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The Forum > Article Comments > The crisis and the textbook > Comments

The crisis and the textbook : Comments

By Joshua Gans, published 8/7/2009

In the US, Europe and Japan, there is a liquidity crisis: in Australia, for debateable reasons, we don't have the same crisis.

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Part of the problem is that even the good economic theory is selectively applied.
For instance it is a mathematical identity that for "utility" to be maximised (which is the goal), profits must be minimised. The traditional way to do this is through competition to force companies to be efficient rather then merely profitable. Alas, most big business these days is skilled at using governments and laws to minimise the impact of competition and thereby maximise their profits. Of course some profits are necessary for health. You cannot have all companies on the verge of collapse so the issue is one of balance. Excessive profits have the effect of a tax on the economy, a dam that prevents true liquidity.
Combined with simple facts such as "you cannot spend more then you make", which holds for countries as well as households and you can see that economic theory *could* have forewarned us, and indeed did for a the very few.
There are simple social factors why the theory wasn't used: It is more profitable not to! Whilst we let banks and insurance companies get ever more profitable and generate more "wealth", what they are actually doing is diluting the real wealth: Energy, manufacturing, farming and mining. Whilst hard working tradesmen go backwards due to real inflation, the top end of town has been taxing them.
Imagine a farm run by a family of 10 invaded by bookkeepers: Previously able to support the family, the addition of 3 book keepers just dilutes the farm's output without really adding much. (More financial reports do *not* provide for food, petrol and get the fences mended)
So: Less unproductive work, less profiteering, more honesty in government and business (=transparency=real journalism)
The economic textbooks need to focus on the critical factors of wealth that have been forgotten because they are un-sexy: Basic national infrustructure.
I am scared that instead of increasing interest rates to their "real" level, we are about to taste inflation instead. This will prop up the folks in excessive debt at the expense of responsible savers. Once again the parasites win.
Posted by Ozandy, Thursday, 9 July 2009 10:00:39 AM
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"In the US, Europe and Japan,there is a liquidity crisis" is simply wrong. The banks are suffering from a solvency crisis. Millionaire bank managers made gigabuck bad bets loosing terabucks. The banks' major profit centers and US major exports of collateralized debt obligations and credit default swaps were sold, bought, bet again, and guaranteed and kited to hundreds? of trillions of dollars of obligations. The only reason the zombie banks are still stumbling is that fools still buy US Treasury bonds, the gain from which is either spent on tools of death or bailing out banks and bank like entities.
Do you have any raw materials or processing plants, you want to sell? The Chinese are in the market to get rid of a couple of trillion.
Posted by 124c4u, Monday, 13 July 2009 1:04:27 PM
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