The Game - Part I: Queen of Hearts - Eric Janszen

[c1ue]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

How will Americans react to a long-term decline in their standard of living? If history gives us any clues, the answer is: "not well." One of the most reliable causes of social violence has been to give people a taste of freedom and wealth, and then take it away. Those who never taste it are much less likely to protest.

I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

In fact I was talking with a long time acquaintance from Georgia (Eastern Europe). I first met him when he was working as a waiter in a Russian restaurant; now he is a taxi driver.

After the collapse of the Soviet Union, apparently the natural gas pipelines to Georgia were cut (or ignored!). He told me that the entire country was going out and cutting firewood for cooking and heating; we're talking city dwellers here, not the rural communities. Apartments getting holes knocked in a wall for a smokestack. No lights when the sun set. etc etc.

If they didn't go nutter, not sure what it would take. Then again, they do have Saakashvili now...but that was after 'recovery'.

[Sharky]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Violence doesn't have to mean revolution.

The Soviet Union may not have had traditional revolutionary-style violence after their collapse, but they did have a massive change in government (after all, the USSR is now gone), not to mention looting on a national scale, massive growth of the black market and organized crime, etc, etc.

Also, I'm not sure the former USSR really fits the model of what I was talking about in terms of people who have had a taste of being well-off. The Soviets are and were an intensely repressed people, with very limited property and wealth compared to the West.

Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

Argentina had massive riots, during which many people were killed. Today, they have an insanely high crime rate. Mobs roam the streets and take what they want from the undefended. Again, it's not traditional revolutionary-style or government-directed violence, but it is violence.

[peterchristopher]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

[peterchristopher]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Any takers? This seems like pretty simple question....

[Down Under]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

Print money [QE]

[peterchristopher]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

OK... but how is depreciating the currency by "printing money" different from expanding the monetary base (#1 below)? And furthermore, how does depreciating the currency refute the deflationists' "detailed and perfectly sound arguments [that] bank credit is contracting [and] the money supply is not growing," as EJ himself points out?

The deflationists agree that you can expand the monetary base by printing money, but you cannot inflate the overall money supply to a significant degree without multiplying it via bank lending. I just don't see this argument being explicitly refuted.

Anyone?

Rules of The Game: Re-inflation by stealth currency devaluation

In a debt deflation crisis, also known as a “balance sheet recession,” economic policy makers have four main tools to use to keep an economy out of a liquidity trap or get out of one.

1. Expand the monetary base
2. Reduce long-term interest rates
3. Run fiscal deficits
4. Depreciate the currency

[Chris Coles]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

OK... but how is depreciating the currency by "printing money" different from expanding the monetary base (#1 below)? And furthermore, how does depreciating the currency refute the deflationists' "detailed and perfectly sound arguments [that] bank credit is contracting [and] the money supply is not growing," as EJ himself points out?

The deflationists agree that you can expand the monetary base by printing money, but you cannot inflate the overall money supply to a significant degree without multiplying it via bank lending. I just don't see this argument being explicitly refuted.

Anyone?

[/indent]

The problem is the financial system set into motion another method of printing money that had not been recognised as such by the regulatory authorities; and has not been acknowledged since from fear of the potential for further disruption.

You need to do some research into the underlying story of AIG. This seems to be a good starting point: http://www.rollingstone.com/politics...e_big_takeover

Normally, the banking system either took in deposits from retail or corporate customers, or took in injections of funding from, in the case of the US, the Federal Reserve or the US Treasury who would do so by creating, "Printing" new money from thin air.

But take a look at recent history of the collapse and you will discover that people keep using the magic word "leverage". In a normal Main Street bank the bank would take the deposits and create new money by issuing credit up to a limit of historically eight or ten times the deposit. That was OK, understandable under the old rules. But what went wrong was the investment banks started to "leverage" their deposits by a factor of orders of magnitude more than the norm. They created new money in the form of corporate instruments of various forms; CDO's, Collateralized Debt Obligations being the best known. Then add to that, the deposits they were taking in were not from their customers as cash, but the self same toxic CDO's. What has happened is that the system started to create new money at many times the rate of creation more than the traditional source, the FED or Treasury and then circulated it, but not in the form of $US Dollar Bills, but the likes of these toxic CDO's. So suddenly you have a financial system overloaded with what seemed to be money, totals on a computer screen, that were, are, in fact; nothing of the sort. Their initial value being created by the credit agencies stating the assets were AAA, when they were anything but AAA.

What is happening today, unseen, is that all those toxic assets are being quietly washed out of the balance sheets of the banking system by new money being issued by the FED and Treasuries of every nation on the planet. So the new funding is not being lent to anyone, it is replacing toxic assets. Taking this a little further, because the system is in such an unstable situation, and the quantity of toxicity is much greater than that which has been publicly admitted; the whole process may take some years before we return to normality.

THAT is why the banks are being given money but not lending it. They cannot lend it. Hope that helps a little.

[raja]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I'm not so sure about that.

If the people in Russia and the Soviet Union didn't turn violent given the precipitous standard of living drop after the collapse of the Soviet Union - given that the USSR was created in a civil war - I'm not clear that the fat lazy stupid Americans will pull themselves away from 'Dancing with the Stars' in order to foment revolution.

Argentina also saw a tremendous fall in standards of living - at least if Bart's poverty rates timeline is any indicator - and didn't see hardly any blood.

In fact I was talking with a long time acquaintance from Georgia (Eastern Europe). I first met him when he was working as a waiter in a Russian restaurant; now he is a taxi driver.

After the collapse of the Soviet Union, apparently the natural gas pipelines to Georgia were cut (or ignored!). He told me that the entire country was going out and cutting firewood for cooking and heating; we're talking city dwellers here, not the rural communities. Apartments getting holes knocked in a wall for a smokestack. No lights when the sun set. etc etc.

If they didn't go nutter, not sure what it would take. Then again, they do have Saakashvili now...but that was after 'recovery'.

Some possible differences:

Russians are accustomed to suffering and making do; Americans aren't

Americans have guns.

The internet now provides an alternative to mainstream info, and creates excellent organizing pathways.

That being said, IMO there won't be a violent national revolution . . . but there will be numerous acts of violence.

[peterchristopher]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Thanks Chris, that helps me understand things a bit more clearly, but my original question still stands.

If right now we are simply replacing all the leveraged debt and no one is lending it, we cannot possibly be adding to the monetary supply. So while this possibly refutes the deflationist argument that we are not going to have deflation because we are printing money to maintain leverage, we cannot possible have inflation result from this either.

So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?

What is happening today, unseen, is that all those toxic assets are being quietly washed out of the balance sheets of the banking system by new money being issued by the FED and Treasuries of every nation on the planet. So the new funding is not being lent to anyone, it is replacing toxic assets. Taking this a little further, because the system is in such an unstable situation, and the quantity of toxicity is much greater than that which has been publicly admitted; the whole process may take some years before we return to normality.

THAT is why the banks are being given money but not lending it. They cannot lend it. Hope that helps a little.

[ThePythonicCow]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Some possible differences:

Russians are accustomed to suffering and making do; Americans aren't

Americans have guns.

The internet now provides an alternative to mainstream info, and creates excellent organizing pathways.

That being said, IMO there won't be a violent national revolution . . . but there will be numerous acts of violence.

The presence or absence of guns is not decisive. I would feel quite safe in rural Texas towns where many men carry guns, regardless of what happens in Washington, DC. I would feel unsafe in decaying urban areas if our American economy or national government decay further. What matters is the quality of the local communities.

[jk]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I think I am missing something here. How does a government go about devaluing its currency in a floating exchange rate system? And specifically, how do you go about devaluing it against oil, the price of which is determined by the market?

i don't know if you've noticed the price of crude oil lately, but - in real life - it appears that the financial system has figured out the answer to your question. this reminds me of an old science joke: "i know it works in practice, but does it work in theory?"

[ThePythonicCow]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

So I have to ask again: what is the mechanism by which we are devaluing our currency against oil?

Money is ultimately a reflection of power. Oil trade is international. As the oil exporting nations respond to the declining dominance of the United States and the rising power of other nations such as China, they will more willingly accept such currency as the Yuan and less willingly accept the Dollar in trade for their oil. The Dollar price of oil will rise. The declining availability of cheap oil will further aggrevate this rise in the Dollar price of oil.

At the same time, domestic American businesses and home "ownership" dependent on easy credit will decline, starved of credit. Domestic American labor markets will shrink, with rising unemployment and weak wages.

Do not look at the world's economy as a single market, in which prices are inversely proportional to the product of the quantity and velocity of money. Rather sense the relative decline of American dominance and the more equal distribution of power with other nations.

It is quite possible in such cases that more dollars are needed (for international trade) even as fewer are available (for domestic credit.)

[goadam1]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

Money is ultimately a reflection of power. Oil trade is international. As the oil exporting nations respond to the declining dominance of the United States and the rising power of other nations such as China, they will more willingly accept such currency as the Yuan and less willingly accept the Dollar in trade for their oil. The Dollar price of oil will rise. The declining availability of cheap oil will further aggrevate this rise in the Dollar price of oil.

At the same time, domestic American businesses and home "ownership" dependent on easy credit will decline, starved of credit. Domestic American labor markets will shrink, with rising unemployment and weak wages.

Do not look at the world's economy as a single market, in which prices are inversely proportional to the product of the quantity and velocity of money. Rather sense the relative decline of American dominance and the more equal distribution of power with other nations.

It is quite possible in such cases that more dollars are needed (for international trade) even as fewer are available (for domestic credit.)

I think the previous 20 or so years of globalization required a huge deficit in the US not only because of balance of trade but because the world needed more dollars to do business. The upside was America's unlimited credit card. The downside is the debt trap. But I don't think we are factoring in all the global mechanisms when we talk about the US going Argentina ala Ka-poom.
It may be experienced as a slow grinding away at wealth as the world moves away from dollars.

[ThePythonicCow]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

I think the previous 20 or so years of globalization required a huge deficit in the US not only because of balance of trade but because the world needed more dollars to do business. The upside was America's unlimited credit card. The downside is the debt trap. But I don't think we are factoring in all the global mechanisms when we talk about the US going Argentina ala Ka-poom.
It may be experienced as a slow grinding away at wealth as the world moves away from dollars.

Excellent points.

[Verdred]

Re: The Game - Part I: Queen of Hearts - Eric Janszen

The presence or absence of guns is not decisive. I would feel quite safe in rural Texas towns where many men carry guns, regardless of what happens in Washington, DC. I would feel unsafe in decaying urban areas if our American economy or national government decay further. What matters is the quality of the local communities.

Underlying racial tensions might also play a part. Lived next to an indian reservation in a rural area and the whites, natives, and mexicans (all substantial portions of the population) are living in three different worlds with plenty of mild-to-medium tensions between them. Take away sense of security aaaand go!