Quote: Original post by Zahlman

Quote: Original post by LessBread
So the closer the line gets to vertical, the greater the percentage rate of growth?

Yes, that's a property of logarithmic plots. (If it were a linear plot, the slope of the line would indicate absolute growth.)

Quote: And the percentage rate is the rate of growth expressed as a percentage of the prior year?

Yes; are there other feasible definitions that I'm not aware of?

Please don't read ulterior motives into these questions. I'm merely seeking clarity.

Quote: Original post by Zahlman

Quote:
The dip in the Great Depression marks 1937, when Roosevelt cut back on spending. The overall trend line appears to gain in steepness after WWII.

The data from 1945-1960 seemed a bit iffy to me. There was a lot of fallout from the war politically, and then finally the new era of American politics came in with Nixon's Southern Strategy; presumably these are related.

Iffy how? Political fallout from WWII, such as? Nixon's Southern Strategy was put into play in 1968. It sought to gain advantage from the backlash to the Civil Rights movement. The span 1945-1960 saw Presidents Truman, Eisenhower, Kennedy and Johnson. Nixon was Eisenhower's Vice President. His most noted moments in the 1950's were leading the House Un-American Activities Committee, the Checker's Speech and his five o'clock shadow during the first televised Presidential election debate in 1960.

Quote: Original post by Zahlman

Quote:
Taxes were tripled during the Great Depression and the slope flipped. Maybe the tax rate should be charted along with the GDP?

I could probably spend an afternoon and do the research and drudge work myself. Probably not for a little while though.

I compiled a table of the data, 1929-1969.

Quote: Original post by Zahlman
I'd like to see the GDP charted against all tax rates, not just the highest. But then, since the income tax brackets have changed around a fair bit, that might be difficult to do in a fair and useful way.

I didn't check around the site I got the top rates from for tables regarding other tax brackets. Maybe they've compiled data for those brackets as well.

Quote: Original post by Zahlman

Quote: It seems to me that we have had some difficulty learning to control deflation.

:) Personally I find the interest rates ridiculously low now (and they've been like this for the past few to several years). Sure, it's great for squeezing out the last few drops of those deliciously lemony home markets (all kinds of metaphor and pun are intended in there... I think), but how am I supposed to save for my future?

I agree that declining interest rates are an important concern. I think that our economic elites have difficulties confronting deflation because the solutions run against the grain of the anti-inflation orthodoxies that guide their thinking. They hold that wage increases produce inflation, so keeping inflation in check requires preventing wage increases. That has been accomplished in a variety of ways, marginalizing unions, exporting skilled jobs, importing cheaper labor. Now they must confront the success of their project as deflation looms.

If Consumers ‘Have To Rely On Their Sinking Wages, The Entire Economy Is In Trouble’, Tough Times in Troubled Towns, When Consumers Cut Back: An Object Lesson From Japan, Gloom persists despite audacious Obama plans

I thought this was funny. Schiff today published a brief editorial mirroring my cave man example, maybe his verbage will illustrate the point more clearly than my efforts.


Link

Quote:

In his first televised speech before Congress, President Obama asserted that prosperity will return once the government restores the flow of credit in the economy. It may come as a surprise to him, but an economy cannot run on consumer loans. Furthermore, credit stopped flowing in the U.S. for a very good reason: there was no more savings left to loan. Government efforts to simply make credit available, without rebuilding productive capacity or increasing savings, are doomed to destroy what’s left of our economy.

The central tenets of Obamanomics appear to be that access to credit will enable people to borrow money to buy stuff, the spending will spur production and employment, and thus the economy will grow. It’s a neat and simple picture, but it has nothing whatsoever to do with how an economy works. The President does not understand that consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.

Suppose there is a very small barter-based economy consisting of only three individuals, a butcher, a baker, and a candlestick maker. If the candlestick maker wants bread or steak, he makes candles and trades. The candlestick maker always wants food, but his demand can only be satisfied if he makes candles, without which he goes hungry. The mere fact that he desires bread and steak is meaningless.

Enter the magic wand of credit, which many now assume can take the place of production. Suppose the butcher has managed to produce an excess amount of steak and has more than he needs on a daily basis. Knowing this, the candlestick maker asks to borrow a steak from the butcher to trade to the baker for bread. For this transaction to take place the butcher must first have produced steaks which he did not consume (savings). He then loans his savings to the candlestick maker, who issues the butcher a note promising to repay his debt in candlesticks.

In this instance, it was the butcher’s production of steak that enabled the candlestick maker to buy bread, which also had to be produced. The fact that the candlestick maker had access to credit did not increase demand or bolster the economy. In fact, by using credit to buy instead of candles, the economy now has fewer candles, and the butcher now has fewer steaks with which to buy bread himself. What has happened is that through savings, the butcher has loaned his purchasing power, created by his production, to the candlestick maker, who used it to buy bread.

Similarly, the candlestick maker could have offered “IOU candlesticks” directly to the baker. Again, the transaction could only be successful if the baker actually baked bread that he did not consume himself and was therefore able to loan his savings to the candlestick maker. Since he loaned his bread to the candlestick maker, he no longer has that bread himself to trade for steak.

The existence of credit in no way increases aggregate consumption within this community, it merely temporarily alters the way consumption is distributed. The only way for aggregate consumption to increase is for the production of candlesticks, steak, and bread to increase.

One way credit could be used to grow this economy would be for the candlestick maker to borrow bread and steak for sustenance while he improves the productive capacity of his candlestick-making equipment. If successful, he could repay his loans with interest out of his increased production, and all would benefit from greater productivity. In this case the under-consumption of the butcher and baker led to the accumulation of savings, which were then loaned to the candlestick maker to finance capital investments. Had the butcher and baker consumed all their production, no savings would have been accumulated, and no credit would have been available to the candlestick maker, depriving society of the increased productivity that would have followed.

On the other hand, had the candlestick maker merely borrowed bread and steak to sustain himself while taking a vacation from candlestick making, society would gain nothing, and there would be a good chance the candlestick maker would default on the loan. In this case, the extension of consumer credit squanders savings which are now no longer available to finance other capital investments.

What would happen if a natural disaster destroyed all the equipment used to make candlesticks, bread and steak? Confronted with dangerous shortages of food and lighting, Barack Obama would offer to stimulate the economy by handing out pieces of paper called money and guaranteeing loans to whomever wants to consume. What good would the money do? Would these pieces of paper or loans make goods magically appear?

The mere introduction of paper money into this economy only increases the ability of the butcher, baker, and candlestick maker to bid up prices (measured in money, not trade goods) once goods are actually produced again. The only way to restore actual prosperity is to repair the destroyed equipment and start producing again.

The sad truth is that the productive capacity of the American economy is now largely in tatters. Our industrial economy has been replaced by a reliance on health care, financial services and government spending. Introducing freer-flowing credit and more printed money into such a system will do nothing except spark inflation. We need to get back to the basics of production. It won’t be easy, but it will work.

President Obama would have us believe that we can all spend the day relaxing in a tub while his printing press does all the work for us. The problem comes when you get out of the tub to go to dinner and the only thing on your plate is an IOU for steak.

Quote: Original post by Dreddnafious Maelstrom
I thought this was funny. Schiff today published a brief editorial mirroring my cave man example, maybe his verbage will illustrate the point more clearly than my efforts. Link

Quote:
In his first televised speech before Congress, President Obama asserted that prosperity will return once the government restores the flow of credit in the economy. It may come as a surprise to him, but an economy cannot run on consumer loans. Furthermore, credit stopped flowing in the U.S. for a very good reason: there was no more savings left to loan. Government efforts to simply make credit available, without rebuilding productive capacity or increasing savings, are doomed to destroy what’s left of our economy.

The central tenets of Obamanomics appear to be that access to credit will enable people to borrow money to buy stuff, the spending will spur production and employment, and thus the economy will grow. It’s a neat and simple picture, but it has nothing whatsoever to do with how an economy works. The President does not understand that consumption is made possible by production and that credit is made possible by savings. The size and complexity of modern economies has obscured these simple concepts, but reducing the picture to a small scale can help clear away the fog.
...

Clear the fog? More like add to it. Obama didn't claim that the economy only ran on consumer loans. "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll." Full text of Obama's speech.

Instead of spinning a bed time fable, Schiff could have used those nine paragraphs to explain in more detail his assertion that the productive capacity of the United States is in tatters. Of course, if he did that, he would likely expose the charade behind his supply side perspective on the economy and it's inability to account for the slump in consumer spending: The Trouble With Consumer Spending. US economic growth dives by 6.2% in fastest fall since 1982 Consumer spending, originally thought to be down 3.5 per cent, was in fact down 4.3 per cent – a major correction, since consumers account for two-thirds of US GDP. In turn, their increasing caution has left manufacturers racing to cut production to reflect reduced demand, feeding a downward spiral that economists predict will not reverse until at least the middle of this year.

According to these statistics, INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION, US industrial production is falling but remains above the average for the year 2002. Utilization, on the other hand, is 9 points below the average for the last three decades. If I understand these statistics correctly, what they show is that the problem isn't on the supply side but the demand side. Industry is producing more than is currently being consumed. So applied to the story of the butcher, the baker and the candlestick maker, the butcher has plenty of extra steaks available to loan.

[Edited by - LessBread on February 28, 2009 4:28:14 AM]

Quote: Original post by LessBread
Clear the fog? More like add to it. Obama didn't claim that the economy only ran on consumer loans. "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll." Full text of Obama's speech.

Which is demonstrably wrong, and the point Schiff is making. The lifeblood of our economy is capital, actual capital, not credit.

Quote:
Instead of spinning a bed time fable, Schiff could have used those nine paragraphs to explain in more detail his assertion that the productive capacity of the United States is in tatters. Of course, if he did that, he would likely expose the charade behind his supply side perspective on the economy and it's inability to account for the slump in consumer spending: The Trouble With Consumer Spending. US economic growth dives by 6.2% in fastest fall since 1982 Consumer spending, originally thought to be down 3.5 per cent, was in fact down 4.3 per cent – a major correction, since consumers account for two-thirds of US GDP. In turn, their increasing caution has left manufacturers racing to cut production to reflect reduced demand, feeding a downward spiral that economists predict will not reverse until at least the middle of this year.

First, Schiff isn't a "supply sider." It would be neat if you could discuss an issue without stamping everyone with your preconceived labels.

Second, The middle of this year is a fairy tale. Barring a miracle, we're looking at switching from the dollar reserve method to an alternate method. Think 1913, or Breton Woods.

Quote:
According to these statistics, INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION, US industrial production is falling but remains above the average for the year 2002. Utilization, on the other hand, is 9 points below the average for the last three decades. If I understand these statistics correctly, what they show is that the problem isn't on the supply side but the demand side. Industry is producing more than is currently being consumed. So applied to the story of the butcher, the baker and the candlestick maker, the butcher has plenty of extra steaks available to loan.

You do understand a portion of what this tells you. You don't understand that Federal Reserve policy distorted the market signals with free money for both production and consumption. As in my example, as in Schiff's, someone is promising to pay for the goods and the cost of production with illusionary capital.

[Edited by - Dreddnafious Maelstrom on March 1, 2009 2:12:04 AM]

Quote: Original post by Dreddnafious Maelstrom

Quote: Original post by LessBread
Clear the fog? More like add to it. Obama didn't claim that the economy only ran on consumer loans. "You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll." Full text of Obama's speech.

Which is demonstrably wrong, and the point Schiff is making. The lifeblood of our economy is capital, actual capital, not credit.

If that was the point he was making, then why didn't he come straight out and say it that way? Why did he focus on consumer loans and not all loans? It seems to me that Schiff probably heard the speech but didn't consult the text of the speech in preparation for writing his response. He heard what he wanted to hear and wrote his response based on that. It indicates a degree of sloppiness on his part.

Quote: Original post by Dreddnafious Maelstrom

Quote:
Instead of spinning a bed time fable, Schiff could have used those nine paragraphs to explain in more detail his assertion that the productive capacity of the United States is in tatters. Of course, if he did that, he would likely expose the charade behind his supply side perspective on the economy and it's inability to account for the slump in consumer spending: The Trouble With Consumer Spending. US economic growth dives by 6.2% in fastest fall since 1982 Consumer spending, originally thought to be down 3.5 per cent, was in fact down 4.3 per cent – a major correction, since consumers account for two-thirds of US GDP. In turn, their increasing caution has left manufacturers racing to cut production to reflect reduced demand, feeding a downward spiral that economists predict will not reverse until at least the middle of this year.

First, Schiff isn't a "supply sider." It would be neat if you could discuss an issue without stamping everyone with your preconceived labels.

Engaging in a bit of self moderation I see (I caught your original remarks before you edited them). Yes, I'm not as familiar as you are with Schiff's economic predilections, but given that he pointed to "productive capacity" as the problem, calling him a "supply sider" isn't a huge stretch. Poking around on the google, I see that Schiff famously debated Laffer on Kudlow's show a few years back, so he probably isn't a full blooded supply sider. Just the same, he's pretty much out there alone in pointing to "productive capacity" as the root of the current problem.

Quote: Original post by Dreddnafious Maelstrom
Second, The middle of this year is a fairy tale. Barring a miracle, we're looking at switching from the dollar reserve method to an alternate method. Think 1913, or Breton Woods.

The snippet identifies the middle of the year as the earliest the economy could bottom out - "... will not reverse until at least the middle of this year." It doesn't report that it will happen then, only that economists predict it won't happen sooner. From what you've written, it appears that you agree. To jump from that to predicting an end to the dollar as reserve currency is quite a leap, especially when you've not backed up your dire prediction with any supporting evidence.

Quote: Original post by Dreddnafious Maelstrom

Quote:
According to these statistics, INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION, US industrial production is falling but remains above the average for the year 2002. Utilization, on the other hand, is 9 points below the average for the last three decades. If I understand these statistics correctly, what they show is that the problem isn't on the supply side but the demand side. Industry is producing more than is currently being consumed. So applied to the story of the butcher, the baker and the candlestick maker, the butcher has plenty of extra steaks available to loan.

You do understand a portion of what this tells you. You don't understand that Federal Reserve policy distorted the market signals with free money for both production and consumption. As in my example, as in Schiff's, someone is promising to pay for the goods and the cost of production with illusionary capital.

That seems rather here nor there, but to be generous, as you saying that those statistics can't be trusted? If so, that's might convenient as they directly contradict Schiff's thesis. Are there different statistics that you prefer, or are you content with downplaying these so that you can inject your unsubstantiated assertions into the discussion?

It seems that you disagree with equating money with capital. If so, please clarify, because the notion seems like common sense. A person needing capital to start a business goes to the bank for a loan which he gets in the form of money. Or he goes to a venture capitalist instead, but the result is the same, money in order to get the new business up and running.

Quote: Original post by LessBread
If that was the point he was making, then why didn't he come straight out and say it that way? Why did he focus on consumer loans and not all loans? It seems to me that Schiff probably heard the speech but didn't consult the text of the speech in preparation for writing his response. He heard what he wanted to hear and wrote his response based on that. It indicates a degree of sloppiness on his part.

He does say it Less, that's what's frustrating in discussing this issue with you. You don't seem to understand points that refute your preconceptions. At first I attributed it to malice, then to a lack of domain knowledge, at this point I'm at a loss.

He focuses on consumer loans because analogues based on microeconomics are easier to draw than those based on macroeconomics. Further, the reader can more easily relate the lesson to their personal knowledge versus being burdened with your beloved "jargon" that enters into a macro example.

Quote:
Engaging in a bit of self moderation I see (I caught your original remarks before you edited them).

I'm trying. You some times shock me with the ummm, "creativity" of your positions. I'll profess to my gut instinct being to deride unreasonable positions, and sometimes the person that carries them. I have to remind myself that you're just parroting what you've read for the most part, and your opinions suffer from their source, not any deficiency on your part personally.

Quote: Yes, I'm not as familiar as you are with Schiff's economic predilections, but given that he pointed to "productive capacity" as the problem, calling him a "supply sider" isn't a huge stretch. Poking around on the google, I see that Schiff famously debated Laffer on Kudlow's show a few years back, so he probably isn't a full blooded supply sider. Just the same, he's pretty much out there alone in pointing to "productive capacity" as the root of the current problem.

I'll agree that the difference is in the details, but the details make all the difference. :)

If you insist on a black and white pairing of economics schools, with one side being demand siders and one side being supply siders then you could attribute him to a supply sider. However, this simplification misses the point.

What's more pertinent is that whether one is a demand sider or supply sider should be immaterial to his example.

Quote:
The snippet identifies the middle of the year as the earliest the economy could bottom out - "... will not reverse until at least the middle of this year." It doesn't report that it will happen then, only that economists predict it won't happen sooner. From what you've written, it appears that you agree. To jump from that to predicting an end to the dollar as reserve currency is quite a leap, especially when you've not backed up your dire prediction with any supporting evidence.

What do you think the Fed has been meeting with its' creditors about exactly? What supporting evidence was in play when Nixon broke Bretton Woods to establish the dollar reserve? What supporting evidence was in play when the US left the gold standard?

Quote:
That seems rather here nor there, but to be generous, as you saying that those statistics can't be trusted? If so, that's might convenient as they directly contradict Schiff's thesis. Are there different statistics that you prefer, or are you content with downplaying these so that you can inject your unsubstantiated assertions into the discussion?

As it must to you, you don't understand the difference between credit and capital.

Quote:
It seems that you disagree with equating money with capital. If so, please clarify, because the notion seems like common sense. A person needing capital to start a business goes to the bank for a loan which he gets in the form of money. Or he goes to a venture capitalist instead, but the result is the same, money in order to get the new business up and running.

You're being very loose with your terminology. "Money" is nebulous in your paragraph, and tells us nothing of what you are trying to describe. By "money" you can mean the actual "specie", you can mean "credit", you can mean "capital", the reason this is important is because each of the above are different creatures, especially as it relates to any macroeconomic view, which is what we're purportedly discussing.

{Warning, some jargon involved, my apologies)
** The difference to the borrower, between credit and capital is that he does not have to pay back his own capital. The difference if he's borrowing someone else's capital, or if he's borrowing a credit expansion is microscopic on the micro scale, but measured on the macro scale as velocity of money.

Money borrowed that is actually backed by another's capital, on the macro level, signals an intrinsic demand capacity. Money borrowed on credit expansion is necessarily speculative, and often generates excess capacity, where the market has not signaled intrinsic demand to satisfy the additional production. This case specifically leads to malinvestment. Artificially lowering the cost of money changes the borrower/saver metric substantially.

This is the nature of financial bubbles. The current economic debate in Washington is about how to reinflate the bubble.

[Edited by - Dreddnafious Maelstrom on March 2, 2009 12:00:39 AM]

Quote: Original post by Dreddnafious Maelstrom

Quote: Original post by LessBread
If that was the point he was making, then why didn't he come straight out and say it that way? Why did he focus on consumer loans and not all loans? It seems to me that Schiff probably heard the speech but didn't consult the text of the speech in preparation for writing his response. He heard what he wanted to hear and wrote his response based on that. It indicates a degree of sloppiness on his part.

He does say it Less, that's what's frustrating in discussing this issue with you. You don't seem to understand points that refute your preconceptions. At first I attributed it to malice, then to a lack of domain knowledge, at this point I'm at a loss.

He misrepresented what Obama said in his speech last Tuesday. From that it follows that he's arguing with a strawman and the rest of his remarks are garbage. It's not malice, it's not a lack of knowledge, it's simple skepticism. If he has an honest argument to make, he should make it without distorting the position he's arguing against and without insulting the reader with fairy tales.

Quote: Original post by Dreddnafious Maelstrom
He focuses on consumer loans because analogues based on microeconomics are easier to draw than those based on macroeconomics. Further, the reader can more easily relate the lesson to their personal knowledge versus being burdened with your beloved "jargon" that enters into a macro example.

But he tells a story about three businessmen, not three consumers.

Quote: Original post by Dreddnafious Maelstrom
I have to remind myself that you're just parroting what you've read for the most part, and your opinions suffer from their source, not any deficiency on your part personally.

And you're not? Seriously. You're not parroting what you've read for the most part? Did you write the economics books you read in school? Are you not parroting what you've gleaned from Mises et al.? Do your opinions not also suffer from their source too? Please, get off your high horse.

Quote: Original post by Dreddnafious Maelstrom
If you insist on a black and white pairing of economics schools, with one side being demand siders and one side being supply siders then you could attribute him to a supply sider. However, this simplification misses the point. What's more pertinent is that whether one is a demand sider or supply sider should be immaterial to his example.

I don't make that insistence. It still remains the case that he presented no evidence to support his assertion regarding American "productive capacity". Maybe I've been spoiled by reading too many lefties too willing to back up their assertions with facts and figures and the like. I mean, geez, such scholarship in contrast! I should just accept what he says because he says it, and he tells such nice childrens' stories too!

Quote: Original post by Dreddnafious Maelstrom

Quote:
The snippet identifies the middle of the year as the earliest the economy could bottom out - "... will not reverse until at least the middle of this year." It doesn't report that it will happen then, only that economists predict it won't happen sooner. From what you've written, it appears that you agree. To jump from that to predicting an end to the dollar as reserve currency is quite a leap, especially when you've not backed up your dire prediction with any supporting evidence.

What do you think the Fed has been meeting with its' creditors about exactly? What supporting evidence was in play when Nixon broke Bretton Woods to establish the dollar reserve? What supporting evidence was in play when the US left the gold standard?

I'm just saying, if you're gonna make a leap like that, you ought to back it up with some concrete observations, especially after you've pushed an easily refuted knock on that economic reporting. You're popping off like a loose cannon and only backing up your claims when called out on them.

Quote: Original post by Dreddnafious Maelstrom

Quote:
That seems rather here nor there, but to be generous, as you saying that those statistics can't be trusted? If so, that's might convenient as they directly contradict Schiff's thesis. Are there different statistics that you prefer, or are you content with downplaying these so that you can inject your unsubstantiated assertions into the discussion?

As it must to you, you don't understand the difference between credit and capital.

There's a typo in my question, so let me ask again: Are you saying that those statistics can't be trusted?

Quote: Original post by Dreddnafious Maelstrom

Quote:
It seems that you disagree with equating money with capital. If so, please clarify, because the notion seems like common sense. A person needing capital to start a business goes to the bank for a loan which he gets in the form of money. Or he goes to a venture capitalist instead, but the result is the same, money in order to get the new business up and running.

You're being very loose with your terminology. "Money" is nebulous in your paragraph, and tells us nothing of what you are trying to describe. By "money" you can mean the actual "specie", you can mean "credit", you can mean "capital", the reason this is important is because each of the above are different creatures, especially as it relates to any macroeconomic view, which is what we're purportedly discussing.

{Warning, some jargon involved, my apologies)
** The difference to the borrower, between credit and capital is that he does not have to pay back his own capital. The difference if he's borrowing someone else's capital, or if he's borrowing a credit expansion is microscopic on the micro scale, but measured on the macro scale as velocity of money.

Money borrowed that is actually backed by another's capital, on the macro level, signals an intrinsic demand capacity. Money borrowed on credit expansion is necessarily speculative, and often generates excess capacity, where the market has not signaled intrinsic demand to satisfy the additional production. This case specifically leads to malinvestment. Artificially lowering the cost of money changes the borrower/saver metric substantially.

This is the nature of financial bubbles. The current economic debate in Washington is about how to reinflate the bubble.

OK. Jargon aside, you've said more in those three paragraphs than Schiff said in twelve! With a little bit of time you might even have been able to get rid of the jargon.

Whether the capital belongs to the entrepreneur or the banker, from what you've written it still sounds like money. I agree that some of the discussion in Washington is about reinflating the bubble, but I think that too is part of the political struggle. I think there are a lot of lobbyists pushing to reflate the bubble so that they can replay the games they played so well the last eight years.

Quote: Original post by LessBread

Quote: Original post by LessBread
{Warning, some jargon involved, my apologies)
** The difference to the borrower, between credit and capital is that he does not have to pay back his own capital. The difference if he's borrowing someone else's capital, or if he's borrowing a credit expansion is microscopic on the micro scale, but measured on the macro scale as velocity of money.

Money borrowed that is actually backed by another's capital, on the macro level, signals an intrinsic demand capacity. Money borrowed on credit expansion is necessarily speculative, and often generates excess capacity, where the market has not signaled intrinsic demand to satisfy the additional production. This case specifically leads to malinvestment. Artificially lowering the cost of money changes the borrower/saver metric substantially.

This is the nature of financial bubbles. The current economic debate in Washington is about how to reinflate the bubble.

OK. Jargon aside, you've said more in those three paragraphs than Schiff said in twelve! With a little bit of time you might even have been able to get rid of the jargon.

Whether the capital belongs to the entrepreneur or the banker, from what you've written it still sounds like money. I agree that some of the discussion in Washington is about reinflating the bubble, but I think that too is part of the political struggle. I think there are a lot of lobbyists pushing to reflate the bubble so that they can replay the games they played so well the last eight years.

I find it rather interesting that the Flow of Funds statistics of FED is showing that the sector that has increased its debt the most is the financial sector (from 70% to 120% of GDP between 1998-2008) – not ordinary citizens with their houses, for instance.

Combining that with the rather shaking change in the financial sector in the last decade, i.e. the forming of a shadow banking system, things get interesting and ripe for conspiracy theories. I find it interesting that some time ago someone loaning 1000 dollars was a loan of thousand dollars. End of story.

Now the chain is much longer. For instance, someone taking a credit of 1000 dollars (I just made this figure) may take it from a special company. Say specialised to give out mortgages. Now, this company may have borrow this money from some bond securities company (probably a wrong term, I'm not that familiar with these in English), which lends it from the hedge funds or other investors, which lend the money from their securities dealer, which lend their money from a commercial bank which lend their money from an actual savings bank.

So, in essence, the credit ultimately is money from someone and it just gets inflated on its way in the chain. The best part of course is that when the loan defaults in some part of the chain and someone pays it, the negative impact isn't considered to be paid, but it bubbles its way back to the savings bank. In essence, the statistics may show a multiple of the actual debt instead of real debt. And that too causes troubles to the whole sector. Especially since only the traditional savings banks are being supervised.

Yeah, this shadow banking system is actually quite interesting especially in its ability to inflate economy and transfer liquidity. The proposal put forth in the EU to stop these practices are also somewhat interesting. We'll see if the U.S. wants to reform this part of the system also. Like that these shadow banks needs monitoring just as the traditional savings banks, perhaps just in some different way.

Quote: Original post by Naurava kulkuri

Quote: Original post by LessBread

Quote: Original post by LessBread
{Warning, some jargon involved, my apologies)
** The difference to the borrower, between credit and capital is that he does not have to pay back his own capital. The difference if he's borrowing someone else's capital, or if he's borrowing a credit expansion is microscopic on the micro scale, but measured on the macro scale as velocity of money.

Money borrowed that is actually backed by another's capital, on the macro level, signals an intrinsic demand capacity. Money borrowed on credit expansion is necessarily speculative, and often generates excess capacity, where the market has not signaled intrinsic demand to satisfy the additional production. This case specifically leads to malinvestment. Artificially lowering the cost of money changes the borrower/saver metric substantially.

This is the nature of financial bubbles. The current economic debate in Washington is about how to reinflate the bubble.

OK. Jargon aside, you've said more in those three paragraphs than Schiff said in twelve! With a little bit of time you might even have been able to get rid of the jargon.

Whether the capital belongs to the entrepreneur or the banker, from what you've written it still sounds like money. I agree that some of the discussion in Washington is about reinflating the bubble, but I think that too is part of the political struggle. I think there are a lot of lobbyists pushing to reflate the bubble so that they can replay the games they played so well the last eight years.

I find it rather interesting that the Flow of Funds statistics of FED is showing that the sector that has increased its debt the most is the financial sector (from 70% to 120% of GDP between 1998-2008) – not ordinary citizens with their houses, for instance.

Combining that with the rather shaking change in the financial sector in the last decade, i.e. the forming of a shadow banking system, things get interesting and ripe for conspiracy theories. I find it interesting that some time ago someone loaning 1000 dollars was a loan of thousand dollars. End of story.

Now the chain is much longer. For instance, someone taking a credit of 1000 dollars (I just made this figure) may take it from a special company. Say specialised to give out mortgages. Now, this company may have borrow this money from some bond securities company (probably a wrong term, I'm not that familiar with these in English), which lends it from the hedge funds or other investors, which lend the money from their securities dealer, which lend their money from a commercial bank which lend their money from an actual savings bank.

So, in essence, the credit ultimately is money from someone and it just gets inflated on its way in the chain. The best part of course is that when the loan defaults in some part of the chain and someone pays it, the negative impact isn't considered to be paid, but it bubbles its way back to the savings bank. In essence, the statistics may show a multiple of the actual debt instead of real debt. And that too causes troubles to the whole sector. Especially since only the traditional savings banks are being supervised.

Yeah, this shadow banking system is actually quite interesting especially in its ability to inflate economy and transfer liquidity. The proposal put forth in the EU to stop these practices are also somewhat interesting. We'll see if the U.S. wants to reform this part of the system also. Like that these shadow banks needs monitoring just as the traditional savings banks, perhaps just in some different way.

What drives me crazy is the prevailing "wisdom" being manufactured by the popular government organs today, as we speak.

The new financial meme is that the housing boom and following bust was created by a glut of savings abroad...


Here is a treatment debunking what the US papers will be peddling in the coming weeks, written last year.


Here is comrade Krugman playing the court jester.

Quote:

World Savings Rate as % of GDP (source: Table A16, IMF) Period 1986–1993 1994–2001    2002 2003 2004 2005 2006 2007 Saving      22.7      22.1    20.5 20.8 21.9 22.5 23.3 23.7 

However, global savings was lower at the start and incline of the bubble and in fact didn't eclipse the modern day average until the its' decline became obvious. Stated plainly, the facts are exactly opposite of the new meme.






Above is the Fed funds rate and the Home Pricing Index. As you can see Housing price and Fed Funds demonstrate an inverse relationship, as predicted by the Austrian Business Cycle Theory.

Quote: Original post by Dreddnafious Maelstrom
The new financial meme is that the housing boom and following bust was created by a glut of savings abroad...

I guess there are different memes depending on country and continent and that perhaps says something about the complexity of the problem. There are fights on how IFRS should be implemented, quants and their models are blamed etc. etc.

I'm by no means a great expert on these matters, so I just remain calmly observing if after this crunch liquidity is as liquid or even more liquid than it used to be – perhaps with better checks (like blood veins, to use a metaphor) – or does the checking actually stifle the flow of capital. That would be a devastating blow to the third world economies.