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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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“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a 'dismal science.' But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance."
Murrary Rothbard

The author’s article rests on two fallacies:
1. because resources are finite, *therefore* we are at or near the natural limits to economic growth.
2. because there is a current economic crisis, *therefore* it’s caused by economic theories that failed to take into account the finite nature of resources and the limits to economic growth.

For starters, the problem isn’t that resources are finite, it’s that they’re scarce – can’t be used to simultaneously satisfy all the different human wants that they could. The amount of hydrogen, say, in the universe is “finite”, but its finiteness doesn’t impose limits on our use of it: its scarcity does.

Even if the finiteness of resources imposes limits to economic growth, that doesn’t mean we are at or near those limits now, and the author offers no proof of this assertion, he just assumes it. In doing so, he ignores the possibility that the economic crisis is caused by something else.

The current economic crisis is caused by constant increases in the supply of money and money substitutes. This causes a host of negative consequences. The main one is to draw scarce resources from where they would be used most profitably, into loss-making uses, while unjustly enriching the inflaters. It distorts the entire structure of production into what is more wasteful and less sustainable.

These problems are not in the nature of “our financial system”. They are in the nature of government raising revenue by printing money instead of by taxes or debt. It would be simple to fix the problem: abolish government control of the supply of money and credit which is always inflationary, because government gets a cut of any increase.

“You cannot however buy insurance to protect against the failure of the financial system.”

Yes you can. Buy gold.
Posted by Peter Hume, Wednesday, 7 December 2011 1:50:06 PM
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Poirot
A derivative is, by definition, the wrong place to look for the origin of something.

The function of a derivative is to hedge risk in the underlying contract. The greater the risk or bubble in the underlying contract, or market, the greater the risk or bubble in the derivative contract or market.

The problem with blaming the lack of regulation in the derivative market is it takes no account of the regulation of the underlying market. If your assumption were true, that regulation solves the problem of risk, then the underlying problems, against which derivatives were bought as insurance, would never have existed in the first place, would they?

You cannot justify more regulation until you justify the last lot. Good luck with that.

Blaming not enough regulation only shows basic economic ignorance. Let's suppose the problem was not enough regulation. Okay. How is government going to know how to equilibrate supply and demand?
Posted by Peter Hume, Wednesday, 7 December 2011 1:58:41 PM
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Excuse me, Mr Leckie, if I find your article underwhelming in the extreme. Karl Mark plotted the inevitable course of capitalism a century and a half ago, lurching from crisis to crisis, unto collapse, and he's been born out by events. But of course no one will believe it until an "economist" comes out and observes the dismal truth--in other words we're still addicted to witchdoctors and pseudo-science, those who couldn't even foresee the GFC!
So thanks for the heads-up, but I've been going on about little else for the last year or two--and I'm not even an economist!
Posted by Squeers, Wednesday, 7 December 2011 4:33:48 PM
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"... and I'm not even an economist."

You can say that again. As usual, your method proceeds by the simple error of calling government control of the means of production "capitalism". Government control of the price of money and credit is not capitalism, by definition - Marx's definition!

If the price of coffee, or beef, were controlled by a Federal Coffee Reserve, or a Federal Beef Reserve, with government functionaries trying to figure out how to equilibrate supply and demand without relying on the market price, by cartelising the biggest coffee and beef companies, and then licensing special deals in which they get zillions in handouts paid for by ripping off the population, we'd be seeing just as much chaos and corruption in the market for coffee or beef, as we see now in the market for money under the current system of money socialism
Posted by Peter Hume, Wednesday, 7 December 2011 5:32:41 PM
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Poirot

I don't disagree with what the Governor of the Bank of England has to say, so I don't know why you refernced it. The Eurozone debt issue is quite a problem, but a part of that is the shift towards a single currency for Europe. However, Leckie is hoping that its a problem that will overthrow the whole system as we know it.. it won't, but there may be some turmoil. The other posters have shot down Leckie's arguments with more accuracy that myself..
Posted by Curmudgeon, Wednesday, 7 December 2011 6:46:53 PM
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Curmudgeon,

Fair enough...I thought you were making light of the scenario, but apparently not.

Whatever happens to the capitalist model in the near future, I think we can expect a shift in political power as China and India emerge into their own.

Regarding the eurozone, it's not just a matter of a single currency. Monetary union is only part of it - at least it should have been recognised as that. The scattered and varied interests and the independence of member countries verses the need for the eurozone to be more integrated is the challenge at hand. Success or failure depends on the recognition that a union is a union, and it can't be achieved by half measures - at least in this economic instance, it doesn't appear so.
The European Central Bank assumed control over monetary policy for original member countries, yet those countries are still able to autonomously tax, spend and borrow at will. With no controlling political authority presiding over the whole, parts will stray in different economic directions.

I suppose we'll just have to wait and see how it all pans out.
Posted by Poirot, Wednesday, 7 December 2011 8:11:01 PM
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The problem with economists is, like the rest of us they know nothing about economics, but unfortunately they like to pretend they do. I have as much confidence in economist getting it right as I do in having my butcher do an engine overhaul on my car. They like to posture and pose, speak jargon and gobble goop its all done with smoke and mirrors. Why do people become economists? Answer: Because they can't get a real job. I caught the bus down to my local butcher, he's not much of a motor mechanic, but a great economist I asked Merv what were his thoughts on the World economic cries, Merv said. "I've got a great special this week on snags, $4.99 a kilo." Now there is some real economic wisdom for you. With an economic mind like that me thinks Merv's is wasted down there in his butchers shop, should we not make Merv president of the World bank or something?
Posted by Paul1405, Thursday, 8 December 2011 5:10:31 AM
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It is interesting to read the comments on the articles you write. I have come to the conclusion that people either believe in limits to growth or not. And I can see how people who don't believe in such limits would have problems with a view that attempts to deal with these limits. Time will tell of course but one of these views will be correct.

Atman, so what if the Club of Rome was formed by wealthy and influential "Euro aristocracy." This is simply an ad hominem argument with no supporting evidence. I also disagree with your comment that the LtG has been proven false. See: http://www.csiro.au/files/files/plje.pdf.

Bitey: increased productivity, if you mean labour productivity is the last thing we need. However if you are talking from an energy perspective then I would agree with you. We need to rethink our whole view of productivity. In the years ahead the more inefficient from a labour perspective we are the better as it will assist in providing employment (people might not be paid as much but at least they will have a job). The path we are headed on for productivity will see many able bodied people marginalised from our society. Productivity as currently defined was only plausible whilst energy was plentiful and cheap. As energy becomes increasingly scarce and expensive then our view of productivity will also change.

Peter Hume - The International Energy Agency has stated that we passed peak production for crude oil in 2006. See their World Energy Outlooks. This is one limit that has been reached. Whilst 'all liquids' production has increased, if you look at where the increases have come from (NGLs, biofuels, tar sands etc) they provide far less net benefit to society than crude oil. It appears that oil is the Liebig factor (the law of the minimum) that has or is limiting growth. I agree with your comment reference expansion of money and money substitutes. Once we hit a Liebig factor, growth can no longer continue regardless of the other resources available, hency why our current financial system is fatally flawed.
Posted by leckos, Thursday, 8 December 2011 8:00:46 AM
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leckos
There are limiting factors and if we are running into one, and there's no substitute available, then yes it's a limit. But that's just a simple fact of nature. It's not, of itself, a criticism of our financial system. Money is not a claim to magic pudding. It's just a medium of exchange. No-one ever claimed that the use of money has the ability to make limitations imposed by nature go away. Even if we lived in a hunter-gatherer society we would still be faced with natural limits to growth. The two issues - limits to growth and our financial system, don't necessarily have anything to do with each other.

However fractional reserve banking *is* a claim to magic pudding, and is pursued as a deliberate policy of state-planned economic growth. I think it should be abolished.

I'm not an advocate of economic growth for its own sake. If people want to accumulate capital so they can produce more, it's fine by me. And if they want to consume capital so they can have satisfaction now at the cost of a possible greater future satisfaction, that's fine by me too. I just think they should be free to do either if they want, without being forced to sacrifice their values to sponsor someone else's belief in the coerced "management" of society or the economy.
Posted by Peter Hume, Thursday, 8 December 2011 12:26:26 PM
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Mister Hume, you cite Rothbard because ... ? His elitist view as to who is entitled to have an opinion is almost as discredited as his disgusting views on race. Excuse me if anyone purporting to have 'knowledge' of economic matters is afforded less credit than they think they deserve, but every time I read an article or watch the news, I see economists wringing their hands and announcing contrary views. For me, the fact that nobody knows what is happening economically is demonstrated by the total lack of agreement among economists as to what should be done next.

For example, how the world's greatest economy could so utterly mismanage it's own affairs would be funny, except for the thousands of people sleeping in their cars. I don't want to sleep in my car. Didn't the US Administration employ, like, economists and stuff to give advice? Maybe they could save some money (which seems to be the point) and sack anyone with an economics degree? Employ gypsies and tarot-card readers instead? Could anyone confidently say they would do a worse job?

Here in Australia, having fluked our way through the GFC, should we be stockpiling baked beans and powdered milk as the author suggests? When our starving northern neighbours descend on us in a low-tech tidal wave of hunger, in the hundreds of thousands, do we share our food with them, or ... ?

Forget oil or nuclear power, religion or politics, the next World War will be fought over food.
Posted by lusker, Saturday, 10 December 2011 11:11:12 PM
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Lusker, finally someone has posted some sense on this topic. The only thing I don't agree with is "Employ gypsies and tarot-card readers" gypsies are far more reliable when they use their crystal balls.
While on the subject of economic guru's. I've been back to Merv's butcher shop. I did ask "Merv, what ya think of the Italian debt crisis?" Merv's reply "Gee, well, ah! I've got topside mince at $6.99 a keg, makes a great spaghetti bolognese." The man's an economic genius, can feed a family of 4 for less than 10 bucks. I wonder if Merv's got any gypsy in him? If you need any political advice there is Terry the taxi driver, when it comes to politics Terry's an expert on every thing.
Posted by Paul1405, Sunday, 11 December 2011 5:26:39 AM
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