"The answer is not free money. For every dollar added to the system every other dollar is worth less accordingly. If I understand correctly you are saying that money needs to be added in order to match production; that is with more production there are more things to back up the paper money, but things aren't produced from nowhere. The only thing we get from nowhere is more people (and I don't mean the external kind)."
But I'm inquiring in general more than answering.
Posts: 23297 | Registered: Jan 2005
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Ken, I like your a-b-c-d, especially the point about stock market inflation. Taking that a little further, we inflated the value of intangible assets (e. g., stock) anticipating that they would continue to increase in value forever. That is different from Munga's point, also correct (though I get lost in the corridors of her mind sometimes), that the value of a dollar is tied to the underlying goods and services that make up the overall economy. Goods/services restrain the growth of the inflation index she cites, but since stock values are tied to nothing (in reality), they leap and fall at the discretion of those who buy and sell them. We really should have a NYSE inflation index, separate from the Dow and S/P. The reason we don't is the same reason that Michigan doesn't have decent inter-city commuter systems or toll-roads, the financial industry won't allow it.
You can never oversimplify a complex problem you don't understand enough, so I'll give it a try, too. A new house can be valued on the cost of construction (and market influences). I learned a long time ago that an existing house is valued only by what someone is willing to pay for it. Stock only has "real" value when a company IPO's; thereafter it's value floats. The credit market is different in that it is inversely tied to the value of the party liable to repay it, i.e., you. Your value goes up when you pay your debts (and your interest burden falls) and goes down when you don't (and the cost of credit rises). They almost literally own a piece of you when you owe them money.
Our economy was stretched to the breaking point by how people have valued those three important non-goods/services over the past 29 years. Those things should have been constrained by the government, since they are tied to nothing, but the government was told to look the other way and we were told to do what Bush told us to do right after 9/11, keep shopping.
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Dave, what you've just written is the negative proof that if you drain the currency from circulation, the physical assets become worthless as well.
Posts: 5515 | Registered: Jan 2008
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I'm not sure how the money is drained from circulation in that picture. Please explain how what I wrote supports that.
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the housing crash didn't cause the drain of money from circulation. as I was saying back when I was the raving witch of ornery before the crash, the money had basically stopped circulating (because it wasn't there, it was being hoarded/exported/saved by the wealthy) more than two years ago when investment grade paper stopped selling.
the money has been drained over many years, simply by people in ownership producing (picture a utility) and getting paid (your bills, going out for products priced very high by speculation which cost them nothing) and never coming back to you (did they ever re-imburse you?). Bush's admin injected the annual liquidity injections into the war effort = to pay contractors in the Middle east. That meant production had no instead of little currency to match.
then, we have essentially an economy of commodities that are being exchanged and when currency was suddenly dried up, the value of the commodities (houses, etc) flopped.
According to many economists, the price level of any economy is equal to the money in it. I only tweek that, the price level of any economy is equal to the money CIRCULATING in it. Because without the ability to exchange, all commodities tank.
quote:then, we have essentially an economy of commodities that are being exchanged and when currency was suddenly dried up, the value of the commodities (houses, etc) flopped.
OK, this I understand. The constant exchange of commodities for no increased utility or value (e.g., buying a new cell phone every year) takes money away from producing new value elsewhere. Buying and selling the same house over and over again (or remortgaging it) adds no value.
IMO, that is why people need to save some of what they earn. Perhaps not 10% as it was in 1980, but we should keep 5% of our powder dry and buy what we lack instead of wasting it on pure consumables (entertainment, replacement gear). We have to learn to say to ourselves that we would rather have a <new thing> than a <better thing than the one we already have>.
The rub is that our economy has become completely dependent on compulsive undisciplined spending. We may be going through a cold turkey phase now that I hope cures us of the addiction. It will take 5-10 years if it works, a lot longer if it fails. Meanwhile, a lot of houses will sit idle and many fewer cars will be sold.
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Dave, I agree, only I would save in debt products. Imagine what would happen, if all the wealthy people today decided that just for this year, they wouldn't "save" and what a stimulus injection that would be.
The thing is, Americans are taught to belt-tighten and dream big (I've got no problem with this) and then, to work hard on a big dream (again, no problem) but then the American government deliberately creates a recessive economy. That means that someone's good business is going to go out, not because people didn't want the products, but because there wasn't currency available for it. Because we are always deliberately 3-6% shy. We say, "make your own fishing pole and learn the skill" and then, we bar the access to the fishing hole. Year by year, those nest eggs have been consumed. People have always tried hard, but they get suctioned away in the recession our government creates even in the best of times. This is why the family farms and lots of other family things are gone now.
Also, as wealthy people, Americans are never taught to understand that they are still part of a system that depends on them. I heard a very funny story about George Romney with his granddaughter. Apparently, he was on some trip with her (this was after he'd made his fortune and retired) and was insisting that they ate meals that they had brought with them. The moral of this story is that George Romney - who I absolutely admire- didn't understand that he was teaching and practicing rejection of equalibrium. He was saying to his granddaughter, "I'm not yet rich enough, because I want to make a net profit on my day, today" and what he was actually doing was still insisting on making money even when he didn't need it. And others, like those restaurants and hotels that they stayed in, were refused the ability to produce their wares (food) and live their American dream. If Romney were an even better American (and he was about the best of all kinds) he'd have said, "I'm worth 20 million dollars right now, and that is more than enough for me and you kids and you've all got a good start, and since I make roughly 10k per day, which the George Romney family doesn't need, I would like you all to help me decide the best locations, every day, to inject this money so that others can have their dreams."
Munga, isn't money saved in a bank available for the bank to lend to someone else? Money is withdrawn from circulation only when it is not used. Peoples' savings enhances the availability of money, but if we hide it under our mattresses it loses value via inflation and creates lost opportunities. It's a double whammy.
I think you're thinking of one pot of money and grumping that that pot is smaller or being used in ways other than you would have it do.
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Dave, most of the wealthy do not leave money in a bank. Only poor and middleclass people do that, mostly. The wealthy only budget for a quarter and have that available. My big problem with the utility owners, as a matter of fact, is that they take the money from the people in payment for electricity etc and then the money leaves the community forever. It never returns. It does not sit in a bank, it is set for "re-investment" meaning that it is set to buy debt paper at the senior secured lender level (by banker private placement or by purchasing government paper) which is why they say the rich get richer and the poor get poorer. When in that position, they either accrue interest payments on the re-investment, or they accrue "a portion of proceeds of property in cure" or in other words, they get what they should of the sale of the collateral if the project failed. Which is pretty darn rarely. So, the rich cannot fail to get richer as long as there is any money in circulation, which is exactly what they do as your arm's length debt-participant. And no, the money doesn't "sit in a bank." Only what little is left of any M2 injection still in possession of the middleclass can sit in a bank, an ever smaller amount.
As put by a UAW worker, who was recently laid off, the UAW set the standard for benefits and fair wages for many employers in this country. Without the tireless effort of Walter Reuther (google him) peolpe in the auto industry would still be paid sweat shop labor prices.
I will concede that for quite a few years the american auto industries were shooting themselves in the foot, but their most recent problems stemmed from the banks failing. The auto companies couldn't borrow money, their customers couldn't get lo this yearans. There went any money they could make. Also the foreign auto companies had losses this year.
To actually think that the bank bailout worked is either blindness or plain stupidity. Banks giving out bonuses for running the company into the ground. They have not used that money to free up assets, or give out new loans. They have instead hoarded it, going against the bush administrations theory that the "wealth would trickle down"
I am perhaps a little biased on this issue since I live in Detroit, and my mother is a currently out of work realtor. My father has been cut back to 3 days a week. I am the only person leaving the house for or 5 days a week for work, and I work part time at a retail shop because I can't get a better paying job. Things have been very grim here, and for many more years than almost any other part of the country. Michigan and Detroit have become dirty words.
Saying that the US companies are not innovative just shos that OSC has never been to auto show. People come from all over the world to see the opening in Detroit. The new cars from Ford and Chrysler and GM are very innovative. Not to mention that no foreign company has made a truck that can compete with the americans. Some people may say that it is an unnecessary, and those people do no need to drive a truck. For all the millions that do for jobs that require a truck bed, like construction, agriculture, any field science like geology or biology and whatnot, it tends to be important.
And let us not forget the class distinction. Most of the politicians don't like to bring it up, but they have shown a preference for an industry with mostly white collar jobs, and used the mostly blue collar industry as their personal whipping boy, mostly to cover that they had not done the same with the now failed bank bailout.
If OSC wonders why so many people voted democrat in the most recent elections, he has no further to search that the last 8 years track record. Or even go back to regan when the deregulation of wallstreet began. Just saying that something has worked does not make it so.
Posts: 4 | Registered: Jun 2005
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