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The Forum > Article Comments > Be prepared > Comments

Be prepared : Comments

By Cameron Leckie, published 7/12/2011

When exponential growth reached the wall of natural limits the financial system was always going to give.

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"Through the seemingly innocuous process of loaning money into existence, we have created an electronic pile of debt in various forms that will never be repaid."

Here's an interactive view of the debt owed by various countries in the Eurozone to other countries....it's all connected. Like dominoes, if one goes down, the others are likely to follow.

http://www.nytimes.com/interactive/2011/10/23/sunday-review/an-overview-of-the-euro-crisis.html
Posted by Poirot, Wednesday, 7 December 2011 8:48:52 AM
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I disagree with the author and this article for a number of reasons. The predictions of the Club of Rome, which he seems unaware is a club of the ultra wealthy, influential and Euro aristocracy, have been proven false and alarmist though many have tried to resurrect the ideas with new paint in order to portray them as 'correct'.

Secondly,the article is a restatement of discredited Mathusian ideas with little evidence provided in support.

Thirdly, one of the main resons for the US economic crisis in 2008 (which we call the GFC) was that the US Govt tried to make homes more affordable for the poor by encouraging the creation of new financial 'packages' such as 'low doc' or 'no doc' loans. Had they let the market stay as it was the crash would probably never have occurred.

It is often interference in the normal running of the economic system, not the system itself which often causes economic difficulties. Limits to growth has nothing to do with it.

PS Don't encourage people to start drawing money out of Banks, That's a sure way to crash the system!
Posted by Atman, Wednesday, 7 December 2011 9:06:17 AM
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Atman,

"....the US Govt tried to make homes more affordable for the poor..."

I believe it was the creation of a huge unregulated derivatives marked that traded in bundles of home loan debt that contributed greatly to the GFC.

The Clinton era ushered in the new austerity in the form of deep cuts to public spending and relied also on greater deregulation of the financial sector.
According to Wolfgang Streeck in "The Crisis of Democratic Capitalism":

"Instead of the government borrowing money to fund equal access to decent housing, or the formation of marketable work skills, it was now individual citizens who, under a new debt regime of extreme generosity, were allowed, and sometimes compelled, to take out loans at their own risk with which to pay for their education or their advancement to a less destitute urban neighbourhood....Subprime mortgages became a substitute, however illusory in the end, for the social policy that was simultaneously being scrapped...."
Posted by Poirot, Wednesday, 7 December 2011 9:37:26 AM
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Poirot

quite right, the Yanks got very enthusiastic with these derivatives, even bundling up and onselling loans made to people who, by definition, would be unable to pay them back.

But that destroys Leckie's argument. We've had the disaster resulting from the excesses of these derivatives and now the market is basically dead - very little speculative activity at all.. The stats Leckie quotes are, I think, for foreign exchange trading (don't think the BIS would concern itself with national stock market activites). Forex trading is, by its nature, highly leveraged - hence the big figures he quotes. Is it a cause for concern? Doubt it.

Forex trading does not seem to have been much affected by the currect economic malaise but is, in essense, quite different from the speculative lending and rebunding of instruments which led to the current problems. Forex trading causes a different set of problems, such as making the Asian economic crisis of the 1990s worse.

Leckie does not seem to know anything much about the economic system he so criticises.
Posted by Curmudgeon, Wednesday, 7 December 2011 10:01:50 AM
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Curmudgeon,

The governor of the Bank of England appears to hold a different view. He described eurozone debt problems as "extraordinarily threatening"
Central banks have moved to inject liquidity into world finance after a prolonged period of volatility in the markets - exactly the same scenario which heralded the first round of the GFC.
Systemic crisis?

http://www.abc.net.au/news/2011-12-02/bank-of-england-stockpile-warning/3708008
Posted by Poirot, Wednesday, 7 December 2011 11:17:56 AM
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Bogey terms like "derivatives" regularly get an airing when people try to understand what is going on in complex financial markets. But does anyone (Cameron in particular) really bother to research precisely how derivatives work and what they actually achieve.

Headline numbers from BIS or whoever don't really mean much. Credit Default Swaps are one sub-set of "derivatives" that are particularly worth researching to get some idea of how the current "crisis" may play out.

But unless Governments learn to spend less than they earn this problem will repeat itself again and again. I won't bother with Cameron's Malthusian approach except to say one word: productivity.
Posted by bitey, Wednesday, 7 December 2011 11:49:57 AM
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