Archive for October 15th, 2008
Hour of the bear on the Russian stock market
Hour of the bear on the Russian stock market
MOSCOW. (Tatyana Marchenko for RIA Novosti) – Based on stock market analysis, which is a crucial indicator of economic health, the Russian and global economies are running a fever. Was the disease unavoidable, or could it have been prevented?
A technical analysis used to scrutinize the stock market in these cases does not provide any answers, while a macroeconomic analysis is applied only rarely.
The dynamics and meaning of the stock market capitalization to GDP ratio, calculated by dividing the total stock market value of all publicly traded companies by nominal gross domestic product, are extremely important for assessing a market’s strategic perspective.
Our analysis of this ratio for the G8 and BRIC (Brazil, Russia, India and China) countries in 1995-2008 pointed to specific changes in the ratio and its dependence on the GDP growth cycle. When a market is overvalued, as shown by an abnormally high market cap to GDP ratio (above 100%), it is bound to fall, thus slowing economic growth.
The capitalization to GDP ratio is high in Britain and the U.S. (180%-200%), rapidly developing economies (100%-150%) and the world as a whole (120%). The figures for developed and developing countries differ for obvious reasons, such as differing development rates in their financial systems and market institutions, and the varying structure of their economies’ corporate sectors. Developmental status notwithstanding, exceeding the limit of 100% is dangerous for both developed and developing economies.
Our survey of the ratio’s dynamics in the world showed that the global financial crisis was provoked by overvalued markets, while the mortgage meltdown only spurred rapid growth and spread of the crisis.
The financial crisis in Russia did not start only because of the global crisis. A macroeconomic review of Russia shows rapid deterioration in May-August 2008, with soaring prices and slowing dynamics in investment in fixed capital, in industrial production, and in economic growth rates.
Russia’s market capitalization to GDP ratio in 2007, at 116%, was almost double the figure for Germany (64%), more than double for Italy (51%), and only slightly lower than in the U.S. (144%) and Britain (141%). However, the U.S., Britain and Germany lead the World Economic Forum’s Financial Development Index of 52 of the world’s leading financial systems, where Russia ranks only 36th.
The 2008 financial crisis has proved that Russia’s market capitalization to GDP ratio was below the level sufficient for a developed economy.
Russia had all the requisite fundamental reasons for a financial crisis, including an overvalued stock market and the deteriorating macroeconomic indictors. From May 19 to October 6, the RTS index fell by 65%, whereas other global indices fell by only 25%-30%. This distinction in depth between the Russian stock market drop and the fall of global stock markets is more evidence that the global financial crisis was the final push that sent the Russian stock market over the edge.
A fall in GDP growth rates, after the market capitalization to GDP ratio reached its peak, pointed to a forthcoming decline in Russia’s economic growth. According to FBK analysis, the country’s economic growth is unlikely to exceed 4% in 2009.
What sets the limit for market capitalization to GDP ratio?
The depths of a market plunge depend on the state of the economy and are the reasons behind changes in investors’ mood.
For example, if bears start to dominate the market, or the downward trend has been provoked by painful external or non-binding internal factors, the stock market fall is unlikely to be catastrophic (20%-30%).
When the change is provoked by a serious deterioration of macroeconomic indicators, compounded by negative external factors, the fall will be steeper (30%-50%).
Lastly, if the reasons for the negative change are rooted in macroeconomic indicators yet no effective measures have been taken to adjust the trend, and the number of external and non-binding domestic negative factors is very large, the fall can turn into a plunge (50%-90%).
The Russian stock market has fallen for the latter reasons.
A decline in the market capitalization to GDP ratio does not necessarily call for emergency measures to stabilize the stock market. However, governments must resort to such measures at the height of the crisis.
Many countries use financial injections to support their stock markets.
In August 2007, the U.S. Federal Reserve approved the injection of $7 billion into the national stock market and the Japanese central bank allocated 400 billion yen ($3.4 billion) to resuscitate its market.
Some time before that, the European Central Bank and the U.S. Federal Reserve allocated an additional $350 billion to stop the mortgage meltdown.
Lately, the Fed approved a $750 billion expenditure on distressed mortgage-related assets in late September 2008.
The Russian authorities have approved trillions of rubles in market allocations, but this measure has not greatly improved the situation. The stock markets continued to fall, although their short-term reaction was very positive.
Allocations are the best measure in the short term, when the crisis threatens to spread to the banking sector already drowning in a financial crisis.
What else can the country’s financial authorities do?
The best anti-crisis measures include limited budgetary assistance to the banking sector; sale of state-owned assets and a ban on the acquisition of ailing assets; approval of a program to stabilize and urge the revival of financial markets; and a program of macroeconomic stabilization focused on containing inflation.
Tatyana Marchenko is a senior expert at FBK, one of the first private auditing companies in Russia.
Economic Collapse: The Financial Death of the US Empire
Economic Collapse:
The Financial Death of the US Empire
Doug Bandow
The American empire is kaput. Neither John McCain nor Barack Obama realizes that fact yet, but the myth of the omnipotent unipower, the essential nation, the country which declares that what it says goes, has been exposed to all. The Iraq debacle sullied Washington’s reputation, but did not destroy the illusion of American indispensability. Assorted politicians, like McCain and Obama, promised to restore US primacy, either through more bluster or better diplomacy. But the financial crash has wrecked the economic basis of America’s imperial pretentions. Washington simply can’t afford to attempt to run the world any longer.
The US stock market has dropped 2500 points in 9 days. Trillions of dollars in wealth disappeared as the Dow lost six years worth of growth. The Bush administration and Congress have tossed ever increasing amounts of money at failing firms, hoping to appease the economic gods, rather as the ancient Canaanites sacrificed children to Baal. But the markets refuse to be appeased, and financial contagion has circled the globe.
Even before the economic crisis spiraled out of control, the US government was effectively broke. The national debt currently stands at $9.8 trillion, up $4 trillion (about 72 percent) since George W. Bush took office. With the pre-bail-out federal deficit in 2009 expected to hit a half trillion dollars, earlier this year Congress upped the debt ceiling to $10.6 trillion. But truly frightening are the many liabilities yet to come due. Uncle Sam is an extraordinary wastral and soft touch, like the person who cosigns notes for relatives, buys rounds of drinks for his friends, and promises everyone he knows that he’ll take care of them.
The federal government makes loans and loan guarantees for most any purpose known to man or woman – education, energy research, housing, agricultural land, airlines, veterans, and more. The Federal Deposit Insurance Corporation is billions of dollars short of the reserves necessary to cover expected bank losses. Washington is on the hook for generous pensions for its own workers as well as billions of dollars in guarantees of pensions for private workers whose companies fail. Then there’s Medicare and Social Security, which together have an unfunded liability – that is, promised benefits exceeding expected revenues – of more than $100 trillion. No one knows where the money is going to come from to pay all of these bills, but that hasn’t stopped Congress from continuing to expand benefits. In 2003 the Republican Congress and Republican president created the Medicare drug benefit without bothering to figure out how to pay for it, adding trillions of dollars more to the system’s unfunded liabilities.
Now the government’s liabilities are going up again, as Congress and the administration spend wildly in an attempt to revitalize the economy. Indeed, the administration and Congress apparently are prepared to bankrupt America to save American business. So far this year they have spent: $850 billion for the Wall Street bailout plus the financial “sweeteners” needed to buy enough votes for passage; $300 billion to bail out the housing industry largely through the Federal Housing Administration; $200 billion in Federal Reserve loans to commercial banks; $200 billion (and probably more) to bail out and essentially nationalize the political piggy banks Fannie Mae and Freddie Mac; $144 billion or more to buy mortgage-backed securities through Fannie and Freddie (yes, the same entities being bailed out by Uncle Sam because of their past purchases of bad debt); $87 billion to repay JPMorgan Chase for financing Lehman Brothers trades; $85 billion for a loan to bail out and effectively nationalize insurer American International Group; $50 billion to guarantee money market funds; $37.8 billion in a second loan to AIG, $29 billion to finance the buyout of Bear Stearns; $25 billion in loans to the auto industry, which continues to sink as demand for cars falls; $10 billion in direct Treasury Department purchases of mortgage-backed securities; $4 billion in mortgage community grants.
That’s $2 trillion, which is real money even in Washington. It’s even more to the American people, running about $18,000 per household. Some, and hopefully much, of that money eventually will be repaid. But don’t hold your breath. And the bailouts aren’t over. Just two business days after Congress approved the $700 billion buy of bad securities and any other assets desired by the Treasury Secretary, the Federal Reserve announced that it may purchase unsecured short-term corporate debt. If so, the Fed will be directly lending to the firms in the biggest financial trouble with no security; we all know how that is likely to end. Moreover, the Treasury Department says it wants to “directly strengthen the balance sheet of individual institutions” by acting like a common investor and buying an equity stake in companies. Treasury also is considering taking a formal ownership position in US banks, giving them cash directly. The Fed then cut interest rates, even though its ongoing policy of cheap, easy money is one of the primary causes of the boom that just went bust.
As Congress and the president continue to pile debt upon debt, America’s financial problems will cascade. In May the Congressional Budget Office warned: “Budget deficits that grow faster than the economy ultimately become unsustainable. As the government attempts to finance its interest payments by issuing more debt, the rise in deficits accelerates. That, in turn, leads to a vicious circle in which the government issues ever-larger amounts of debt in order to pay ever-higher interest charges. In the end, the costs of servicing the debt outstrip the economic resources available for financing those expenditures. At some point, then, policy has to change: Taxes must be raised, spending must be reduced, or both.”
With the post-bailout 2009 budget deficit now expected to run around one trillion dollars, Uncle Sam may soon have to worry about who is going to buy all of this debt. Will the Chinese continue purchasing securities from a financially irresponsible entity that keeps adding obligations with no obvious means of paying? Will Americans want to take on the increasingly risky paper? Will they be able to afford to do so?
Earlier this year – before the tsunami of federal bailouts covering anyone even walking near Wall Street – Moody’s Investors Services announced that it was considering downgrading federal bonds, citing the government’s failure to fund Social Security and Medicare. “These two programs are the largest threats to the long-term financial health of the United States and to the governments’ AAA rating,” Moody’s Vice President Steven Hess explained. Tom Lemmon, also of Moody’s, warned that “the underlying credit rating of the US government faces the risk of downgrading in the next ten years if solutions are not found to our growing Medicare and Social Security unfunded obligations.” Lowering the investment rating for US debt would hike federal expenditures even more.
As credit dries up and the US economy stalls, how can Washington continue to engage in social engineering the world over? The Iraq war continues. Nearly $600 billion so far has been wasted on Bush’s folly, and the total cost will exceed $2 trillion, according to the Congressional Budget Office, and maybe $3 trillion or even more, if Joseph Stiglitz’s and Linda Bilmes’s numbers come true. Getting out now would cut the expense, but many of the costs are impossible to escape, such as the expense of caring for America’s grievously wounded, which will stay with us throughout their lifetimes.
Then there are Washington’s other military activities. America accounts for roughly half of the globe’s military outlays. The US maintains nearly 800 military bases and other facilities around the world. In 2009 Uncle Sam will be spending roughly $515 billion on “normal” military operations – more, in real terms, that at any time since World War II. That means Americans now are spending more per year to patrol the globe than they spent to fight the Cold War, Korean War, and Vietnam War.
But that’s not including Iraq and Afghanistan, which together cost roughly $12 billion a month. Toss in those costs and include some money for unexpected contingencies, and we’re talking $700 billion. That’s the amount of the Wall Street bailout, but an expense that will continue year after year.
It’s one thing to act like the global dominatrix when the country is living on easy street, enjoying record economic growth and government revenue. But as the economy is crashing and Uncle Sam will soon have to visit the equivalent of global loan sharks to finance its operations, the time for the pretention of international hegemony is over.
Why are over-burdened US taxpayers expected to defend the Europeans, who have a larger collective economy and population, from nonexistent threats? Yes, the government in Moscow has an ugly edge, but Vladimir Putin is not the reincarnation of Joseph Stalin and there will be no Red Army dash through Germany and France and on to the Atlantic. And if that was a possibility, then why shouldn’t the Europeans sacrifice a little more of their abundant wealth to defend against it? In fact, with the financial crisis hitting Europe as well, military spending there is likely to drop. Observed Mark Stoker of the International Institute for Strategic Studies in London, “I can’t see defense is going to escape any kind of austerity measures. It would be very difficult for any government to justify cutting health and education in favor of, say, building two aircraft carriers and buying a load of planes to stick on them.” Surely the US shouldn’t be subsidizing Europe if those nations spend even less on their own defense. What they spend for the military obviously is their decision to make, but they should bear the full consequences of whatever decision they do make.
Even worse, why should Washington take on the role of protecting former pieces of the Soviet Union and even the Russian empire? We should wish the Baltic States, Georgia, and Ukraine well. But they never counted as a security interest to America. Just how much US money and blood should be spent to guarantee Georgia’s right to supress secessionists and settle a century-old feud to its satisfaction? If Europe believes this to be an important goal, wonderful. Let the Europeans spend the money and take the risks necessary to make it happen.
It is equally nonsensical for America to continue subsidizing the defense of Japan, which has the second or third largest economy in the world, depending on the measure used. Yet it spends less than one percent of its GDP on defense, a quarter of America’s burden. The ongoing economic crisis is a good time to tell Tokyo: you’re a big country now, so defend yourself and your region.
The same goes for South Korea. It possesses one of the largest economies in the world and has 40 times the GDP of its decrepit northern antagonist. A majority of younger South Koreans say they fear America more than North Korea. Why are nearly 26,000 US troops still on station there? Bring them home and demobilize them, while the Republic of Korea takes over responsibility for its own defense. South Korea has matured. It should act like it and take on “adult” international responsibilities.
Finally, it’s time for Washington to give up on nation-building. Social engineering is difficult enough at home. It’s well-nigh impossible for outsiders, especially naïve and ignorant – even if well-intentioned – Americans, to transcend history, tradition, geography, religion, ethnicity, and culture to remake other societies. Iraq has been a catastrophe. We’ve been trying to fix Haiti for more than a century. Arresting warlords in Somalia was one of Washington’s dumbest ideas. Neither Bosnia nor Kosovo are real countries, despite years of American attention.
And, to be perfectly blunt, who cares if they become real countries? We should be concerned about the mistreatment of people everywhere. But Washington has demonstrated no competence in setting foreign nations right, and ivory tower humanitarians have no right to risk the lives of our brave servicemen and women in the name of a glorious crusade for democracy in Mesopotamia, the Balkans, Caribbean, Africa, or anywhere else. War truly must be a last resort, which means no resort at all unless American society truly is at risk in some fundamental way. No wars of choice or convenience, no matter how easy and cheap they appear likely to be.
The American economy will eventually recover from its current trauma. But the myth of US omnipotence likely is shattered forever. Over the last six years the US has tossed away its moral superiority, diplomatic indispensability, and military infallibility. Now it has lost its economic security. Washington is broke, having made a succession of financial promises the country can ill afford to cover.
There was never a good time for empire. But if there ever was a good time, it has passed. Instead of attempting to micro-manage global affairs, America should again become a normal country, strong enough to protect itself, but no longer claiming responsibility for maintaining global security, stability, and prosperity. Doing so isn’t possible, at least at an affordable price.
Empire isn’t worth the risk to American society or the lives of American military personnel. It certainly isn’t worth the cost, especially at a time of economic crisis. Let us make John Quincy Adams’ apt dictum the lodestar of our new foreign policy: America “goes not abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own.”
Not Enough Money in the World: The Real Monster in the Meltdown Closet
Not Enough Money in the World:
The Real Monster in the Meltdown Closet
Written by Chris Floyd
The myth has quickly taken hold that the global financial crash was caused by bad mortgages. This has allowed rightwing hatemongers to blame the meltdown on the “liberal” programs that encouraged home ownership among a small percentage of lower-income people (a poisonous canard that parts of the mainstream media have actually done a fairly good job of knocking down), while “progressives” of various stripes have denounced banks and other financial institutions for pushing over-easy credit on people who couldn’t really afford it.
Unsustainable mortgages are a key factor in the global crash, of course. And many people (most of them white, by the way) did take out mortgages they would not be able to afford if the housing bubble ever burst, which it has, most spectacularly. And yes, it is undeniable that the financial services industry has been tempting people with easy credit like schoolyard pushers flashing reefers.
All of this was bound to end badly, and did. But this alone would not have been enough to threaten the destruction of the entire global financial system, nor cause the blind, screaming panic that has strangulated the financial markets, seized up the vital flow of money between banks, and caused the “free” market-worshipping governments of the Western world to carry out nationalizations and interventions that, in sheer numbers, dwarf anything ever seen following a Communist revolution. (As John Lancaster notes in the London Review of Books, the Bush Administration’s takeover of Fannie Mae and Fannie Mac alone was “was, by cash value, the biggest nationalisation in the history of the world.” And that was just the beginning.)
What has struck mortal fear in the heart of markets and governments is not bad mortgages, but the almost incomprehensibly huge and complex market for “derivatives,” based in part on mortgage debt — but also on a vast array of other sources that were “securitized,” turned into tradable if ghostly commodities then sold off in a bewildering variety of increasingly arcane forms. This was accompanied by the expansion of yet another vast market in insurance mechanisms designed to protect these derivatives — mechanisms which themselves became “securitized.”
At the same time, the financial services industry used its paid bagmen in governments around the world to loosen almost all restrictions not only on securitization and the trading of derivatives, but also on the amount of debt that institutions could take on in order to play around in these vastly expanded and deregulated markets. For example, as Lancaster points out, UK’s Barclays Bank had a debt-to-equity ratio of 63 to 1:
Imagine that for a moment translated to your own finances, so that you could stretch what you actually, unequivocally own to borrow more than sixty times the amount. (I’d have an island. What about you?)
The result of all this has been the construction of a gargantuan house of cards, based on next to nothing, and left alone in the shadow of building “perfect storm” of greed, deregulation and political corruption.
That storm has now struck. The house of cards has fallen down, and revealed a hole of derivatives-based debt that could not be filled, literally, by all the money in the world, much less by the mere trillions that national governments are frantically throwing at it today.
Yes, “mere” trillions. As Will Hutton explains in the Observer:
…the dark heart of the global financial system is the $55 trillion market in credit derivatives and, in particular, credit default swaps, the mechanisms routinely used to insure banks against losses on risky investments. This is a market more than twice the size of the combined GDP of the US, Japan and the EU. Until it is cleaned up and the toxic threat it poses is removed, the pandemic will continue. Even nationalised banks, and the countries standing behind them, could be overwhelmed by the scale of the losses now emerging.
Try to imagine that: a $55 trillion market now at risk of complete destruction. Even the derivative debt owed by individual institutions stands at nation-wrecking levels. For example, a single bank in Britain, Barclays again, holds more than $2.4 trillion in credit default swaps, the tradable “insurance” mechanism against securities default. This is more than the entire GDP of Great Britain. If all this paper goes bad, there are not enough assets in the entire country to pay it off. And that’s just one bank, in one country.
Hutton gives the details:
This market in credit derivatives has grown explosively over the last decade largely in response to the $10 trillion market in securitised assets – the packaging up of income from a huge variety of sources (office rents, port charges, mortgage payments, sport stadiums) and its subsequent sale as a ’security’ to be traded between banks.
Plainly, these securities are risky, so the markets invented a system of insurance. A buyer of a securitised bond can purchase what is in effect an insurance contract that will protect him or her against default – a credit default swap (CDS). But unlike the comprehensive insurance contract on your car which you have with one insurance company, these credit default contracts can be freely bought and sold. Complex mathematical models are continually assessing the risk and comparing it to market prices. If the risk falls, the CDSs are cheap; if the risk rises – because, say, a credit rating agency declares the issuing company is less solid – the price rises. Hedge funds speculate in them wildly.
Their purpose was a market solution to make securitisation less risky; in fact, they make it more risky, as we are now witnessing. The collapse of Lehman Brothers – the refusal to bail it out has had cataclysmic consequences – means that it can no longer honour $110bn of bonds, nor $440bn of CDSs it had written. On Friday, the dud contracts were auctioned, with buyers paying a paltry eight cents for every dollar. Put another way, there is now a $414bn hole which somebody holding these contracts has to honour. And if your head is spinning now, add the three bust Icelandic banks. They can no longer honour more than $50bn of bonds, nor a mind-boggling $200bn of CDSs….
While every bank tries to pass the toxic parcel on to somebody else, the system has to find the money. So will compensation for the near valueless contracts and thus now uninsured debt ultimately be made – and by whom? And because nobody knows – not the regulators, banks or governments – who owns the swaps and whether they are credit-worthy, nobody can answer the question. Maybe holders of insurance policies will get the cash due to them, but will that weaken somebody else? The result – panic.
This is the ultra-dangerous downward vortex in which the system is locked. It is why share prices are plummeting. As recession deepens, there will be defaults on securitised bonds and the potential collapse of more banks outside the G7 ring-fence. Nobody knows what proportion of the $55 trillion of credit default contracts that have actually been written will be honoured and who might bear losses running into trillions of dollars.
This is the beast in the dark that is haunting the feckless leaders of the developed world: $55 trillion of unaccountable debt, and no way of knowing how much of it is even now being flushed down the toilet, taking the global economy with it.
The massive interventions we are seeing might stabilize the markets temporarily, or at least arrest their free fall long enough to come up with some kind of massive restructuring of the global financial system. Or they might not. For it is by no means certain that the wisdom, and the political courage, to come up with a more viable system can be found among the world’s political leaders — all of whom, as we noted here the other day, have risen within the present system and, to one degree or another, owe their own power and privilege to the “malefactors of great wealth” and the extremist cult of market fundamentalism. There is no indication anywhere that the circle of collusion and corruption between governments and Big Money has even lessened, much less been broken, by the economic catastrophe. All of the various bailout plans and “coordinated actions” still have as their chief aim the preservation of the malefactors in their current state of wealth, privilege and domination. As Jonathan Schwarz notes:
Still, U.S. elites will try to impose as much of a structural adjustment as they can get away with, in order to make the bottom 80% of America pay the price for the elites’ spectacular screw-ups. The Washington Post has already started writing about how the current crisis demonstrates that we must cut Social Security. Look for much more of this to come.
The only slim hope we have for any genuine reform — even an imperfect, conflicted, compromised reform, which is the only kind we will ever have in this world, until the lion lies down with the lamb — is that the sheer scale of the real problem — the $55 trillion beast, the very real potential for the complete destruction of the global economy, and the state power that depends upon it — might force some politicians to turn apostate, renounce the market cult, and bite the hands that have fed them for so long.
Absent this near-miraculous possibility, we will be left with yet another rickety house of cards, slapped together on the fly — largely at the malefactors’ direction and for their benefit — while the beast gapes wide his ponderous jaws, and prepares to swallow us whole.
How Central Banks Destabilized the World’s Economies
Monetary disorders are always
the product of inflationary policies
Two economic fallacies govern the actions of central banks. The first one is that of the stable price level. According to this fallacy so long as prices remain stable the economy cannot fall into a recession. This fallacy was championed by Irving Fisher. It cost him $10 million. Those who argue that the money supply should be manipulated in away that prevents prices from either rising or falling have assumed that though individual prices are determined by supply and demand the level of prices is a function of the money supply.
This view cannot withstand even a cursory examination. Money always enters the economy at certain points from which the effects of these new spending streams ripple outwards. Even if a ” helicopter” approach is assumed in which everyone simultaneously receives the same amount of money the theory still breaks down because people’ s preferences are neither identical nor fixed. Not every economist at the time agreed with Fisher as the following quote shows:
…difficulties are viewed largely as the inevitable aftermath of the world’ s greatest experiment with a ” managed currency” within the gold standard, and, incidentally, should provide interesting material for consideration by those advocates of a managed currency which lacks the saving checks of a gold standard to bring to light excesses of zeal and errors of judgment. (C. A. Phillips, T. F. McManus and R. W. Nelson, Banking and the Business Cycle , Macmillan and Company 1937, p. 56).
If Fisher and his disciples had been correct he would not have lost his fortune and much of his reputation as an economist. During the 1920s the Fed almost doubled the money supply. So why didn’ t this raise prices? It did. Commodities boomed as did the demand for capital goods. Because of the focus on consumer goods the prices of capital goods and land were ignored. What makes this observation of critical importance is that it blows away the theory that prices can be stabilised. They cannot.
Changes in money streams will always change the price structure and hence the pattern of production. (Richard Cantillon, Essay on the Nature of Commerce in General , Transaction Publishers, 2001, written about 1734 and first published in 1752). These money streams are brought into existence by the central banks forcing down the rate of interest below its market rate. Consequently businesses take on more time-consuming projects, projects that are economically justifiable because the necessary capital is not available to complete them. What central banks are in effect doing is substituting credit for capital. In the mid-’20s it was observed that the
tendency to substitute bank credit for real capital [capital goods] was looked upon as a very ominous tendency. The years 1924-29. . . abundantly justified these apprehensions. (Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946 , LibertyPress, 1979, p. 99).
The second fallacy is that recessions are caused by “deficient demand”. This is probably the most dangerous economic fallacy around. Its adoption by the mass of economists and hence central banks is a curse for which we can thank Lord Keynes. This invites a simple question: Why is it that more and more monetary injections are needed to prevent recession?
The classical economists had the answer and it was called disproportionality. They noted two things: The first being that the “revulsion” as they called always started with manufacturing. The second thing being that these disruptions always occurred in clusters. Ricardo arrived, and rightly so, at the conclusion that the problem was caused by the banking system creating excess credit. (Excess being defined as bank deposits exceeding the banks’ gold reserves). It is this excess credit is what fuels stock market booms. Fritz Machlup explained that a share market boom requires a continuous flow of bank credit. This can only happen if the central bank loosens the monetary spigot. Therefore a
… continual rise of stock prices cannot be explained by improved conditions of production or by increased voluntary savings, but only by an inflationary credit supply. (Fritz Machlup The Stock Market, Credit and Capital Formation , William Hodge and Company Limited, 1940, p. 290).
Today’s economists miss what became self-evident to the early economists: Ultimately “products are always bought with other products” . (Jean-Baptiste Say A Treatise on Political Economy , 1836 edition republished by Transaction Publishers, 2001, p. 166. Also chapter XV). Say and the classical economists fully understood that goods had to be produced in their proper proportions, i.e., equilibrium had to prevail. Say’s response to the charge of over production was to point out
… that the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short. (Ibid. p. 135).
David Ricardo was at one with Say on the issue of gluts:
Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities; the demand for corn is limited by the mouths which are to eat it, for shoes and coats by the persons who are to wear them; but though a community, or a part of a community, may have as much corn, and as many hats and shoes, as it is able or may wish to consume, the same cannot be said of every commodity produced by nature or by art. ( On The Principles of Political Economy and Taxation , Penguin Bookes, 1971, p. 292).
Concerning the problem of booms, busts and so-called general gluts, an exasperated Ricardo wrote to a friend that
Mr. Malthus never appears to remember that to save is to spend, as surely, as what he exclusively calls spending. ( The Works and Correspondence of David Ricardo Vol. II , liberty fund Indianapolis 2004, First published by Cambridge University Press in 1951 p. 449).
In 1829 or thereabouts John Stuart Mill wrote a devastating critique of the idea that aggregate demand can be deficient. Adhering to Say’ s law he emphasized that so long as wants remain unsatisfied and the means to sate them are scarce then the notion of ” general over-production” is absurd. The key to his argument is the insight that demand springs from production, not consumption. As he eloquently put it:
The argument against the possibility of general over-production is quite conclusive, so far as it applies to the doctrine that a country may accumulate capital too fast; that produce in general may, by increasing faster than the demand for it, reduce all producers to distress. … It is true that if all the wants of all the inhabitants of a country were fully satisfied, no further capital could find useful employment; but, in that case, none would be accumulated. So long as there remain any persons not possessed [of goods], there is employment for capital; and if the commodities which these persons want are not produced and placed at their disposal, it can only be because capital does not exist, disposable for the purpose of employing, if not any other labourers, those very labourers themselves, in producing the articles for their own consumption. Nothing can be more chimerical than the fear that the accumulation of capital should produce poverty and not wealth, or that it will ever take place too fast for its own end. ( Essays on Economics and Society , University of Toronto Press 1967, p. 278).
William Stanley Jevons, one of the first neo-classical economists, also explained why general gluts (demand deficiency) were not possible. In his opinion
Early writers on Economics were always in fear of a supposed glut, arising from the powers of production surpassing the needs of consumers, so that industry would be stopped, employment fail, and all but the rich would be starved by the superfluity of commodities. The doctrine is evidently absurd and self-contradictory … Over-production is not possible in all branches of industry at once, but it is possible in some as compared with others. ( The Theory of Political Economy , Kelley & Millman, Inc. 1957, p. 203, first published in 1871)
For Jevons and his contemporaries genuine purchasing power could only spring from production. It should be easy to see from this observation that as individuals increase their real purchasing power, i.e., expand individual output, total output rises, which is just a fancy way of saying that total demand has expanded. This process of exchange will tend to equate the value of the worker’ s output with that of his wages. All said and done, we can now say at this point that purchasing power is another term for exchange power, which in turn is labour’ s ability to create goods for exchange.
Yet something that would be glaringly obvious in a barter economy drops out of sight with the appearance of money. If the fundamental principles that the early economists discovered were resurrected and adhered these crises would not develop.
It clear that the crisis was not caused by political incompetence but by very bad economics. Unfortunately, this fact will not satisfy political bigoted journalists like Frank Thomas of the Wall Street Journal for whom lying is second nature. It is not much different in Australia, for which Rupert Murdoch much shoulder some of the blame. The idiotic Peter Jonson (aka Henry Thornton) had the audacity to blame President Bush and Chaney, pompously declaring that
Bush and Dick Chaney should resign just as soon as the votes are counted in the current election. The Speaker of the House, who would become acting President and would be expected to work closely with the President-elect on the plan to restore trust to the world’ s financial system.
Other Prime Ministers and Presidents should look deeply into their souls and decide whether or not to resign — after appointing a person of proven experience who has no interest in the coming election to run the Government until the election is settled. ( The Australian , It’ s time to restore trust , 10 October 2008)
If anyone needs to do any soul searching it’s the sanctimonious Jonson and his mates. Their crummy economics brought about this crisis. Now the puffed-up ass wants to put the cretinous Pelosi in charge of the US economy. I am truly sick to death of political flakes like Jonson and their imperious announcements about Bush.
By Gerard Jackson
BrookesNews.Com
Gerard Jackson is Brookes’ economics editor.
Copyright © 2008 Gerard Jackson
Feds Give Hundreds of Billions to Banks, But Get Only NON-VOTING Shares in Return
Feds Give Hundreds of Billions to Banks, But Get Only NON-VOTING Shares in Return
Paulson’s original bailout plan was so ill-conceived, and the markets reacted so poorly, that he had to copy the European model of buying shares in banks in return for injections of capital. As Kenneth S. Rogoff, a professor of economics at Harvard, said, “The Europeans not only provided a blueprint, but forced our hand”.
But the European governments get voting shares in return for bailing out their banks. With voting shares, the governments could force the banks to operate in the best interests of the country, make sure they loan to consumers and small business, and take other action necessary to get their economies back on their feet.
With voting rights, the European governments can also insist that the banks stop buying and selling risky derivatives, which are one of the root causes of the economic crisis.
In contrast, America’s bank buy-out gives the government non-voting shares. In other words, the feds can say pretty please, but they have no voting power.
This flies in the face of U.S. history as well. As the Wall Street Journal notes:
“During the Depression, the Reconstruction Finance Corp. bought billions of dollars of preferred stock that came with voting rights. The government then barred banks from paying dividends until they had bought out the government’s stakes. This time, the government stakes are nonvoting and the dividend restrictions are less onerous.”
Without voting rights, the banks can keep on doing the same things that got them (and our economy) into trouble in the first place.
http://georgewashington2.blogspot.com/2008/10/feds-give-hundreds-of-billions-to-banks.html
Great Britain: What is it and where is it going?
Great Britain: What is it and where is it going?
Cailean Bochanan
Optimism returned to the markets today as Gordon Brown, the rock on which the new doctrine of “part-nationalisations” is built, set the master plan in motion. But will it work, will it, as they say, “do the trick”?
If the trick in question is how to bailout the banks to the tune of £500 billion without the figures turning up on the government’s current account, the answer is a resounding “yes!” But what about the real economy? I can already see the puzzled, inquisitive expression on the City financier’s face. They didn’t get where they are today worrying about the real economy. Did I mean would it reignite the housing bubble or mean a resumption of credit card fuelled binging by Britain’s “there is no tomorrow” generation? If so, certainly not! The banker’s have got better things to do with our money than simply giving it back to us.
With regard to the real economy and the real everyday lives of the inhabitants of this country , it will most certainly not “do the trick”. The party is over and the bill has been handed to us. It’s not that we can’t pay it just now: we can’t pay it tomorrow – we can’t pay it ever!
What are we to do? To even begin to answer that question we have to address the question of the fundamental nature of Great Britain.
Few nations can claim their origins in a conspiracy to invite a foreign financial, military and constitutional takeover. Such, however, was the coup d’etat of 1688. A small group of conspirators, in touch with William of Orange and the Whig exiles in Holland pulled of a plan of stunning boldness precipitating the greatest military invasion since the Roman Empire, and an accompanying influx of Dutch money on which the British empire was to be based.
This extraordinary operation, whose essential nature would have to be concealed from the British people in perpetuity, was only made possible by prolonged ideological preparation, a propaganda campaign which had been running for over a century. This “war on terror” was a device all too familiar to us today: but it was directed against Catholics, not Muslims. Just as today the evocation of the ‘Muslim threat’ has made all kinds of things possible which would not otherwise have been, so it was with the evocation of the “Catholic threat”. It even made the self-liquidation of English nationality possible.
The idea was essentially to create an offshore base in which to reproduce the financial system already developed in Holland and from which to fight France and to construct a maritime empire. Controlling England was not sufficient to attain this goal: control had to be extended to the whole British Isles, merging Scotland and England,subduing Ireland and extirpating the Gaelic culture of the Celtic periphery. There could be no point in shifting the massive wealth off-shore out of France’s reach only to allow France in by the backdoor i.e. via Ireland or Scotland. The resulting constitutional arrangement, Great Britian established by the sword and by deception in 1707 and more or less stabilised by 1715 was a completely artificial entity.
The great novelty of the finacial was the permanent indebtedness of the the executive power to a consortium of private bankers, constituted in the so-called Bank of England. The financiers were able to permanently enrich themselves at the expense of the nation who had to meet the interest payments which the executive was charged on the national debt. The principal was not repaid but merely rolled in perpetuity. This gave Britain a great advantage in the prosecution of wars, the funding of which had caused so much difficulty to the Stewart kings. Swift alludes to this situation in one of the many illuminating passages from his masterful satire on Britain, Gulliver’s Travels, which should be read by all who wish to find the roots of our present predicament.
Having noted the excess of expenditure over income the King of Brobdingnag expresses his perplexity that “a kingdom could run out of its estate, like a private person. He asked me who were our creditors, and where we found the money to pay them. He wondered to hear me talk of such chargeable and expensive wars; that certainly we must be a quarrelsome people, or live amongst very bad neighbours, and that our generals must needs be richer than our kings. He asked what business we had out of our own islands, unless upon the score of trade, or treaty, or to defend the coast with our fleets. Above all, he was amazed to hear me talk of a mercenary standing army, in the midst of peace and among a free people.”
The connection between Whig finance and war was already clear to Swift. It was also linked to the ruination of the yeomanry through taxation and the related export of people through colonisation. Gulliver’s distaste for the latter is the reason, which made him “less forward to enlarge his majesty’s dominions” by his discoveries, he having “conceived a few scruples with relation to the distributive justice of princes on these occasions”.
“Here commences a new dominion acquired with a title by divine right. Ships are sent with the first opportunity; the natives driven out or destroyed; their princes tortured to discover their gold; a free licence given to all acts of inhumanity and lust, the earth reeking with the blood of its inhabitants: and this execrable crew of butcher’s, employed in so pious an expedition, is a modern colony, sent to convert and civilise an idolatrous and barbarous people.”
With the treasonous Orange takeover and what Disraeli called the Venetian system in place, the new Great Britain was the the greatest instrument for war and conquest ever created. Through conquest, through usury, through trading in slaves, guns and every commodity, through monopoly and the ruination of native economies it became the greatest instrument for the accumulation of wealth.
All of this was three hundred years ago but we can see the persistence of similar trends in modern Britain. If there was ever any doubt, we know now that this place is controlled, as it was then, by high finance. We know that this power centre is closely linked to war and that this connection gives rise to a military industrial complex. Then as now the economy was parasitic, living of global financial dealings based on stealth and brute force. The original Whig elite lived of government bonds issued in Britain. By 1820 the bond market was rapidly extending throughout the world. Today, money is sucked into London as foreign producers except our currency in payment for the goods we consume and recycle them into our government bonds.
The mechanisms behind these mechanisms of exploitation are complex, but the essence of the situation is that we have placed ourselves at the centre of a web of relationships and a kind of international division of labour which are favourable to us, or, rather ,our financiers, since this massive public debt and our endless wars is now also as intolerable to us as it is to the wider world. 1688 created imperial Great Britain , but, contrary to popular consciousness, it is still an empire, albeit one on its last legs. This realization must be the starting point for any attempt to resolve the present crisis.and I will try to draw out the implications of this in my next article.
