economics - where to begin?

That makes a lot of sense. Concentrating wealth = taking away chairs. xp

BTW, in re stocks, it's less about what businesses are like now than what people think they will be in the future. A stock's price bears some theoretical relation to a company's FUTURE earnings prospects, so if information suddenly changes about the company's future earnings potential, people may try to sell the stock to get out. I mean there's nothing entirely rational about any of it -- a stock price is ultimately just a function of supply versus demand for the stock, like any other product, and the reasons people buy and sell the stocks aren't always entirely rational.

With a big insurance or finance company it's frighteningly easy for things to get misstated or fudged about future earnings, as opposed to a company that just sells food, where all you're really concerned with are the costs of making and supplying the food and the level of demand for the food. AIG, for example, had all kinds of crazy shit on its balance sheets that was kind of hard to value because you're talking about, like, insurance policies on securities that are bundles of other securities that are bundles of mortgages. It's much easier for a company like that to one day make it seem like everything is rosy and then the next day reveal that no, actually the company is completely and utterly fucked.

Also, I don't think a drop in share price has a direct negative impact on a company unless the company needs to raise capital, i.e. it effects what price the company can issue/sell shares at to raise capital. Otherwise the company being "worth" less on the market should not matter. The stock price is usually more an effect than a cause of a company's problems.

That makes a lot of sense. Concentrating wealth = taking away chairs. xp

― L.P. Hovercraft (WmC), Sunday, August 21, 2011 5:01 PM Bookmark

Not exactly what I meant although actually yes that's true. In the mortgage bubble, e.g., there was all this paper wealth being "created" that didn't actually exist, and when the music stopped a lot of it disappeared, but a few lucky parties had managed to create real wealth from the paper wealth in the meantime.

can i point out, incongrously and hopefully without being jumped upon, that hayek had an intersting set of insights into the way complex systems (ie economies but also etc) operate and that his work isn't even really incompatible with our friend keynes so much as the crazies pushing the awful 'road to serfdom' would have you believe?

^^^^^this

Hayak had much to say about the conditions of artificially low interest rates that lead to credit bubbles, malinvestment, and subsequent financial crises, but offered little advice on how to extricate the economy from the lingering aftereffects. Keynes had much to say about how to escape a deflationary spiral, but offered little advice on how to prevent one in the first place. Arguably they're complementary viewpoints, which when taken in concert would suggest running fiscal surpluses and eschewing any monetary stimulus during mild growth (the road not taken 2000-2008), which might obviate the need for both when a business cycle turns.

The economist who has come out smelling of roses from the current debacle is the post-KeynesianHyman Misky, whose financial instability hypothesis describes the last decade well. The Dodd-Frank financial reform bill would have a lot more teeth if lawmakers paid attentin to Minsky.

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.

Keynes major insight was that, so far from these being merely difficult to separate, in actual practise they are inseparable. When money stops circulating, whether or not it is instigated by irrational fear, then the only rational response is to avoid debt, and not spend or invest, until conditions improve. But this very prudence inhibits conditions from improving.

Keynes understood that the antidote for this vicious cycle is for someone to fly in the face of prudence, by borrowing and investing. Since too few individuals would be willing to take that risk to make any aggregate difference, the only actor able to respond in this way is the government, because the risk of borrowing and spending will be shared equably by the entire society.

This was the exact opposite of what governments were doing when Keynes first wrote his theory. Revenues were down, so governments were retrenching and shrinking their budgets to keep them balanced. This only aggravated the slowdown, of course.

What's going on now in the USA is that the tea partiers are rejecting Keynes's antidote, on the grounds that the risk of debt is too great for society to bear, except almost all of them appear ignorant of Keynes's basic argument or his research, and unappreciative of the risks that are being run by cutting government spending.

Bernanke is doing everything he can from the monetary easing side of the equation, but the risk is that he will only fuel another bubble, while businesses sit on their cash, unemployment stays high, spending slows further and the vicious cycle gains momentum. Good times.

In my mind one of Hayek's best contributions was on the theory of the firm, particularly outlining the limits of Weber's bureaucracy, but that is stepping somewhat beyond the field of economics.

Is the tea party being called on this? For an ideology-free society, you do seem prone to utterly counterproductive bouts of ideology sometimes.

I'll put it this way, harping on the idea that tea partiers don't understand Keynes would do them zero damage politically, because a good 95% of US voters would just shrug, because they, too, know nothing about Keynes and anyway all anyone needs is just some "common sense".

There is no point calling them on this, there is no intellectual foundation or consistency on which to challenge them. I'd say it was luddism but that gives it too much credit.

tea party isn't an ideology, it's just a new brand name for various reactionary far right Americans. it's quite un-ideological beyond that. they can't be called out in their beliefs because they don't have shared, coherent beliefs about anything in particular. xp

I thought it was an anti-big-government thing?

only nominally

except when it comes to their state being bailed-out or the bridge that needs to be built in their county or their medicare benefits etc etc

they're against a very vague idea of big government

I dunno. AFAICS, the tea party fringes have a certain overlap with radical liberatrians. They would love to see the federal government shrunken down to almost nothing, on the theory that this would catalze an anarcho-capitalist paradise. But the largest component of the tea party's fringe would probably be the ones who want to establish a theocracy.

nah i don't think the majority of Tea Partiers have "a theory" any more than the majority of any mainstream political movement's supporters

Was speaking of the tea party fringe, not the majority. The majority are bedizened by the idea that lower taxes would leave more money in their pockets and stop funding something they dislike, like welfare or health care for poor people. Their ideas stop right about there, leaving them too dazzled to move any further, except for the religious fundamentalists who form the core of the tea party, who believe God is on their side and He must be repaid for His aid by forcing the country to become more 'godly' once they achieve victory.

Albeit looking from a distance, there seems to be an acceptance that they have a point - I've seen news anchors challenging them along the lines 'I sympathise with your wanting for freedom from central government oppression, but...'. If that's widespread, the battle is half-lost already.

Keynes understood that the antidote for this vicious cycle is for someone to fly in the face of prudence, by borrowing and investing. Since too few individuals would be willing to take that risk to make any aggregate difference, the only actor able to respond in this way is the government, because the risk of borrowing and spending will be shared equably by the entire society.

Schumpeterian cycles of creative destruction probably do more to bring about the end of recession than merely increasing Govt spending in first world economies now, though- large scale spending by the Govt isn't enough anymore, it has to be efficient and infrastructurally productive, and I don't know if Keynes still applies as well in incrasingly open globalised money markets.

i...i can't back that up, like

good post either way imo

yeah it's the kind of soundbite that the media loves, tbf

sometimes I get the feeling that Obama scares big economic entities into sitting on their cash and waiting for him to leave- they fear he will tax them or something so they dont want to help the economy by lending/spending - they will just sit ass to ice until he leaves

also kudos for "Schumpeterian" xp

LG, if those big economic entities thought they could make a shitload of money, it would not matter to them that a slightly larger percentage of it was taxed, they would eagerly go out and make a shitload of money and then complain bitterly about the marginally higher tax rate while enjoying their capital gains.

So I had this kind of everything-comes-together realization about monetary policy today and I want to try to write it out and maybe someone can tell me if it's totally offbase. Basically it's this:

Anti-fed people worry that all this money-printing is going to lead to inflation, on the kind of basic principal that if you drastically increase the amount of money, the "value" of that money should decrease (i.e. inflation). Yet we don't seem to have inflation. Why not? Because the relative value of all the "stuff" in the economy is actually decreasing so much all this time that the increased money supply is just keeping pace. In other words, you can think of the "inflationary" pressures of increased money supply as an upward force, and the "deflationary" pressures of the economic collapse/recession as a downward force, and the two are kind of balancing each other out. In fact a fair amount of the "deflation" is merely the evaporation of pure paper value that probably never should have existed.

But what's the point of all this if it's just an illusion, i.e. the increasing of the money supply is merely avoiding the appearance of an even more precipitous decline in wealth in the economy? Well, I guess because it avoids a deflationary spiral, i.e. a situation where prices of everything continue to fall and everyone holds onto money which only causes prices to fall more (we're talking about capitalists and large assets here, not average joes with their groceries).

Of course, it kind of seems like capitalists are holding their money anyway, so I don't know what gives.

I feel it's slightly pointless me speculating because it's such a complex system that I couldn't begin to see all of it, but I figure there are at least two significant other factors at work:

• a lot of this new money *is* being taken out of circulation immediately as banks in particular rebuild their reserves
• debt has a nominal, not a real, value, so heading off deflation is extremely important because the hangover will never be worked off if everyone's income is decreasing in nominal terms

ismael could you explain your second bullet point?

If you borrow £10k, it stays £10k whether you have inflation or deflation. When inflation is say 3%, then in a normal career you might expect your wages to go 30k-32k-34k-37k-40k for example, so after five years you still have the £10k debt but it suddenly looks a lot more affordable. If there's deflation though, your wages might hardly budge or even could decline, so five years later the debt is still as mammoth as it was.

Other things play into it as well of course - inflation would raise the cost of everyday items which reduces your free cash to pay off the debt - but the point basically is that the debt reduces in value relative to everything else. The bank lent you a third of a salary, but you pay them back a quarter.

Normally you'd have high interest rates (trying to squash inflation) as the quid pro quo to all this, but they're low for the foreseeable future so in theory these are great conditions to be a borrower.

which is why nobody's lending at these interest rates?

I don't think so, it's more because banks are hoarding money to rebuild their cushion against being insolvent if there's a repeat of the convulsions of three years ago. There's still loads of money sloshing around - more so as QE goes on - and if they don't lend they don't have a business after all. You can get a loan easily if you're low risk - mortgage rates have dipped under 4% but you have to put down a huge deposit. It's the risky loans that have dried up.

Also, inflation is happening in the UK at least, at around 4-5%. A few years like this, with low interest rates, and the indebtedness will look significantly different.

Ok this is fine, except - how does inflation by itself make the debt seem smaller? Unless there is wage inflation to match it?

Like, say I earn £100 a week

and i spend

£50 Food Travel Clothes
£40 Loans
£10 Spending money

then there is inflation of 5% but my wage has stayed the same, then out of that £100 I would now be spending

£52.50 Food Travel Clothes
£40 Loans
£7.50 Spending money

Without my wages going up too I'm still having to spend £40 out of £100 on my loan, the only thing that has happened is my costs are going up meaning I've less spending money to go have fun with? If wages don't

Unless we are having 4-5% pay rises along the way? I don't feel like I'm getting pay rises like that!

personal debt market surely competing with eg govt bonds etc for bank cash/investment, though?

Lol business degree 2006 this stuff is fading like latin

oops missed a bit - If wages don't rise equivalently then food/travel etc is just taking up a larger percentage of my pay packet each month

and yeah xp the prob with assumed wage increases in line with inflation is that lol

Well yeah, it does depend on that. Wage inflation doesn't come about through some idea of fairness of course, it's through your bargaining position getting better as an employee - i.e. it's more difficult for your employer to replace you. This ought to improve in time too, employment figures are heading up slowly. Once this happens, interest rates will have to go up a bit to keep wage inflation in check.

All this stuff is going to take years, basically, but after that the idea is that the huge debts racked up before 2008 won't be so crippling anymore.

Thats fine but what happens if the figures above were this instead

£60 Clothes etc
£38 Loan
£2 Spending money

then 5% inflation + no wage increase becomes

£63 Clothes etc
£38 Loan
£-1 Spending money

Isn't your loan now getting bigger rather than smaller?

Then it's getting bigger relative to your salary, and lower relative to bread, travel, rent, etc. That's the worst of all worlds really.

Its getting bigger in absolute terms also because unless you cut back on clothes etc you have had to borrow another £1

Bigger relative to your disposable income, i mean.

Things change in value relative to each other constantly - think about what clothes or toys cost now compared to the early 90s, as against what wages have done in the same period. That's largely down to China making much more of that stuff at low cost now. The shift might be only a few % each year in either direction, but over years the total effect is huge.

I could be wrong, but my impression is that an increase in the money supply should theoretically have an equal effect on everything, including wages. That doesn't mean wages go up at the same rate as everything else, however, because there are other forces applying downward pressure to wages, e.g. the outsourcing of labor.

ceterus paribus ftw

An amusing post - works up a good head of steam decrying the ignorance of economists:

http://scottlocklin.wordpress.com/2011/07/31/in-which-i-have-a-laugh-at-economists/

I like the idea of debt decreasing over time due to inflation but salaries dont seem to be keeping up

I think the other benefit of inflation is that it's supposed to encourage companies to invest. Right now companies are just sitting on great gobs of cash, since there's a lot of uncertainty about the economy. If inflation were to pick up, suddenly companies would have to put that money to work or it would lose value.

I dont like this economy!

from wiki

Joseph Tainter
In his 1988 book The Collapse of Complex Societies, American anthropologist Tainter presents the view that for given technological levels there are implicit declining returns to complexity, in which systems deplete their resource base beyond levels that are ultimately sustainable. Tainter argues that societies become more complex as they try to solve problems. Social complexity can include differentiated social and economic roles, reliance on symbolic and abstract communication, and the existence of a class of information producers and analysts who are not involved in primary resource production. Such complexity requires a substantial "energy" subsidy (meaning resources, or other forms of wealth). When a society confronts a "problem", such as a shortage of or difficulty in gaining access to energy, it tends to create new layers of bureaucracy, infrastructure, or social class to address the challenge.
For example, as Roman agricultural output slowly declined and population increased, per-capita energy availability dropped. The Romans solved this problem in the short term by conquering their neighbours to appropriate their energy surpluses (metals, grain, slaves, etc.). However, this solution merely exacerbated the issue over the long term; as the Empire grew, the cost of maintaining communications, garrisons, civil government, etc., increased. Eventually, this cost grew so great that any new challenges such as invasions and crop failures could not be solved by the acquisition of more territory. At that point, the Empire fragmented into smaller units.
We often assume that the collapse of the Roman Empire was a catastrophe for everyone involved. Tainter points out that it can be seen as a very rational preference of individuals at the time, many of whom were better off (all but the elite, presumably.)[citation needed] Archeological evidence from human bones indicates that average nutrition improved after the collapse in many parts of the former Roman Empire[citation needed]. Average individuals may have benefited because they no longer had to invest in the burdensome complexity of empire.
In Tainter's view, while invasions, crop failures, disease or environmental degradation may be the apparent causes of societal collapse, the ultimate cause is diminishing returns on investments in social complexity.[10]

Free book from Dean Baker, and it's on my own personal hobby-horse:

"Liberals ... have accepted a framing where conservatives want market outcomes whereas liberals want the government to intervene to bring about outcomes that they consider fair. This is not true. Conservatives rely on the government all the time, most importantly in structuring the market in ways that ensure that income flows upwards."

http://www.cepr.net/index.php/publications/books/the-end-of-loser-liberalism