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FT LTE: Much-touted prosperity of the west was fake

by Jerome a Paris Mon Oct 13th, 2008 at 01:34:22 AM EST

The FT has published the Letter to the Editor sent last week as a commentary to Martin Wolf's article on the 'savings glut" theory, which I discussed:


Much-touted prosperity of the west was fake

Sir, The "savings glut" theory that Martin Wolf resurrects (October 9) is a dangerous attempt to find mitigating factors to what is the root cause of the financial crisis: the reckless dereliction of duty by central bankers, politicians and financial leaders.

While Asia's mercantilist policies, and its desire no longer to have capital account deficits, are very real, its savings surplus has been largely created and fed by policies in the west. Central banks, led by Alan Greenspan's Fed, maintained absurdly low interest rates for too long despite massive asset bubbles whose existence they denied against all evidence until the last possible minute. In fact, these bubbles were a desired result, as they allowed for massive profits by the financial sector, and made it possible to hide from the general population the stagnation of their incomes caused by parallel policy measures such as labour market deregulation.

Fundamentally, people in the western hemisphere lived above their means. Together, these policies created an appearance of prosperity for all (gross domestic product was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few. The Asians were happy to tag along, as it allowed them to develop their infrastructure and economies, but it is unfair to blame them for the fact that the much touted - and very unequally shared - prosperity of the past years in the west was essentially fake, as the current crisis reveals the hard way.

Jérôme Guillet,
Editor, European Tribune

It looks like Martin Wolf had a hand in getting the letter published (his name is included in the byline), which is nice as he wrote back to me to say that he disagreed with the content of the letter. So thanks to Mr Wolf for letting that discussion continue in public.


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Good work, Jérôme!
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 13th, 2008 at 02:59:35 AM EST
I really do hope you have time to organize your thoughts on the "Anglo Disease" and work it into something publishable in an academic journal.

It is a useful analytical concept, and I think that you would be surprised by how quickly the concept would spread if you inked it out in something with a letter greater academic significance than ET.

The thing I keep coming back to in moments of clarity, when the milieu of the rhetoric being exchanged in the current crisis subsides, is wondering precisely how much of the "real", wealth producing, economy has been cored out by the speculative nonsense that the financial sector has been playing.

If what you're hinting at here, is on the ball, that the "prosperity" of the last decade was "fake" because it was achieved through financial tricks rather than the creation of items of use value to soak up the money value created by the financial sector, then if we properly account for these things and discount the value of derivatives and the like accordingly, the size of the economies of Western Europe and the US may be considerably smaller than we have been led to believe.

Now if the extent to which the pool use value (sorry to employ Marxist terms here, I can't think of a better way to put it) in the economy does not match the money value created by the financial sector becomes apparent.  Then, the question is the extent to which the proportion of money value to use value must increase, i.e. inflation?

Or, is it going to be a matter of large amounts of money value created by the financial sector being allowed to go puff?  This is essentially what happens when you have the collapse of these banks, yet the call to rescue them is, at least in part, a call to save the financial sector's funny money from being rendered worthless.

And look at the measures of US money supply.  The M1 measure has mushroomed over the last month so the question is whether the use value of money outside of the financial sector is being diluted to preserve the existence of this massive facade of wealth built up in derivatives and other games?

Are we allowing the purchasing power (this may be a better term than use value, but is problematic because we are talking about its use in reference to the standard frame of reference.) of grandpa's 401K to be diluted through inflation?  (If it costs $2 to buy what it used to take $1, then we've effectively cut purchasing power for the same quantity of money in half.)  

And all this is to preserve the false value created by Wall Street so that the trillions of dollars of derivatives and other exotic financial instruments are not converted to millions of dollars through returning their value to the realm of reason?  Isn't this s massive redistribution of wealth from the productive sectors of the economy in order to buoy the financial sector?  Wasn't it always so, but now the Ponzi scheme has been exposed for what it is? Isn't this the essence of the "Anglo Disease"?

Why not just let them lose their shorts (at the same time employing a strong, nay, dirigiste state presence in the economy to stamp out the financial tricks and ensure there's a semblance of a match between the purchasing power of production in the economy, and the amount of money that is being created in the financial sector), so that this funny money is drained from the system?

If we drain the cesspool at the same time that we have the government step in to provide capital directly to industrial sectors to maintain production, in the short term of course, don't we have the power to take money out of the hands of those that played the system, and put it back into the hands of working people?  To achieve in the medium term another of what Paul Krugman called "the great compression" in which economic inequality was rapidly reduced in the period between 1933-1950?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Mon Oct 13th, 2008 at 03:10:14 AM EST
Fundamentally, people in the western hemisphere lived above their means. Together, these policies created an appearance of prosperity for all (gross domestic product was up, on the back of strong income growth at the top) while effectively organising a vast transfer of wealth from the many to the few.

Bravo Jerome! One couldn't put it better then this!
It'll soon be visible how fake it was...
But where is the wealth? Where is the money from those prosperous times? All we ordinary people have is a mortgage and huge debt on credit cards and other loans.
We all were lead to think that we are making our wealth through ever incising value of our real estate. What now?


Science without religion is lame, religion without science is blind...Albert Einstein

by vbo on Mon Oct 13th, 2008 at 03:30:26 AM EST
I like the title they (?) chose for your letter.

Well done.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Oct 13th, 2008 at 05:02:41 AM EST
Maybe possibly Martin Wolf's whose name is on the byline of the article on the FT.com version online.

It is an appropriate title, absolutely.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 13th, 2008 at 05:33:41 AM EST
[ Parent ]
But of course... also a title that sends a specific message to the core FT audience. After all for them the prosperity was real. That's where the wealth was transferred to...
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 13th, 2008 at 05:38:15 AM EST
[ Parent ]
Welcome among the Serious People!

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 13th, 2008 at 05:47:27 AM EST
[ Parent ]
Is that meant as a compliment or an insult?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Oct 13th, 2008 at 06:00:47 AM EST
[ Parent ]
(In case </snark> is missing: ironic compliment and mock insult:-) )

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Oct 13th, 2008 at 06:28:55 AM EST
[ Parent ]
How nice!
As Ivonne said, "An adult conversation!"
Thanks to you both.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Mon Oct 13th, 2008 at 06:09:16 AM EST
what the replies to this letter will look like.

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Mon Oct 13th, 2008 at 07:42:11 AM EST
It would be interesting to see all of them - but we won't...
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 13th, 2008 at 08:18:51 AM EST
[ Parent ]
Why is that?

They tried to assimilate me. They failed.
by THE Twank (yatta blah blah @ blah.com) on Mon Oct 13th, 2008 at 08:31:32 AM EST
[ Parent ]
We'll only see what the FT decides to publish, if at all.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 13th, 2008 at 10:20:10 AM EST
[ Parent ]
BRAVO!

Good work Jérôme (and ET peanut-gallery editors)!

Now that you've got all this free time on your hands, I expect at least one of these masterpieces a week....  ;-P

Thanks for all the hard work, it's paying off!

by gioele (gioele(daught)sandler(aaaattttt)gmail(daught)kom) on Mon Oct 13th, 2008 at 01:50:33 PM EST
[Martin Wolf] wrote back to me to say that he disagreed...

What does he know differently from what you stated that he could be disagreeing with. The truth, the telling, unfortunately will be in the future.

He can't be disagreeing with the dereliction of duty point. Or can he? Just a few bad apples? The rating companies are supposed to be in bed with the companies they rate?

The west hasn't been feeding and taking advantage of the policies of the east; 1) Japan to shake out their 80's bubble and China and others to build infrastructure in lieu of gain fantastico? That Greenspan didn't keep rates too low too long? That these bubbles weren't a desired result, allowing the economy to be sucked dry lest everything stagnate.

That the income of the lower 90 or 95% hasn't stayed roughly the same since the 70's?

What is he disagreeing with?

The economy has been falsely on fire since the tech-bubble 90s. It appears that the following bubble (housing) was meant to disguise the fact that a shake out of the previous one hadn't fully occurred. But they knew that they couldn't go through a 3 year trough like Reagan did and survive.

Then the Amp'd Economy of the False Trade-bubble spun the housing-bubble to another dimension - the shake out will have to be gi-normous.

To bet that Dow 9,000 is the end of a shake-out is to bet that everything is up from here. We have seen the last of it. The recession is over. 750 billion thin-air-created dollars, promised but not yet thrown into the pool, has inoculated us from the 30 trillion dollar false economy of trades on fake trades. Everyone can jump right in, the chlorine that is coming -being loaded on the truck right now - has cleaned the feces from the pool. It is safe now. Get your shopping on~!

One wonders if Martin Wolf can post to other sites - perhaps he would like to explain or defend his disagreeing statement.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Tue Oct 14th, 2008 at 03:45:03 AM EST
... but as the recession unfolds, the index level of a p/e ratio of around 7 will be declining.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Oct 14th, 2008 at 01:39:27 PM EST
[ Parent ]


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Oct 14th, 2008 at 01:39:58 PM EST
[ Parent ]
Certainly the complete and final triumph of finance capital turned out to be short-lived and the collapse made the collapse of the communist regimes in eastern europe seem slow motion
by rootless2 on Tue Oct 14th, 2008 at 06:49:21 AM EST
the complete and final triumph of finance capital
...was and always has been an elaborate PR operation on behalf of the looters.  As we blog, be certain that from the American Enterprise Institute to The Hudson Institute the right wing think tanks are hard at work trying to come up with new confounding rhetoric to replace what has just exploded.  They seem to have no requirement for historical memory or logical consistency.  Their only criterion is rhetorical effectiveness.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Oct 15th, 2008 at 12:36:01 AM EST
[ Parent ]


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