Thursday, June 04, 2009

A Very Brief Economic Summary-Part 1

The following article—prognosticating dark, evil clouds with possible silver linings— was submitted for posting by NotNow, an occasional commenter at CF. I find it worthy, and so I share it for the benefit of CF readers. I will break the article into two or three parts to be posted separately.

ver the past 18 months we have witnessed at least five distinct financial crises. First it was mortgage-backed securities, and we were all told "it's contained". Each subsequent crisis has been larger and more ominous than the last.

"How serious is it? The best measure, as always, is historical. And by that measure, this one is one for the record books. In fact, this one rewrites the record books. The language of central banking is arcane, by design. You're not supposed to understand, you're just supposed to pay. Cutting through all the BS, by various measures, the Federal Reserve and Treasury have either spent, lent or committed to spend a total of over $12.8 Trillion, so far. Compare this to inflation-adjusted total US costs of World War II ($3.6 Trillion) and the New Deal ($500 Billion) and you can see how big the problem is. GDP of the U.S. is $13.5 Trillion.

"There is no money.

"What is being "done" about it? The fact is, there is nothing that CAN be done about it. Another fact is this: NOTHING WOULD BE THE BEST THING TO DO. First, do no harm. But government is not in the business of doing nothing, and so they are doing "things" to try to "stabilize" the system. The system IMO is beyond stabilizing; it is a dead man walking. Wall Street, purportedly a place where businesses raise capital to engage in productive business and create wealth, is in fact a crooked casino filled with liars, cheats, and madmen. There is no money. There might have been at one time, but that was long ago.

"A capitalist economy runs on. . . .capital. Capital is, essentially, savings. It is deferred consumption. Instead of buying your kids the GI Joe with the Kung Fu grip, you plow some of your earnings back into the system so it can be applied by a business in a productive manner, employing workers and producing a useful product or service and bringing it to market at a competitive price. It's simple, really.

"But somewhere along the line, money became too easy. Capitalist economies actually need recessions to flush out stupid businesses ("malinvestment") and kill them off, making way for new, smarter businesses. Politically, though, recessions are always to be avoided, by any means necessary. So the Federal Reserve responded to each recession by making money ("credit") easier and easier by lowering interest rates, which makes money easier to borrow and also speeds up the actual creation of new money. In such an environment, a lot of people have more money than they need, and that excess money encourages foolishness. In an easy-credit environment you can start a business selling two pounds of shit in a one pound bag, and lots of people did. Conspicuous consumption was the order of the day, and to keep up with the Joneses everyone spent everything they had, and then borrowed and spent more. No one saved a dime. The capital pool depleted, so we borrowed capital from China and the Middle East, and used it to fund more consumption.

"Most recently, this easy money blew a big bubble in real estate. A really big bubble, many $Trillions of dollars. Fannie Mae and Freddie Mac, for example, together hold about $6Trillion in home loans. That's a lot of jack. The US GDP is about $13.5 trillion annually. GDP of planet earth is about $60 Trillion. We're talking about big numbers here.

"Like all bubbles, the RE bubble burst and home prices started falling. The problem is, all those home loans are "assets" on the books of various financial institutions. Now the "wealth" creation multiplier is working in reverse. In response, the Fed is quite literally printing money
The Fed's "balance sheet" has nearly tripled since August of 2008. In spite of this, the stock market has tanked. Interest rates are as low as they can go. The system is not reawakening. IMOP, that's because it is dead. On Monday, 9 March 2009, the Asian Development Band reported that the global financial crisis slashed the value of financial assests worldwide by $50 Trillion last year.

"When a nation's banks are insolvent, the nation "nationalizes" them, taking them over and using public money to keep them running. But what happens when the banks are on the hook for more money than the nation itself can produce? The nation itself becomes insolvent. That is what happened to Iceland, as their major banks (Kaupthung, Landsbanki) bit off more than they could chew, and took the country down with them.

"Major European banks are in a similar state: UBS (Switzerland), RBS (Scotland), and many others are up to their eyeballs in bad loans. A domino effect may play out. The English banking system is on the ropes, propelled there by none other than Iceland, and has just received legislative permission to print their way out; yes that's right, they are literally going to crank up the presses and print up enough money to reinflate the system, or die trying. It's just, exactly, like Zimbabwe.

"The U.S. isn't much better off, but the world still clings to the sanctity of the U.S. Treasury bond and the U.S. dollar as the last haven of safety. Those diehard true believers are in for the shock of their lives; IMO a dollar collapse is all but assured. All money that is backed by nothing will be recognized for what it is. And our money, like all currencies worldwide, is backed by nothing. Some would say it's backed by the economy, and some would say it's backed by the ability of the U.S. government to tax it's citizens. How's that looking?

"For men, the questions are many, but let's start here: What the fuck does this have to do with feminism and the family court system? IMO, it has everything to do with them."

To Be Continued. . . .


Anonymous Anonymous said...

"For men, the questions are many, but let's start here: What the fuck does this have to do with feminism and the family court system? IMO, it has everything to do with them."

Great essay,cant wait to read the rest of it.I always had a sinking feeling feminism is implicated quite deeply in all of this.Nice to know someone agrees.

6:06 AM  
Blogger MarkyMark said...


In his closing comments, when he talked about money backed by nothing, it's clear that he's going to champion a gold or silver standard. While that's fine in theory, a backed money supply can be debauched too; only the methods employed are different.

Let's look at the Roman Empire, shall we? During Roman times, copper was a precious metal, much like gold and silver are today. Rome based its money on copper, with their main unit of money being a coin called the As. Rome came to a point where they needed more money than the nation could produce, so they debauched their money. How did they do this? Well, they reduced the copper amount in the As by half, thus doubling the money supply!

The same thing could be done if our money were backed by gold or silver. All a corrupt government would have to do is reduce the amount of gold and/or silver backing the paper money in circulation, thus achieving the same thing that Rome did. Ergo, backing our money with gold or silver will not prevent a government from debauching the money supply; all it'll do is force them to do it differently. End result is that we still end up in the crapper economically.


4:38 PM  
Blogger Amateur Strategist said...

This writer sure understands the system, and if you don't find this in books, that's precisely why.

Marky Mark is right about the gold-silver backing, even in roosevelt's time we were still backed by gold and a week after he issued an order for the people to turn in their gold or be fined/jailed, he re-established the gold price at 175% of it's value, meaning anyone who turned in gold at the $20.67/ounce figure just lost a TON of money.

That is to say, if a government is allowed to rebase the price of gold, they can sure just say "oh, that note is only worth 1/2 ounce of gold now".

But, one mustn't lose sight of the TRUE values in life, like food, water and shelter. If you have your own protection in those regards, all the economic collapses in the world probably can't phase you, you'll just have to work harder to live.

5:20 AM  
Blogger Marty Lee said...

Our current situation has at its roots the willingness of Congress to let Wall Street make its own rules. It wasn't difficult for Wall Street to buy off Congress.

The mantra of deregulation rode on the back of Reaganomics and free market guru Milton Friedman. It culminated in the personage of Alan Greenspan.

After the tech bubble burst, a lot of money was left on the table. Rampant speculation in the real estate market, along with the pooling and selling of real estate contracts (mortgage backed securities), became the new game.

Thanks to a fraudulent rating system for these securities and a practice of trading the very credit insurance that would have otherwise backed up these "riskless instruments" should they default, we are now in a period of rapid real estate deflation due to a "banking crises."

9:56 AM  
Blogger Fidelbogen said...


Hey, I wonder what the author is going to say next?

I can hardly wait to find out! I wish I would hurry up and publish part 2! ;)

4:33 PM  
Anonymous Anonymous said...

"I wish I would hurry up and publish part 2! "

What the heck,Fidel!Have you converted and become a feminist since last Thursday?Post part II already!Thats an order!

4:50 PM  
Blogger Fidelbogen said...

"!Have you converted and become a feminist since last Thursday?"..

Shhhh! (Yes..but I converted back again!)

9:37 PM  
Blogger Coffee Catholic said...

"Some would say it's backed by the economy, and some would say it's backed by the ability of the U.S. government to tax it's citizens. How's that looking?"

Tax it citizens? What citizens? The feminists keep aborting all of their kids. Our population growth is below replacement level. In one generation we're going to have so few in the work force that there will hardly be any taxes!

12:50 AM  

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