mfioretti: debt* + economy*

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  1. In 2007, the greatest financial crisis of of the modern age hit like a tsunami. What was the response from the UK? Well, it was to bail out the banks with public money. Of course, that raised levels of debt. Now, that was no big deal: governments can always print money, and during times of extreme crisis, whether famine or financial, they should. Furthermore, national debt is not the sum of your debt and my debt, and it has no real bearing on our live whatsoever: just as you can happily carry a credit card balance forever, and many people do, so prosperous nations can bear debt, and the strength of a nation is precisely to be able to do so.

    But the average person was tricked into believing the very opposite. They came to think, through sophistry masquerading as economics and punditry disguising itself as analysis and sheer propaganda that there was no way out of this mess except to rip the heart out of public life, to pay off the debt incurred by bailing out the banks by cutting public goods and services. Thus public goods — the NHS, BBC, transport, education, and so on — were eviscerated to pay off private debts, and even that is an understatement: the moneys spent went of course to lavish compensation packages and grand accoutrements, not really to “paying off debt”, which is still high, and still doesn’t matter a whit to the average person.

    Perma austerity killed the UK economy, by producing perma stagnation. And then came Brexit. Brexit was another misguided, maleducated response: since the UK needed to “save money” to “pay off its debt” the average Brit was again conned into believing that the next great cost, after public goods, was EU membership. “You’ll save millions a week!” the propaganda went. But who was “saving” and what precisely was being “saved?” Nothing at all, as it turns out, because now the economy is well and truly dead, stagnant into forever.

    So: this logic, that one must “save money” to “pay off the national debt” or else — who knows? Just like a mafia intimidation tactics, the threat is never really fully stated, is it? — has been proven to be wrong. It has killed the British economy dead.

    And it’s also precisely how the American economy died, too. Where do you think Britain learned this illogic from? From the American fringe. There, starting in the 1980s, American extremists championed a strange new set of concepts: “fiscal responsibility,” “personal responsibility,” “balanced budgets,” and so on, all of which really meant the above: “pay off the debt” by “saving money” — perma austerity, which also means that we can never invest in anything at a social level, because, of course, that would add debt for a few years. Why? Because cities and towns and countries don’t pay for things in cash or gold, they issue bonds, and that is how finance has always worked since the beginning of time. Do you think any society in human history has paid for a subway system or healthcare system in cash or gold? How? By sending supertankers of notes across the world? Perhaps you see the absurdity of perma austerity now.

    So. “Paying off the debt” to “save money,” “personal responsibility” and “fiscal responsibility” — these aren’t economic ideas: they are to economics what ancient aliens are to biology. They have no empirical basis, no factual reality, and no evidential proof. Indeed, the opposite is true.
    Tags: , , , , by M. Fioretti (2017-11-23)
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  2. as David Hume famously proved, you can’t argue from “is” to “should”. We may be able to use science to help us get what we want but we cannot use science to tell us what to want nor to tell others what they should want.

    This is where the field of economics has stepped in. Human well-being, according to mainstream neoclassical economics, is fundamentally about the expression of individual preferences. The more money we have the more preferences we can express and, therefore, the freer and happier we are. Boom, Nietzsche’s existential problem solved.

    Jeremy Bentham, An Introduction to the Principles of Morals and Legislation said:

    Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do.

    The utilitarianism that underpins neoclassical economics simply equates money with choice and choice with the freedom to pursue pleasure and avoid pain. The freedom to buy.

    The very notion of human induced climate change and the actions required to arrest it clash so fundamentally with the modern mantra of “gain wealth, forgetting all but self” that many simply refuse to believe it.

    The economic constraints on freedom are extremely powerful. Risking economic security for the sake of the future climate borders on inconceivable in a society dominated by individualistic social hierarchies of wealth and the cult of celebrity.

    Financial institutions lend ever more and more money to investors who pay more and more for real estate based on the assumption that others will pay more still. The result is that the average citizen has to spend their whole life in debt peonage to banks just to have a house to live in. They are no freer to challenge the financial system than feudal peasants were to challenge their lords.

    The fact that our economic system is a social construct means that we have made a choice, even if an unconscious one, and that we can remake that choice.
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  3. An essential and enduring insight of Keynes is that what works for a single family in hard times will not work for the global economy. One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income. The more people cut back spending to increase their savings, the more the people they used to pay are forced to cut back their own spending, and so on in a downward spiral known as the Paradox of Thrift. Income shrinks so fast that savings fall instead of rise. The result: mass unemployment.

    If Keynes were alive today, he might be warning of a repeat of 1937, when policy mistakes turned a promising recovery into history’s worst double dip. This time, Europe is the danger zone; then it was the U.S. What’s called the Great Depression was really two steep downturns in the U.S. The first ended in 1933. It was followed by four years of output growth averaging more than 9 percent a year, one of the strongest recoveries ever. What aborted the comeback is still debated. Some economists blame President Franklin Roosevelt for signing tax hikes and cuts in New Deal jobs programs. Others blame the Federal Reserve. Dartmouth College economist Douglas Irwin argues that the Roosevelt administration triggered the relapse by buying up gold, removing it from the U.S. monetary base. The move to prevent inflation succeeded all too well, causing deflation. Whatever the cause, Britain and other trading partners were dragged down, and U.S. output plunged and didn’t fully recover until America’s entry into World War II. “We are really at a kind of 1937 moment now,” says MIT’s Temin. “It’s a cautionary history for us.”
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  4. On Monday, September 29, the Wall Street Journal (WSJ) published a story called “Why Peak Oil Predictions Haven’t Come True.” The story is written as if there are only two possible outcomes:

    The Peak Oil version of what to expect from oil limits is correct, or
    Diminishing Returns can and are being put off by technological progress–the view of the WSJ.

    It seems to me, though, that a third outcome is not only possible, but is what is actually happening.

    3. Diminishing returns from oil limits are already beginning to hit, but the impacts and the expected shape of the down slope are quite different from those forecast by most Peak Oilers.

    Peak Oilers got at least part of the story right–the fact that we are in fact reaching diminishing returns with respect to oil. For this they should be commended. What they didn’t figure out is, however, is (1) how the energy-economy system really works, and (2) which pieces of the system can be expected to break first. This issue is not really the Peak Oilers fault–it is the result of starting with a very bad model of the economy and not understanding which pieces of that model needed to be fixed.

    We are dealing with a networked economy, one that is self-organized over time. I would represent it as a hollow network, built up of businesses, consumers, and governments.

    This economic system uses energy of various kinds plus resources of many kinds to make goods and services. There are many parts to the system, including laws, taxes, and international trade. The system gradually changes and expands, with new laws replacing old ones, new customers replacing old ones, and new products replacing old ones. Growth in the number of consumers tends to lead to a need for more goods and services of all kinds.

    An important part of the economy is the financial system. It connects one part of the system with another and almost magically signals when shortages are occurring, so that more of a missing product can be made, or substitutes can be developed.

    Debt is part of the system as well. With increasing debt, it is possible to make use of profits that will be earned in the future, or income that will be earned in the future, to fund current investments (such as factories) and current purchases (such as cars, homes, and advanced education). This approach works fine if an economy is growing sufficiently. The additional demand created through the use of debt tends to raise the prices of commodities like oil, metals, and water, giving an economic incentive for companies to extract these items and use them in products they make.

    The economy really can’t shrink to any significant extent, for several reasons:

    With rising population, there is a need for more goods and services. There is also a need for more jobs. A growing networked economy provides increasing numbers of both jobs and goods and services. A shrinking economy leads to lay-offs and fewer goods and services produced. It looks like recession.
    The networked economy automatically deletes obsolete products and re-optimizes to produce the goods needed now. For example, buggy whip manufacturers are pretty rare today. Thus, we can’t quickly go back to using horse and buggy, even if should we want to, if oil becomes scarce. There aren’t enough horses and buggies, and there aren’t enough services for cleaning up horse manure.
    The use of debt for financing depends on ever-rising future output. If the economy does shrink, or even stops growing as quickly as in the past, there tends to be a problem with debt defaults.
    If debt does start shrinking, prices of commodities like oil, gold, and even food tend to drop (similar to the situation we are seeing now). These lower prices discourage investment in creating these commodities. Ultimately, they lead to lower production and job layoffs. If deflation occurs, debt can become very difficult to repay.

    Under what conditions can the economy grow? Clearly adding more people to the economy adds to growth. This can be done by adding more babies who live to maturity. It can also be done by globalization–adding groups of people who had previously only made goods and services for each other in limited quantity. As these groups get connected to the wider economy, their older, simpler ways of doing things tend to be replaced by more productive activities (involving more technology and more use of energy) and greater international trade. Of course, at some point, the number of new people who can be connected to the global economy gets to be pretty small. Growth in the world economy lessens, simply because of lessened ability to add “underdeveloped” countries to the networked economy.

    Diminishing returns are what tend to “mess up” this per capita growth. With diminishing returns, fossil fuels become more expensive to extract. Water often needs to be obtained by desalination, or by much deeper wells. Soil needs more amendments, to be as fertile as in the past. Metal ores contain less and less ore, so more extraneous material needs to be extracted with the metal, and separated out. If population grows as well, there is a need for more agricultural output per acre, leading to a need for more technologically advanced techniques. Working around diminishing returns tends to make many kinds of goods and services more expensive, relative to wages.

    Rising commodity prices would not be a problem, if wages would rise at the same time as the price of goods and services. The problem, though, is that in some sense diminishing returns makes workers less efficient. This happens because of the need to work around problems (such as digging deeper wells and removing more extraneous material from ores). For many years, technological changes may offset the effects of diminishing returns, but at some point, technological gains can no longer keep up. When this happens, instead of wages rising, they tend to stagnate, or even decline.

    What Effects Should We Be Expecting from Diminishing Returns With Respect to Oil Supply?

    There are several expected effects of diminishing returns:

    Rising cost of extraction for oil and for other commodities subject to diminishing returns.
    Stagnating or falling wages of all except the most elite workers.
    Ultra low interest rates to try to make goods more affordable for workers stressed by stagnating wages and high prices.
    Rising governmental debt, in an attempt to stimulate the economy and in order to provide programs for the many workers without good-paying jobs.
    Increasing concern about debt defaults, as the amount of debt outstanding becomes increasingly absurd relative to wages of workers, and as all of the stimulus debt runs its course, in countries such as China.
    A two-way problem with the price of oil. On one side is recession, when oil prices rise to unaffordable levels. Economist James Hamilton has shown that 10 out of 11 post-World War II recession were associated with oil price spikes. He has also shown that there is good reason to expect that the Great Recession was related to the run-up in oil prices prior to 2007. I have written a related paper–Oil Supply Limits and the Continuing Financial Crisis.
    The second problem with the price of oil is the reverse–price of oil too low relative to the cost of extraction, because wages are not high enough to permit workers to afford the full cost of goods made with high-priced oil. This is really a problem with inadequate affordability (called inadequate demand by economists).
    Eventual collapse of whole system.

    Our networked economy cannot shrink; it tends to break instead. Even well-intentioned attempts to reduce oil usage are likely to backfire because they tend to reduce oil prices and have other unintended effects. Furthermore, a use of oil that one person would consider frivolous (such as a vacation in Greece) represents a needed job to another person.

    One of the areas that Peak Oilers tended to miss was the fact that an oil substitute needs to be a perfect substitute–that is, be available in huge quantity, cheaply, without major substitution costs–in order not to adversely affect the economy and in order to permit the slow decline rate suggested by Hubbert’s models. Otherwise, the problems with diminishing returns remain, leading to declining wages and rising costs of making goods and services.

    One temptation for Peak Oilers has been to jump on the academic bandwagon, looking for substitutes for oil. As long as Peak Oilers don’t make too many demands on substitutes–only EROEI comparisons–wind and solar PV look like they have promise. But once a person realizes that our true need is to keep a networked economy growing, it becomes clear that such “solutions” are woefully inadequate. We need a way of overcoming diminishing returns to keep the whole system operating. In other words, we need a way to make wages rise and the price of finished goods fall relative to wages; there is no chance that wind and solar PV are going to do this for us. We have a much more basic problem than “new renewables” can solve. If we can’t figure out a solution, our economy is likely to reach what looks like financial collapse in the near term. Of course, the real reason is diminishing returns from oil, and from other resources as well.
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  5. "People will never see the connection to oil. They will assume the issue is all financial, and can be fixed with a new financial system."

    Energy consumption is integral to “holding our own” against other species.

    All species reproduce in greater numbers than need to replace their parents. Natural selection determines which ones survive. Humans are part of this competition as well.

    In the past 100,000 years, humans have been able to “win” this competition by harnessing external energy of various types–first burned biomass to cook food and keep warm, later trained dogs to help in hunting. The amount of energy harnessed by humans has grown over the years. The types of energy harnessed include human slaves, energy from animals of various sorts, solar energy, wind energy, water energy, burned wood and fossil fuels, and electricity from various sources.

    Human population has soared, especially since the time fossil fuels began to be used, about 1800.

    Because the world is finite, the greater use of resources by humans leads to lesser availability of resources by other species. There is evidence that the Sixth Mass Extinction of species started back in the days of hunter-gatherers, as their ability to use of fire to burn biomass and ability to train dogs to assist them in the hunt for food gave them an advantage over other species.

    Also, because of the tight coupling of human population with growing energy consumption historically, even back to hunter-gatherer days, it is doubtful that decoupling of energy consumption and population growth can fully take place. Energy consumption is needed for such diverse tasks as growing food, producing fresh water, controlling microbes, and transporting goods.

    We began an economic growth cycle back when we began using fossil fuels to a significant extent, starting about 1800. We began a stagflation period, at least in the industrialized economies, when oil prices began to spike in the 1970s. Less industrialized countries have been able to continue growth their growth pattern longer. Our situation is likely to differ from that of early civilizations, because early civilizations were not dependent on fossil fuels. Pre-collapse skills tended to be useful post-collapse, because there was no real change in energy sources. Loss of fossil fuels would considerably change the dynamic of the outcome, because most jobs would become obsolete.

    Most models put together by economists assume that the conditions of the growth period, or the growth plus stagflation period, will continue forever. Such models miss turning points.

    we cannot ramp up all of the physical infrastructure needed (pipelines, steaming equipment, refining equipment) without badly cutting into the resources needed to “grow” the rest of the economy. A similar problem is likely to exist if we try to ramp up world oil and gas supply using fracking.

    he link between energy and the economy comes both from the supply side and the demand side.

    With respect to supply, it takes energy of many types to make goods and services of all types. This is discussed in Item 2 above.

    With respect to demand,

    (a) People who earn good wages (indirectly through the making of goods and services with energy products) can afford to buy products using energy.

    (b) Because consumers pay taxes and buy goods and services, growth in demand from adequate wages flows through to governments and businesses as well.

    (c) Higher wages enable higher debt, and higher debt also acts to increase demand.

    (d) Increased demand increases the price of the resources needed to make the product with higher demand, making more of such resources economic to extract.

    11. We need a growing supply of cheap energy to maintain economic growth.

    12. Oil prices that are too low for producers should be a serious concern. Such low prices occur because oil becomes unaffordable. In the language of economists, oil demand drops too low.

    A common belief is that our concern should be oil prices that are too high, and thus strangle the economy. A much bigger concern should be that oil prices will fall too low, discouraging investment. Such low oil prices also encourage civil unrest in oil exporting nations, because the governments of these nations depend on tax revenue that is available when oil prices are high to balance their budgets.

    The issue we are now seeing is the reverse–too low oil prices for oil producers, including oil exporters. These low oil prices are contributing to the unrest we see in the Middle East. Low oil prices also contribute to Russia’s belligerence, since it needs high oil revenues to maintain its budget.
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  6. It is worth stressing, once more, that little of this is dependent on public sector debt. Government debt rose sharply as a direct result of the crash, having remained very stable for the decade or so beforehand. On Cuthbert’s figures it’s now around 105% of GDP: substantial – and certainly more than its historic average – but utterly inconsequential relative to the 1,364% of GDP that are the total liabilities of the UK’s financial sector. This is much larger than the estimate NEF has used in the past. We quite deliberately took a conservative approach to the calculation, following the method used by McKinsey in this 2011 report, since the case for transformation is solid even on these conservative figures. Cuthbert, more ambitiously, includes financial derivatives, the use of which expanded wildly over the 2000s.

    These are (largely) private sector liabilities, held by (largely) private sector institutions – the twist being, of course, the semi-public ownership of two major UK banks. But 2008 revealed that the location of ownership need not matter: in the event of a major crash, it is the whole of society that can be forced to carry the costs of a privately-owned financial system. This is precisely what happened, through the bailouts and the recession.

    So one way to understand the seeming irrationality of austerity is in part, as Cuthbert suggests, not the need to shrink government debt now, on which it has in any case been so far wholly unsuccessful. Rather, it is the need, as far as possible, to clear the decks in the event of a future crash. Bailouts last time came close to bankrupting us; there is no way they could be afforded on this scale the next time round. And “next time round” may, on current evidence, be far sooner than we would wish.
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  7. “There are striking similarities between China and Japan in the 1980s and ’90s, and they’re not superficial,” he says. “They’re two very different countries but they ended up with a banking system that basically produces the same result—the outcome being a rapid deceleration of (hitherto high) growth, as well as zombie banks and corporations.”

    Chovanec is referring to what happens when, during economic slowdowns, banks or the government refuse to let unprofitable companies die, keeping them alive on a steady drip of new credit. Japan’s decade of the living dead began after its export-led boom abruptly ended, leaving the country hooked on credit before it had developed market mechanisms to keep that borrowing bonanza in check.

    China too has gone on a credit-fueled investment bender as its export-led boom has faded. The prevailing assumptions about what happens next are that China will either suffer a US-style banking crisis that forces unprofitable corporations to the wall, or implement reforms that keep it growing at a healthy clip.

    But it’s actually likely to suffer a fate more like Japan’s: a “zombie infection” in which large companies feed off credit while the economy stagnates. To understand why, though, it’s important to understand what China’s rise has in common with Japan’s—and how it’s already exhibiting the same symptoms
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  8. This continued attachment to big bonuses might lead you to ask whether bankers, and the organisations which employ them, have learned anything from the financial crisis. But a more beguiling question is why bankers remain so attached to bonuses, despite the significant evidence that they often cause more harm than good.

    There are many answers to this question on offer, but one of the most intriguing comes from an ex-trader. Writing in the New York Times, Sam Polk claims the reason bankers can’t let go of bonuses is because they are addicted to them. He explains how in his final year as a banker he “wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted”.
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  9. Indeed, the pope’s writings and public pronouncements reveal a deeply caring and passionate man who speaks from the heart. In Evangelii Gaudium, an “apostolic exhortation” released late last month, the pope bemoans inequality, poverty, and violence in the world.

    But here’s the problem: The dystopian world that Francis describes, without citing a single statistic, is at odds with reality. In appealing to our fears and pessimism, the pope fails to acknowledge the scope and rapidity of human accomplishment—whether measured through declining global inequality and violence, or growing prosperity and life expectancy.


    He did not anywhere claim that material living standards are getting worse, and considered rich countries and poor countries to have different problems.

    To pick out just one of the falsehoods from your post, You write, “Moreover, the U.S. government redistributes some 40 percent of all wealth produced in America—up from 7 percent a century ago. Much of that wealth comes from the rich and pays for everything from defense and roads to healthcare and education, which are enjoyed by Americans from all income groups.” Leave aside that Francis was talking about the world, and the United States is not the center of the universe. What you call “redistribution” turns out, following your link, to mean all federal, state and local government spending as a percentage of U.S. GDP, so not the federal government. You yourself point out that you’re counting all spending on everything, including defense, roads, health care and education that benefits everyone. That is not “redistribution.”

    Furthermore, you’re wrong about the percentage. That ratio is not 40%, although if you ignore everything that has happened since 2009, you might incorrectly extrapolate that it could get there. During the recovery, it has steadily fallen to 34%, below its level in the early ’80s or the early ’90s.

    Additionally, much of the money comes from the rich (as it should) because the rich control such a large share of the wealth and can more easily afford to pay, but a great deal also comes from the middle class. 40% of federal revenue in 2010 came from the regressive payroll tax, as opposed to 42% from the income tax, and you count as “redistribution” all transfer payments to the poor, but no tax breaks for the rich—such as deductions for homeowners, the carried-interest loophole that allows Wall Street to pay the lower capital-gains rate, or for that matter, the fact that people whose income comes from owning capital pay a much lower rate than people whose income comes from labor. Conservatives are not even consistent about whether tax breaks count as redistribution, having complained incessantly throughout 2012 that most of the poor paid only payroll tax and not federal income tax (although usually this got misunderstood as “pay no taxes,” which is false.) The result is a system that in practice is barely progressive at all.
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  10. America’s overall retirement system is in big trouble. There’s just one part of that system that’s working well: Social Security. And this suggests that we should make that program stronger, not weaker.

    Before I get there, however, let me briefly take on two bad arguments for cutting Social Security that you still hear a lot.

    One is that we should raise the retirement age — currently 66, and scheduled to rise to 67 — because people are living longer. This sounds plausible until you look at exactly who is living longer. The rise in life expectancy, it turns out, is overwhelmingly a story about affluent, well-educated Americans. Those with lower incomes and less education have, at best, seen hardly any rise in life expectancy at age 65; in fact, those with less education have seen their life expectancy decline.

    So this common argument amounts, in effect, to the notion that we can’t let janitors retire because lawyers are living longer. And lower-income Americans, in case you haven’t noticed, are the people who need Social Security most.

    The other argument is that seniors are doing just fine. Hey, their poverty rate is only 9 percent.

    There are two big problems here. First, there are well-known flaws with the official poverty measure, and these flaws almost surely lead to serious understatement of elderly poverty. In an attempt to provide a more realistic picture, the Census Bureau now regularly releases a supplemental measure that most experts consider superior — and this measure puts senior poverty at 14.8 percent, close to the rate for younger adults.

    Furthermore, the elderly poverty rate is highly likely to rise sharply in the future, as the failure of America’s private pension system takes its toll.
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