THe Economy

[welshdragon]

I'm intrigued to find out people's views on the current economical situation, if it has affected you then briefly explain how it has done so.

I have been warned that any racist or derogoratory comments may be removed, i would also remind people that this is a place to express feelings, not te exert hatred against one another, we are being watched very closely by the admin team

So far i've not been affected much, sure, gasoline prices are falling asd i'm sure sometime soon train fares may yet decrease, the only annoying thing is that the Student Loan Company are taking ages to process my loan

Anyway, express your opinion on the situation, but please do it in consideration for others!

[John]

Fully understanding the current economic climate can be very tricky for those without a degree. As such, it is useful to have an analogy that normal people, like me and you, can understand. The best one I have found so far is the following.


Think of the current economic climate as a fan











covered in s***.


See, isn't that much easier to understand?

[Ameecher]

I have been warned that any racist or derogoratory comments may be removed, i would also remind people that this is a place to express feelings, not te exert hatred against one another, we are being watched very closely by the admin team

I'm struggling to see how this topic could be turned into that.

Of course, I blame the [Insert race here]!

So far, the downturn in the economy hasn't affected me aside from the good point of petrol prices coming down.

John, that's brilliant.

[beeb375]

*Struts in with 2/3rds an Economics degree*

The news media is right basically, too many bad debts being shuffled around, American banks giving mortgages to people who had no way of paying them back, excess credit and liquidity in world markets, unwise investment decisions (HBOS nearly got forced to change a sizeable chunk of their operating strategy by a regulator), general short-termist attitudes to investment decisions... all these have contributed to the bursting of the bubble and the mess we find ourselves in.

So far I'm not feeling the pinch too bad, since I live out of an overdraft half the time anyway I just try not to go out or buy food in town much when it's cheaper elsewhere. As far as energy bills are concerned, we keep the heating off as much as possible, but it'll always get paid at the end of the day, so it's no big worry. As long as you're sensible with your spending you won't freeze or starve.

[dunbrine47]

T too many bad debts being shuffled around, American banks giving mortgages to people who had no way of paying them back,

Way to go Bill(Clinton).

[Ameecher]

T too many bad debts being shuffled around, American banks giving mortgages to people who had no way of paying them back,

Way to go Bill(Clinton).

Wait, what? You're blaming ALL this on one man? Brilliant!

[athanasios]

Which economy?

All I know is that if a poor all day working fellow owns a small business and it doesn't go well, the bank will come and take his shop and his house and he will end a beggar.
Now the 'bank owners' spent all their money in whores, drugs, vacations in exotic places etc and they ask the governments for more to continue their debauchery. And the governments take the money from the poor by heavy taxes and give them to them. The latter may be not true-they keep part for themselves.

What else to say?

For those who didn't understand yet, one I have to add: Wake up!

[Niek]

Wake up and do what? Rebel?

[JamieLei]

Way to go Bill(Clinton).

Wrong yet again I'm afraid. Bill Clinton was a Democrat president, and supported greater control of the financial system. Care to explain why you believe that?

I have been warned that any racist or derogoratory comments may be removed

As crazy as it seems, my friend said to me in the corridor as we were walking to Economics, "That's what you get when you sell mortgages to Black people!" As racist as it sounds, there is an essence of truth in it. A news report showed two maps of a Chicago suburb side-by-side, one showing the concentration of sub-prime mortgages and the other showing the concentration of Black people. And the two maps corresponded almost exactly.

The problem is not at all that Black people buy sub-prime mortgages because they're black - that would be a major corruption of cause-and-effect theory. The truth is that Black people are statistically poorer than white people, and thus far more inclined to buy sub-prime mortgages in lieu of a bank mortgage. It's often the case that people find a correlation between A and B and therefore assume that A causes B. As shark attacks rise as ice-cream sales increase, does that mean that more ice-cream is luring sharks, or more shark attacks are causing people to buy ice-cream? Of course not!

[SkeedR]

Wake up and do what? Rebel?

Why not?

[Ameecher]

Wake up and do what? Rebel?

Why not?

Ok, so how do you propose to rebel against it?

[michael blunck]

[...] too many bad debts being shuffled around, American banks giving mortgages to people who had no way of paying them back, excess credit and liquidity in world markets [...]

Ok, so how do you propose to rebel against it?

Almost all people are unwilling (or unable) to understand how the financial/economical system works, although it´s quite easy.

As an example, let´s talk about "money". What is money?

Money is generated by credit. I.e., you borrow money from your local bank and the bank borrows money from the central bank. Same with companies. Now, to get the money, you´ll have to have "securities" and you´ll have to pay interest.

In this way, chains of creditors and debtors are established, i.e. every piece of money and every bill is represented as a debt somewhere in that chain.

Now, the question is how do you repay the debt?

Well, this is impossible, simply because of the interest which has to be paid as well. Because the money to pay the interest isn´t generated together with the original credit, it has to be obtained from somewhere else, i.e. from another person´s/company´s credit. Remember, money only gets into the economic cycle by debt. Consequentally, to get additional money to pay the interest needs new debts. This is the core of capitalism and this simple mechanism makes capitalism "dynamically" resp. "greedy". The system is based on the assumption that there will always be individuals taking on new debts to pay the interest for (someone else´s) old debts.

In that way, capitalism is doomed to "growth". I.e., if there would be no new debts, the credit chains would break and old debts couldn´t be financed any more. Even stagnation is fatal to this system. That´s why saving money and holding back consumption is a negative behavioural pattern in the capitalistic system.

Now, if you hear talk of "economic growth", be aware that this isn´t the result of "increased productivity" or "more flexible labour markets", but simply means an increasing level of debt. In this way, even rising stock markets don´t show "increasing earnings" or a "prosperous national economy". They´re just showing the increasing level of debts which can never be repaid.

regards
Michael

[beeb375]

Now, if you hear talk of "economic growth", be aware that this isn´t the result of "increased productivity" or "more flexible labour markets", but simply means an increasing level of debt.

That's a bit extreme, those two things are common causes of economic growth in their own right, but you're correct in saying that increasing levels of debt do often go hand in hand with growth.

[JamieLei]

Sadly the United States debt has now surpassed $10 trillion. Which is so big they had to alter the National Debt Clock in New York City to account for the extra digit!

[Kevo00]

T too many bad debts being shuffled around, American banks giving mortgages to people who had no way of paying them back,

Way to go Bill(Clinton).

Like Georgie Dubya has nothing to answer for here, as he quite happily ignored this ticking timebomb while fighting wars. Then eventually the bubble bursts and he happily goes all socialist suddenly and starts bailing out banks. Perhaps if his government had been paying attention they might actually have realized that

Debt of itself is not a bad thing. Debt helps entrepreneurs start new businesses, it helps existing firms grow, and it means that normal people can afford to buy houses and cars. Debt is fine as long as the debtor can afford to repay it. All of these things do help to create economic growth which makes society wealthier, whether micheal blunck above likes it or not. Capitalism has been a success - we have to work much less now for things we need, such as housing than our ancestors in any generation had to. The creation of money is fine as long as it is positively used to generate wealth through more production.

The problem comes when debts are given to those who cannot afford them. This is not just something that has happened lately in the South Side of Chicago, but something much more pervasive, and particularly in the UK economy. Lending on houses in the UK became so loose that banks were not even requiring applicants to provide information on their incomes to prove that they could afford to repay the loan from their future earnings. This was a big change from the days when only building societies could lend against houses and required you to have been a member since childhood to get a mortgage. Away from housing, in private equity (lending to firms) we saw problems too, with many companies, which were perfectly viable businesses being given debts known as 'credit swaps' which often equaled ten or twelve times their capitalization. Infact half of all the private equity lending to take place since 1945 occurred in 2006 and 2007, fueled by the bubble created by loosened regulation and low interest rates. Also there are debts out there where the contract is so complicated that few people understand them and the implications of them are yet to be known which could cause yet further problems, but which are now on the balance sheets of the public sector (which is exactly why banks should not have been nationalized).

So anyway, I don't think we will, or should, see the end of capitalism, just a readjustment along more conservative lines with narrower banks with more rules about who they can lend to.

[SkeedR]

Money still seems like a pointless exercise to me.

[Ameecher]

Money still seems like a pointless exercise to me.

I was going to rise to that but changed my mind.

[JamieLei]

Money still seems like a pointless exercise to me.

It's the best form of a medium of exchange that we've ever had

Else, if you have lots of potatoes, and want some apples, you'll have to find someone who has apples that wants potatoes. With money, you can find someone who has apples regardless of whether or not they want your potatoes.

Even communist states had to embrace money, as it enabled people to get the things they wanted. When the currency fails, the entire economy collapses and a crisis ensures as is happening in Zimbabwe at the moment.

[michael blunck]

That's a bit extreme, those two things ["increased productivity", "more flexible labour markets", mb] are common causes of economic growth in their own right, [...]

No, they´re not. How could they generate money on their own if only the central banks may do so? These two factors are only weights in the general distribution of the "money flow". The system as a whole works like a pyramid scheme, and o/c there are always participants who make more money as they have to pay back. But as a whole, the capitalist economic system is essentially unstable and that´s why financial crises, national insolvencies, currency reforms, etc ... are happening in an unavoidable sequence. These aren´t "faults", but immanent to the system, and only by these occurences it´s possible to start a new cycle with public and homemade leverage.

[...] but you're correct in saying that increasing levels of debt do often go hand in hand with growth.

That´s not what I said. They don´t go "hand in hand", but debt and "growth" are two sides of the same coin. Without debt there´s no "growth", and vice versa.

Debt of itself is not a bad thing. Debt helps entrepreneurs start new businesses, it helps existing firms grow, and it means that normal people can afford to buy houses and cars. Debt is fine as long as the debtor can afford to repay it. All of these things do help to create economic growth which makes society wealthier, whether micheal blunck above likes it or not. Capitalism has been a success - we have to work much less now for things we need, such as housing than our ancestors in any generation had to.

Yes, debt isn´t a "bad thing", simply because it´s an inherent component of the capitalistic economic system. I.e., without debt, the system would not exist at all. And o/c, its function isn´t restricted to "entrepeneurs" starting "new businesses", but it´s a general necissity in a capitalist society. We´re all in chains of debt as long as we don´t own enough money to gain more interest from it than we have to pay, either directly to a bank or indirectly through tax or even when buying goods or food. (Part of prices is foreign interest.)

And no, it´s totally irrelevant whether a debtor can afford to repay his credit or not. The best credit in this system is one which will/can never be repaid but is endlessly bearing interest. In fact, this is one of the "secrets" of capitalism, namely that companies and states may shift the reimbursement date into Greek calends, as long as they´re able to pay the interest. (That may not hold for individuals, though.)

Moreover, there´s no need in getting personal if you don´t like a description of the current monetary and economical system which doesn´t stop at the surface. Indeed, it may be questionable if "capitalism has been a success" at all. At least it seems to be so for part of the human race, but surely not for all (which, BTW, would be impossible from technical reasons). And indeed it is "a success" in gradual form: few are gaining the highest "success" and the majority gets only little (or no) "success".

And then, on a completely different level, the question of cost of capitalism has to be answered, because it´s not only debt which is inseparably connected with capitalistic "growth", it´s also the exploitation of the whole planet with severe implications to the environment which must be accounted for.

Also, I doubt that you´re right with that bold claim, that "we have to work much less now for things we need, such as housing than our ancestors in any generation had to". Some real numbers would have been more impressive here. Especially with regards to "houses" I´d claim the opposite because I do have some numbers. OTOH, "prices" are meaningless in a capitalistic economy, because "the market" is said to "make the price" - see e.g. the U.K house bubble.

The creation of money is fine as long as it is positively used to generate wealth through more production.

Sorry, this sounds like knowledge from a nursery school. How could "money" be used "positively" (or "negatively"?)? In addition, by "generating wealth"? E.g., to stimulate the US economy, billions of fiat money have been put into the US "defensive" industry. Is this "positive"? Did it generate "wealth"? Even more billions of fiat money have been put into the US house bubble. Is this "positive"? At least the latter has generated "wealth" (what is it, BTW?) for a greater audience, but o/c only for a limited amount of time. You don´t seem to understand the connections between "creating money", debt, production and consumption.

regards
Michael

[Kevo00]

Well, my apologies if you think I am getting personal.

Yes the repayment of debt may not have to happen in reality, but the willingness of a bank to lend must still be a function of the likely success of a venture. There is no point in lending to someone who cannot afford it, and as I have pointed out the present problem is that capital has been given out too freely. Corporate assets can still be repossessed if a firm cannot afford to repay or service its debts. And yes, I have heard of Modigliani and Miller, the cost of capital being independent of its source etc (although they also teach us that investors don't care about dividends, just the value of the security).

It is not a bold claim that we have to work less now to afford a better standard of living. I know of plenty of academic studies which have proved this to be the case. Take for example this offering on the US by Robert Whaples for EH.net, the inhouse website of the Economic History profession, http://eh.net/encyclopedia/article/whap ... k.hours.us which gives us a variety of data. In Table 2 they put together a variety of datasets and show that average weekly working hours for males fell from almost 60 hours a week in 1900 to around 40 by the late 1970s. That is a significant fall. Table 3 gives us a similar result, with working hours for railroad workers almost halving in 100 years. Tables 5 and 6 help more with living standards - in table 5 the time available for leisure almost quintuples from 1880 to 1995; table 6 supports this further. This suggests that as real wages have risen, people have had less of an incentive to work as long hours.

I accept that this trend may be most apparent in developed countries, but there is also evidence that living standards are increasing in developing countries, for instance in the UN's Human Development Index, which takes into account living standards based on income, educational attainment and life expectancy among other measures. If you look at table 2 of http://hdr.undp.org/en/media/HDR_20072008_Tables.pdf you can see that the values for most countries are rising, suggesting some improvement - and these countries are supposed to be loosing out from capitalism? I accept they may be relatively behind, but some of the world's best minds have worked on this and fail to suggest how things would be better otherwise.

I don't have time to find the exact data relating to housing prices and wages right now, but I suspect it is the case that out ancestors paid more either in real terms for housing or suffered another cost, that of worse living conditions than we do now. For instance I live in London in a flat of four. Our flat has five rooms - four individual bedrooms with one person sleeping in each with en-suite facilities and a kitchen. In Victorian London it would not be impossible to find a similar flat with a family of four living in each room, sharing a toilet with other households, and a tap too, and probably cooking in the same room that they lived in. Even my parents generation did not have as much living space as we do now - my mother shared a bedroom with her 3 sisters and 1 brother for example, and when my father was a boy his parents lived with their parents still in a tiny flat in Glasgow because of the incredibly high price of rent. Further in the UK it has only become common to own your own home since about 1970 or so, probably much later in reality, because people simply did not have the income to do that before. Yes there has been some difficulty of late, but the market is readjusting itself now.