In a Nutshell

[phirang]

Re: In a Nutshell

Huh? What exactly is the point of preserving production if there is no consumption? Without the latter there is no need for the former. [Or are you implying that consumption in the producing region...Asia...can be the foundation for rebuilding the world economy?]

The whole purpose of any economic system is to create production that meets demand from a consumer willing to pay for that good or service. This is the important point that is completely missing from the debate over the General Motors and Chrysler bailouts. Not only is the government foolishly trying to preserve the production of vehicles for which there is no consumer, but those who slam GM and Chrysler as "dinosaurs" overlook the fact that there isn't enough of a market to support Toyota, Honda, Nissan, BMW and other car manufacturers production capacity either.

Wait, so BBY isn't a buy??!

[Jay]

Re: In a Nutshell

It would appear we are going to get a similar "cleaning of the slate"; hopefully without the same level of mortality.

Is this the real reason, beside the obvious, that Kissinger is against nukes? You can't clean the slate very easily when you might also have your clock permanently cleaned by the counter party. Creative Destruction in a world of warring nations without nukes is much easier, especially when you are the superpower. Basically, he isn't against wars or destruction, as long as his side has the advantage. Is that such a crazy thought?

[don]

Re: In a Nutshell

Below is a quote from a recent piece by Henry Liu that paraphrased the quote from Marx that started this thread. To me it's understanding the dynamic inherent in the system that launches these conditions. Here's the quote (emphasis added):

"With runaway "supply-side" voodoo economics keeping wage income in check during the boom phase in corporate profits, the resultant overcapacity from demand lag resulting from low wages shuts off investment opportunities for productive expansion and forces the excess money supply into speculative manipulation of debt, giving birth to restructured finance and sophisticated, circular hedging of risk."

http://www.atimes.com/atimes/Global_.../KA06Dj04.html

[GRG55]

Re: In a Nutshell

Below is a quote from a recent piece by Henry Liu that paraphrased the quote from Marx that started this thread. To me it's understanding the dynamic inherent in the system that launches these conditions. Here's the quote (emphasis added):

"With runaway "supply-side" voodoo economics keeping wage income in check during the boom phase in corporate profits, the resultant overcapacity from demand lag resulting from low wages shuts off investment opportunities for productive expansion and forces the excess money supply into speculative manipulation of debt, giving birth to restructured finance and sophisticated, circular hedging of risk."

http://www.atimes.com/atimes/Global_.../KA06Dj04.html

I don't completely agree with this.

• Indiscriminate expansion of capacity [Liu's "overcapacity"] is not sustainable even during the "boom phase" if there is no market into which to push the output. The exception is when there is a chronic subsidy of an industry, and the global auto industry and agriculture in certain regions, both of which have been subsidized by governments for decades, are examples of this.
• The shut-off of investment opportunity is concentrated in those sectors and products where demand/consumption declines in the recession, not across entire economies. Once again, auto's are the poster child example today.
• The foundation of the debt pyramid was levered real estate...not just in the USA, but virtually everywhere around the globe. That foundation did not suffer from income compromised "demand lag" did it?

[Jay]

Re: In a Nutshell

• The foundation of the debt pyramid was levered real estate...not just in the USA, but virtually everywhere around the globe. That foundation did not suffer from income compromised "demand lag" did it?

Isn't real estate suffering from exactly that now?

[Jay]

Re: In a Nutshell

Below is a quote from a recent piece by Henry Liu that paraphrased the quote from Marx that started this thread. To me it's understanding the dynamic inherent in the system that launches these conditions. Here's the quote (emphasis added):

"With runaway "supply-side" voodoo economics keeping wage income in check during the boom phase in corporate profits, the resultant overcapacity from demand lag resulting from low wages shuts off investment opportunities for productive expansion and forces the excess money supply into speculative manipulation of debt, giving birth to restructured finance and sophisticated, circular hedging of risk."

http://www.atimes.com/atimes/Global_.../KA06Dj04.html

What I wonder is that if this excess capacity must be run off, can it occur without a large war? That is, while beneficial creative destruction occurs in small pockets of the economy in normal times, now that we have approached what seems like the limits of the debt economy will the massive debt deflation needed lead inevitably to war? Is that the only way to pare excess capacity of this magnitude, or will mass global bankruptcies do the trick also? This is confounded by governments trying to avoid deflation and bailing out every insolvent company to big to fail, which just makes the problem bigger, no?

[phirang]

Re: In a Nutshell

What I wonder is that if this excess capacity must be run off, can it occur without a large war? That is, while beneficial creative destruction occurs in small pockets of the economy in normal times, now that we have approached what seems like the limits of the debt economy will the massive debt deflation needed lead inevitably to war? Is that the only way to pare excess capacity of this magnitude, or will mass global bankruptcies do the trick also? This is confounded by governments trying to avoid deflation and bailing out every insolvent company to big to fail, which just makes the problem bigger, no?

The Chinese have been kvetching about this for quite some time. I think Obama is going to get a bond market dislocation in the face if the insane spending keeps up.

[don]

Re: In a Nutshell

What I wonder is that if this excess capacity must be run off, can it occur without a large war? That is, while beneficial creative destruction occurs in small pockets of the economy in normal times, now that we have approached what seems like the limits of the debt economy will the massive debt deflation needed lead inevitably to war? Is that the only way to pare excess capacity of this magnitude, or will mass global bankruptcies do the trick also? This is confounded by governments trying to avoid deflation and bailing out every insolvent company to big to fail, which just makes the problem bigger, no?

I was citing the end of WW2 as the ultimate Creative Destruction event favorable for the US. Most CD is achieved through downturns like we're experiencing at present. Depends on your definition of violence as well. I heard the other day the number of Indian farmers committing suicide last year exceeded 10,000. I have not fact checked that number.

http://www.indiatogether.org/2008/dec/psa-16k.htm

[GRG55]

Re: In a Nutshell

Isn't real estate suffering from exactly that now?

Nope. It's suffering from the withdrawal of the cheap credit terms that fueled the bubble in the first place. It was not until the lending terms stopped being relaxed that the bubble burst. Nobody was expecting incomes to rise enough to maintain the bubble. Everyone was expecting constantly rising house prices to allow perpetual refinancings, with the usual "they all lived happily ever after" ending, like so many other familiar fairy tales.

[Jay]

Re: In a Nutshell

Nope. It's suffering from the withdrawal of the cheap credit terms that fueled the bubble in the first place. It was not until the lending terms stopped being relaxed that the bubble burst. Nobody was expecting incomes to rise enough to maintain the bubble. Everyone was expecting constantly rising house prices to allow perpetual refinancings, with the usual "they all lived happily ever after" ending, like so many other familiar fairy tales.

Gosh, I guess I had it backwards, I thought lending terms changed after the bubble burst. And while tight credit standards obviously now contribute to the downward spiral, I thought the tightening was a consequence of the popped bubble not the cause. I thought the bubble was initially pricked by the inability of incomes to match ridiculously high asset prices no matter what exotic mortgage product was created and no matter how low the FFR went. I didn't realize that credit was tight in mid 2005, the apex of the bubble, I thought it was cheap then.

[Jay]

Re: In a Nutshell

The Chinese have been kvetching about this for quite some time. I think Obama is going to get a bond market dislocation in the face if the insane spending keeps up.

Phirang, what specifically are they kvetching about? That we won't let our companies fail and that the bailouts are making the problem worse, creating inflationary forces that might destroy the dollar, which would put more pressure on their exporters and vis-a-vis the chinese gov't itself through potential domestic dislocation if their industry falters? Hence forcing them to buy Treasuries to keep their exporters rolling? Or something else?

[GRG55]

Re: In a Nutshell

Gosh, I guess I had it backwards, I thought lending terms changed after the bubble burst. And while tight credit standards obviously now contribute to the downward spiral, I thought the tightening was a consequence of the popped bubble not the cause. I thought the bubble was initially pricked by the inability of incomes to match ridiculously high asset prices no matter what exotic mortgage product was created and no matter how low the FFR went. I didn't realize that credit was tight in mid 2005, the apex of the bubble, I thought it was cheap then.

It was cheap then. But to keep the game going it had to keep getting cheaper still. Just as it became cheaper and cheaper prior to the "apex".

Do you really think income growth between 2000 and 2005 was an important factor in creating the bubble?

[Jay]

Re: In a Nutshell

I was citing the end of WW2 as the ultimate Creative Destruction event favorable for the US. Most CD is achieved through downturns like we're experiencing at present. Depends on your definition of violence as well. I heard the other day the number of Indian farmers committing suicide last year exceeded 10,000. I have not fact checked that number.

http://www.indiatogether.org/2008/dec/psa-16k.htm

What is it that has to be destroyed exactly to make things run smoothly again? And is there another solution beside the creative destruction wrought by war or bankruptcy?

Lui's piece says, "With runaway "supply-side" voodoo economics keeping wage income in check during the boom phase in corporate profits, the resultant overcapacity from demand lag resulting from low wages shuts off investment opportunities for productive expansion and forces the excess money supply into speculative manipulation of debt, giving birth to restructured finance and sophisticated, circular hedging of risk."

What exactly does he mean by overcapacity? Too many factories in China? Would just letting a bunch of factories go belly up satisfy the condition? I doubt it as it wouldn't create counter party trust in the banking system. Would flipping the problem on its head work by just increasing wages? It probably would work, but you wouldn't get rid of the moral hazard prevalent throughout the system today through that route, you would only continue the system as is and let it grind on. Letting banks fail through a debt holiday is how it could be done, difficult when the politicians are controlled by big finance, but better than endless war and bankruptcies to keep the charade going for another turn. So, it appears that what needs to be destroyed is the financial system as it exists today, holy shit! Otherwise it is war and bankruptcies for all and we might get that either way because a flattened banking system likely means catastrophe, wow what a conundrum! Am I thinking straight here, because those are grim prospects. And just looking back on my thinking, it is clear to me why the gap between rich and poor has become so wide, and it will get wider as the music keeps playing. It is also clear why we are at 8 trillion and counting, because no one wants to find out what the world looks like when these answers have to be contemplated in a nuclear world. Fukc.

[due_indigence]

Prozac IndigNation

What Engels failed to understand was advanced capitalism's deft wielding of complexity, the cloaking of risk, the originate-and-distribute 'hot potato' model, securitization as camouflage, the democratization of credit, the false hope of counter-partied and unanticipated concentration risk, etc. Heck, who beyond a select few people understood it even nine months ago? Even now, the rationale of post-bubble fervor is hard to reconstruct. My guess is Engels would resist the anomalous language of 'bubbles' and argue that the so-called anomaly is simply the business-as-usual, crisis-to-crisis nature of the capitalist system. He might also marvel at the financial capitalist's ability to 'feed at the socialist trough' whenever it suits him. I know I do. I suppose greed subscribes to the ideology of expedience.

Anyway as the elite stole from the top via stock options, ridiculous salaries, acquiescent boardrooms etc., they simultaneously (and ingeniously) created credit models that augmented stagnant wages and sustained the workers' consumption patterns against the Marxist cul de sac of overproduction. In short, cheap credit caused the worker to believe he was still keeping ahead and enjoying the fruits of his production. For a time it masked his real wage declines.

The Freddie/Fannie paper factory also benefited from an implied governmental (read: socialist) backstop which, as it turned out, was ultimately invoked; this aggressive credit creation relied upon the gumption of relatively less sophistocated and emergent capitalist markets (many prior Marxist-Leninist states ironically) that, for a variety of currency and developmental reasons, were happy to remain production-bound and vendor-oriented.

Like any Ponzi scheme, this dog-and-pony trick can only succeeed once. No one will be fooled again. Meanwhile the American worker is being unceremoniously dumped back into a classic Marxist overproduction trap as credit sources evaporate, home equity disappears, manufacturing jobs vanish and inflation looms. The new cars and houses are stacking up. Absent credit, no one can afford them. Which is to say, no one can afford them. When the deleveraging process completes itself, we will be back to 'merely' wages --and horrendous wage disparities-- once again i.e. a more classic Marxist playing field.

The question to me is, when will the American pot finally boil over into meaningful social unrest? Or are Americans so naturally docile (and/or medicated) that outrage is not an available response? Is Prozac Huxley's soma? If so, they sure as hell better find a way to keep the pills rolling.

[derelict54]

Re: In a Nutshell

Two scenarios I see from here:

1. The bankstas that just retired here on all that subprime grissle and now full of well cooked TARP are all over in China devising a way to go milk that cow for a while. With the right amount of propoganda and a spirnkle of Greenspeak, the Chinese people can be the next pawns in the debt/consumption game. The chinese government will sell their treasuries to finance infrastructure projects for their masses. They are so far behind on infrastructure they could provide jobs for a decade. In the meantime the bankstas offer the citizens cheap credit to get into a shanty, New Century CEOs are over there teaching the Republic how to play the subprime game and away they go. China gets their food from Brazil, Russia provides some wheat, timber and oil, Iran some more gas and America has passed the torch. China isn't much different than America in the 50's, big surplus, lots of opportunity to manufacture for your own people to bring the standard of living up, etc. Rogers said the smart ones moved from London to New York after WWII, now they have moved to Asia. Will the dollar devaluation and the hyperinflation over here result us in electing someone radical enough to take on China? Possibly that's how Hitler got to power in a hyperinflated Germany. And if Tennesee or Alabama got a governor running for the White house we just might. That's the KaPoom theory i'm talking about. Nukes galore.

2) Or we renogotiate Bretton Woods, go back to a PM based currency, tell China our debt has been forgiven and they can go shove it becuase we allowed them to peg their currency, practice intellectual right piracy, and meanwhile brought their society up from the dark ages. We go through a 50% overnight inflation, some people lose out, but all said and done our debts suddenly don't look so bad. Throw in some protectionism, renegoiate trade agreements, jail some corrupt bastards, close some tax havens and reindustrialize America and rebuild our wealth. Does China get pissed off in that scenario? Maybe, nukes, maybe, but I'd rather go through that than the first scenario.

Either way the spread between the rich and poor in one country cannot be as extreme as in America or you risk economic collapse, and if hard enough, social unrest/revolution. Unfortunately I think the true best society is a shared capitalist society, somehwere between socialism and liberatarian, we had a good balance for a while here in America, but unfortunately, as of late the rich have just got a tad too greedy. They went out and bought the politicians to give them some free market trade agreements so they could squeeze profits, get rid of labor costs, also begged and recieved some extreme tax breaks for the last decade, couple that with overshore tax havens, GAP 3 accounting and you got yourself a pigslop of pork. Our government included. It needs to be exercised on a treadmill daily until it is a fast moving agile cheetah, especially in this market.

I think some rich people "in the know" are being given until the G20 summit in spring to move their money to a safe haven before Bretton Woods III hits, and Barrack and team will follow suit with scenario number 2. The rest of the somewhat rich not in the "know" get beat down like a 22 year old blonde in her first orgy. Anyhow, with Bretton Woods III negotiated, All the sudden Uncle Matts got a pay raise of 50% and can start paying off that 500k option arm he signed up for 4 years ago. Whoopee, great country, I tis of thee, sweet land o