European Tribune - Community, Politics & Progress.

Revenge of the real economy

by Colman
Fri Apr 25th, 2008 at 03:27:10 AM EST

Mohamed El-Erian in the FT is expecting the real economy to have its revenge on the financial system shortly:

Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.
Economic data in the US have taken a notable turn for the worse. Most im portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.
Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

Well, if you will run a system based on the idea that you can spend beyond your means indefinitely ...

I'm not sure it's fair to describe this as the real economy contaminating the financial system: the consumers have been living beyond their means precisely because they were encouraged to and taught to by the financial industry.

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Revenge of the real economy | 25 comments (25 topical, 0 editorial, 0 hidden)

Re: Revenge of the real economy (4.00 / 4)

Well, it's an attempt to shift the blame from the financial system and it will probably work. Everyone knows that bankers never do anything wrong, they are just sometimes taken advantage of by unscrupulous members of the real economy.

by Metatone (metatone [a|t] gmail (dot) com) on Fri Apr 25th, 2008 at 05:17:07 AM EST

Re: Revenge of the real economy (4.00 / 2)

European Tribune - Community, Politics & Progress.

Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption.

Disruption of what? surely the real economy is the playing field we're all on so it's a disruption to somebodies wishful thinking economics.

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

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Apr 25th, 2008 at 05:48:22 AM EST

There is no real economy ... (4.00 / 2)

... in the technical sense of the actual economy as distinct from the projection of the actual economy into monetary values.

(And the fiction that such a thing exists is part and parcel of the fiction that the economy is something other than a social subsystem.

Because the actual economy is a monetary production economy. To set up a model that emulates our economy, but where monetary aggregates do not matter in their own right, its necessary to have more information input from the future that we don't actually have, and to have synchronization between markets that we don't actually have, and for markets for goods and services and labor to be actual organized markets, and not just sets of transactions described as markets as a loose analogy.

Since you need a bunch of stuff that is not so, in order to remove the impact of aggregate monetary values in their own right, that means that in the real world, money is not neutral, and so in the real world, monetary institutions are part of the actual economy.

So there is no such thing as a "real" economy in the marginalist economist's sense of the term ... not among the monetary production economies of the world, at any rate.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Apr 25th, 2008 at 09:31:43 AM EST
[ Parent ]

Re: There is no real economy ... (none / 0)

So, basically, what you're saying is that there are few principled reasons to distinguish between "speculation" (what one might refer to as large-scale bookmaking) and "the real economy" (i.e. the part that makes railroads, steel, electricity, etc.). Or am I reading too much into you here?

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 25th, 2008 at 09:42:58 AM EST
[ Parent ]

Re: There is no real economy ... (none / 0)

No, I'm saying that the "real economy" phrase is another one of those jargon shell games by marginalist economists, used with one technical meaning in technical discussions with economists, but read as meaning something else when they describe their analysis to non-economists.

Indeed,, pretending that there is a real economy distinct from the monetary economy does an excellent job of confusing the effort to distinguish between speculation and prudent financial investment, because that is a distinct that is within the financial sector.

Appealing to a fictitious realm to try to make the distinction does not help matters, because the con artists rationalizing the speculation when it helps them garner a larger share of a nation's income tend to be skilled at creating fictions.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Apr 25th, 2008 at 10:34:17 AM EST
[ Parent ]

Thanks (none / 1)

I think I get it better now.

The distinction is not between the "real economy" and the "financial economy" - rather, it is between the "making stuff" economy and the "making bets" economy. And the shell game is that parts of the financial sector are in the former, and parts of the non-financial sector are probably in the latter.

- Jake

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

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 25th, 2008 at 11:04:30 AM EST
[ Parent ]

Yes ... the difference between ... (none / 1)

... the finance sector at the service of the productive sector, or the productive sector at the service of the finance sector.

The finance sector makes an excellent servant for a monetary production economy, and an egregious master.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Apr 25th, 2008 at 11:32:23 PM EST
[ Parent ]

Re: There is no real economy ... (none / 0)

glad you explained that I was in danger of being suckered by the bollocks of their frame there for a minute.

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

by ceebs (ceebs (at) eurotrib (dot) com) on Fri Apr 25th, 2008 at 01:35:07 PM EST
[ Parent ]

Re: There is no real economy ... (none / 0)

The thing is, it could be a great frame, but they've sabotaged it.

Kind of "attack them where you are weakest", marginalist economics claiming ownership of the term "real".

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Sat Apr 26th, 2008 at 12:34:20 AM EST
[ Parent ]

Or, shorter and pithier ... (none / 0)

... what you're saying is that there are few principled reasons to ...

No, I am saying that the principle that marginalist economists try to use as a foundation for the distinction is a load of bullshit.

Its not as if marginalist economists represent all economics ... fortunately, since this issue is outside the scope of their analytical toolkit.

Utsukushikereba sore de ii

by BruceMcF (agila61 at netscape dot net) on Fri Apr 25th, 2008 at 10:41:30 AM EST
[ Parent ]

Re: There is no real economy ... (4.00 / 2)

So there is no such thing as a "real" economy in the marginalist economist's sense of the term ... not among the monetary production economies of the world, at any rate.

yup, it's just an avatar economy! a desktop icon, not the application!

they made the lead of an economy tied to the real world into the gold of their 'second life' 3d artefact, where numbers cuddle and multiply in the test tube of their imaginations, untied to such gross concepts as resources, externalities, er hello!, just because it's outside your tinted limo window doesn't mean it's not happening, let alone concern to a future human existence of any quality on this planet, or for any of the doomed denizens who can't afford the comfort-buffer.

2-year-olds have more sense!

the media didn't see it coming... they were paid to turn a blind eye.

"Two wrongs don't make a right, but three lefts do." Jim Hightower

by melo (melometa4(at)gmail.com) on Sat Apr 26th, 2008 at 04:10:47 AM EST
[ Parent ]

Re: There is no real economy ... (none / 0)

melo:

yup, it's just an avatar economy! a desktop icon, not the application!

Great line, melo!

I wish I had said that

<you will, Chris, you will>

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 Sat Apr 26th, 2008 at 07:41:57 AM EST
[ Parent ]

Re: Revenge of the real economy (4.00 / 2)

And just what have you been doing with all that rope we gave you?

The blurker formerly known as ignorant bystander.

by b--- (budr at hughes net) on Fri Apr 25th, 2008 at 07:15:31 AM EST

Re: Revenge of the real economy (4.00 / 3)

"Wrapping it around your necks to take our fall. Aren't we the coolest?"

by Colman (colman at eurotrib.com) on Fri Apr 25th, 2008 at 07:21:52 AM EST
[ Parent ]

Re: Revenge of the real economy (3.83 / 6)

European Tribune - Revenge of the real economy

Pity the US consumers. Their ability to sustain spending is already challenged by the declining availability of credit, a negative wealth effect triggered by declining house values, and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will accentuate the pressures on consumers, leading to income declines and a further loss of confidence.

Producing more while getting paid less had nothing to do with this.

I love punditry like this. It's so very, very serious, and so very, very cattle-like in its rolling four-footed stupidity.

Also, 'negative wealth effect' - isn't that a wonderful phrase?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Apr 25th, 2008 at 07:55:27 AM EST

Re: Revenge of the real economy (4.00 / 2)

It is a wonderful phrase, whatever it means.

I hypothesise that if I choose not to believe in reality then absolutely none of this will effect me.

Ad astra per aspera

by In Wales (inwales aaat eurotrib.com) on Fri Apr 25th, 2008 at 09:19:25 AM EST
[ Parent ]

Re: Revenge of the real economy (4.00 / 4)

We'll make an economist out of you yet.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Apr 25th, 2008 at 09:22:25 AM EST
[ Parent ]

Re: Revenge of the real economy (none / 0)

Wealth effect is that feeling that there is plenty of money floating around that will always be there, especially in my house. Forget the fact that I am not making any more, nor do I have any savings, but hey, I can borrow on my house.

The money that people have been withdrawing from their HomeATM® was measured in the billions and kept the US out of recession for years. In 2000 and 2001, the GDP was so low it was only the borrowed money that people were spending that kept the nominal GDP positive.

But alas, the machine closes when the wealth effect doesn't feel the same...in fact, the wealth effect of the decreasing value of the house and the bank that won't lend is...here it comes...a negative wealth effect.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Fri Apr 25th, 2008 at 10:42:17 AM EST
[ Parent ]

Re: Revenge of the real economy (none / 0)

Yes, that damned real economy ruining their party....

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

by Drew J Jones (myfriends@thisispancakes.com) on Fri Apr 25th, 2008 at 10:49:18 AM EST

Re: Revenge of the real economy (4.00 / 3)

Never trust anything published in FT.
Never trust anything written by a person whose living comes from making money from money.

The sky is falling, but this current downturn isn't it. It's just another turn in the business cycle. Since the world has gone off the gold standard, there are no physical restrictions on what countries can do to correct financial imbalances. The only limit is the willingness of others to accept their money or credit. When the strongest nation on earth (US) starts to get shaky its currency devalued about 50%. When one of weakest (Zimbabwe) acts imprudently, they can't give it away and inflation rates reach 30,000%.

The US has a cushion, in that if the currency sinks too far all those holding treasury notes will suffer a big loss. This keeps a lid on wild currency movement.

The real sky is falling scenario is unfolding much more slowly, it is a combination of over population, excessive consumption, declining resources and uncontrolled pollution. There are no realistic plans for how to deal with this. In fact there may be no way out of this that doesn't involve huge dislocations. The population of the earth is now so large that the loss of a few million people in a regional conflict hardly makes the news anymore. From 2-3 million to 100 million is a small step, especially if those suffering are "over there".

The only risk to the developed nations is that the civil wars which are becoming commonplace in Africa and other poor regions spread back home when the imbalances in society get too large. The riots in France should be a warning to those in Europe. The US hasn't had its wakeup call yet.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Apr 25th, 2008 at 06:49:27 PM EST

Re: Revenge of the real economy (none / 0)

That's it in a nutshell

You can't be me, I'm taken

by Sven Triloqvist on Fri Apr 25th, 2008 at 07:10:14 PM EST
[ Parent ]

Re: Revenge of the real economy (3.50 / 2)

rdf:

The sky is falling, but this current downturn isn't it. It's just another turn in the business cycle. Since the world has gone off the gold standard, there are no physical restrictions on what countries can do to correct financial imbalances. The only limit is the willingness of others to accept their money or credit.

The sky is commencing its fall IMHO but the problem does not lie in the US exchange rate. I agree with you that creditor nations share an unholy mutual interest in not seeing the dollar go entirely down the toilet.

That is not the problem.

The problem in the US is that the deficit-based monetary system is entirely - and probably permanently - fucked.

ie a pending shortage of money.

IMHO the only policies capable of avoiding the pending Depression are fiscal: a Green New Deal, for choice.

Unfortunately not one of the existing Presidential candidates shows any signs of applying any policies other than conventional monetary insanity.

Give it a few months, and lots of red lights will be showing....

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 Apr 25th, 2008 at 08:58:30 PM EST
[ Parent ]

Sounds about right (none / 1)

ChrisCook, I think you've got the general outline right, and nobody can predict all the details yet anyway. I saw a joke that's going around in Europe.

Q: What's the difference between one dollar and one euro? ... A: One euro.

That not-so-light-hearted jest tends to confirm your point that the "deficit dollar" has about reached the end of its useful life, and high time, too.

On the other hand, I'm not sure about a "shortage of money." I think the Feds will continue to respond by feeding money into the system. What's not clear is how and where they would feed it. I do totally agree that a works program is the only possible right answer, assuming that's what you mean by a "Green New Deal."

Since our friends the financiers have failed so pathetically to manage the, you know, finances, it's time for others to get a shot at running the system.

Obama will be smart enough to make that happen, I think. A few more months like these past few and an awful lot of people are going to be ready to go along with him on it.

Less than a mile from my house in New Jersey, I just saw gasoline at $3.54 and diesel at $4.49. If those prices persist, big changes are coming to Main Street a lot sooner than most people realize.

by Ralph on Sat Apr 26th, 2008 at 02:04:21 AM EST
[ Parent ]

Re: Sounds about right (none / 0)

Ralph:

On the other hand, I'm not sure about a "shortage of money." I think the Feds will continue to respond by feeding money into the system. What's not clear is how and where they would feed it.

The shortage of money derives from the nfact that historically it has been the Banks - not the Fed - which creates it.

Bank balance sheets are fucked, but more than that the investors (through securitisation, credit derivatives and credit insurance) whose capital actually backed most of the credit fuelling the Mother of All Bubbles have gone - probably for good.

The question is whether the Fed actually dares to bail out the banks by buying rather than pawning their toxic waste. As opposed to actually nationalising the banks like we do over here.

Did you mean to give me a "3"? I'm offended! ;-)

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 Sat Apr 26th, 2008 at 07:53:37 AM EST
[ Parent ]

Re: Revenge of the real economy (none / 0)

The US hasn't had its wakeup call yet.

yes it has, it was the sixties, and they've slept through the alarm.

oh yeah and jailed a quarter of the young black population, meanwhile, with imported crack and zero tolerance, guns as easy to score as a gram of mindfuck-rock.

they just built a tougher pressure cooker.

psst, that steam escaping from under the thingy in the lid, that's obama.

if it weren't for that...well, let's say it feels good to have the atlantic there.

it's kinda hilarious that the only tactic powerful enough to chill large crowds of unemployed, 'bitter' people, gathering for great sports events etc, might be to legalise puff.

less controversial than spraying them with 'anomie-gas' from helicopters or knocking them over with water cannon!

that's the last card they'll have to pull out of their ermine sleeves, lol.

go back home and, like good children, listen to your ipods, chill and dream up a better world, while we finish properly raping this one.

shurrup and watch the telly, basically...oh wait...

backs would really have to be up against the wall to make that happen, the pope would have to make it the eucharist in italy!

gonna fill those churches again though! what about it benedict?

do the math, you think waxen saints are going to pull them in for ever? why should the devil get all the best drugs?

grillo for pontiff!

"Two wrongs don't make a right, but three lefts do." Jim Hightower

by melo (melometa4(at)gmail.com) on Sat Apr 26th, 2008 at 04:31:03 AM EST
[ Parent ]

Revenge of the real economy | 25 comments (25 topical, 0 editorial, 0 hidden)

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