economics - where to begin?

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

Is taht book any good? I mean its free...

I can feel the economics

thats just my rising indicator on yoru leg

lukas i'm reading that (free!) book. it is housing me

WHY is it a bad thing if greece exits the euro? i don't understand any of the headlines today

But they beat Russia last night, they aren't out :-)

Not really about a bad thing - things are v bad now. Some people will lose a lot of money outside Greece, others have already lost their lives inside the country.

Reports I have read say that Greece are already out of the Euro...whatever the outcome it seems patience has run out.

the problem aiui is that greece is so obviously a basket case and a barrier to any kind of eurobonds/debt mutualization or w/e and because its fiscal management was so disgraceful it allows a lot of fat lutherans to moan about RESPONSIBILITY and AUSTERITY (even though many other troubled govts like spain were running a surplus prior to 2008)

so why is a greek exit from the euro quite so feared? it must represent like 3% of the eurozone economy....and unlike a default, the debts held by northern banks will presumably be renominated in nu-drachmas.....it would create turbulence but the current pattern of indecision and torpor is doing exactly the same

Because if Greece exits Spain, Portugal and Ireland may be tempted to do the same and the whole Euro "project" loses credibility, banks become overexposed (again), and it's back to 2008..

spain is big enough to extract bargains from the ecb/germany

ireland is fucked thanks to the ahern guarantee, and there is no political will to renege on that afaik

portugal maybe? but again it is a tiny economy

Not so much about Ire and Por as about Spain and then speculation about Italy. Those are too big to fail type thing.

the last six months or so has been about exceptionalizing greece and firewalling it wherever possible

a greek exit will probably look nasty enough on the streets of athens to thoroughly dissuade spain and italy from following

tbf it`s the lenihan guarantee

the Greeks are fucked no matter what they do ... if they leave the euro, they'll be less fucked (b/c they can then control their own currency) but shit will still be bad for at least a while. obviously the devil will be in the details, but theoretically if the Greeks have their own, non-Euro currency then the new Greek currency can be devalued and make Greek products and services more competitive which would (theoretically at some point) aid their economic recovery.

the band-aid analogy is apt here ... they can rip it off fast and be in excruciating pain for a concentrated period of time; or peel it off slowly and be in lesser (though still agonizing) pain for a longer period of time.

hard truths from dr eisbaer :(

if Greece exits Spain, Portugal and Ireland may be tempted to do the same

A revival of the infamous 'domino theory'?

The most interesting thing to me is that, if Greece stays in the euro, their path out of penury is wholly dependent on bailouts and guarantees to prop up their euro-denominated debt, and therefore their future is placed in the hands of governments whose interests do not lie in Greece, except in the most tangential and attenuated sense. The Germans really don't give a rip if Greece sinks, so long as the euro floats.

Given this fact, I think the Greek people correctly suss that fleeing the euro at least gives them the power to seek their own interests, and perhaps a shorter way through the blinding pain of retrenchment and back into relative health. As a tourism-heavy economy, a retreat to cheaper drachmas makes a hell of a lot of sense to me, since you can sell 'cheap holidays' over and over and still have more tourism left to sell tomorrow.

http://www.thedailybeast.com/articles/2012/08/15/thanks-for-the-feedback.html

for a year or two now Frum's been preaching that low interest rates coupled with mild inflation could be the tonic to pull us out of our situation. the idea (as i understand it, and i'm very dumb on these matters) being that mild inflation would accelerate debt reduction and help households regain confidence to spend.

is he on to something? and is anyone listening? and if they are, would it even matter? because it seems that the one of the few places where mainstream GOP and Paul freaks see eye-to-eye is on tight money. and, let's face it, these guys are winning the messaging war when it comes to monetary policy.

he's not the only person talking about this, paul krugman's latest book is all about this, and the academic consensus is that the fed are not being aggressive enough

in theory monetary policy should not be influenced by GOP rhetoric or ron paul, the fed are an independent ("monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government" - wikipedia) although the extent to which this is perfectly true is debated ("we would treat [Bernanke] pretty ugly down in Texas" - rick perry). it's always a guessing game as to what the fed's real intentions are; their control over "expectations" is equally if not more powerful as their control of interest rates. central bankers might be playing it safe in case of a republican win, but that's only one of many possible explanations

relevant utube:

https://www.youtube.com/watch?v=a62dNGqQfNM