The causes of the current crisis
- From: ADR <aretzios@xxxxxxxxx>
- Date: Fri, 22 Jan 2010 19:03:47 -0800 (PST)
On Jan 22, 10:35 am, "*Anarcissie*" <anarcis...@xxxxxxxxx> wrote:
On Jan 21, 1:01 pm, ADR <aretz...@xxxxxxxxx> wrote:
As the thread that this was in has been transformed into the "history
of baseball", I thought of starting a new thread. Although this is
not ancient history per se, the main theme is money through the ages.
There are some short answers to your dilemma:
1. First, incomes did not remain static since the 1990's. This is a
misconception. What actually changed since then is the distribution
of income increase through the social strata.
2. Stocks actually declined in value. In 2010, the DOW and the S&P500
are about where they were in 2000. In you factor in inflation, then
stock prices actually declined a lot.
3. Real-estate, following the recent correction, has increased
moderately since 1998-1999
4. Manufactured goods have increased in proportion to income.
The present, 2010, is a bit confused to judge by; full reinflation has not taken place yet. The
period during which I became curious about why rapid inflation was occurring in equities, real
estate and collectibles, but not in manufactured goods, lower-cost services and labor, and the
like, called "the real economy" by some, was in 2003-2004. I was also curious about the Fed and
related interest rates which were significantly lower than the rate of inflation, whereas I
believe the natural rate of interest is about 3% higher than the rate of inflation.
"Natural interest rate"??? There is no such thing.
It certainly makes no apparent sense for it to be lower than the rate of inflation!
Go tell it to the banks!!! Currently, interests rates only 50% of the
rate of inflation. With many people saving money now and the banks
having access to cheap money from the Fed, our money in the deposit
accounts is not all that desirable. Thus, the low interest rates.
However, if the government imposes this situation, then naturally people who can get hold of cheap, indeed,
negative- interest money are going to do it as long as they believe they have any prospect of using it
and being able to pay it back (or borrow more later).
Sure, this is the whole idea.
In the realm of manufactured goods, we also need to observe that large quantities of goods were and
are being imported from China on borrowed money This serves to keep the price of the goods
consumed by the folk low, while it contributes to unemployment and the wasting away of the U.S.
industrial plant. But perhaps this is not fundamental.
It is totally immaterial. But what actually caused the shift in
manufacturing was not the borrowed money but the much cheaper labor
abroad.
Since the status quo ante is being restored, I think it is only reasonable to expect the catastrophe quo ante to > be in turn rerun.
No, it would not happen, not in our lifetimes. Other problems will
occur and new bubbles will form and burst, but not this one. In fact,
steps have been taken to make sure that this particular one does not
happen again.
Of course, but credit has not been expanding indefinitely. In any
case, credit increases are regulated by the Fed. The main index that
the Fed is tracking regarding money supply includes credit. Thus, the
Fed can reduce availability of credit at any time. A typical
mechanism would be to increase short term interest rates, etc,..
Only they can't. The recent crisis was set off
when Bernanke began harrumphing about inflation
and raised the rates. The more marginal people
with ARMs couldn't pay and began defaulting.
You may think that this caused the crisis but it did not. Yes, the
increase in interest rates cooled the real estate market but the
persons with ARMS had other problems. They had a teaser rate for only
2 to 3 years, with an automatic reset to higher rates. They needed to
refinance but when the market cooled, they did not have the equity to
refinance. They just defaulted. However, the bursting of the real
estate bubble on its own would not have been adequate to create a
crisis. There were other moving parts that caused it.
Whereupon the real estate market in many areas
began to collapse, and with it numerous banks,
insurance companies, and so on. Ask yourself what
would happen if the Fed had raised the interest
rates at any other time.
Real estate bubbles and crashes had happened before (notably between
1986 to 1990) but they did not cause a systemic problem in the
economy. What brought the financial system to its knees was not the
housing bubble but structural problems in the system, the weak point
of which was exposed by the housing bubble.
You mention lack of credit as a cause of the
present recession. It is not a cause, it is a
consequence, or rather, a step in a normal
sequence of conditions. Lack of credit follows
excess of credit. Unlike fiat money, credit can
disappear almost instantly. When people stop
believing in fiat money, inflation occurs, that
is, more money is required to get people to do
labor or give up property.
The statement above is not true. First and foremost, inflation occurs
when there is too much money chasing too few goods, irrespective if
this is "fiat money" or "real money". For example, one of the
greatest periods of inflation in history was that of the 16th
century. From 1520 to 1580 CE, the Spanish monarchy inserted billions
of golden and silver coinage in Europe to pay for its wars. Although
this was very much "real money", a huge inflationary spiral begun. In
terms of modern money which is based "on faith", loss of confidence in
it results in its fast depreciation (a race to zero value) which
should not be confused with inflation although it may feel the same to
the average person. It is instructive that this occurred several
times in history, one of the most notable being in the 3rd century CE,
when the Roman Empire progressively debased the currency without
changing its nominal value. Money actuallyprogressively disappeared
in transactions and it was replaced by barter. Constantine finally
reversed the trend by the introduction of the golden solidus (the
solid piece) which actually served as "reserve currency" in Europe for
centuries.
By contrast, when
people stop believing in credit, it simply
vanishes, and deflation occurs.
Deflation is not caused by the lack of belief in credit. In fact, the
US faced deflationary pressures in 2000 - 2002 when credit not
discredited, was extremely cheap and available. Japan experienced
substantial deflation for the whole decade of the
This is what we
observed in 2008: the money value of the real estate and stock markets contracted significantly.
A more complete collapse was averted by the government replacing private credit with
government credit, but the underlying problems remain.
Well, the crash occurred for a number of reasons: the most notable one
was the fact that after the default of Lehman Bros, many derivatives
guaranteed by this bank became worthless because there was nobody who
could actually step in to guarantee them and because these mortgage-
based derivatives were of "undertemined" value (later renamed as
"toxic assets"). With assets fast disappearing (due to the removal of
"toxic assets" from the books, insurance companies like AIG, who were
underwriting major companies, did not have the funds to pay out so
many expensive claims. Thus, the government intervened with TARP (to
buy out the "toxic assets"), recapitalize the banks and to provide
money to cash-strapped insurance companies. Of course, TARP did not
work as envisaged, but this is another story. In any case, since no
bank knew how stable other banks were, interbank loans virtually
ceased and credit progressively disappeared.
(The first instance I can remember of this sort of
routine was run in 1987, when the stock market
began to crash, and the government made virtually
unlimited credit available to the NYRB's
specialists so that they could keep the market
from cratering.
The market can crater even the government provides unlimited funds.
The market is about the value of companies. Today, the Fed is
providing easy credit but the stock market may still crater if the
companies cannot generate profits that justify their value.
Ultimately, for money to be worth anything, it has to trade for labor or things produced
by labor, that is, it has to cause people to want to trade goods or services for it.
However, the very free expansion of credit in
the '00s led to a situation in which no amount
of labor could balance the huge amounts of
theoretical money implicit in the real estate and
equities markets.
No, I do not believe this. The recession was not caused because of
the lack of confidence in money. In fact, during the worse of the
recession, the dollar rose and it only declined when the worse had
passed
Hence it was nearly inevitable that there would be at least a partial collapse
of the arrangement, or "correction" as some prefer to say.
Corrections of the type you mention occur in the pricing of stocks or
commodities. Not to wages. Wages can be driven lower by unchecked
inflation or by abundant supply of labor (which is happening today).
The fact that unemployment, understated as it is, is still rising, suggests that the
correction or collapse may not yet be complete.
Unemployment keeps rising because it feeds on itself. If there are
fewer consumers, fewer people are needed to produce goods and so on in
a vicious cycle. Originally, the current crisis caused unemployment
because with the absence of credit, many companies could not support
the expansion or maintenance of their business. Consumers were
frightened out of their minds and stopped spending. When they stopped
spending, companies started to shed labor to maintain profit margins,
reduce inventories and trim manufacturing. This, of course, caused
further unemployment and so on and so forth. Unfortunately, the
federal government was just too timid in intervening with an
appropriate stimulus and when it did so, it was just too little, too
badly directed and badly managed.
.
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