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The Forum > Article Comments > Why the pump priming won't help the financial crisis > Comments

Why the pump priming won't help the financial crisis : Comments

By Ken McKay, published 27/1/2009

Here is food for thought: while economic pundits are talking about recoveries induced by stimulation packages, there will be no recovery.

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Ken
In my article 'Globilization is not the answer' ( http://www.onlineopinion.com.au/view.asp?article=8275 ) I saw the scraping of Bretton Woods as a way of removing control of the world economy away from America and getting rid of the IMF. I did not look deeply at what would replace it.
I would be interested in a more information of how you see a new Bretton Woods ageement operating. Would there be an overall world system apart from exchange rates, or would it be up to each country to manage it's own affairs in its own way?
Posted by Daviy, Tuesday, 27 January 2009 9:47:31 AM
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'To look at finding a solution we need to correctly diagnose the disease."
Somewhere among Keynes' vast writings there is a comment that people will be trying to apply his Depression solutions when the problems are different.
I agree with your diagnosis but in 1972/3 Neil McInnes wrote a series published in the AFR, "What do we do with these worthless American dollars?"
Keynes at Bretton Woods wanted a trading currency based on a basket of the currencies of major trading nations but the strength of the USA in the aftermath of WW2 could not be restrained. That ended when the production of oil from USA fields peaked in the early seventies. The Basle Agreements mainly served to push out the day of reckonning and as always happens such action make the ultimate problem worse.
I made the following comments in a letter to the Bulletin in July 1999.
"The world really is upside down when many of the worlds leaders think it is reasonable for the largest and most prosperous economy to be seen as the consumer of last resort. We seem to have forgotten Keynes’ exhortation to look at the problems of the day and find solutions to them."
And "America is consuming, for example, Arabian oil (a real asset), paying for it by creating bank balances in American banks for Arab princes and claiming that these balances can be on lent as if they were real capital. At current oil prices Saudi reserves ($10 per bbl) have about the same value as all USA farms at about $US8000 per hectare. When their oil is gone will the oil exporters own and occupy all USA farming land or will they own pseudo capital which can be wiped out at the stroke of a pen backed by a few aircraft carriers?
Adam Smith was adamant that capital should not be allowed to move across borders (meaning between different currencies). Politicians need to institute a different exchange system for genuine international trade."
i.e. We need a new Bretton Woods but have we got a Keynes?
Posted by Foyle, Tuesday, 27 January 2009 10:28:26 AM
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In my previous post for some reasom I gave the title of my article as 'Globilization is not the answer' when it should have been 'Globilization is not the real problem'. I agree we need another Keynes, and it may be worth while looking again at his 'Bancor' world currency suggestion. It seems to me that the root cause of the world economic problems is that our system is geared to the conditions that existed at the end of the World War when America was the only game in town. Whatever replaces Bretton Woods it must not be dominated by one country or currency.
Posted by Daviy, Tuesday, 27 January 2009 11:26:20 AM
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Ken
If we start with the wrong theory, we’ll end with the wrong conclusion.

“If it was January 27, 2008 and I made a prediction that every stock market across the world would crash losing 40 per cent in value, major economies would go into recession and face a deflation threat I would be labeled a loony left winger and probably sent to the asylum.”

The Austrian school of economics predicted this economic crisis years in advance: see http://mises.org/sto

Google also Peter Schiff. These are the only school with a sound theory with real explaining power.

All the other schools of economics, the Keynesians, the neo-classical, the institutionalists, the monetarists, all the policy advisers, all the central banks, the Federal Reserve, were and are clueless. They do not make the connection between their policy prescriptions and the disaster that followed. What credibility do they have?

Underlying your argument is the establishment premise: if the market is left to its own devices, the economy will fall into a recession (polite word for depression). The price mechanism does not operate to clear the unhampered market. Government spending is necessary to stimulate the economy.

But the more this belief system causes massive disasters, the more its proponents externalize the blame and insist that the solution is more of the same. The belief system is unfalsifiable: superstition replaces science.

At root the idea is that, if we can just give government more control, replace voluntary action with compulsory action, we can make bread out of stones, we can create real wealth just by printing paper. How does this miracle work? By (forcibly) taking money from A and giving it to B (‘stimulus package’); by paying people to dig holes and fill them in again (‘public works’); by building pyramids to the glory of Pharaoh.

A moment’s reflection shows this is wrong. Real wealth does not come from spending and endlessly rising debt. Someone must first engage in productive activity. That means savings and work:

(cont)
Posted by Peter Hume, Tuesday, 27 January 2009 11:32:55 AM
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But that is exactly what the state destroys by taxation and inflation!

The problem is fiat money. Got that?

While ever governments are addicted to inflationary finance, we will continue to have these disasters and injustices.

Inflation is theft. It is governments stealing from the whole population, and calling it social justice.

*Government* causes both the booms and the busts. The other explanations ignore sound theory of money.

If the establishment economists were right, the problem would not have occurred in the first place, either that, or total government control of the economy would make us better off. Your premises are mistaken, and so is your conclusion. It is not just a matter of ideology. Reality kicks in. Sound theory, and sound money, are necessary, and you stand for neither.

If we give John Jones a monopoly power to print and spend money, you can see that that is inherently inflationary, can’t you? He will just print and spend, print and spend, even while the whole economy collapses (post-revolutionary France, continental USA, Weimar Germany, Zimbabwe 2009, USA 2009). Well that’s what governments are doing! Would you give someone else a power to go into your bank account and take what he likes without your knowledge or consent? Of course not! Well guess what? There is no more reason to trust government with this power than anyone else!

The history of government control of money and banking is one of nothing but abuse and fraud. The flaw in establishment economics is to ignore the clear conflict of interest between government and everyone else over control of the money supply.

The current ineffectuality of government bespeaks their cluelessness.

Government intervention can only make the problem worse.

The solution is to abolish governmental control of the money supply. You can’t repeal the law of gravity by throwing stuff up in the air. And governments can’t repeal the laws of economics, and make society better off, by printing paper. This is just voodoo and political fraud: a denial of economics.

Liberty is the only (a) moral and (b) practical solution
Posted by Peter Hume, Tuesday, 27 January 2009 11:34:01 AM
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Peter Hume - "The solution is to abolish governmental control of the money supply."
The Australian Government has had not created money for many years but it has stood idle while the private deposit takers, mainly he banks, have created money at the rate of about 13% average compound since 'the depression we had to have' and Westpac was saved from disaster. The Howard Government with Costello as treasurer had a 'let it rip' attitude.
Use of Capital Adequacy Ratios was a scheme that could only have been dreamed up by bankers. CAR's are responsible for the massive increase in charges to bank customers when bankers realised that any excess profit over and above that necessry for dividends flowed directly to a bank's capital adequacy base. They even devised ways to borrow foreign funds to add these to their CA base. With the Australian dollar now much lower it is no wonder banks are concerned at the prospect of having to refinance those borrowings. Banks have been caught by their own version of the Swiss Loans.
The CAR scheme, a part of the Basle Agreements, is the major culpable factor in all of the asset bubbles of the last ten years and could only have one outcome, the debacle we now have.
Posted by Foyle, Tuesday, 27 January 2009 12:47:04 PM
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Interesting article, wrong diagnosis, right about fears for the future, wrong on what to do about it.

Poor economic policy decision making is just another part of the problem, like the property bubble, fiat currency and US hegemony -- pieces of the puzzle. Yes, the immediate problem we have now is debt deflation and the cause of that is the unwinding of the Ponzi-scheme-like pyramids of debt built up over 20 years or more as cash flows can no longer build them higher, but these are just consequences of a deep problem in global finance.

The root cause is that Western democracies have been funding economic activity and consumption out of debt, in excess of productive capacity, while developing countries like China have been creating excess productive capacity and generating surplus savings, which they have lent back to the West. This cycle has produced the "Great Moderation" and one of the longest periods of prosperity ever, involving well over half the world's GDP. It's over.

Now debt is everywhere: private, business and government. Some of the smartest people on the planet have been engaged in finding new ways to create debt and places to hide it (and getting paid well do do it). Yes, many of those people were in the USA but no single country was the cause and no country will escape. Europe and exporters like China will probably be hit worse than America. The system is broken.

No, the US dollar is not about to crash, because there is nowhere else that is safer. Yes, we need a replacement for Bretton Woods, but fixing the global financial system is more important than commodities or gold. With the banks broken, international trade is impossible and the consequences of that are unthinkable.
Posted by dyork, Tuesday, 27 January 2009 1:11:57 PM
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Keep it up, Ken, looks like a near dead Maynard Keynes was right during Bretton Woods when he warned about a coming Casino Capitalism without his eco' philo's.

As even Adam Smith was right way back when he warned about greed messing up the need that was truly the intention of the freedom for his marketing.
Posted by bushbred, Tuesday, 27 January 2009 5:18:49 PM
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It seems to me that the author has put his finger on one of the basic problems that plague the world - that the US has been living beyond its means since WW2, and Australia has been doing the same since 1972. What I am not so sure about is any of the methods proposed to fix the problem, because as soon as any system causes difficulties for the government (gold standard, bretton woods, etc.), the government defaults on its obligations to uphold the system. As a result I would agree with the author that we ain't seen nothing yet, but cannot work out how to preserve my capital. The one thing that is obviously needed is for the standard of living of the ordinary worker to be reduced substantially, but how you do this and remain in power is not something that I can advise governments on.

However, although the world at large may be going to hell in a handbasket, the fact that Australia is the only country in the world with the four vital things (food, energy, minerals, and a sea boundary) means that we stand a better chance of survival in our little corner of the world than most countries. The main thing we need to do is to stabilise our population by cutting back on migration and stopping the inevitable flood of refugees, and hopefully rising unemployment will bring this about.

And we haven't even mentioned two other little problems, that the production of oil has peaked, and that peak oil will shortly be followed by peak food. The current collapse in demand for oil has cut the price for a brief interval, but any recovery will send it soaring again.

Should be an interesting century.
Posted by plerdsus, Tuesday, 27 January 2009 10:18:51 PM
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An interesting century indeed.
I always thought that money and the money market supposed to be the mechanism that allowed the real economy to work. Barter was too restrictive so we had to learn how to barter at a distance using a medium of exchange. But it was the capacity and ability of the real market that makes a healthy economy.
Greed reverses this. The real problem as I see it is that with greed the money market drives the real economy beyond capacity until it breaks.
The stock market was a good idea. It allowed small investors to aid companies that needed to raise capital to expand in the real economy. But it quickly became the world's largest floating poker game. Loans that allow people to buy houses are a good idea provided the person who obtains the loan is able to repay the loan. As soon as the money market becomes greed driven and the money market drives the real economy will have a problem. It is always going to end in disaster.
I do not see regulation as an ideological thing. The real economy needs to be kept healthy no matter what a person's ideology is. Regulating to ensure the money market acts in response to the real economy is essential for long term economic health. If that means restrictions on how the stock markets work, and how the loan markets work then it is only a product of those markets inability to manage there own affairs. If those regulations appear draconian to the greedy then so be it.
There are any number of good systems (Such as proposed in the article) that would fail because of greed. As we hope move through this financial debacle and attempts are made to find better financial systems I hope that we remember that we are not regulating for the honest, we are regulating for the greedy and the corrupt.
Whether or not regulations appear restrictive or not depends on if a person is honest or corrupt. But no matter what we do greed will probably find away around it.
Posted by Daviy, Wednesday, 28 January 2009 10:03:56 AM
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You would think that from the propaganda coming from the austrian school of economics there were no recessions or depressions before the concept of Keynesian economics appeared, this is simply not correct. Recessions/depressions occurred in 1797, 1807, 1819, 1837, 1857, 1873, 1893 for instance all prior to the advent of Keynesian economics.

If we look at the recent financial crisis, it’s real root cause is that the private financial institutions have created a “blackmarket” fiat monetary system via the creation of derivatives notionally linked to the residential property market in the United States.

Looking at the damage done by the merchant bankers in this unregulated market it is unbelievable that the sales reps for the Austrian School believe that Governments should abandon the regulation and control of the monetary system and hand it over to these same cowboys.
Posted by slasher, Thursday, 29 January 2009 9:47:11 PM
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On face value thats a great article. I too predicted the decline in the world markets and the damage is far from over because the real economists havent adressed the problem.Throwing money that doesnt or will not exist isnt the solution.the real fiscalsolutions being
proposed are just the same as the ones used for inflation. That in itself tells us the treeasury hasnt got a clue andfollowing the spin from the rest of thw world wont help either. I believe it wasthe british treasurer / prime minster that originally suggests the current confidence trick we are now experiencing.
Posted by thomasfromtacoma, Friday, 13 February 2009 1:27:43 AM
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