economics - where to begin?

this rings totally true though! it's completely counter-intuitive and i don't understand why you're right, if you are. i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.

also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

No! If it's a choice between borrowing money and letting their children starve on the streets, most households would opt for borrowing the money, if they could. But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

Also, no matter how big a government's debt or deficit is, they still need to keep the economy moving to stop tax revenues drying up even furher. If tax revenues dry up, then the debt or deficit will get bigger. So if consumers and businesses won't spend in sufficient quantities, the government has to in order to stop that happening. This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered, because otherwise they'll make the situation and deficit worse not better.

i don't understand why the government isn't a household. and i disagree that households that are completely broke will take on debt.
also if this is the case how the hell does anyone ever expect this argument to be on the winning side?

The basic idea is that if a household stops spending and saves instead, then it has more money - it has taken it out of the game

But if everyone stops spending and saves money - then not only are fewer things being sold so less jobs needed, but also there is less money in the game full stop

just as money appears when loans are made...it disappears when debts are paid off.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

Yes, it's worth mentioning that if there was no debt than virtually nothing would get done. No one would have the cash to buy a house, build a building, establish a business, anything, which means fewer jobs. No one except a few people who'd inherited money, and most of them would have had ancestors relying on debt at some point.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

― colby, Thursday, August 18, 2011 4:00 PM (2 seconds ago) Bookmark

this sort of presents the current distribution of property and power as not a problem!

the concept of debt - not its current manifestation

But a government isn't like a household because it can continue to borrow for longer and can never go bust, although it can get into a lot of trouble like eg Greece.

so why did greece get into trouble? i don't really understand exactly what greece's trouble is or why we're not in the same trouble.

This is why a lot of economists are arguing that they shouldn't be austerity measures until the economy has recovered

but isn't the only reason austerity measures are needed BECAUSE the economy is shit?

i have no idea what "the economy is shit" even means.

debt is presented as a "problem" but it really isn't. Think about the amount people owe in loans and mortgages - then think about the number of people who have savings and how much they are likely to have saved. they are hardly equivalent. most people don't have tens and hundreds of thousands of savings..

owing tens of thousands of pounds in loans sounds like a problem to me! also i tend to thinking that mortgages are terrifying and the only way i ever want to pay for a house is if i have that amount of money in cash. you can't predict the future!

so our economy relies on

- debt
- money that isn't real
- borrowing money you don't have

WHAT THE FUCK

Once I tried to calculate how many times a dollar has to change hands every year for the US economy to be healthy, but I couldn't really figure out how to start and bogged down.

i have no idea what "the economy is shit" even means.

there's no growth, and a large gap between government revenue and government expenditure, necessitating borrowing, 'debauching the currency', etc. the second question relates to the 'household' meme. the growth question is more interesting.

The UK owes more than Greece, but we also bring more in in tax due to being a much bigger economy, so we can cope with paying off that debt. Also we are trusted by lenders to keep paying back, so they're okay with continuing to lend. The same isn't true of Greece.

owing tens of thousands of pounds in loans sounds like a problem to me!

Well the idea is that you have something (a house - a company - some shares - a big bag of diamonds) that you could sell to pay back that loan, if necessary

who are the lenders? why are we trusted? what happens if they capriciously (and UNPREDICTABLY) stop trusting us?

i wouldn't fucking trust us

also why isn't this taught in schools?

The lenders are the banks - who write the money into existence, they trust us because they know that people will work for the bulk of their lives to pay it back

If everyone wasn't in debt and didn't have to work to keep hold of their things and pay it all back...then people would take a different view of work and it wouldn't be a 40 year stretch

The lenders are banks. They trust people because a) they have enough data to know they can, or that the risk is lower than with other people, and because they have mechanisms in place to insure against the risk (some sensible, some utterly bonkers and useless as we've seen). They lend the money because they're reasonably sure they will get more back.

what happens if they capriciously (and UNPREDICTABLY) stop trusting us

This is what the credit crunch is. Lenders stopped trusting borrowers, initially banks stopped trusting other banks to be able to pay back the money they lent them, this meant banks stopped trusting the businesses they lent to, those businesses were more likely to go bust as a result, and the whole system started to collapse.

They lend the money because they're reasonably sure they will get more back

Well they also lent it because on an individual level there were personal incentives to do so - and if you know you're not necessarily going to be working for that institution when it all goes wrong, then why not? You only have to worry about what happens while you are working at that particular institution

this thread is making me oscillate between feeling really dumb and thinking everyone else is really dumb. that cessation of trust seems so obvious to me, like OF COURSE it was gonna happen. the entire system seems ridiculously flawed and fragile.

OF COURSE it was gonna happen. the entire system seems ridiculously flawed and fragile.

― lex pretend, Thursday, August 18, 2011 11:21 AM

If i take a decision at my work that will make me, personally, a lot of money over the next 3 years but will destroy my company in 10...what do i do?

And can i be trusted to regulate myself to make sure i don't make that decision

who gets to trust the banks?

or not trust them

other banks

Lex's thought processes must be much like those of a cartoon character when it realises it's run off the edge of the cliff and is standing on thin air.

Or alternatively a bit like everything we've gone through in three years except all hitting home at once.

who gets to trust the banks? or not trust them?

These are the questions that governments are wrestling with the world over.

i watched the first 10 minutes of the video tracer video and it's like an actual horror film when the main protagonist keeps going off by themselves to explore empty rooms down darkened corridors and not bothering to turn on the light

the history of modern banking seems to be

- banker does something greedy and stupid
- people find out and are briefly annoyed
- and then go "oh it's ok, never mind"

the history of modern banking seems to be

- banker does something greedy and stupid
- people find out and are briefly annoyed
- and then go "oh it's ok, never mind"

― lex pretend, Thursday, August 18, 2011

This kind of seems to have happened again quite recently!

when you all first learned about this, did you at any point have the same "THIS IS COMPLETELY MAD" reaction that i'm having, and if not why not?

I did!

the entire edifice seems optimistic to the point of stupidity

when i've finished writing this piece i am actually going to email my libertarian friend in arizona and ask her about silver

tbh it's got us pretty far. well aside from all the inequality, poverty, hunger, and death in the world.

... probably had the last three before capitalism came along

don't think it's had a monopoly on inequality either

when you all first learned about this, did you at any point have the same "THIS IS COMPLETELY MAD" reaction that i'm having, and if not why not?

You also have to think about what would happen if they suddenly stopped, which would be even worse.

what would happen if they stopped?

Businesses big and small would be unable to operate properly, the government would abruptly be unable to continue to fund a health service, police force, army, school system, whatever, a shitload of people would be made unemployed and homeless. Crime and social disorder would escalate. This explains why governments would rather get themselves into enormous debt and run up massive deficits than risk the banking sector collapsing in 2008.

There's interesting stuff about Abraham Lincoln and the funding of the US civil war here that I'd like to know more about.

http://en.wikipedia.org/wiki/Demand_Note

Like - as I understand it, for a (pretty brief) period of time the US govt issued currency directly and not via banks (because European banks wanted levels of interest Lincoln didn't want to pay?). Could do with a better explanation of what actually happened here though!

i have some questions that i thought of as i was absent-mindedly picking the nuts out of the muesli box instead of doing my work.

so the financial crisis was caused by the markets losing confidence in people's ability to pay back the money that they'd been lent. kind of like dominoes if everyone was lending to each other? (who is at the top of this pyramid, by the way?)

but...none of it is real, i learned from this thread the other day. if everyone demanded what they were owed, people wouldn't be able to pay it back ANYWAY. and that is what drives the economy? so, why is it suddenly an issue? why don't the bankers reassure themselves with this whole "none of it is real anyway" maxim that seems to underpin the whole system, and carry on as before?

i still don't understand this notion of "confidence" either - do the "markets" have some sort of monolithic hivemind on this? why can't they just snap out of it (by...governments?) if they lose confidence? what if some banks lose confidence and some don't? this whole reliance on "confidence" makes it seem like the entire system is dependent on bankers' whims and caprices.

actually what ARE the "markets"?

also what the hell is going on in this article

http://www.guardian.co.uk/politics/2011/aug/21/so-what-do-we-do-now-chancellor

what does it actually mean when it says markets plunge? why does that matter? the markets don't seem very reliable, why are we subject to their whims and moods?

There are different types of markets. Equity markets, which that article is largely referring to, are thousands of people or institutions buying and selling stakes in businesses of all kinds. If a business is "quoted" on the stock market then anyone can buy and sell a stake whenever they want.

There are long-term and short-term investors - long terms ones will buy a stake in a company hoping to realise its value (both in terms of profit share aka dividends and in being able to sell that stake off for a profit later). Long-term investors are more likely to be willing to ride out the value of their stake rising and falling according to its market value. There are also short-term investors, who buy stakes in companies hoping that stake will rapidly increase in value and they can sell it off quickly for a profit. Those people are more likely to sell quickly.

If a lot of people are buying shares, the value of a company goes up. If lots of people are selling (or pulling their money out) then the value of the company goes down, there is literally less money in it. That has consequences for the businesses ability to expand or invest. Generally speaking if markets are plunging it means that investors are (rightly or wrongly) panicked about the state of the economy and what that will mean for the companies in which they invest. Or they're short-termist and are selling that stake before it can go down in value and leave them at a loss.

If the stock market plunges, then the cumulative value of all the companies quoted on it goes down, so a lot of investors are concerned. It's not necessarily a terrible disaster, as what goes down can later come back up again, but it's a sign of declining confidence in the UK economy.

if everyone demanded what they were owed, people wouldn't be able to pay it back ANYWAY. and that is what drives the economy? so, why is it suddenly an issue?

The underlying thing here is - they don't want you to pay it all back. If i lend you £10k plus interest - i don't want you to just give me the £10k straight back, what would be the point? i want you to continue paying the interest on it each month - and you still owe ME the £10k as well. The less you pay off of that £10k the more in interest you continue to pay, so I'd rather you didn't give me back much of the actual £10k

The problem comes if you start to struggle to pay back the interest, then for me there is no point in you continuing to have that £10k anymore i might as well ask for it back and go do something else with it. Except if you're struggling with the interest, there's no way you can give me the £10k:(

But as long as you are giving me interest on the £10k I'm fine with it (and if you were ONLY paying interest, then eventually, one day you would have paid me more than 10k - and STILL owe me the 10k). Say i'm charging you 10% interest - I'm getting £1000 a year off you and my £10k is still there should i ever want it back. I'm willing to overlook the fact you don't actually have it as long as that interest continues to roll in

re: the markets - it seems totally at the mercy of people's panic and whims and herd behaviour (i assume the shareholders, if they sell, do so because they see lots of others are?). why aren't there fixed minimum terms for holding shares to prevent that panicky short-termism leading to instability?

i assume herd behaviour is the default, too - is that what people mean when they say "confidence"?

is there a point at which a business gets big enough that it's immune to the panicky stuff?

also isn't every business different...if the "markets" as a whole are plunging, does this mean the majority of businesses are suddenly going shit? surely at any given time there are always some thriving businesses.

if so many of these tenets - they don't want you to pay the loan back, they don't want full employment - are so patently bullshit, why don't people call the banks/politicians out on it?

and why did they not teach me any of this when i was studying economics at the best university in the country, lol.

in fact i've long been scandalised that politics isn't compulsory in schools, and that languages aren't compulsory from a much earlier age, and now i'm scandalised that these economic basics aren't compulsory. i believe there was an option to do economics a-level, and it was very much a niche subject like drama or design & technology, and i went to a decent school. but nothing compulsory. what is wrong with our national curriculum? why did i have to spend so much goddamn time doing biology/chemistry/physics (completely irrelevant to my adult life) while the educational system failed to give me the basics of this shit that underpins everything we do?

And underlying the debt thing is that is that you borrow the £10k because it's worth it regardless of the future interest payments - as an individual you get your nice house now and know you can afford £1k a year in future, especially with wage rises (inflation erodes debt, so collectively we'll get out of this eventually); as a company you can trade with it and make more than £1k a year in profit; as a government you can continue to provide services to maintain your tax base and bring in more than £1k that way; etc.

And underlying that is stability, it gives everyone an interest in an orderly, prosperous future. If kept in check, obviously, but I'm thinking Weimar Republic here, not credit crunch.

http://epetitions.direct.gov.uk/petitions/8903

as an individual you get your nice house now and know you can afford £1k a year in future

oh fuck, freelancers never ever get to own a house, do they

i mean even apart from the basic "not paid enough" thing

'The markets' are the people with the money, ultimately - governments, companies, etc need to borrow from/buy from/sell to them, all the stuff that goes on day-to-day is setting the price at which those things happen.

Herd behaviour is totally the thing, but it's a very complex herd. Yes, that's basically 'confidence'.

The markets plunging means the price of shares is cheaper - or the flipside, money is more expensive. If you have cash, it's a great time to buy; the difficulty is knowing whether it's an irrational plunge, in which case wahey the sales are on, or a rational one because the businesses are turning to shit. Like you say, every business is different, so it might be both.