Forum Post: Capitalism Naturally Crashes
Posted 13 years ago on Oct. 13, 2011, 9:40 a.m. EST by benhogan53
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This content is user submitted and not an official statement
http://www.associatedcontent.com/article/8058367/the_inevitable_capitalist_crash.html?cat=3 My undergraduate thesis about how capitalist crises are a systemic problem. The 1907 Crises followed the same script as our current one. Hyman Minsky's Stabilizing an Unstable Economy, written in the 1980's is a must read for those in the movement
Everything naturally crashes. The problem is we keep trying to build static, unchanging infrastructures around ever-changing, ever-growing, ever-different generations of human beings. We're not rocks. And not even the rocks remain identical and unchanged over hundreds of years. We need a system that embraces constant change and reassessment. This is the only system that will not inevitably, eventually, crash. It's like trying to plot a trajectory in space without calculating the gravitational pull of the hundred celestial bodies in the way. Won't happen. We're heading for yet another crash landing :)
The crash and bank panic of 1907 were the result of systemic features of a capitalist economy that make it unstable and prone to a financial crisis. The investment boom created a tremendous need for financing. Since the expected returns on investment were good, the investment methods became more speculative and margins of safety were reduced. The banking system had evolved to meet the demands for financing, as national, state and investment banks became much more connected. When interest rates rose, money became scarce and the assets used to fuel investment declined in value. The investments turned from speculative into Ponzi finance as the costs of commitments exceeded the income that they would produce. The connected nature of the banking system ensured that insolvency of a bank would have wide reaching effects. The lack of a central bank to serve as a lender of last resort allowed the crises to reach very severe levels, as investors panicked and attempted to withdraw massive amounts of money. With the banking system crippled, investment stalls and a capitalist economy cannot function. The agreement of banks to inject liquidity back into the system was behavior similar to a lender of last resort. The crises was stalled, and it lead to a serious reform with the creation of the Federal Reserve. The federal reserve allowed for a much more effective lender of last resort to exist, however it did not address the systemic instability that capitalism will produce. Following the 1st World War, a boom period occurred which was followed by the worst depression in the history of the United States. Except for a tranquil period after World War 2, the boom bust cycle has continued to the present day. While much has changed since then, the need for investment in a capitalist economy has not. The drive to maximize profits existed then as it does now, and the investment strategies continue to be risky and based on individual profit, not the general welfare of the country. The financial crises followed the same script that has been seen for over 100 years in the capitalist economy of the United States. Investment decisions are made based on future projections using past behaviors as their guide. Under this model, it is inevitable that financing will become more risky during an investment boom. When the boom ends, the expected returns are reduced and leave banks or companies in a position where they cannot meet their financial obligations. The connected nature of the economy creates a situation where this failure can have far reaching effects. A lender of last resort can lower the effects, but does not serve to prevent the normal functioning of the economy which leads to these crashes. The irony is that in 1907 and in other crashes the economy was actually behaving normally for a capitalist system.
http://www.thevenusproject.com/
Here is an article about the fed chairman during the time of the Great Depression and what he thought caused it. It appears that the same thing is happening again for the same reasons:
http://toomuchonline.org/americas-most-egalitarian-banker/
The problem is massive inequality. For prosperity to endure it needs to be shared. Mass production, demands mass consumption, but people can’t afford to consume if the wealth an economy generates is concentrated at the top. In consequence, as in a poker game, where the chips are concentrated in fewer and fewer hands, the other people can stay in the game only by borrowing. When their credit runs out, the game stops.
Somehow I feel with my whole being that this is the reason why I chose to be born to this exact period of time. To be able to witness the end of everything and at the same time the birth of the new and more complete world...together with all of you. Thank you for this experience. And remember that phisical distance matters less by each minute.
The End of Capitalism http://www.youtube.com/watch?v=pBRfQFBgRSY
http://www.youtube.com/watch?v=4Z9WVZddH9w
agreed - capitalism assumes unlimited resources and for the past 200 years our resources appeared unlimited because they are so vast. We believed there was an unlimited amount of air, water, land, and energy. Capitalism with limited resources is like the board game Monopoly - it ends when one player owns ALL the resources and nobody else can afford to rent/buy the resources from the owner.
Capitalism is also a victim of it's own success. Capitalism rewards efficiency and machines/robots/computers are way more efficient than humans. In 1952 Kurt Vonnegut, Jr. wrote "Player Piano" about a society where machines do ALL the work. Are we there now? or on our way? We've had HUGE gains in efficiency in the past 100 years, particularly in the past 20 years. Everybody can visualize the factory worker being displaced by a robot, but few "see" that a middle manager of today with a computer does the work of 10 middle managers just 20 years ago. This is why the middle class is disappearing.
The problem with productivity gains is the owner of productivity gains is the owner(s) of the business. Employees only rent themselves out, therefore don't benefit when a machine/robot/computer either replaces them or helps them increase efficiency. If productivity benefits were spread throughout the population, we ALL would be working 20 to 25 hours per week and spending lots more time playing with our kids and going to the beach.
http://www.JeffBlock2012.com
This proposal does not dictate how the 'The People's Act' and 'Amendment XXVIII' should read but rather suggests how the demands and the concerns of protesters can be written and passed into law.
“We The People” initiative
'The People's Act' – Legislative Item #1
'Amendment XXVIII' – Legislative Item #2
October 15th - December 31st (Launch “We The People” Reform initiative)
January 1st New Year's Day (Drafting committees formed and finalised)
READ MORE and see FAQs @
http://occupyboston.wikispaces.com/message/view/Solidarity/44102877
Exactly, which is why what we most immediately need is a comprehensive strategy, and related candidate, that implements all our demands at the same time, and although I'm all in favor of taking down today's ineffective and inefficient Top 10% Management System of Business & Government, there's only one way to do it – by fighting bankers as bankers ourselves. Consequently, I have posted a 1-page Summary of the Strategic Legal Policies, Organizational Operating Structures, and Tactical Investment Procedures necessary to do this at:
http://getsatisfaction.com/americanselect/topics/on_strategic_legal_policy_organizational_operational_structures_tactical_investment_procedures
Join
http://finance.groups.yahoo.com/group/StrategicInternationalSystems/
if you want to be 1 of 100,000 people needed to support a Presidential Candidate – such as myself or another you'd like to draft – at AmericansElect.org in support of the above bank-focused platform.
Capitalism, as an ideology, is irrelevant. We need a functional society and free markets and private property are part of the solution. (Also, remember that we have a global society and a global economy but only national governments, many of them smaller than many international corporations. What would you expect to happen?
So true, unregulated Capitalism is a Hobbsian State of Nature. Life in Hobb's state of nature is nasty, brutish, and short. The funny thing is that to have true competitive capitalism, you need a lot of government regulation because in Capitalism people are always trying to gain advantages through uncompetitive means e.g. by creating barriers to market entry, monopolies, tying arrangements, and millions of other anti-competitive actions. If you allow this, then people gain advantage not by having the best product or service, but by being the most underhanded and society looses. The more competition the better the products and services.
Unregulated Capitalism eventually leads to monopolies. Highly regulated Capitalism leads to the most companies competing and winning by having the best products not by stifling competition. Highly competitive regulated capitalism lead to the best products and services for society.
What the Republican's want is uncompetitive, unregulated Capitalism where the few wealthy and powerful benefit the most and consolidate their power. But, neither party is promoting real Capitalism because the wealthy and powerful have bought both parties.
Notice how we only have a handful of phone providers and now they will be getting fewer and bigger because AT&T and T-mobile are merging? Notice how CEO's get rewarded in our "Capitalism" for failing:
http://www.nytimes.com/2011/10/01/business/lets-stop-rewarding-failed-ceos-common-sense.html?_r=1&ref=executivepay http://www.ecgtn.org/events/oxford2005/documents/bebchuk_grinstein.pdf http://www.alternet.org/economy/49631/http://www.foxnews.com/story/0,2933,240987,00.htmlhttp://money.cnn.com/2007/01/03/news/companies/home_depot/index.htmhttp://www.pay-without-performance.com/Preface%20and%20Introduction.pdfhttp://blogs.hbr.org/ashkenas/2010/06/rethinking-the-assumptions-beh.html http://www.law.harvard.edu/faculty/bebchuk/pdfs/BCS-Wages-of-Failure-Nov09.pdf
You completely missed the boat on this one. Hobbes refers to the state of nature as a concern for what happens when there is no government. In fact, he addresses the need for government in order to PROTECT PROTPERTY. This is the foundation of Capitalism, which requires government simply protect our individual right toproperty. Capitalism is an economic system devised to deal with the problem of scarcity.
The reality is, that while capitalism is imperfect, it is the least imperfect solution ever devised by man. At no other point in the history of human events could the working class lead a life of relative comfort and security, the way they can in America today.
No I didn't get it wrong, I compared the Hobbsian state of nature to Capitalism without government regulation. Without government regulation, Capitalism is subverted or at least true competitive Capitalism. I think that you are the one not getting it. The government sets the rules of the game. With no rules, like in football, you will have people not playing a good game of ball to win, but merely trying to use baseball bats at the knees of opponents to win.
The way to fix Goverment is so simple its childs play. 1. Make it illegal to accept any campaign contributions from any company lobbyist or individual by penalty of jail to the politician or the giver Each politician will be given the same amount of money to run for office . How they spend it shows how smart they are..2. We regulate the airwaves so mandated TV and Radio time for cnadidates equally distributed. Civil servant will be that again, instead of a whore with his hand out. NO MORE MONOPOLIES!Walmart/SAms,Banks and no bid contract Haliburton,Phone companies,cable companies. I relize theere are a few but a very few competing companies You move your company over seas for cheap labor you pay higher taxes for moving overseas and must match employee for employee in this country for living here. No more out sourcing phone jobs to India or any other company. You do bussiness is here you hire here. Maybe then those 20 million dollar bonuses could come back to the average Americans hands. I am all for people coming to this country but not at the expense of the working man. The richest Americans want them for labor then they must pay their medical dental and reasonable housing. Other than that i want a concrete wall between US and Mexico to stop the illegal crossing of our borders. The building of the wall will crreate many jobs as Nafta has not worked and must be done away with. It just benefited the rich to move their companies. This 2 party system , must go!!!!!. The 2 parties make sure that no other party can get started or a foothole in this country. No more bailing out rich companies or banks when they make. We bailed out the biggest banks in America and let the little ones fail and they didn't cause this mess. Now they banks we bailed out are taking record bonuses after some, taking a 1.00 for the year like they were doing us a favor. After spending our tax dollar to bail them out They should have been paid a 1.00. There should be a FLAT TAX of between 15% to 18% depending on what the goverment needs. The rate is based on the fact our politicians can no longer be whores with their hand out ,our money will go a lot farther and get things done so we are not sure exactly what the rate will be but this will encompass everything. No more sales tax or property tax and everyone rich and poor will pay the same. With my idea in a couple years there will be no more poor. I live in St Petersburg Fl its a peninsula about 20 miles long and 10 miles wide There are approx 20 mayors 20 councils and aides and aides too aides You want to reduce goverment start local. This is a small area for this many people running the goverment. The size of goverment should be based on the size of the area. Its absolutely alarming at how big the goverment is in this small area. The tea party was started with some good intentions it is allegely supported by some of te richest Americans Like David Koch of Koch industries (BILLIONAIRE) and Rick Scott Gov Multi multi Millionaire of Florida to protect their income and does not even come close to going far enough to protect is from the greeedy Corporate Giants.... ITs run by! I would be proud to join occupy wall street as long as we agree that democracy is the only way. If you like my ideas you may write me at Conscience of America: 5680 Dunfries st St Petersburg Fl 33709
Awesome work. thank you.
you should put up a synopsis (1 paragraph) of your argument. I don't think anybody wants to read a whole undergraduate thesis, only to find out what is your main point
thanks, did so
a bid to deterministic/path dependent, but so be it.
you say "The irony is that in 1907 and in other crashes the economy was actually behaving normally for a capitalist system."
... what are you precisely saying here? normally within what context? normally within the context that it was deregulated and unfettered? Just curious. If it 'performed' normally, what was the drive for the Federal Reserve System?
how does the FDR (Social security, glass-stegal acts, SEC, etc.) scheme fit in your argument. I see this very monetary (central bank) centric as it reads.
Again, how exactly do you stand to state intervention, regulation, monitoring, curtailment of that 'capitalist' (i assume you mean laizzez fair?)
Capitalism always is a step ahead of government regulation. The chain banking technique got around banking laws at the time for greater investment. Capitalism is always going to be boom bust cycles. Over investment followed by under investment. An endogenous money supply exists, so the Fed Reserve only has so much control over the supply of money. The fed got put in because 1907 was seen as an isolated incident where the economy did not behave normally. Intervention serves to prevent complete meltdowns, but in essence insures corporations against their risky speculation. So the economy busts will only grow worse. Major shifts in philosophy are needed. Our economy needs to be geared towards collective rather than individual growth. The investment techniques used to promote individual growth can have a negative collective effect
you might find this interesting; This is more social theory/critique.
habermas; legitmization crisis Polanyi: the great transformation
I can't go with you all the way in what you are saying (see below); for it lends itself to be exploited by radical free market ideologist. And i don't agree with. That said, i recognize how you rescue that with a fundamental shift in how we see society, economy, et al. (collectivist like notions - i don't like the word, but that not important).
"Intervention serves to prevent complete meltdowns, but in essence insures corporations against their risky speculation. So the economy busts will only grow worse"
False, the citizens become complacent during the boom times as corporations try to secure their future profits by lobbying politicians to enact overly restrictive and complex laws which drive out competition and stifle innovation and small businesses. The creates a non-capitalistic environment chock full of perverse market incentives and egregious government waste which is what causes the downfall.
Pure capitalism is creative destruction which allows only the most innovative, productive ideas and technologies to flourish thereby enriching peoples lives.
"Pure capitalism" protected fraud in the mortgage industry, from insane loans for individual houses to wild and stupid derivative CDO's at the international level. It crashed our economy.
There has to be a balance of regulation to rein in these incredible money-making methods that enrich the guilty and leave millions of the innocent as economic collateral damage.
No, that was not pure capitalism, that was a politically altered economic landscape wherein the incentives were distorted by the actions of Fannie Mae and Freddie Mac.
I agree that the banking sector needs regulations (re-instatement of Glass Steagall) to stop this from happening again but overall the problem is not capitalism, it's corrupt politicians and corporatism.
Okay. Terms like "pure capitalism" and "free market discipline" are used to support the distortions you refer to. That is why they make me uncomfortable.
Based on my reading on the sub-prime mortgage mess, Fannie & Freddie were less central than the wild behavior of the deregulated mortgage broker industry, the derivative factory in Wall Street, and the support from the clueless ratings industry. They were going great guns on non-guaranteed loans without them. A minor point, perhaps.
Dr. William Bernstein predicted trouble when Glass-Steagall was gutted, posted in his blog The Efficient Frontier. I agree with you on re-instatement.
You got a degree for that trash?
that and other work. You have a better theory?
I could throw dog shit on a piece of paper and it would be a better 'theory' than that. At least mine would hold up to scientific rigor.
so you dont
No, ben. No. I don't. You got me. For lack of competition, your theory wins the day. Bravo sir. In solidarity.
The cause of the crisis was the fundamental instability that is seen in a capitalist economy. Although Hyman Minsky wrote in the 1980s about crisis that occurred after World War 2, his assessment of the problems of a capitalist economy fit the events of 1907. Minsky states that a cause of instability for the past 150 years is due to the financing needs of industrial economies. (Minsky, 199) Minsky also cites the crisis of 1907 as being a clear example of instability within the economy, which in turn lead to the formation of the Federal Reserve. An investment boom was occurring prior to the 1907 crash in the United States. (Minsky, 44) Minsky notes that an investment boom increases the fragility of the economy. (Minsky, 217) This occurs because institutions are more likely to take up riskier ways of financing when investment seems profitable, decreasing margins of safety. Minsky also notes that interest rates will rise as an investment boom matures. (Minsky, 214) The leadup to the events of 1907 clearly follows Minsky's theories. The industrial organizations had a tremendous demand for financing. Since it was very profitable they turned to debt and equity financing despite the fact that doing so was more risky. Interest rates also rose prior to the 1907 crash. The rise in interest rates caused the price of investment to increase. This very important because institutions are making financial commitments in a time where investment is profitable, and when this situation changes, they may be unable to meet their financial obligations. A capitalist economy through normal functioning will create conditions that are conducive to a crisis because of an investment boom. (Minsky, 218) Bruner and Smith in their analysis of the crisis do cite Hyman Minsky and generally agree with his view that the structure of the economy creates risky situations. (Bruner, 181-183) However, they disagree with this view when trying to explain 1907, arguing that "real shocks" and a lack of transparency come closer to explaining how 1907 occurred rather than viewing it as an inevitable consequence of economic expansion. (Bruner, 198) However that argument is severely flawed. There has never been great transparency regarding the economy in the history of the United States. Secondly is the issue of a so called real shock. The San Francisco earthquake was a "real" event. However there is no difference between a real event that has economic consequences and an artificial event, such as a raise in interest rates. Both have an ability to make a financial investment go bad. The important factor is that a financial investment is made regarding past performance of the economy. It is impossible to predict how the economy will behave in the future, it is therefor normal to make an investment that will go bad. Even if a natural disaster is partially to blame, resulting shifts in the economy are artificial. The boom cycle prior to 1907 created conditions where the economy was prone to a crisis as speculative finance increased and margins of safety decreased.
theres another theory for you
Ben. Be Serious. I have a job. Do you think I have the time to read your drivel?
yeah, you have time to troll the forum. do you just not understand anything I mentioned?
I've studied enough asset bubbles to refute your 1907 analysis without reading beyond the first sentence.
So do it, and stop slinging insults. Boy, I get tired of that from all the sides. Make a useful contribution to the discussion, or stfu, right? At least, that's what my dad always said, hehe.
Oh, without the stfu part - I added that for internet humor. Ahem. disappear
Do it then.
you have enough time to insult people on this forum, than you have enough time for a proper refutation following the formalities of discussion.
Provide examples and evidence to support you claims, and avoid ad-hominem and other fallacies.
You won't be taken seriously until you provide this.
Do you think I am inclined to participate in your "formalities" of discussion? I have made no claims. I have no evidence. I am pure ad-hominem.
you can't respond because mainstream economics cannot explain asset bubbles, among many other things
Asset bubbles have been happening for millennia. From inflated pepper prices in 400BC to tulips in the 1630s to dotcoms of 2000 to Treasury bonds today. Your fucking 1907 example is a blip on the timeline. Go read a fucking book.
we also have REITS in the 70's CD's in the 60's. commodity is over invested, inflated in value and collapses
So what causes asset bubbles then.
You've said that they exist, but you have offered no explanation.
Why are you being so rude, do you feel offended and upset?
I could tell you that asset bubbles are a specific phenomena unique to each individual asset subject to myriad regulations, supply and demand fundamentals, storage and mobility constraints, substitution properties, and available credit, but you wouldn't understand any of that.
Let's just label market operators as "evil speculators" because we don't fully understand what they do and thus they must be doing something shady and corrupt to make money.
Or better yet, let's blame "capitalism" as the means to all pain, hunger, sin, and debauchery.
Explain it then.
You spend so much time on insults and sarcasm, and such little time on meaningful discussion.
regardless, the existence and causes of asset bubbles do not provide a reason FOR the sustainability of capitalism.
If, for instance, currency was based upon labor, asset bubbles wouldn't exist because the value of commodities would be bound to the time spent on production of those goods.
What would be the point? You want me to explain the finer points of interactions within a market or across global markets? On the message board of a forum dedicated to Occupying Wall Street? What would it prove? You would still be set in your silly ways and I would have wasted time throwing my pearls to you swine. I don't mind wasting time, as I sit at my desk watching global asset prices, managing a portfolio of futures, currencies and options, because I think all of you idiots are hilarious.
I've spent years in school and years in personal study researching economics and market history, trading, and risk management. If you want to understand, please revert to my prior sentiment, read a fucking book.
not necessarily.
I am listening, I might change my mind.
I am yet to be convinced that capitalism is sustainable, from it's very inception it has been based on inequality.
But you're attitude has been ...unapproachable... so far. I get angry too, so I know what it's like.
I am reading a book. It's called capital volume 1 by Marx, and part of the manifesto.
And after reading that, it seems that capitalism, because of it's very nature, is actually the cause of the unemployment.
You see, I'm not interested in bias. I'm not going to listen to you merely for the fact you have studied economics, I'm only going to listen to you if you can provide a solution to the crisis.
It doesn't sound like you have one, so you are of no use.
You said yourself that you are all ad-hominem.
Even when I am being aggressive, I tend to use examples of phenomena in reference to the real world and how it works, not just emotional tirades and biases.
The reason why there is the unemployment, is because labor is superfluous. Business that aim to maximize profits do so by reducing labor costs. Outsourcing and technological automation mean that there is an over supply of labor power.
Scarcity is more profitable than abundance, so in the interests of business, scarcity will sometimes be created artificially. This is bad, it's not good for human beings.
Now, can you use your education to explain why everything is going to be OK if we keep capitalism?
Or maybe you want to call me a stupid idiot some more. Do so, get it off your chest. Express you true feelings. Don't hide, because I wouldn't wish that upon myself. It's important not to bottle up emotions and always concede to politeness.
But I am rational, I like science, I like fact and reason and explanation.
You haven't given me one. You've named some general economic concepts, but you haven't contextualized them in terms of this discussion, which ultimately boils down to the viability of capitalism.
You cite Marx and expect me to not think my time is wasted on you? Please.
All you have done is proclaim the existence of asset bubbles, and list various principles of economics.
No relevant contextual link between the two has been described, no evidence contrary to the instability or sustainability of capitalism has been given.
mainstream economic theory was unable to predict the biggest crises since the great depression. The last 50 years have been marked by continuous boom bust cycles in the economy. Instead of looking at the system as a whole they look at each individual episode and blame the government for disrupting the market. I've studied mainstream theory, it doesnt have the answers. When I read Minsky I was literally saying Oh My God on every page.
heh cool.
I'm very new to economics. It's a very interesting world. Hopefully we can end exploitation.
You are confusing a price phenomenon with an entire economic system. Do you think the scarcity of bread in 1980s USSR lead to price shocks? Asset bubbles can occur in any economic system when the demands of buyers far outweigh the supplies of sellers.
not if the price is bound to a currency based on labor time.
How are you going to "price" this currency in the international currency markets?
I don't know, probably the same way. I don't have all the answers. I am still learning.
All I know is that traders extract thousands of dollars from the money supply each and everyday, causing inflation and the cost of living to go up.
People who spend all day in the coal mines, laboring away to extract your primary wealth - they get paid nothing.
Demand really has nothing to do with it, it's not a fair system. You know it, I know it. It's exploitation, no matter how many different ways you can explain it.
This is the shit that's going to reverse itself, sooner or later.
The majority always overcomes the minority. It's the way of history.
Wrong again. Dude, the premises on which you live are false. Traders do not cause inflation, nor do they have any direct effect on costs of living. Did you get your info from an editorial on Yahoo finance?
Look to gov't intervention in trade agreements, tariffs, currency controls, debt levels, interest rates, competing currencies, etc. etc. to the cause of volatility and inflation in the system. Again, it is not a simple system by any means.
Also, sure, great for labor working in coal mines. You call them being exploited, and yet, when they are freed from their labor by machines and robots able to perform their job for a third of the cost, in a 10th of the time, and all the while saving lives by removing the man from the cave, you blast the people managing the company, trying to keep it alive by cutting costs and increasing efficiency.
Bottom line, whether they had the resources or not, they chose to do what they are doing. No one is holding a gun to their head forcing them down the mine every day. It is voluntary.
Demand has everything to do with it. If there is no demand for coal labor, should a company be forced to hire coal laborers simply to sit around? Or should the coal laborers take some responsibility, learn a new trade, ADAPT, grow, and find gainful employment elsewhere.
NO ONE HAS A RIGHT TO A JOB.
This is my understanding of inflation.
There's 100 dollars in circulation. Everyone starts with 10 dollars, but one person is good at business, starts a monopoly on the food supply and ends up with 90 dollars.
Because the rest of the people cant afford to buy the food, more money is pumped into the system through the banks.
So the overall value of money goes down.
I don't know if that's too juvenile for you but that's how I understand it so far.
Sorry, but the concept of inflation within a fiat currency is a bit more complicated than that. And fundamentally, you are incorrect about how the money is introduced into and withdrawn from the system. It essentially boils down to the government issuing debt in the form of Treasury bonds, bills, and notes. If you want the details, pick up this book: http://amzn.to/qWvO8P
The more there is in circulation, the less it is worth.
I don't have any money, or an income, to spend on this book.
I don't know why a couple of sentences of explanation is above your means.
You expend a lot of energy telling me how wrong I am, but are reluctant to say why.
If you consider explaining to things to me to be a 'waste of time', that's fine. Spend your time however you see fit.
In my opinion, if you have an understanding of economics that is particularly insightful and helpful, it would perhaps be a little more important for you to share it with others.
My own observations, studies and research give explanations for why there are problems with this system.
I'm aware that the government issues bonds to the federal reserve, and you might be a person who wishes to end the fed.
I'm guessing, because this whole time we have been discussion, I'm not sure have put forward a solution to the problem.
That's all that I'm really interested in. A solution.
Fact One: The only way to value a currency is when you compare it to other currencies or wealth assets (gold, silver, copper, wheat, corn, crude, etc.). Saying, "the less it is worth" implies an objective standard of value (ie: worth).
For instance, if a US dollar buys 1 ounce of silver, and a British pound buys 2 ounces of silver, you can reverse that and say 1 ounce of silver is worth $1 or .50 GBP. This suggests one GBP is worth two USD.
Now. Fact Two. The US Treasury issues debt. This debt has nothing, necessarily, to do with the Fed. When the UST sells a 30 year bond for $1B, this $1B magically appears in their account. It is not as if they really have a bond worth $1B, and they are selling it for fair value. They are simply looking for a loan. This money is then created out of thin air, thereby increasing the total amount of dollar bills in circulation by $1B physical notes (dollar bills).
Fact Three. This inflationary increase in the supply of money means the value has now gone down against other currencies and hard assets. Because of this new $1B in circulation, let's say one GBP can now buy 4 USD. And accordingly, one ounce of silver can still buy .50 GBP, but that same ounce of silver can now buy two USD.
This effectively makes the GBP/USD trade at a rate of 1 GBP per 4 USD.
This is inflation.
What causes to UST to issue debt.
Is it just whenever they feel like it?
Oh, ya know sometimes mortgage backed securities collapse in value and threaten the entire banking system. No business will take on that debt, so the government does
LOL! =)
Whenever the US govt needs money to run itself. GOP typically wants small gov't so debt issuance and volumes are usually lower during GOP admins. Dem presidents are usually big-govt, big-social programs that require large amounts of cash to run, hence our debt crisis under Obama.
The UST changes the issue dates and times. It issues short term debt weekly, 2, 3, 5, 7, 10, 20, and 30 year debt all issued throughout the year. Long-term usually issued quarterly, the 2-20 years are usually issued monthly.
thanks for the info.
I think the biggest cause of debt is the wars and national defense - which probably isn't necessary. Social programs are very small in comparison.
Therein lies the problem with the school of economics. You are using past stats to predict the future. Long Term Capital Management had these state of the art models that were supposedly perfect AND THEY LOST 4.6 BILLION DOLLARS. in the 1990's How many times do your models need to be wrong?
I'm not sure what 'school' you mean, but my 'school' does not use past returns, statistics, correlations, whatever, to predict the future. Anyone who believes they can predict asset prices is not a good asset manager. Whether you believe this or not (and I'm guessing not because you don't understand the concept of a spread or arbitrage position across an interest rate curve), every single position LTCM was forced to liquidated TURNED OUT TO BE RIGHT. Had they had more cash on hand and the ability to withstand the volatility of their positions, they would have made money.
Why stop there? What about Amaranth? Motherrock? Sempra? Barings?
So you have access to future information that is 100% correct? I doubt it. Arbitrage positions have the risk for heavy short term losses, so its irrelevant that LTCM was eventually right. That is one of the big risks of that strategy
After 1998 calmed down, the positions in LTCM's book returned to normal relationships and could have been exited profitably. Read "When Genius Failed" if you want more. I am an arbitrage trader. I think I understand the risks inherent.
or you can see that easy credit and increasingly risky speculation are a factor in every bubble
Have you ever purchased a share of stock?
yes, and I know that is speculation. However I'm not investing enough where a drop in assets bankrupts me
Regardless. The principle remains the same.
No it doesnt I'm not arguing against all capitalist activity, Im arguing against excessive speculative finance with little safety margins. Not to mention the collateral effect of my bankruptcy is nothing compared to something like Bank of America.
It's gov't interaction in markets that creates the moral hazard of which you speak.
here we go. I wasnt aware the gov't was in charge of investment plans for private companies. They can change rules or interest rates, but it doesnt mean that a company needs to invest in a reckless matter.
See moral hazard.
And by definition, the gov't doesn't change, charge, or fix interest rates. The gov't issues debt, and the willing and voluntary buyers of that debt, based on how many of them there are, set the market interest rate at that specific point in time.
yes but they essentially set it by lending or borrowing
No, wrong. Market forces set the interest rate based on credit quality, GDP, taxable power, debt outstanding, perceived risk, cost of financing, foreign rates, etc. etc. etc.
Federal Funds Rate
Federal Reserve is not a legal branch of the gov't. But yes, to the detriment of the USD, they have intervened and have supported the buying of US debt.