax is not the concept, but the size of the cut ... it should be cut down to 10%, with an offsetting tax on wealth. And, indeed, that only needs to be an offset in the structural budget, so it could well be an increase in some tax or taxes with their primary incidence on the wealthy.

Or here in the US, a gas tax starting from $0.00 and increasing by a nickel (US$0.05) per month, with the proceeds distributed as a lump sum social dividend, quarterly in the first year, monthly thereafter. Since low income people do not consume more fuel than high income people, directly and indirectly, just a higher percentage of their income, a gas tax with a lump sum social dividend will be a progressive income redistribution.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Wed Dec 24th, 2008 at 11:57:52 AM EST
[ Parent ]

Re: But all income comes from debt ... (4.00 / 6)

BruceMcF:

On the other hand, all income originates as debt.
In a closed economy, income can only increase because spending that is not financed by income occurs. That finance is debt.

In an insane economy like ours, where Money is Debt, and Uk Plc has a National Debt and no National Equity, then that is true.

But it need not be the case.

Why should not the Commons of Land, and the Commons of natural resources, and the creative Commons of knowledge, be subject to a levy made upon all those who have exclusive rights of use of these Commons?

And why should not such a levy be pooled and distributed to all citizens as a dividend from such National Equity?

So we should tax privilege, and hence wealth, and that will reduce the need to tax income, possibly even to zero. And we must evolve a financial system where money consists of value, and not a claim over it issued ex nihilo by a credit institution.

Nothing else will do, IMHO. The financial system we know is finished, and the only solution is to change not the quantity of credit - by refinancing debt with yet more debt - but its quality, through a debt/equity swap on a massive scale.

End of rant.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Wed Dec 24th, 2008 at 01:41:56 PM EST
[ Parent ]

Re: But all income comes from debt ... (4.00 / 2)

If you're not part of the solution, you're part of the precipitate.

by ceebs (ceebs (at) eurotrib (dot) com) on Wed Dec 24th, 2008 at 01:50:53 PM EST
[ Parent ]

Its debt of one form or another. (4.00 / 2)

Production does not take place all at the same place and all in a single instant, which is why we need money in the first place. In any monetary production economy, in order to expand production, and hence real income, there needs to be an expansion in money first, preceding the expansion of production.

If there is no liability attached to the receipt of that money, there is no constraint on the creation of money, and if there is no ability to create money in advance of the production, each increase in injections or drop in leakage rates would be met with a liquidity crisis.

The "financial system we know" is only two to three decades old ... in the financial crisis to date, having the financial system we used to have would prevented the financial melt-down.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Wed Dec 24th, 2008 at 01:52:11 PM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

"In any monetary production economy, in order to expand production, and hence real income, there needs to be an expansion in money first, preceding the expansion of production."

Why?
Should I suddenly decide to produce something after my working day -I don't know, violin lessons, baking cakes... and sell it, I could hope to divert a tiny part of the monetary base in my direction. Then, either the price of some goods might fall in proportion, so that they don't stay unsold, in which case we have a tiny deflation, or there could be a liquidity injection to match, so that we keep the same prices. In either case, there was no expansion prior to the increase of production.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Thu Dec 25th, 2008 at 04:40:27 AM EST
[ Parent ]

Re: Its debt of one form or another. (4.00 / 5)

Cyrille:

"In any monetary production economy, in order to expand production, and hence real income, there needs to be an expansion in money first, preceding the expansion of production."
Why?

Credit is needed for the creation of productive assets. The money we use is credit. Therefore money is conventionally needed.

The examples you give relate to you, the individual, producing objects and services by investing your time in their production.

You thereby create new "Money's worth" with a value in exchange and you may liquidate this value in exchange in two ways:

(a) straight barter - eg cakes for fish, with no "money" involved, and no reference to money;

(b) delayed barter - ie with credit, or "time to pay", and this requires "Money".

There are two mechanisms for delayed barter.

The conventional route is that a bank creates credit as an interest-bearing IOU, or in the case of a Central Bank/ Mint, a non-interest-bearing IOU such as a Ten Pound Note. You then accept the IOU in exchange (the first leg of the barter) and in due course exchange it for something of value (the second leg of the delayed barter transaction). This system uses a "credit intermediary", which is the function of a Bank.

The second possibility is of disintermediated or "Peer to Peer" credit, and this takes place where settlement is made in due course - after a period of time - through the acceptance by the seller of "money's worth" either from the original buyer or from someone else within a monetary system, by reference to a "Value Unit".

The WIR Bank is the closest there is to such a system.

This is a Swiss Business to Business (B2B) barter system with in-built credit. The discipline which has supported this system and made it so sustainable is that members have to give a charge over their property. So any debit balance would be settled by disposal of property.

In other words the WIR is a property-backed monetary system where money's worth of goods and services changes hands not for Swiss Francs, but by reference to Swiss Francs as an abstract Value Unit.

My ambition is facilitate the networked and viral spread of such systems to retail "B2C" transactions through the use of "Guarantee Society" framework agreements.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Thu Dec 25th, 2008 at 06:47:19 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

OK, I agree that the money we use is credit, and that the use of money imply the use of credit.

But my question is why should the expansion of money need to take place before the expansion of production. In my example, it either took place afterwards, or not at all (with a deflation that increased the value of existing money).

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Thu Dec 25th, 2008 at 01:30:49 PM EST
[ Parent ]

Re: Its debt of one form or another. (4.00 / 3)

You are expending "money's worth" of your time to provide something with a value in exchange. In doing so, you have increased the amount of "money's worth" available for circulation.

As far as I can see, this would be - conventionally - deflationary, since there is, all else being equal, now relatively less (albeit infinitesimally so) money than money's worth available to buy.

Provided you can "afford" to provide these goods and services (ie it's in your "spare time", and your cost of living is met from other sources), then money is not needed.

But normally you will need money (or rather, money's worth purchased with money..!) to survive in the period before people pay you. ie the period in which you are giving your employer credit.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Thu Dec 25th, 2008 at 02:37:09 PM EST
[ Parent ]

That's for things that are hard to produce, and .. (none / 0)

... therefore money has to be spend in the production process before the goods are available for sale.

If its part of an expansion of production, that requires either an increase in the velocity of circulation of money or an increase in the money supply ... and while the velocity of circulation can increase, it cannot increase without limit, therefore the ability to sustainably increase production requires the ability to expand the money supply in advance of production.

It is misleading to refer to money as "debt" or "credit" and especially to refer to money under one set of institutions as "debt" and under a different set of institutions as "credit", because a financial debt is also a credit and a financial credit is also a debt ... a financial asset is a commitment, with someone obligated to perform some activity on one side of the relationship and someone who is the beneficiary of that activity on the other side.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Mon Dec 29th, 2008 at 05:15:28 PM EST
[ Parent ]

Re: That's for things that are hard to produce (none / 0)

But the money that is spent in the production process is spent for some production too.

If I buy equipment, that equipment had to be produced. If it wasn't produced before, it is an increase in production, even though it may come a year or more before the finished good that I have in mind is on the market.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Tue Dec 30th, 2008 at 03:31:56 AM EST
[ Parent ]

Re: That's for things that are hard to produce (none / 0)

Yes ... long term finance for equipment can generate a need for short term finance for the production period.

The workers that produce the equipment need to be paid, after all, and even for lengthy production projects requiring payment for work in progress ... the payment is for meeting benchmarks, so its payment for the work that has been finished. The materials and other costs of production and the wage bill must still be financed.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Tue Dec 30th, 2008 at 11:37:02 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 0)

"..The money we use is credit."

Perhaps the money we use today, but not in the times of the gold standard. Then all money was backed up by gold. Gold is a natural resource (which has mostly just exchange value) and not debt.

by kjr63 on Sat Dec 27th, 2008 at 06:02:56 PM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

"which has mostly just exchange value"

Oh no it does not! The price of gold increased tenfold in real terms over the past 40 years (something like that -my wife is in Laos with the book that has the source, namely "The Accidental Theorist by Krugman, so I can't check for the exact numbers).

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Sun Dec 28th, 2008 at 01:46:24 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

"The price of gold increased tenfold in real terms over the past 40 years "

Not in real terms i believe. The purchasing power of 1oz of gold, i believe, is about the same today as it was 40 yrs ago. My point, however was against the idea that money is debt. Money is exchangeable property. You can change your not-so-well-exchangeable property to money, it is not debt. If you find piece of gold somewhere, it is not debt. It is debt if you borrow money.

by kjr63 on Mon Dec 29th, 2008 at 06:24:35 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

I think you have missed at least half a dozen discussions here on this subject. The money we use is interest-bearing debt created by credit institutions upon the base of an amount of capital set by the Bank of international Settlements in Basel.

ie credit has been "monetised".

Gold backing for monetised credit ended in 1971 ie the practice of requiring the "Capital base" to be stocks of gold bullion so that credit was nominally redeemable in gold.

There is not remotely enough gold in existence sufficient to meet the needs of the global economy. What gold does exist is demonstrably subject to routine manipulation by intermediaries (and Central Banks appear to be the worst offenders), so it would be inappropriate to use it as the basis of a currency.

IMHO we should use as a basis for a currency Units redeemable for other, more abundant, forms of value, in particular land rental values and energy.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Mon Dec 29th, 2008 at 06:53:29 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 0)

"I think you have missed at least half a dozen discussions here on this subject."

That is absolutely correct.

"The money we use is interest-bearing debt created by credit institutions upon the base of an amount of capital set by the Bank of international Settlements in Basel."

This is very interesting and complicated. I will have to read what is written about this..

by kjr63 on Mon Dec 29th, 2008 at 11:27:21 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

"The purchasing power of 1oz of gold, i believe, is about the same today as it was 40 yrs ago."

Really?

I can't find the figures for 40 years ago, but let's try 1971 then -37.

As you can see here Deflators, 40$ in 1971 would get you in 2007 (figures not available for 2008, but it would be around 3% extra):

$204.73 using the Consumer Price Index
$165.75 using the GDP deflator
$222.12 using the value of consumer bundle (probably the most relevant)
$200.31 using the unskilled wage
$336.89 using the nominal GDP per capita (that makes little sense in terms of purchasing power)
$490.02 using the relative share of GDP (makes no sense at all in terms of purchasing power -you'd have to have newcomers receiving zero to bring it to the previous, already inflated, figure)

As you can see here Gold price history, an ounce of gold was worth around $35 (I didn't want to be told that my figures were due to rounding the graph too low, hence my 40$ above).
That reached around 680 in 2007.

So OK, my tenfold was way off, it's actually threefold (or maybe it's not over 40 years at all, but much longer, or rather over the seventies, where it was indeed tenfold in real terms), but as I said I didn't have the figures with me. The point is that it's a legend to hold gold as fully representative of purchasing power.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Mon Dec 29th, 2008 at 09:41:43 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 0)

Yes, you are correct. There is a significant raise in gold's value.

by kjr63 on Mon Dec 29th, 2008 at 11:34:11 AM EST
[ Parent ]

Re: Its debt of one form or another. (4.00 / 2)

You are assuming something that does not require you to lay out money in order to get the resources to produce it.

And, no, if it is not a monetary production economy ... if money is not required in order to gain command of the means of the production ... then money is not required to expand production and income.

For example, in a pure freeholder subsistence economy, in which the means of production are inherited or otherwise allocated as inalienable property, producers can work longer hours to produce more, provided they can perform the production with the resources they already command.

If they have to buy something in order to produce more ... a tool, seeds for a new crop, fertilizer ... then they either have to have physical savings ... something stockpiled that they can sell to raise funds ... or access to credit.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Thu Dec 25th, 2008 at 10:46:03 PM EST
[ Parent ]

Re: Its debt of one form or another. (4.00 / 2)

"If they have to buy something in order to produce more ... a tool, seeds for a new crop, fertilizer ... then they either have to have physical savings ... something stockpiled that they can sell to raise funds ... or access to credit."

Well, that's an important alternative isn't it? I know savings had a bad name in the States lately, but if I reckon that a direct investment will yield more (risk balance taken into account) than my savings account and to that respect divert some money from them to the investment, I'should be doing exactly that.

I know everyone wants huge returns from extreme leveraging, but that may be part of the problem. We now see absurd situations where investors massively buy US bonds that yield negative real returns when there are essentially risk free investments (like Jérôme's projects in areas with feed-in tariffs) that struggle to happen even though they would yield enough to easily repay a bank loan should the bank have money to lend.

If there truly is a savings glut as many argue, then there should be no need for monetary creation. All capital projects should happen and happen frequently. Except that people want double digits returns on capital and to be bailed out when one investment fails, but if one demands the unachievable, it should come as no surprise that it cannot be achieved.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Fri Dec 26th, 2008 at 12:45:38 AM EST
[ Parent ]

Re: Its debt of one form or another. (4.00 / 2)

Cyrille:

I know everyone wants huge returns from extreme leveraging, but that may be part of the problem.

Most leverage comes from the use of credit and it is the worthless nature of bank-created credit that is directly responsible for inflation of asset prices, and an indirect contributor to retail price inflation.

The principal cause of retail price inflation is fiscal deficit. ie when government credit which is not backed by taxes is spent into circulation (as opposed to being invested in windfarms etc).

Cyrille:

If there truly is a savings glut as many argue, then there should be no need for monetary creation. All capital projects should happen and happen frequently. Except that people want double digits returns on capital and to be bailed out when one investment fails, but if one demands the unachievable, it should come as no surprise that it cannot be achieved.

At the heart of our problems is people's unrealistic inflationary expectations combined with the hybrid nature of the money as debt that we use.

Money has no cost - unless it happens to be debt.

Credit (as distinct from money) does have a cost - and that is the cost of defaults, combined with system operating costs.

The use of Capital - by which I mean productive capital, such as land, energy equipment, and, increasingly, knowledge - does not so much have a cost, as a market price.

Capital in existence (your savings glut - largely consisting of land rentals monetised through mortgage intermediaries) has expanded massively over time, and the market price of "low risk" Capital has shrunk from 25% pa in Babylonian times, through 10% pa in medieval times, and 5% before the dawn of the industrial revolution, to what is probably 1 to 2% now - maybe even less.

I am proposing what is a Debt/Equity swap on a massive scale, the effect of which will be to reduce massively the financial claims on property users by removing the debt obligation. The result will be that debt owners will not be wiped out,but will have a tradable form of quasi equity carrying a reasonable real return.

So the vast pool of "savings" out there - which is rapidly disappearing down a black hole as market prices of land in particular collapse - may be redeployed in low risk "affordable" housing and in refinancing low risk existing public infrastructure.

This will give investors a low risk real return. Those looking for greater returns must take a greater risk, which will typically be "development risk" in new projects. Good returns are possible here without leverage, but not without risk.

Not everyone with savings is prepared to take such risk, and the problem has been that people have been looking for rates of return in excess of the populations' capability to pay them, one of the reasons for that being that capital ownership is not widely spread.

Mathematically, this debt money spree had to end, and from Babylonian times onwards we have always known that debt is unsustainable - which is where the concept of the Jubilee comes from.

What I am proposing is not so much to "forgive" debt but to reinvent it into a new type of equity.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Fri Dec 26th, 2008 at 04:48:59 AM EST
[ Parent ]

Re: Its debt of one form or another. (none / 1)

But don't confuse accumulated financial assets with a stockpile of grain.

An individual decision to spend out of "saving" is handing financial assets to someone else, and they hand money over, and that money is spent. It changes the identity of the person spending the money on goods and services, not the quantity of money spent.

You are trying to get a handle on it from the bottom up, without looking at the system within which it is located.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Dec 26th, 2008 at 11:50:11 AM EST
[ Parent ]

Re: But all income comes from debt ... (none / 1)

At least one thing we can agree on is that we should tax rent a lot more.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 26th, 2008 at 05:30:41 AM EST
[ Parent ]

Re: But all income comes from debt ... (none / 1)

Absolutely.

I doubt whether it would be necessary to tax much else, actually.

Systemic Fiscal Reform

is an interesting site.

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Fri Dec 26th, 2008 at 05:38:23 AM EST
[ Parent ]

Re: But all income comes from debt ... (none / 1)

Necessary or not for balancing budgets, I want to see the use of primary resources taxed.

And inheritance should be taxed too -we need something with a redistributive effect.

On the other hand, labour need not be taxed at all (though income should be -we need automatic stabilisers in the economy).

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Fri Dec 26th, 2008 at 05:41:47 AM EST
[ Parent ]

Rent as in profit, rent as in payments for ... (none / 0)

... natural resources, rent as in the money handed over by renters to be allowed to continue occupying their flat/condo/house?

Monopoly rent, "Rent, Interest, Profit, Wages & Salaries" rent, or house rent?

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Dec 26th, 2008 at 11:52:08 AM EST
[ Parent ]

the first kind, of course (none / 0)

unearned profit on a resource

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Dec 26th, 2008 at 12:38:38 PM EST
[ Parent ]

That's the least common usage of the three. nt (none / 0)

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Dec 26th, 2008 at 01:45:21 PM EST
[ Parent ]

Not amongst economists :) (none / 1)

And actually it comes from the French word "rente" which is different from "location" wchich is rental.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Dec 27th, 2008 at 09:44:29 AM EST
[ Parent ]

Re: Not amongst economists :) (none / 0)

It depends on the topic at issue.

The most common usage in macroeconomics would be the national income accounting, where it is income streams owing to title to a natural resource, and the national income accounts make no judgement that one of the four sources of factor incomes is earned and another unearned ... in the national income accounts, all factor income is earned, and unearned income involves transfers that come from the taxes that introduce a wedge between earned and disposable income.

On the other hand, the neoclassical rent is unearned income due to the scarcity value irrespective of whether it is due to a claim on a natural resource or on productive equipment ... the rent that is incorporated into the purchase price for the strategic resource can just as easily be the rent on a taxi medallion when the number of licensed cabs has been allowed to fall behind the extent of the market as the rent on a favorable site for a wind farm.

And, after all, neoclassical economics is, after all, quite passé, even among marginalist economists.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Sat Dec 27th, 2008 at 11:55:47 AM EST
[ Parent ]

Re: Not amongst economists :) (none / 1)

Actually, no, it comes from the Latin, rendere...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Dec 29th, 2008 at 05:56:42 PM EST
[ Parent ]

Trapped (4.00 / 3)

The shift to self-financed old age (at least in the US) has put the average worker in an untenable position.

During the heyday of (unionized) heavy industry, workers were guaranteed a fixed rate pension based upon years of service, earnings and a few other easily calculated factors.

Now the majority of workers have to deal with managing at least part of their retirement funds in IRA's, 401K's and the like. This is where the trap comes from. If you put you money in entirely risk free instruments like treasury bonds or money market funds you will end up with less than you started with due to the effects of inflation.

If you put money into the stock market, either directly or through mutual funds, you run the risk of sudden changes in value. The current decline of 40% has happened before a half dozen times in the past 40 years. There is no reason to expect any change in the probability of this happening again in the future. If you have been saving steadily for 30 or so years and see the value of your savings cut by 1/3 it is as if you cut 10 years off your retirement plan.

Some have turned to more opaque investments as the Madoff scandal reveals. Many investors bought through third party funds (feeder funds) and didn't even know they were investing in his operation. Such third party funds don't have to reveal their investment decisions since they are not regulated by the SEC.

So, one has only bad choices: safety, but a zero or negative long term return, high risk in publicly traded shares, or outright gambling.

I would guess that on average most people don't get out much more than they put in when adjusted for the rise in the cost of living. If this weren't so then society would be continually creating wealth out of nothing. We can have the illusion of doing this, even for relatively long periods of time, but eventually values have to return to that of the underlying economic strength.

A few decades ago a very small proportion of the population was involved in the stock market. It is now over 40% and this influx has been pumping new money into the system for all this time. This alone has been enough to keep pushing prices higher.

Yet another reason why my insistence that we new a new system to replace traditional capitalism is overdue.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Dec 24th, 2008 at 11:15:29 AM EST

Re: Trapped (none / 1)

I would guess that on average most people don't get out much more than they put in when adjusted for the rise in the cost of living.

Actually, people on retirement get out of that system essentially as much, or less (when accounting that true capitalists are on average better gamblers, and managing funds) as people preparing for retirement at the same time are putting in the stock market. Sellers can only get out of it as much as buyer are willing and able to put into it.

So the system is no different that any euro-like repartition scheme, but with a strong random element added in. I wonder if we'll see many more bull markets now that the baby-boomers are retiring and the generations coming up are not as numerous...

Also, (and at least it is the case in France that) generational inequality is increasing : in France it used to be that a starting worker earned 15% less that his parents ; the difference now is 40%. That leaves much less to invest in the stock market for retirement..

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Wed Dec 24th, 2008 at 11:32:37 AM EST
[ Parent ]

Re: Trapped (4.00 / 2)

A significant caveat though: what you are saying is strictly true if you are thinking purely in terms of capital.

It should be remembered, though, that the value of a stock in a rational world should reflect the expected value of the series of dividends that it will yield from the moment of valuation.
Crazy speculative bubbles occur when it is no longer the case. But people in retirement can still get the dividends from their stocks even if they don't sell them.

Of course, most people really are trapped because they have to behave like investors without having access to the means of doing it well (though the libertarians will insist that each person is the most qualified to make his own decisions. Well, I know that if I want clothes in which I look good, I'd better ask my wife for advice. If I had a car, I would not trust myself with repairing the engine. And I don't think that decisions regarding my health are best left with me. But, as Keynes said, no one will believe that economics present the slightest difficulty). As Jérôme would say, that's a feature, not a bug.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Wed Dec 24th, 2008 at 12:05:08 PM EST
[ Parent ]

Re: Trapped (4.00 / 2)

I'm not sure the caveat about dividends is significant : the value of a liquid stock that has dividends decreases exactly by the amount of that dividend when it is given. Dividend is, in effect, capital being given back to the owners.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Thu Dec 25th, 2008 at 08:09:23 PM EST
[ Parent ]

Re: Trapped (none / 1)

Again, the traded value only matters if you are intending to sell the stock (and the fact that the value diminishes means that you can get it bought more easily, even with fewer people planning for retirement). If there are enough dividends you need not ever do so.

Besides, the value will fall on the day of dividend distribution, but all things equal will exactly come back over the course of the year. A company with stable earnings and PER will be expected to trade at the same value on the same calendar day of each year should risk aversion and interest rates remain stable.

"Few can believe that suffering, especially by others, is in vain. - Galbraith"

by Cyrille (cyrillev domain yahoo.fr) on Fri Dec 26th, 2008 at 12:36:37 AM EST
[ Parent ]

Re: Trapped (4.00 / 2)

The logic of building up before retirement and then spending the capital is not that of a rentier living of dividends ; when saving, during the work career, dividends are supposed to be reinvested immediately ; and after retirement, the future value of money is lowish, and stocks are being sold quickly. Most people won't be able to build up enough capital to live on dividends only, anyway ; especially for stocks : the one rent people tend to get from their capital is that of living in a home they own.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Fri Dec 26th, 2008 at 03:27:59 PM EST
[ Parent ]

Re: Trapped (none / 0)

I remember running through this logic with Migeru on a couple of occasions. One of his hobby horses is that this view is so very 19th century.

We currently have a tax code that taxes incomes far more than capital gains - that is, if you sell your stock or liquidate the underlying company, the profits from this operation will be taxed much more gently than the income you would derive from having the income paid out as dividends. This is not a minor incentive - in some countries it can be as much as half your net profits!

This kind of incentive means that "reinvesting" the money in the company (e.g. by spending the money to drive up the stock price by buying back stock) is more profitable to the shareholders - so long that they don't need liquidity so much.

Now, if this logic is reasonably correct, then

The profits from owning shares will be much less dependent on the underlying revenues than on "the sentiments of the market" - namely the valuation of the stock on the given day you happen to need liquid assets.
Short time horizons are applicable when making investment decisions - you don't expect to hang onto the stock, after all.
On the short time horizon, salesmanship, smoke and mirrors can be as effective at propping up share prices as a healthy underlying cash flow.

I don't think I need to spell out where I'm going with this... suffice is to say that it ends a bit like Star Wars usually does: Stuff Goes Boom.

- Jake

"Terraforming your own planet to make it uninhabitable hardly counts as epic win." - ThatBritGuy

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 26th, 2008 at 01:28:28 PM EST
[ Parent ]

Of course ... it relies on the Dragon Hoard ... (none / 0)

... theory of saving, the intuition that that "saving" works like building up a hoard of real assets that increase the total amount of real goods available when it is spent.

In reality, spending financial saving is putting a claim in to grab a share of current income, normally handing over a financial asset to those who are surrendering claims on current income.

Financial manipulations that are not a part of the process of increasing the total amount of goods and services available can't increase the total amount available to live on in retirement, they can only be part of redistributing that amount.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Dec 26th, 2008 at 11:57:10 AM EST
[ Parent ]

Re: Is the second 1% (none / 0)

Next time around, if we are to experience wall-to-wall coverage of all stages of the presidential contest, we would like the chance to vote. No saturation without representation.

Never gonna happen again. The cycle won't even be as long next time, as east as far as we'll be able to tell from the coverage. It just isn't going to interest the public that much. I mean, this year we had a black guy, a woman, and a corpse. How the hell do we top that, short of actually running Zombie Reagan?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Fri Dec 26th, 2008 at 12:20:07 AM EST

Re: Is the second 1% (none / 0)

as east as far

...at least as far....

More beer.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Fri Dec 26th, 2008 at 12:22:04 AM EST
[ Parent ]

Plus the President that made everyone want to ... (none / 0)

... think about his replacement.

Next four years will only be open on the Republican side, which will only attract much interest if Caribou Barbie runs, and eight years from now, who knows what the media landscape will be like.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Dec 26th, 2008 at 11:59:21 AM EST
[ Parent ]

Re: Plus the President (none / 1)

If I had to guess right now -- and obviously it's almost impossible to project these things -- I'd guess that 2012 is not going to be very close at the presidential level.

Caribou Barbie will run. Mittens will run. Each is a joke. I don't think Jindal will run.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (myfriends@thisispancakes.com) on Fri Dec 26th, 2008 at 12:10:19 PM EST
[ Parent ]

Re: Is the second 1% finally realizing.. (none / 1)

Not so bad article, but nothing will change. The society is build on wage-labour. Until capitaless and landless will develop significantly more self-sufficiency, they will never be in a position in society that in true market economy belongs to them. "Jobs" have not, and we should by now (after 100+ years experience) believe that they will not, liberate working class. And there is no political (or even significant "economical") movement willing to make a change.

by kjr63 on Fri Dec 26th, 2008 at 02:00:00 PM EST

Is the second 1% finally realizing it's been had? | 49 comments (49 topical, 0 editorial, 0 hidden)

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