UPDATE May 27, 2011: While the inflation information here is correct, be aware news has just come out that the NIA (who made the video) is a pump and dump group, doing potentially fraudulent work. So enjoy their videos but beware of their stock recommendations. We wondered who was behind this video — at least it finally makes sense.
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Background
Joanne occasionally writes about the science and corruption of monetary systems. She summed up the connection between the two dismal sciences (climate and economics). If you are new to this theme see the explanation and links at the bottom of the article.
You might think inflation and climate science are only linked metaphorically. But the corruption in science is fed by the corruption in our currencies.
The monetary system that allows a privileged few to print money from nothing is the same system that allows massively misdirected spending. When there are so few controls on the growth of money, there is less negative feedback, fewer brakes, and virtually no limits. If the system is swimming with easy money, people can “afford” to build wildly extravagant and unproductive things — like wind-farms, carpets of solar panels, or symbolic rivers of blue plastic.
This is a video related to the endgame of that topic, and I gather it’s going viral. It’s provocative.
‘The sound track is very professional, even if the plot time-line is overly compressed. In the end this is also interesting because it marks another incremental step up in the war between new media and old. If you have a message to tell, you can pay for advertising on MSN or you can create an online video and watch it run…
| The Day the Dollar Died by the National Inflation Association. | |
| The first 12 hours of a U.S. dollar collapse. |
Could this happen in a day? No. But over a few weeks or months, maybe. The US debt level (compared to its GDP) is now higher than it’s ever been. The easiest way to pay off these debts (and possibly the only way left now) is to print money. The new money is digital, so no one will need a wheelbarrow. (Did you hear the one about the German in 1923 who got mugged on his way to buy a loaf of bread with a wheelbarrow load of cash? The mugger dumped the cash and took the wheelbarrow.)
But while inflation may be the only road out of the debt-pit in a democracy (many borrowers, few lenders), no one in power will be issuing a press release. Those in control of the currency will be doing all they can to ensure the appearance of inflation lags far behind the reality, to keep inflationary expectations low. The “best” kind of inflation for the central banks, who inflate our money supply to the advantage of banks and government, is the invisible kind (and we’ve had a lot of that in the last two decades). Once the punters wake up to it, they start demanding wage rises, and then the exponential acceleration takes off like an A380.
Central banks already have conferences dedicated to discussing “inflationary expectations.” (Ask yourself why any government controlled entity ought to be managing “expectations” rather than just managing “inflation” and reporting that honestly, and exactly as it is.) I’ll write more soon about how adjustments to the CPI, which include geometric addition, hedonic calculations and changing the basket weighting, can all affect the official CPI figures.
Parts of the projected scenario are already happening
China almost stopped buying US treasuries around Feb 2010, but increased their holdings a few months later. In the table of major foreign holders of US treasuries, China ($883b) and Japan ($865b) are almost equal — but what’s curious is that the UK ($459b) has doubled its holdings this year, rushing from a minor 6th place a year ago to a serious 3rd.
Our supply lines too, are deceptively fragile. Shelves have been emptied in the UK and US just from unusually heavy snow. In Boston it only took an hour to clear the bottled water stocks, when the authorities announced that the tap water was contaminated.
Mid year, Greeks rioted with deadly fires in the streets, which upset markets all over the world. This month British Students protested violently as one part of the easy-money-gravy-train started to be reigned in.
There are strong rumors from traders that for a while in 2008 the COMEX stopped delivering bullion for its futures contracts, as required. Instead they offered 25% above the spot price rather than pay out the contract in real gold. The traders wanted the gold, the COMEX did not have enough.
Note the scapegoat
Who better to blame than the only people who are asking for real money and a return to the same-rules-for-everyone? The Tea-Party. It all seems so “obvious”.
The hyperinflation helicopter is off the ground
Notice in the graph how all the money pumped in as a temporary rescue in late 2008 and early 2009 has been paid back and the system restored to it’s former normal (inflationary) path…? (Not.)
So much for the “brief band-aid” over a patch of “poor liquidity”.
Is that new money spike, printed from thin air, coming back out of the system? Not in our lifetimes.
This graph is my “favorite” Money Base graph from the St Louis Fed. I wrote about the unprecedented changes in the money base graph on gold sites back in Nov 2008 as it was rising vertically, and explained exactly what the “monetary base” means as the narrowest monetary aggregate.
1984 - 2010. US dollar money base growth. (Click to enlarge)
And if you liked that video, you’ll enjoy Jon Stewart.
Hat tip to the very well connected Bob Ferguson from SPPI.
The “science” of money? Why is she writing about money?
Before Jo Nova investigated the corruption in climate science she was researching monetary history, inflation, CPI measurement, and details of fiat currencies and money supply and writing for The Mining Chronicle. Joanne has also traded gold futures on the Comex and analyzed gold stocks. That odd combination was probably why she was the first person to recognize that carbon credits are a fiat currency, and the first to document climate science from a monetary point of view with the landmark study “Climate Money”.
Increasingly she is focused on the endemic corruption or distortion found in some official statistics, and also in the role the media plays in explaining (or not) the key factors involved and applying logic and reason used to explain economic events. As always, where ever vast sums of money are involved, the debate is marked with bullying, intimidation and name-calling.
Cheap money is what caused the recent financial crisis. In 2000 and 2001 the U.S. Frederal Reserve reduced interest rates so low that it became a no brainer money maker for the banks to loan money. The fed did so to stimulate the economy which was in recession. Fannie Mae and Freddy Mac were forced by the government to grant questionable mortgage loans to unqualified buyer. Then, Wall Street securitized the debt via sophisticated and complicated debt instruments. This created the housing bubble whose collapse generated the worst economic downturn since the great depression.
Candidate Barack Obama said that under his policy if cap and trade became law then electricity prices would skyrocket. Very few were paying attention. The U.S. economy is predicated on an abundant supply of cheap base load energy. When Jimmy Carter was president and the oil embargo occurred stagflation resulted in an economy that was in a quagmire, a recession with spiraling inflation. Somebody should erect a statue to Carter with the words “Malaise forever” emblazoned in capital letters on its base.
If the greens have there way energy will become so expensive that what happened during the Carter administration will seem like the “good old days.” Will the U.S. economy collapse because of a worthless dollar? Perhaps, but we will take the entire world down with us, including China. The U.S. is China’s largest trading partner. They subsidize our debt to ensure their economic survival. If they ever believe it is the least of two evils to stop subsidizing our debt we all need to learn how to speak Chinese.
If cap and trade were adopted by the world’s economies it would result in the worst economic depression the planet has ever seen. And that is why it will never happen.
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Eddy Aruda: # 1
I am not so sure, that it will not happen.
I am going to take an extreme point of view for a moment. We live in a world that values specialisation – so everybody is a specialist. Taken to the extreme, each person knows a great deal about a narrow subject area, and because specialisation’s develop their own languages, they find it difficult to communicate clearly with other non-related specialisation’s.
There are very few generalists around, because it doesn’t pay well, and it doesn’t pay well because the specialists don’t see the value, in fact they see generalisation as a positive lack of value, in that it can be disruptive.
But from a generalist point of view, the whole world in interconnected. You do something here, to influence a situation there, and implications suddenly manifest themselves elsewhere. It is euphemistically known as, “The Law of Unintended Consequences”.
We have just witnessed a monetary grab-fest in Cancun. We have recorded, and commented on, the bloat in the UN (and the EU), and their ever increasing misuse of money on “administrative initiatives”.
To these people, money is the be-all and end-all, they have little appreciation about money’s relationship to utility; they see wealth as being an accumulation of money, and not as outcomes from of the utilisation of money.
So they demand thousands of millions of dollars (I am not going to get into the “trillions” debate) from the donor countries, who will then firstly try to avoid payment, and then secondly print money if forced to pay.
And while we are printing money, why not agree to cap and trade? “The chances of it all turning to mush on my watch are quite low, and anyway, I am informed by my specialists, that we can readjust the value of the currency by withdrawing some from circulation later, so it will be OK.”
We often mention George Orwell, but sometimes Lewis Carrol seems closer to the mark.
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Call me old skool if you like but my understanding of capitalism is that it evolved to help ensure the efficient utilisation of resources.
Many people don’t seem to understand that capitalism is designed to punish the greedy and dumb people. The mechanisms for that are called corrections and recessions.
Unfortunately, over the past 30-40 years this system has been bastardized into a greed is good culture which has been reinforced by bureaucratic oxygen thieves who have tried to prevent these corrections and recessions for two main reasons as far as i can tell:
1) They don’t understand the system
2) They want to get re-elected
The result is the corrections and recessions have basically built up to a point where the funny money can no longer be hidden.
The artificial boom times have given rise to a pathetic naivety which makes people think they can afford things they cannot and probably should not invest in.
Do a google search on the ghost city of ordos in china for a case in point.
One more thing for people to be aware of. Inflation isn’t really about all those naughty people spending money. It is an indicator of how much money is in circulation. As our American and European friends must be aware of by now – the printing machines have a much higher influence on this that anything you or i do.
Keynesian economics advocates that you’re better off paying people to do non productive things in tough times. But it alsonadvocates paying down debt during boom times in preparation for the inevitable bust.
Unfortunately our economically challenged masters chose largely to ignore the second part of this sentence.
What’s next? Maybe an expiry date on all US dollar? – the zim dollar had this which i thought was a rather valiant but futile attempt at controlling hyperinflation.
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This has nothing to do with world finance, but this video tickled my funny bone.
Watch it Bishop Hill. http://bishophill.squarespace.com/blog/2010/12/14/armstrong-and-miller-on-climate.html
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A few minor points before I get sidetracked with other stuff… one advantage the USA has over other countries is that it has a currency it can devalue. It is one of the least painful ways to deal with their current debt. If they weren’t the largest economy in the world people would cut it adrift, but because it is we are in a symbiotic death spiral with its currency. Basically allies and enemies alike are buying the currency in the hope it doesn’t spiral out of control and ruin the entire world’s economy.
Despite all the “quantitative easing”, which as we know means “printing money” (virtually or otherwise), the US has not managed to trigger inflation at home, which it desperately wants to. It has, however, managed to devalue its currency against more stable currencies (such as ours and to a lessor extent the Euro). Even China stubbornly refuses to float their currency, instead going down with the US dollar. They are reluctant to decouple as long as so much of their exports go to the USA. So of all the economies in the world, China’s has the closest symbiotic relationship with the USA. If the US economy falters, China goes with it. Once China can decouple they will be holding an economic gun to the US’s head in their (almost) trillion-dollar treasury surplus. Then we shall see interesting times.
As I said before, the USA has an advantage over some economies (think those tied in with the Euro) because it has the option of devaluing its currency. The Euro countries do not have that option… therefore they are much more vulnerable to economic collapse than the US. They are smaller as well, meaning they can be allowed to collapse… the USA is “too big to fail.” But fail it will, sooner rather than later.
And I wonder why they call economics the dismal science?
I know I have posted it a few times before, but there is a lot of insight to these issues in John Mauldin’s “The end game” so here goes again:
http://www.youtube.com/watch?v=4mn4ujPLKvA
Enjoy… quarter one 2011 is not far away. The world is looking for a trigger to start the panic. You think Assange is being locked up because a few diplomats are embarrased? Or is it more likely the USA fears what he promised to release next year… the information that is likely to bring down a major US bank?
http://www.google.com/hostednews/afp/article/ALeqM5ite_wZhqyprqgihhb3Esphs600xw?docId=CNG.53075ad2350ca0616102f4e994a06283.f71
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MadJak: # 3
Absolutely!
What the left has done is institutionalised greed,
They foreswear religion but adopt a new creed,
That says give us your produce, give us your seed,
For there’s those in Africa who are in need,
So we’ll have your money, we’ll make you bleed,
And we’ll throw a big party, so others will heed,
That there’s no use in crying, no way to plead,
The worthless must die, and we’ll do the deed.
Sorry – best I can do with the time available.
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Rereke:
I’m expecting talking white rabbits and playing cards to turn up any moment now. Truly the world seems to have gone mad.
I think it was Orwell who said something like “if you remove all credible external threats a culture will go off the rails”. He was right.
It’s almost enough to make me nostalgic for the threat of global thermonuclear war.
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Mike,
Nothing brings together people like a common threat. Of course, the threat must be believable and real, unlike AGW
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Great, let’s replace ecological catastrophism with economic doomsaying and join hands with the eviromentalist as we share in western miserablism.
The hockey stick graph in this post shows a market correction by government as a response to reduced economies of scale experienced in the US compared to emerging economies such as China, India and Brazil.
Why aren’t we seeing hyper-inflation in the US? The US market is A.) Debt driven. B.) Already realised most of it’s reductions in economies of scale. C.) Counter-balanced by China’s under-realisation of their economies of scale.
The US money base will contract once the securitised debt’s are consolidated. On the proviso that 1.) The US wakes up to the CO2 scam and puts into production it’s huge natural gas reserves. 2.) The US either withdraws from Iraq or introduces the draft.
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So, in other words, the US cannot and will not repay the debt it is increasing by printing money and other countries holding onto it.
Noticed Saudi Arabia was not one of the major holders of U.S. currency.Did they go to buying gold?
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This is sort of on topic. But it is an interesting back down
http://www.guardian.co.uk/politics/2010/dec/14/huhne-backtracks-bank-green-projects
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Let me guess the 13 Illuminati families plan to implement their global currency the Bancor if we let them.
http://www.infowars.com/bancor-the-name-of-the-global-currency-that-a-shocking-imf-report-is-proposing/
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A/ Because hyperinflation isn’t happening (not yet). We won’t see it until after it starts.
B/ Because even measures of normal inflation have been as fiddled and corrupted as the surface temperature record. The CPI is not calculated the same way was it was in 1980. If we used the same methods now the CPI would be measured at about 8% instead of the official 1 or 2%. Arithmetic calculations become geometric ones, basket weightings change, hedonic calculations came. There are as many ways to “find” lower adjustedprices as there are to find warmer temperatures.
C/ Because the money poured into the money base (graphed above) stopped the banks from going bankrupt, but has not yet flowed into the real economy — the M3 growthrate was declining (according to Shadowstats.com) until mid 2010.
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Waffle: # 9
Proviso 1 isn’t going to happen on this President’s watch – he and his supporters are too heavily invested in the scam.
Proviso 2 isn’t going to happen either with the current Republican influence in the Senate – too much money invested in the region, and they need to demonstrate a counter balance to Iran.
America has painted itself into a corner by pretending to have a free market, but then taking interventionist actions in the financial sector. So, when there was the inevitable bust, following an extended boom period, they were forced into a bail out.
In my (private) view, it should never be the role of governments to underwrite risks in the commercial sector. If the commercial sector is immunised from the risks of failure, they will simply assume more risk, because it is risk that generates profits.
I am no economist, but I don’t find the concepts hard to understand.
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Rereke Whakaaro:
December 15th, 2010 at 5:29 am
If money isn’t the most important thing I would hate to see what comes in second! Christians preach that a person cannot serve both God and man and that avarice is the root of all evil. Yet, I have never heard of a religious service where they did not pass around the collection plate. Money makes the world go round. As Sophie Tucker once said, ” I have been rich and I have been poor and ooh baby trust me, rich is much better.”
It isn’t just the people at Cancun looking for a free lunch, it is endemic to human nature. As a father I have become an expert at telling my son, “No.” Every year I hear how some politician is going to wage war on pork barreling but nothing of substance ever results, just more rhetoric.
I do not have a crystal ball but the American taxpayer will not stand for eco-poverty to appease Gaia! Barack Obama wants a second term and he is already stampeding to the center. I have said it before, a politicians highest duty is to himself, not the people. For a pol, survival is the driving force of every decision. Cap and trade will not happen, in my humble opinion.
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Rereke Whakaaro:
December 15th, 2010 at 2:00 pm
I always enjoy your posts as they are always thought provoking. America has never practiced pure, unadulterated capitalism. The only time I ever saw laissez faire truly embraced was by the Ferengi on Star Trek: Deep Space Nine! 😉
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John Smith: # 12
Yeah, this comes up from time to time.
One has only to look at what is happening to the Euro to see what the results would be. Ireland, Portugal, Spain, Italy, Greece, are all in the Eurozone, and all got into financial difficulties due to their local climatic conditions (and local domestic policies).
In pre-Eurozone Europe, they would simply have devalued their currency against those of their trading partners, and walked away wounded but wiser.
But now that they share the Euro with the rest of Europe (excluding Britain and a few others) they no longer have that option, so: a) their problems won’t go away; b) the pain and the suffering continues; and c) the problems start to distort the local economies in other countries, such as France and Germany.
Brussels is in panic mode right now, because of the rigidity of the Euro, and the risk that it might go into free-fall.
Money doesn’t have any value other than what it can be exchanged for. And that varies in different parts of the world, and as Europe is now discovering, sometimes it varies in different areas within the same continental land mass, whether you call them countries or not.
The IMF doesn’t need the Bancor as a global currency – just get everybody to sign-up to the Kyoto Protocol and use Assigned Allocation Units as a common currency. Oh yes, I nearly forgot, we have already tried that and it didn’t work any more than the Euro is working right now.
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Eddy Aruda: # 15
A story:
A friend of mine – an Englishwoman – became a Buddist. As part of her journey to enlightenment, she went on a pilgrimage to visit a shrine in Tibet. At this shrine was an old Buddist monk, who sat cross-legged in deep contemplation. By his side were two bowls. One was his food bowl, and the other was a bowl containing money.
Some visitors placed food into his food bowl, and this provided sufficient sustenance to keep the old monk alive. Other visitors put money into the second bowl, and occasionally a few visitors took money out of the the second bowl.
My friend questioned the old monk about this.
His reply was that the money was worth nothing to him, but some people gained inner peace by putting money that they did not need into the bowl, and other people gained inner peace by taking the money that they needed out of the bowl.
Nobody ever took all of the money, and nobody ever took any of the monks food.
Money is only a means to an end – we should judge people, not by how much money they have, but by the ends they hope to achieve.
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Eddy Aruda: # 16
I agree. That is why I said, “by pretending to have a free market” 🙂
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Jo, it’s common knowledge amongst economists that western governments fudge their CPI, GDP and unemployment numbers. Banks do their own surveys of the market for more accurate information. They only use government figures in commentary to stay politically neutral. I would say that best key performance indicator of the US economy is unemployment. I don’t think hyper inflation is going to happen because, at the current unemployment rate no-one is going to hedge that the US will recover anytime soon. Hence, no derivatives driven hyper-inflation/stagflation.
Governments are incorporated entities like any other business. And as such, in my view, are part of the economic market. They are unique in that they aren’t listed in any stock exchange but, they do pay a dividend. Namely, standard of living for their constituents. Though, you and I agree that ‘too large to fail’ is a grave economic mistake by governments. That’s like giving a supplier money not to go out of business without acquiring any capital in exchange.
Re: Iraq. Option 2(the draft) will be the most likely outcome. In 2008 DoD released a paper reporting that the average salary per pair of boots on the ground is $US120 000. This is unsustainable and is a consequence of having half of your military consist of privateers, not servicemen.
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Great time to buy hard assets in the US with borrowings in $US at very low fixed interest rates. Then sit back and pray for hyper inflation and pay off your debt with the $A you kept back. Sure the world economy would struggle with a failing US economy, but Australia, whose major trading partners are in Asia, would do relatively better than most countries. Of particular interest would be food producing land (food demand is fairly inelastic), and some of those residential properties selling for a fraction of previous valuations provided you can be sure to get an unencumbered title deed. Other good buys are producing oil, gas, and other resource companies, again borrowing in $US.
Asset values are at historical lows now, so hyperinflation would be a bonus. It happened in some South American countries, notably Chile, Brazil and Argentina in the 70’s, 80’s and 90’s. Those who did well were invested in real assets, or shares in companies which produced resources and commodities.
While it would be painful for the US and the rest of the world, something has to give eventually. I can’t see the US voluntarily going through the pain which is needed to correct their economy.
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what on earth is this?
15 Dec: ABC: Maps predict future floods for cities
Rising sea levels are likely to cause serious and regular flooding in Australian coastal cities by the end of the century, according to maps released by the Federal Government today.
The maps for low-lying areas in Melbourne, Sydney, Perth, Newcastle, the New South Wales’ central coast and south-east Queensland show significant levels of inundation by the year 2100.
The maps show three different scenarios, with the lowest rise of 50 centimetres representing a situation which is likely to be unavoidable.
The medium level map shows a rise of 80cm and the highest level of 1.1 metres shows the flooding risk identified in the most recent climate change research.
The Government says the flooding shown in the maps is likely to occur at least once a year.
Climate Change Minister Greg Combet says the maps will help communities prepare for the effects of climate change…
“Developed in partnership with the Co-operative Research Centre for Spatial Information, these maps are an important product for the community to understand potential risks to infrastructure and properties and to prepare for the climate change impacts of sea level rises.”…
http://www.abc.net.au/news/stories/2010/12/15/3093667.htm
personally, i’m sick and tired of this alarmism.
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Eddy, I believe that Rereke may have been talking about the difference between money and wealth. Most socialists are confused by this issue which is why they believe that the wealthy have so much money because they have taken it from the poor and therefore it needs to be redistributed back. They have difficulty understanding that wealth is created through productive activity and, although everybody benefits from this productive activity, the entrepreneurs who are the ones who take the risk in organising the development of the productive activity naturally keep a larger share.
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I had to warn off a friend of mine who wanted to buy into the US property market earlier this year. They are called toxic assets for a reason. Basically, you will not get tenancy into those residential properties and two things will happen before you will every hope to offload them.
1.) You will pay increasing amounts of tax, captial gains, council rates, etc as US governments at all levels pursue their tax and send agenda.
2.) That property will be stripped, copper, lead, steel timber, everything. You will have to pay to have the structure rebuilt or the remains taken away.
The key fact is that China will not let $USD devalue rapidly. Their wealth is tied to the fate of the $USD. Look to invest in US pharmaceuticals, software and other IP driven sectors. At the first sign of trouble China will aggressively move on a PBS and create a partnership with American software giants, most probably in the spheres of operating systems and communications tech. I’d also keep my eye open for GM opportunities.
And for liability purposes, my recommendations are not recommendations. 😉
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Lets see how quickly water front property values drop. Combet warns of lost suburbs.
http://au.news.yahoo.com/australian-news/a/-/australian-news/8514726/maps-predict-future-floods-for-cities/
What can we do to stop these D-Heads panicking the people?
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pat @ 22
It is now over 70 years since the beginning of the second World War and I doubt sea levels on average have risen by more than 5 cm since then. Another 70 years takes us to 2080 and the government is telling us that by then a sea level rise of 10 times that much is “likely to be unavoidable”.
Since WW2 CO2 levels have risen perhaps 90 ppm. Where is the sea level impact to date from the “positive” feedbacks the alarmists so desperately require? What makes the atmospheric physics of the future any different from the past?
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[…] This post was mentioned on Twitter by Robert J, B. V. Done. B. V. Done said: Inflation: the creeping hand of corruption. Climate science corruption is fed by corruption in currencies: http://bit.ly/hBIUWc #climategate […]
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Great post Jo.
I wonder if the few who really pull the strings of this world intentionally invented money to create those US bubbles which burst in 2008. Debt is a global ruler and when all are in debt or have lent too heavily (China?) to those in debt, then the time is ripe for a New World Economic Order (NWEO) to be conveniently wheeled out.
When the US invaded Iraq in ’92 old man Bush gave a half hour speech which was aired on the Oz ABC radio. At least 20 mins of that speech was not about war but about establishing a NWEO. That was when I realised Saddam Hussein had been set up and that the real power players keep most of us in the dark most of the time.
AGW is just a srting to their bow and inflation is an insidiuos weapon which under-mines those with paper assets. Eventually the only people with any standing will be those with tangible assets and useful skills.
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Ian Hill mentioned above CO2 levels rising about 90 ppm since WW2.
Let’s just say that historical temperature records isn’t the only things that gets “adjusted” to fit the doomsday scenarios.
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I haven’t posted a comment on this thread because my knowledge about money is limited. I got none. (money that is)
But when I read a comment like this one..
I have to comment.
Where I live, in Australia, one CANNOT carry out day to day living without having a bank account, it’s just not possible.
Therefore, if a bank goes under, be it because of bad management or because of inadequate prudential regulations (is that the word, prudential?) I expect the government to make good on my deposits.
If society doesn’t want to bail-out banks or superannuations, then they must allow ways and means for people to run their daily lives without having to deal with financial institutions, if that’s at all possible.
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I’ve been reading up on some alternative economics blogs like and as a consequence have learnt about how FIAT currency’s are supposed to work. Ie the government creates money by spending and destroys money by taxing.
The problem is not the fiat system, but the fact that the vast majority of people (including the current government) don’t know how it works. A government cannot go into debt by spending its own money! This lack of knowledge leads to governments like the UK treating their spending like a household budget, and creating austerity measures like the University cuts that will destroy the prosperity of future generations.
Obviously one of the main problems causing this crisis is the use of cheap credit being invested into non productive asset classes like property (or green bs). In australia this has been caused by deregulation first allowing mortgage backed securities and subsequently the severe decline in credit standards and affordability as the deposit requirements declined. If House prices had been include in the CPI figures then Interest rate rises would have acted as a negative feedback but unfortunately it wasn’t. Things are about to go pear shaped in Aus as a result of the housing bubble popping although the government is puffing it’s hardest to keep the thing inflated. 66% of housing investors are loosing money and require capital gains to make money. They obviously didn’t hear that it took 90 years for property prices to recover after the 1890 crash!
As for the US there are major market distortions created by allowing china to peg its currency to the US. The QE measures have actually caused hyperinflation in China resulting in the cheap credit going into their huge housing bubble. I’ts similar to the situation in Ireland where cheap credit was caused by the marked distortion of interest rates being set in germany.
What is needed is for countries to have at their disposal a correctly used fiat currency system combined with a flexible taxation system that helps channel money into increased productivity to provide full employment.
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Whoops, forgot to close link, its delusional economics
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Baa Humbug you have company.
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Baa Humbug: # 28
I take your point, and that is a reasonable point of view, given the current state of banking that assumes that the government will underwrite your deposits.
But this is a vicious circle. Because the assumption is that the government will step in, the banks can then lend every cent they get (or expect to get) to other people, and hold nothing in reserve.
As soon as somebody defaults, the bank has a short-fall, and the government has to cough up. But they do so with tax payers money, so it is the taxpayers collectively who end up paying for the imprudent actions of the banks. So the banks do not suffer. You may get your deposits back, but it is the rest of us who lose in the end, because the government simply collects extra taxes to cover the difference, or devalues the currency to reduce purchasing power.
The banks should be required to insure against a prudent level of risks, as assessed by actuaries employed by the insuring companies. This provides for a system of checks and balances, and spreads the commercial risks through the commercial sector.
And lets face it, people and companies are always more prudent with their own money than the government will ever be.
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I don’t pretend to understand economics, but how about if 20 years of debt creation, fractional reserve banking, US property crashes and debt deleveraging has left the world with debts that outweigh the GDP of all nations and are rapidly mounting. I don’t see how all that missing ‘money’ can be replaced without printing gobs of Wiemar-money and thereby triggering hyperinflation. But then I’m an amateur in this area.
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I have done a massive amount of researching into how our planet works.All indicators point to a massive Ice Age occurring and that the temperature numbers are being adjusted to hide this. The U.S. government controls these “projects” and has an influence of what is allowed to be reported. Salt on the oceans surfaces indicates that the atmosphere pressure has built-up and the oceans are cooling by reflecting more sunlight.
Hiding an Ice Age until too late would save the U.S.from a world war.
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Countries of all stripes have to balance their budgets. There is no excuse for piling up long term debt. It simply sets you up for the inevitable punishments that the PIGS are going thru now and the rest of us will see sooner than a lot of people think. Don’t spend what you don’t have and then nobody can take you toys away.
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A very Merry Christmas to all our climate realist friends!
http://ourmaninsichuan.wordpress.com/2010/12/15/fenbeagle-chris-the-huhnes-christmas-present/
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Rereke Whakaaro #32 & #17
It sounds like you’re describing moral hazard which is definitely possible in the case of banks.
Brussels is definitely panicking and don’t forget about the Irish general election early 2011.
That election alone could decide the Euro’s fate, why? The Irish Budget may be rejected by the opposition if they win and we should expect the Euro to really tank downwards.
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This is what happens when bad policies are implemented by corrupt and inept politicians:
Death of 27 asylum seekers highlights Australia’s immigration problems
http://www.telegraph.co.uk/news/worldnews/australiaandthepacific/australia/8203842/Death-of-27-asylum-seekers-highlights-Australias-immigration-problems.html
And the world still wants the global warming crap?
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Just a couple of comments…
The Federal Deposit Insurance Corporation (FDIC) is funded solely by premiums paid by the insured institutions and returns on investment in government bonds. They get taxpayer’s money only to the extent of the interest on those bonds, which, of course the public purse pays for. Most bank failures seem to have been taken care of by getting some other bank to buy up the failed institution. So FDIC outlays because of failures are reduced. Their web site has a lot of information. In any case, FDIC coverage reduces the possibility of a run on the bank, making things a lot easier to deal with. Per FDIC, to date no insured depositor has ever lost a penny since the FDIC came into existence.
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I’m only sure of one thing. In the end the problem is self correcting. It only takes things getting bad enough. The questions are how long will it take? How bad must it get? And what will the world look like after things recover? It looks like a wild ride.
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Roy Hogue: # 41
Thank you Roy. I wasn’t aware of the FDIC, and the role they play.
But isn’t it still backed by government (i.e. tax) money? A commercial insurance company will underwrite risks with other insurance companies, often across multiple currencies and jurisdictions. Do they play in that sandpit, or do they just sit and watch?
I am confident that these things will sort themselves out eventually – but oh the pain.
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Waffle @ 24
I agree you need to select property well in US. You wouldn’t buy into an area with a declining population like Detroit where people are leaving because there are no jobs. You also have to be careful in residential areas which were specifically set up in an area to serve an industry which is failing. You also have to be sure that the title has not been sold in a securitisation process which has unravelled without leaving the bank which is selling the property to you with clear title. If you cover those bases, you shouldn’t have much problem. The population is still increasing in the US, so apart from people moving back in with parents and relatives, there is still a need to house everyone. Sure rents wont be as high as pre GFC, but they will be good compared to what you pay for the property. Often as much as 20% – 30% yields.
Many people in the US have walked away from their properties simply because they can. Mortgages are provided on a limited recourse basis. That is mortgagors can only chase mortgagees to the extent of the mortgaged properties. Many homes were bought at the peak of the market and many mortgage providers were lending up to 110% of valuation. With properties falling in value in some areas by up to 70% (Detroit, Florida), but more commonly by 30% or so, and with increased unemployment, it is an easy decision to walk away when the mortgage is much more than the house is worth. But those people still need to be housed.
Capital gains tax only applies on a profitable sale of the property, and only if the proceeds are not reinvested in residential property, but it implies that the values will go up, something you are clearly saying wouldn’t happen. So there is a contradiction in your post.
Property taxes may go up, but given it would apply across the board, there would be a lot of unhappy voters who are already doing it tough. Remember in the US everyone from the local Mayor, Sheriff and school board members often run for election so they are sensitive to putting up property taxes.
You certainly have to do your research. I purchased a new apartment in Marina Del Ray in LA at about 35% of the original off the plan price from the bank. It couldn’t be built for twice the cost I paid. So there is plenty of room for capital growth. Meanwhile I have leased it where the tenant pays all outgoings including rates and property taxes and leaves me with a net yield of 15% on my investment. BTW I borrowed locally (in the US) when the $A was only fetching $US0.84 so my borrowings have already declined substantially in $A terms.
The situation with China is far more complex. They are artificially holding the Yuan low, which still makes retail goods imports into the country relatively expensive, while still being able to sell their goods to the world and in particularly the US relatively cheaply – thus undercutting US industry further. Keeping the pressure on with the currency, and at the same time refusing to to buy more US Treasury debt could be disastrous for the US and give China the ideal opportunity to go in and buy American assets and Obama would be begging them to do so to stay afloat. But even if a disaster scenario like that didn’t happen, it will be a long time before the US economy will recover, so buying producers of inelastic goods and commodities with world demand is the best option, provided you do your research.
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Rereke,
Their web site is pretty matter of fact about their only source of funding. I doubt that they play in any other “sandpit” as you called it. If things got beyond where the FDIC could handle it I don’t know what would happen. But their budgeting seems to be taking circumstances into account. There is no provision for tax support that I know of except the bond interest.
I could wish Freddy and Fannie had done as well with their mandates.
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It is sad to live through this debacle.
It seems that everything we are touching here is turning to crap.
Our ‘leaders’ are more interested in considering political opponents enemies rather dealing with real enemies.
In the so-called lame duck session of Congress, not one serious conversation has taken place to propose ways to clean up our spending from either party.
All they are doing is spending yet more.
Assange was allowed to get away with his espionage for months and we still ahve moved reluctantly and timidly against him. we are frittering away our nuclear weapons in a pointless treaty that does not increase our security.
Our President is acting more and more like a sad Hamlet, lost and ineffective and sullen.
We are in BIG trouble.
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In response to Waffle #24:
China can’t do much to force the $USD not to devalue. At this stage, the last remaining item of real deep value that the USA has is military technology — and this is not going to be up for sale to China, not under any circumstances. They were warned that this would happen and they did not listen. It seems that currently they are trying to get out of their dollar dependency (e.g. not buying as many treasury bonds, organising bilateral trade agreements, etc).
Frankly, Asian nations are coming from a long way behind with software. I can’t see them zooming ahead in the next decade. IMHO it is a cultural and language limitation that tends to give Western nations a bit of an advantage in this area (someone will no doubt call me racist for saying that, but at the moment the proof is in the pudding).
Operating systems are a tough area to make money on right now. For specialist stuff Linux or one of the BSDs will beat you on price. Sure you can start with BSD (like Apple did) but then you need real value-add. For general purpose stuff (desktops, laptops, etc), Microsoft will beat you because they have the incumbent advantage (i.e. more software runs on their platform, more people familiar with it, etc), and even the behemoth Microsoft don’t make much on operating systems these days (perhaps $50 per desktop under ideal conditions, but whittled back by huge piracy).
RedHat of course sell support contracts and give away the OS for free as an incentive to sign up to the support contract. Oracle also sell support but really they sell databases, and throw the both OS and support in for free if you buy a database. Microsoft make most of their big money on MS-Office, and I guess X-Box is turning a profit by now.
I can imagine China pushing OS design for political reasons (to keep themselves independent of Western domination) but it’s unlikely that investors will get return on Chinese government policy mandate. Maybe China will be generous to investors, but they are swimming in USD right now, so what need do they have for foreign investors?
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In the spirit of finding the right word, I’d like to distinguish “economics” from its primary branches.
Macroeconomics studies the effect on a country’s (or the world’s) economy as a whole and its society of aggregated private decisions and decisions or actions by government. No one (yet?) has found the macroeconomic equivalent of chemical elements, so there is no table of their features and limited understanding of their interactions. Aside from the ever-popular games of beggar-thy-neighbor (mercantilism, tariffs on imports, etc.) and log-rolling (regulation in my favor or against my competitor), that is one reason (others include the fact that conversations among business people often end in conspiracies (that’s my off-hand sense of Adam Smith’s point, not a quote)) such decisions have political weight and why, therefore, IMO governments do not leave decisions meant to affect unemployment, the distribution of income, the money supply, and so on to private markets.
Microeconomics studies the effect of private decisions by individuals, families, or firms (sole proprietors, partnerships, … , as big as it gets) about pretty much everything else on markets. Microeconomics includes baking or buying a loaf of bread, how many hours of labor (or candy bars) to offer on the market, choosing a college major, whether to marry and how many children to have, etc. The data microeconomists use is collected from smaller units, more microeconomic data is available, and microeconomic problems are more tractable. A physicist or chemist would sneer at the margins of error, but microeconomics often makes predictions that lead to testable hypotheses.
Macroeconomics, like climate science, relies on models. There will be no resolution of the intellectual war between monetarists and pump-primers, say, until the components of macroeconomics are as well understood as those in the table of physical elements, which is being revised.
Since governments create money, anything to do with the money supply or banking, including inflation, is part of macroeconomics.
Fair warning: I try to play fair, but I’m a microeconomist. I’ve been known to mention Walt Disney’s version of “The Sorcerer’s Apprentice” from his film, “Fantasia,” and Mussorgsky’s “Night on Bald Mountain” when asked to teach undergraduate macroeconomics.
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I wonder whether Combet will sell his beach side mansion in Newcastle with the (false) predictions of rising sea levels?
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[…] blog de Joanne Nova encontrei este video que, embora alarmista, é ilustrativo do perigo que as economias ocidentais […]
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UPDATE May 27, 2011: While the inflation information here is correct, be aware news has just come out that the NIA (who made the video) http://www.economicpolicyjournal.com/2011/05/schfif-truth-about-national-inflation.html“>is a pump and dump group, doing potentially fraudulent work. So enjoy their videos but beware of their stock recommendations. We wondered who was behind this video — at least it finally makes sense.
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