Soros - Stimulus the answer not Austerity

Degenerate

dopester wrote: »

Why didn't the Gov and BoE stimulate themselves out of the early 90s recession, protect companies going bust, protect the old ways of doing things, and stop house prices falling? Basically nannying everyone who stood to lose.

In the early 90s recession we were tied into the ERM, obligated to try to maintain fixed exchange rates via interest rate policy. They did indeed slash interest rates when the opportunity arose after we were forced out of it. We also did run deficits, and came out of it with a considerably larger national debt, which Ironically Gordon Brown paid down considerably in his first term as chancellor.

There wasn't the same dialogue about stimulus vs austerity, but then it was a much more ordinary recession - it wasn't precipitated by a global banking crisis and huge contractions in money supply.

dopester

Is this what you fear? (below) It could happen again.

The contraction of credit has major deflationary implications - perhaps enough to bring great disorder to the country and Europe - you are correct.

However it could be triggered by more rounds of stimulus. It could also be triggered by accepting deflation now. I worry we've passed the point of no return already, but hope we haven't. Your stimulus, running up more debt on the national balance sheet, is just delaying adjustments required to a failing system.

The problem is the better paying jobs today are reserved for those with high skills in demand, and great swathes of us just aren't.. smart enough to be in those fields.

Well paid jobs of the past couple of decades have been very dependent upon expanding debt - last one especially. There are niches where average people can still be successful entreprenuers though (fc123), but overall the well paid jobs of the past decade or so has been thanks to credit expansion and debt.

Not all of us can get the better paying jobs in today's world (for example.. no way I'm a match for my brother with his first in Computer Science and AI, splicing DNA into AI generation computer coded "creatures" at Uni, beaming them with radiation to age them, and give them other tests, to study them evolve and adapt." Now running computer systems for an investment bank.)

Fewer opportunies for people unless you're really smart and have skills in high demand. It's no wonder there has been a big rise in everyone wanting to be the next X-factor Popstars ect.

Unlike the 50s-60s when UK was a manufacturing power, the world now has global manufacturing overcapacity and surplus. "The economic change of recent decades has been from the primacy of manufacturers to that of communications, from machine power to electronic, from factory to office, from mass production to small teams."

Now it's the credit expansion, and the need for more stimulus (QE) keeping the whole thing going.. people in average jobs on high pay. Including bankers on super-pay as well. Unlike below where the nation still had its own industrial revolution to go through, bringing wealth, and then other advancements and changes bringing more opportunity and wealth... I think we've peaked a while back, with only credit-expansion keeping people in well paid jobs.

Let us tell you a story of a nation in depression. It is a true story. It illustrates many of the common features and consequences of severe economic slumps. If a slump hits today it could have similar consquences. In most times and places, depressions have generated wild swings of inflation and deflation, successively impoverishing creditors and debtors alike, bankrupting governments and bring on a collapse of crucial public services. In many cases, the social upheavals lead to revolution or a major change in the form of government.

The story we are about to tell illustrates these tendencies well. It is the story of a newly independent country. Mainly agricultural, most of its residents earn their livelihoods from subsistence or barter farming. Most of the few manufactured necessities they can afford are imported from abroad, resulting in a large trade deficit and a mounting burden of foreign debt.

As the depression deepens, the national assembly government finances are "chaotic". It cannot pay their troops their promised wages. When the national assembly does turn up for appointed sessions their physical safety is sometimes threatened by angry mobs or mutinous troops. The government "facing utter bankruptcy" makes laughing stocks of the few citizens and groups incautious to lend it money.

The government's debt securities are so depreciated that they sell for less than fifteen cents on the dollar. The implied interest rate on the national debt skyrockets to 40 percent. But this is just an implied rate, not an actual yield. Interest payments on both domestic and foreign debt are in default. In many places, the hapless creditors are in the absurd situation of having their property confiscated "for non-payment of taxes" allegedly levied "to pay them interest on their securities."

As so often happens, authorities, lacking a better expedient, resort to printing paper money. In one of the few commercial centres, the values of local paper money tumbles by 92% in thirty months. What was the equivilent of a dollar becomes just 8 cents. Some local government debts are discharged at "the depreciated ratio of a thousand to one." As the local paper money is discharged or discredited, an automatic deflation sets in. People prefer to do business in stronger foreign currencies that circulate in inadequate amounts. As a consequence, real wholesale prices tumble by more than 60 percent in just a few years.

As real wealth shrinks, the country suffers the classic symptoms of economic and political instability. Attempts at tax collection are redoubled even as public services go on a downward spiral. The interior of the country is so impoverished that the imposition of a head tax of just 3 dollars a year precipitates open rebellions. Armed bands roam the interior, forcibly preventing courts from sitting.

As the depression bites into spending power, merchants find their stocks of unsold goods far exceed what they could plausibly hope to sell at a profit. They clamor for protectionist laws to cut off the import of foreign goods. That national government, however, is too weak to enforce such counterproductive measures. In an effort to keep prices high, local areas erect their own barriers to stall or penalise the shipment of goods from anywhere - even domestic goods from neighbouring jurisdictions. The result is rampant smuggling in a growing black market.

As commercial distress multiplies, the entire financial system teeters on the brink of collapse. Banks fail. Cheques written by the largest bank in the country regularly bounce. The local currency is worthless in foreign commerce. The indebted nation, dependent upon foreign bankers to keep even minimal trade afloat, finds its foreign credit has gone. As chaos mounts, impoverished debtors look for scapegoats. Here and there, angry mobs attack homes and persons of the rich. Politicians seeking office campaign on the promises to repudiate the national debt and inflate away private debt with more paper money.

Newspaper reports that desperate debtors in the backwoods are organising an armed rebellion supported by foreign agents. The rebels group together under the command of a mysterious "Committee of Seventeen." The papers report that the rebels' aim is nothing less than to establish a radical form of communism. It is widely reported and widely believed that they intend to seize all property in the country and redistribute it equally. An alarmed local governor begs the national assembly for help restoring order. Little is forthcoming. Wealthy citizens are so frightened that they take up a collection in foreign money to privately pay the loyal troops.

Such is a potrait of a nation overpowered by depression and political collapse. A commentator captured the mood of the time with the observation that people "ceased to care whether the Republic lived or died." With debtors in revolt and the government floundering, a leading general determines that the time has come to take charge. "Something must be done, or the fabric must fall, for it certainly is tottering." Other wealthy citizens join him in organising a new government that can take effective measures to enforce austerity. The public greets him with open arms.

This is a story that has been repeated in one form or another throughout the world in this century. You have read many versions of it in the newspaper. This particular version would hardly seem farfetched, unless of course, we told you that the nation in question was the United States. Yet everythihng we have just recounted did happen. It happened during the depression of the 1780s. This was the depression that wiped away the greatest inflation of American history - the greatest that is, prior to the current period. Not surprisingly, therefore, it saw the greatest collapse of asset values in American history. The index of all commodity prices fell from 226 to just 85 in a decade, a breathtaking collapse.

It may have been farfetched to think that communist revolution was underway, but that is what General George Washington did think. He was responding to a report written by one of his trusted friends, General Henry Knox, on October 23, 1786. General Knox who, as Secretary at War under the Articles of Confederation, was commander of the United States forces, implored Washington to take a hand in radically restructuring the government.

The story of the United States of America in the depression of the 1780s is remarkably precise because it reflects the common characteristics of depressions in all times and places. No country is immune from instability. Wherever you look throughout history, human beings have responded in remarkably similar ways in the face of sharply falling incomes. This is not to say of course that all depressions are the same. Far from it. No espiode is exactly like another. Nevertheless, many of the features that distinguish depressions from one another are broadly predictable. Among the more important variables.

1. Market drops are most severe in the most advanced countries.
[continues]

StevieJ

Wow my post generated some stimulating debate.

John_Pierpoint

There is one country that can make this decision one way or the other and that is China.
If we (the West) stimulate, our currency will fall in value and the Chinese will buy our assets, our minerals and food supplies for their massive population.
If we deflate - several of our industries will go bust and at the bankruptcy auction China will buy the assets and ship them East.

After decades of conning the rest of the world to finance our deficits, both fiscal and balance of payments, the party is over.

Generali

dopester wrote: »

Is this what you fear? (below) It could happen again.

The contraction of credit has major deflationary implications - perhaps enough to bring great disorder to the country and Europe - you are correct.

However it could be triggered by more rounds of stimulus. It could also be triggered by accepting deflation now. I worry we've passed the point of no return already, but hope we haven't. Your stimulus, running up more debt on the national balance sheet, is just delaying adjustments required to a failing system.

The problem is the better paying jobs today are reserved for those with high skills in demand, and great swathes of us just aren't.. smart enough to be in those fields.

Well paid jobs of the past couple of decades have been very dependent upon expanding debt - last one especially. There are niches where average people can still be successful entreprenuers though (fc123), but overall the well paid jobs of the past decade or so has been thanks to credit expansion and debt.

Unlike the 50s-60s when UK was a manufacturing power, the world now has global manufacturing overcapacity and surplus. "The economic change of recent decades has been from the primacy of manufacturers to that of communications, from machine power to electronic, from factory to office, from mass production to small teams."

Now it's the credit expansion, and the need for more stimulus (QE) keeping the whole thing going.. people in average jobs on high pay. Including bankers on super-pay as well. Unlike below where the nation still had its own industrial revolution to go through, bringing wealth, and then other advancements and changes bringing more opportunity and wealth... I think we've peaked a while back, with only credit-expansion keeping people in well paid jobs.

Debt repudiation will presumably be the way forward then; Iceland has shown the way - the people didn't want to pay for the mistakes made by banks domiciled there and their regulators. Presumably there will come a point where the Irish will be looking at doing the same.

FWIW, I read a piece a while back on the Bedlam Asset Management website (lots of good articles are posted on their poorly named 'Pick of the Week' section) claiming that if you ignore the period when the fascists were in power so Greece's Government couldn't borrow, Greece has been in default for more than 50% of its history since 1801 or thereabouts.

John_Pierpoint

Anyone got any figures for that "Petro" state Ecuador:
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=EC
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=GB

greenbubble

http : //www .gfmag.com/gdp-data-country-reports/281-ecuador-gdp-country-report.html

at first glance over the last three years they have experienced reducing inflation .

not sure on the validity of the data , but i guess they wont be too upset at the rising cost of oil.

green

des_cartes

If printing funny money was the route to economic success, how come Zimbabwe isn't an economic super power?

greenbubble

they printed their own , and not US$.

green

des_cartes

greenbubble wrote: »

they printed their own , and not US$.

green

Couldn't happen in the UK then.