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What's Going Down

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...in a nutshell.

 

"The Politics of Economic Disaster"

 

Every day, I read another economist, journalist, or government official opining on how best to achieve economic recovery in this country or that. Needless to say, the remedies all contradict each other. But almost all of these pundits seem to me to live in fantasyland. They actually seem to believe their remedies will work in some relatively short period of time.

 

The fact is that the world is only at the beginning of a depression that will last for quite a while and will get far worse than it is now. The immediate issue for governments is not how to recover but how to survive the growing popular anger they are all, without exception, facing.

 

Let us start with the economic realities of the present. Just about everybody throughout the world - governments, enterprises, individuals - has been living above their income for the last 10-30 years, and doing it by borrowing. The world went giddy with inflated earnings and inflated consumption. Bubbles have to burst. This one has now burst (or actually several bubbles have burst). The impossibility of continuing on this path has sunk into consciousness, and suddenly everyone has gotten scared that they are running out of real money - governments, enterprises, individuals.

 

When that fear takes over, people stop spending, or lending. And when spending and lending declines significantly, enterprises stop producing or slow down. They may close down entirely, or at least fire workers. This is a vicious cycle, since closing down or firing workers leads to lower real demand and causes further reluctance to spend or to lend. It's called depression, and deflation.

 

For the moment, the United States government, which is still in a position to borrow money and print money, intends to throw some new money into circulation. This might work if the government threw an awful lot, and threw it wisely. But quite probably, it won't do it wisely. And quite probably throwing the amount that might work amounts to little more than creating another bubble. And the dollar might then really fall much faster than other currencies, pulling down the last important prop to the world-economy.

 

In the meantime, there is less and less money for daily consumption of all kinds for the bottom 90% of the world's population (and it's not so good for the top 10%). People are getting restless. Just in the last month, we have seen people in the streets protesting economic difficulties in a growing number of countries - Greece, Russia, Latvia, Great Britain, France, Iceland, China, South Korea, Guadeloupe, Reunion, Madagascar, Mexico - and probably a lot more that haven't been noticed by the world press. In fact, it's been relatively mild up to now, but the governments are all on edge.

 

What do governments do when their primary concern is dealing with internal unrest? They really have two choices - shoot the protestors, or appease them. Shooting works only up to a point. For one thing, the agents of force must themselves be well-enough paid to be willing to do it. And when there is a serious economic downturn, arranging this is not all that easy for the regimes.

 

So the regimes begin to appease their populations. How? First of all, by protectionism. Everyone has begun to complain about the protectionism of other countries. But the complainers are all practicing it themselves. And they will do a lot more of it. The free market economists all tell us that protectionism makes the overall economic situation still worse. That's probably true, but politically quite irrelevant, when there are people in the streets wanting jobs - now!

 

The second way governments appease when there is unrest is by social-democratic welfare measures. But to do that, governments need money. And governments get money from taxes. The free market economists all tell us that raising taxes (of any kind) during an economic downturn makes the overall economic situation still worse. That may be true, but in the short run that's also irrelevant. As it is, in a downturn, tax receipts fall. Governments can't keep up even with current expenditures, not to speak of paying for increased expenditures. So they will tax in one way or another. Or they will print money.

 

Finally, the third way they appease is by a healthy dose of populism. The real income gap between the top 1% and the bottom 20% both within countries and worldwide has grown enormously in the last thirty years. The gap will now be reduced to the more "normal" gap that existed in 1970, which is still very large, but somewhat less scandalously large. Hence, you have governments talking now of "income caps" for bankers, as in the United States and France. Or you can prosecute people for corruption, as in China.

 

It's a bit like being in the path of a tornado. The worst can come upon governments suddenly. When that happens, they have only minutes to take shelter in their cellars. The tornado then passes, and if one is still alive, one comes out to survey the damage. The damage will turn out to be very extensive. Yes, one can rebuild. But then the real argument begins - about how one rebuilds, and how fairly one shares the benefits of rebuilding.

 

How long will this gloomy picture prevail? No one knows or can be sure, but it will probably be a good number of years. In the meantime, governments will face elections, and voters will not be kind to the incumbents. Protectionism and social-democratic welfare serve governments the way the cellar does during a tornado. The quasi-nationalization of banks is another way of taking shelter in the cellars.

 

What we the people have to think about and prepare for is what we do when we emerge from the cellar, whenever that is. The fundamental question is how are we going to rebuild. That will be the real political battle. The landscape will be unfamiliar. And all our past rhetorics will be suspect. The key thing to realize is that rebuilding can take us into a far better world - but it can also take us into a far worse one. In either case, it will be a far different one.

 

by Immanuel Wallerstein

 

[Copyright by Immanuel Wallerstein, distributed by Agence Global. For rights and permissions, including translations and posting to non-commercial sites, and contact: rights@agenceglobal.com, 1.336.686.9002 or 1.336.286.6606. Permission is granted to download, forward electronically, or e-mail to others, provided the essay remains intact and the copyright note is displayed. To contact author, write: immanuel.wallerstein@yale.edu.

 

 

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For the moment, the United States government, which is still in a position to borrow money and print money, intends to throw some new money into circulation. This might work if the government threw an awful lot, and threw it wisely. But quite probably, it won't do it wisely. And quite probably throwing the amount that might work amounts to little more than creating another bubble. And the dollar might then really fall much faster than other currencies, pulling down the last important prop to the world-economy.

 

I was musing on the low inflation rate the other day. Classic econ says that massive government spending vs income accompanied by massive cash infusions into any economy will result in massive inflation. This should be upon us by now, yet it has not occurred (yet). It appears that what is happening is not only are they borrowing by issuing treasuries at record paces, but they are also buying those very T-bills back at a record pace. So the result is that less money gets in circulation. I don't understand the effects that utilizing this slight of hand trick will get us....as it appears very intentional. This appears to be having the result of deflating the dollar. Perhaps others can weigh in here on that. STP has been posting a bunch of kick assed web-sites, does anyone else check that stuff out? One site he linked suggested keeping cash on hand can be the best thing to do right now as the dollar deflates. Inflation, on the other hand, will make everything which you had stuffed under your mattress disappear faster than a KKK member at a NAACP meeting. I think that one personal hedge against this, no matter which way it goes is a bank account that is accounted in Chinese Yuan. I'm trying to resist it but am considering getting into some Wheat Futures thinking that the weather/dollar combo may help that transaction this year.

 

What are everyone else's thoughts on this? What personal moves are you making?

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This stuff is way outta my depth. I usually dislike long posts but here are some thoughts...not sure if any is useful in a detailed coherent way.

 

There's some disagreement going on with what's happening in the current situation. You could have simultaneous deflation in some asset classes and inflation in others which makes it difficult to put a simple name on it.

 

The analogy I heard was that the Fed is figuratively trying to inflate a rapidly deflating balloon, one with a massive hole. The black hole of imminent debt collapse (deleveraging) is consuming a large measure of virtual (assumed) wealth. So at this point inflationary effects will not be noticed until the situation stabilizes before it can run the other way.

 

Fiat money is a debt-based currency which has its basis in a fractional reserve system. Additional money is created by debt instruments based on a promise to pay. If all loans were paid off before their term, then that share of money (or purchasing power) created by the outstanding loans would cease to exist. Also, if defaults occur, this is destructive in a somewhat similar way. So essentially, it's a system based on perpetual debt.

 

As I have heard, cash is king during deflationary periods. The problem is maintaining cash during a protracted time (how do you maintain cash flow so that your reserves are not consumed?). If you were prescient you could convert the cash into something of immediate or lasting value depending on your needs: food, tools, raw materials, etc. However, once inflation begins to set in, your ability to convert currency is devalued.

 

My gut feeling is that in this current global situation, fiat currency is suspect. For instance, what if you invested in a foreign currency but what if there's a run on the currency? Incidently, around Sept 15 this year there was a run on the domestic money market funds. Institutions were rapidly pulling liquidity out, the effect of which was similar in style as a run on a bank.

 

Gold on the other hand is used as a hedge against inflation of fiat currency. It's a medium of exchange with known physical properties, is relatively stable (will not disintegrate over time) and it cannot be conjured into existence like fiat currency (by the printing press). However, the price can be driven into the stratosphere by excessive demand which can then be followed by a crash. Of course, the best time to acquire is sometime before it tops out. Good luck.

 

Despite the caveats, I suppose if you were attentive enough and if you had relevant information, you could find opportunity just about anywhere but again no one has a crystal ball so diverification is the best strategy. ( I think it was Nassim Nicholas Taleb who suggested 90% in safe investments (preservation of capital) vs 10% in risky.) Talk to an investment specialist. Other than that, I’ve basically come to the conclusion that for the majority of folks we’re at the mercy of circumstances.

 

If the worst happens... read this.

 

Oh, BTW, don't expect a war to get us out of the mess. If it happens (again) it's perhaps only part of the mess, not the eventual solution. Spending on war has to come from somewhere--tax revenues, deficit spending (there's no free lunch)--though I suppose it could have the effect of creative destruction.

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Nice link STP, very long and worthwhile reading. If you lived in the burbs, it should be a wake up call to sell immediately and move inner city to a larger/funkier place with an eye on vacant land and mass transportation nearby.

 

2 parts I specially liked.

 

Right now the Washington economic stimulus team is putting on their Scuba gear and diving down to the engine room to try to invent a way to get a diesel engine to run on seawater. They spoke of change, but in reality they are terrified of change and want to cling with all their might to the status quo. But this game will soon be over, and they don’t have any idea what to do next.....

 

 

 

...What if you still have a job? How do you prepare then? The obvious answer is, be prepared to quit or to be laid off or fired at any moment. It really doesn’t matter which one of these it turns out to be; the point is to sustain zero psychological damage in the process.....

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gee Bill, I'm totally sorry, Orlov is obviously an unbiased and prescient commentator whose views should be accepted wholeheartedly because his analysis will quickly come true!

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