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The Forum > Article Comments > Bernanke's cash can't fix political crisis > Comments

Bernanke's cash can't fix political crisis : Comments

By Damian Karmelich, published 27/8/2012

And just as politics has prevented Japan arising from its slumber so too it is politics that threatens the economic revival of the US and keeps the European Union on the brink of disaster.

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Pardon my ignorance, but what might you suggest that they (the politicians)have (or have not) the political will to do. Perhaps we are at last entering the new paradigm of zero growth.

David
Posted by VK3AUU, Monday, 27 August 2012 11:50:58 AM
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Extremely well argued, thoughtful article. Written by someone who clearly understands economics and the basic underlying causes of the current economic malaise!
A malaise that simply cannot be solved by more quantitative easing; but, temporally nationalised banks perhaps?
From my perspective, things have got to get much worse before they can get better!
We can save the ours, America's and the global economy or completely undeserved unwarranted privilege. But not both!
We must read the writ large writing on the wall; and take such steps as are available to us to insulate our own economy from the (worse) global economic storm emerging in a foreseeable future.
We have, I believe, vast untouched easily accessed energy resources, which we could tap; to reduce the total carbon output of our economy, around 35% in the first instance.
Competition is the very cornerstone of free market based capitalism, and ought to be reintroduced, into an almost captive energy market.
This would assist an economically depressed, energy starved world to begin to recover and transition towards a carbon constrained future!
Only a lack of intestinal fortitude and the political will prevents us from supplying lower cost, lower carbon energy components, to cash and carry customers?
We can also demonstrate already existing carbon capture and storage, by completely natural means, that instead of adding costs, adds profits and alternative, exponentially expanding energy supplies!
Very cheap energy has always accompanied/been responsible for human progress and freedoms! Today, it is what the whole world needs now; to first fully recover, and then transition towards a universally affordable carbon neutral/free economic future!
We simply won't ever get there, if only around 20% of us can ever actually afford the change; or we, even more thoroughly emasculate our/their/the global economy, in the endeavour!
Rhrosty.
Posted by Rhrosty, Monday, 27 August 2012 12:43:39 PM
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A very thin piece indeed.

As VK3AUU points out, it is long on vague opinions about what is wrong, and significantly short on thoughts about alternatives.

And there are some odd moments that seem to have come from pub chat, rather than considered analysis:

"...major financial institutions... held onto the funds to bolster their capital reserves rather than issuing loans and stimulating the real economy as the Fed had intended."

If the Banks had embarked upon a programme of aggressive lending, would they not have i) endangered their capital adequacy position and ii) been simply replaying the behaviour that caused the problem in the first place? And, in keeping with the overall tenor of the article, there is no suggestion as to how they could or should have acted differently, without falling into these traps.

One of the more recent aspects of the European rescue efforts has been the belated understanding that it is the Banks that need direct support, if they are to be part of the solution. Whether or not you believe Banks to be the source of the problem in the first place, letting them all go bust holus-bolus only drives the problem deeper.

"The problem was not the availability of credit or its price but rather demand. Deep structural problems within the Japanese economy and the absence of the political will to fix them dampened consumer demand and the corresponding requirement by business for funds to invest in future growth."

All true. But the structural problems in Japan bear no resemblance to those of the US, with the sole exception of the burst of their own property bubble. Japan's industry was - and to an extent, still is - conducted through keiretsu, a complex web of interlinked businesses, kept afloat through a sophisticated old-boy network of the depth and breadth that exists nowhere else in the world. To compare this with the fiercely competitive, dog-eat-dog, devil-take-the-hindmost US marketplace shows a suspicious lack of understanding of the functioning of commerce.

Not everything can be explained in glib sound-bites.
Posted by Pericles, Monday, 27 August 2012 1:03:18 PM
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An interesting take on things, but I do believe the current (as in 2012) problem is political.

What is not recognised, at least in Australia, is the fact that we have relied entirely on China to support us through the GFC.

China's growth has not been economic; it is political, driven by the need to have growth at any cost, to provide the jobs for the 500 million odd people who have moved from an agrarian life to one in the urban areas of eastern China.

Australia's entire economic and therefore political future has been modelled on a false dictum. China's economic growth is not real, it is political, the entire Chinese government has been hell bent on ensuring social stability, it has now realised that it has too much debt just like everyone else and is heading toward a very hard landing.

However, it is moving toward cornering the gold market, it is currently not capable of taking over the global reserve currency, but give it a couple more years and it will announce its gold reserves and the entire global economic sphere will be shaken to the core, China is very quietly moving to use a Gold standard and Australia is about to witness huge losses in value of our major resource companies and the banks (43% of the stock market) that will see our dollar collapse, house prices plummet and most people's super disappear in puff of disbelief.

Our entire growth model (economic and political) is based on a ruse out of China.

The US and ECB can print all they like, the political and economic side of their future is shot, China is the game-changer and no economist or politician has recognised what they are really up to!
Posted by Geoff of Perth, Monday, 27 August 2012 1:39:47 PM
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That's a new take on an old chestnut, Geoff of Perth. But as irrelevant as all the others.

>>China is very quietly moving to use a Gold standard and Australia is about to witness huge losses in value of our major resource companies and the banks (43% of the stock market) that will see our dollar collapse, house prices plummet and most people's super disappear in puff of disbelief.<<

Pure fantasy. There is absolutely no point in China "using" a gold standard, simply because there is no possible means whereby they could enforce it. Consider first of all the tiny amount of the metal that is available. Only around 150,000 metric tonnes of the stuff has ever been dug out of the ground. at $53m per tonne, that's only around $8 trillion, hardly enough - even if all of it could be mobilized - to sustain a world economy.

Then imagine, for a split second, what impact this would have on China's own economy. Their vast store of US$-denominated loans would have to be written down, and their export trade would dry up in an instant. That's just for starters.

But to get back to your prediction for a moment.

How would China adopting a gold standard affect our resource companies? Surely, being paid in gold would not be particularly disadvantageous - unless its value fell, which I don't think is part of your scenario. How would it affect our house prices? We don't have a gold standard here, so how would its impact be felt? How would it affect our Banks? How would it impact our superannuation?

You seem to believe there is some kind of cause-and-effect going on here. Perhaps you could spend a moment or two explaining it.
Posted by Pericles, Monday, 27 August 2012 3:58:08 PM
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Pericles it is very difficult to state so much with so little wording permitted.

Notwithstanding, Australian banks are highly exposed to credit (debt) from the Oz mortgage belt. Our home owners (those in debt to their eyeballs) are tapped out except for their limited access to credit.

Australia's major resource companies (BHPB and RIO) coupled with the big four banks make up about 43% of the ASX's value.

China's growth is not economic in real terms it is political, and China is very quietly changing their game plan.

Gold is going to be a key in their strategy to gain control of the markets, and they will not give a hoot about European or US debt, nor their US holdings which will become irrelevant.

China last reported gold reserves in 2002 (approx 550 tonnes), they will next report in 3-5 years and will shock the world with 5000+ tonnes and this will be a game changer.

Our current growth (apparently) is so good that no-one seems to be mentioning that the ASX has dropped 19% in the past 12 months and national house prices have dropped 10% over the same period.

We are about to learn the real lessons of politics, China's growth is a mirage, our terms of trade are about to reverse and significantly.

In my mind, buy gold, silver and make sure you dump stocks in any of the big four banks, BHP or RIO and any companies that are tied to them.

This is not going to happen today or tomorrow, but you will see it happen over the next couple of years.

My 0.02 worth
Posted by Geoff of Perth, Monday, 27 August 2012 4:28:59 PM
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The private central banksters are criminals.This "Quantative Easing" is them creating money from nothing ie stealing from the people via inflation and giving it back as debt.

We do not need private central banks as they are parasites and a blight all all our humanity.
Posted by Arjay, Monday, 27 August 2012 5:49:52 PM
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Simply asserting the same things over again isn't particularly helpful, Geoff of Perth.

>>China's growth is not economic in real terms it is political... China's growth is a mirage<<

I'm sorry, that is complete bull. On any measure, China's economy has been growing, much of it on the back of massive exports of manufactured goods. Or had this escaped your notice? What part of that immense inflow of currency is a mirage?

>>China is very quietly changing their game plan. Gold is going to be a key in their strategy<<

Yes. You mentioned that. But you are not being very clear about the impact of this change.

>>...they will not give a hoot about European or US debt, nor their US holdings which will become irrelevant<<

You are kidding. Banks in China operate in exactly the same way as ours. They most certainly "give a hoot" about the value of their international debt. Why would they not? They keep balance sheets, just like everyone else.

>>China last reported gold reserves in 2002 (approx 550 tonnes), they will next report in 3-5 years and will shock the world with 5000+ tonnes<<

Actually, according to the IMF, China reported reserves of 1054.1 tonnes in 2010. If they do get hold of another 4,000 tonnes by 2015 - which will cost them around $200 billion - they will be the proud owner of around a third as much as is held by the European Union. Or two thirds of what the US held in 2010. How does that make it a game-changer?

China conducts business in the same manner as the rest of the world. The fact that their government is still actively managing their exchange rate in favour of their export trade is different to most other countries, but this is not on its own either a good or a bad thing. For one thing, it acts to keep a lid on the costs - i.e. the wages of the workers - and this can only last for a limited time.

But you can forget about a gold standard. It won't happen.
Posted by Pericles, Monday, 27 August 2012 6:56:32 PM
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Gold is only a good currency backer when the wheels are about to fall off.

We do not need precious metals to back money.Money is backed by our productivity.All that is needed is a proper constitution that ties money supply to productivity.

Note that in the West inflation of approx 3% is nearly always the same as increases in productivity.Because our productivity gets expressed as debt by private banks,we need inflation to equal it, so there is enough money in the economy for it to function.

We need a responsible body to control the supply of new money outside the parameters of private central banks and gold will be unnecesssary.
Posted by Arjay, Monday, 27 August 2012 8:28:16 PM
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Pericles, I acknowledge the obvious research you have done to come up with the numbers you cite.

I would love to play a game of poker with you!

If you think quoting the IMF has any substance, I think you are barking up the wrong tree.

China has been producing gold at about ~350 tonnes per annum since 2002, I do not know the exact figure, China has been importing gold at a frenetic rate since 2008, it has also advised its people to invest in gold and silver, previously illegal.

If you cannot understand the US, Europe, Japan and the west is insolvent, and that you can't fix a debt problem with debt/austerity, Austrian economics beside, then you are deluded.

Growth as we know it in the 'west' is almost certainly over, the central banks of the US, Europe and the rest of the cartel are doing everything possible to prop up a completely failed system (model).

China realised what they were doing (stimulus and growth at any cost) was bound to fail, but they are now on a different political path, if you understand the Chinese you will learn quickly this will mean a completely new paradigm.

I do not have all the knowledge, answers or facts, if you dig deep enough, you can see that Australia is going to be in a lot of trouble financially in the very near future.

If you are going to hedge a bet, it is always prudent to know your adversary, in our case, our (mainstream economists and politicians) have no idea what the Chinese are really up to. They and we are in for a rude shock.

If you have super or investments I would recommend you seriously take a look at where your future lies and adjust accordingly.

Plain and simple, but unfortunately the MSM will advise differently.

Good luck if you think you can financially survive the Tsunami that is to come

Geoff
Posted by Geoff of Perth, Monday, 27 August 2012 8:33:58 PM
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Capitalism has reached its zenith. It now channels most of the worlds wealth to the benifit of 1% of the worlds populace. Bully for them, tough for the poverty stricken and dis-enfranchised billions of souls around the world who are left clutching at straws.

Inhumane as this situation is, it is also self defeating. The simple fact is that the more wealth channeled to the 1% the lower the spending power of the 99% and without that recycling of spending power both the marketplace and associated economy will collapse. But isn't this what has been happening? All the theorizing about monetary policy and market led economies will change nothing unless this basic fundamental is addressed.

During the last 40 years the wests de-regulated economies have held off the inevitable day of reckoning by reaping the advantage of cheap product from the slave labour in disadvantaged communities around the world. The thin edge of this wedge is very close.

China has benfited from the current global situation due to stable government, maintaining a high level of regulatary control and sound planning. An example from which the psuedo democracies could all learn.
Den7
Posted by DEN71, Monday, 27 August 2012 9:40:14 PM
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I'm sure you would, Geoff of Perth.

>>I would love to play a game of poker with you!<<

I'd be hopeless. I find it impossible to bluff. All that pretending that you have something that you don't. Not my speed, I'm afraid.

>>China has been producing gold at about ~350 tonnes per annum since 2002, I do not know the exact figure...<<

Sure you do, if you only bothered to look. Let me help with some current figures:

http://www.commodityonline.com/news/china-gold-production-rises-10-y-o-y-to-808-tons-in-q1-48032-3-48033.html

At this level, that equates to around 15% of the world's total production. And they are indeed rumoured to buy another 6,000 tonnes on the open market.

http://www.mining.com/heard-the-rumour-china-is-buying-6000-tonnes-of-gold-it-may-not-be-as-crazy-as-it-sounds-11560/

None of which indicates that they would be crazy enough to attempt to fix their currency to gold. Don't forget that the essence of a gold standard is a fixed conversion rate - anything else is merely trading and speculating a commodity.

All that their anticipated buying spree will achieve is an even higher gold price. It doesn't give them any particular advantage - let's say they hoard the world's supply of gold; who would they be able to trade with?

>>If you cannot understand the US, Europe, Japan and the west is insolvent...<<

You might like to work through the significance of what you wrote here. If these countries are insolvent, who will buy China's output? Take a look at China's balance of trade, and try to imagine what they would do if their export trade dried up.

There is far more mutual dependency in the present financial situation than there is adversarial advantage to be gained. One of the benefits of centuries of world trade - like it or not, we're all in it together.

>>...in our case, our (mainstream economists and politicians) have no idea what the Chinese are really up to<<

To be frank, I'm not entirely sure that they know either. The world hasn't been in this situation before.

You seem to believe this is some form of zero-sum game, where in order for one side to gain, the other has to lose.

It doesn't work like that.
Posted by Pericles, Monday, 27 August 2012 11:23:27 PM
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DEN71,free markets are not the cause of the current demise.A monopoly system of private money creation is the central cause.Since private banks can create from nothing all the money to equal our productivity,they own our productivity and give it back to us as debt.

This is why the West is consumed by debt and China can grow at 9-12% pa with no debt.

When the central banksters own our currency,the market can never be free.
Posted by Arjay, Tuesday, 28 August 2012 10:50:00 PM
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Do your homework, Arjay, for goodness' sake.

>>This is why the West is consumed by debt and China can grow at 9-12% pa with no debt.<<

No debt? Of course they have debt. Here is the story of just one city, and how it has funded its growth through borrowing, just like every other growing entity.

http://online.wsj.com/article/SB10001424052702303459004577359972617862832.html

To help you understand the scope of it, there are just over six Yuan to the dollar.

"10 major investment vehicles the city used to fuel its growth accumulated more than 346 billion yuan ($54 billion) in liabilities, as it recapitalized banks and built highways, bridges and other projects that boosted growth and helped attract global companies looking for an entry into China's booming inland markets. In 2007, when Mr. Bo became Chongqing's party chief, its top post, those vehicles had total liabilities of 162 billion yuan."

Oh, and then there's this:

"I don't think it would be a stretch to say that Chongqing local government, state-owned enterprises and state-owned developers collectively owed 1 trillion yuan at the end of 2011"

Which can be put into an overall perspective here...

"Local investment vehicles like the ones in Chongqing became more aggressive after the 2008 financial crisis as the government tried to stimulate growth, leading to an estimated 10.7 trillion yuan in town-hall debt nationwide."

This took nearly ninety seconds to discover, simply by Googling "China's debt", and there's plenty more where that came from.

Do you deliberately avoid checking your wild assertions, for fear of discovering that you are talking through your... hat?
Posted by Pericles, Wednesday, 29 August 2012 8:05:52 AM
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