Tags: debt*

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  1. The last 40 years has seen a steady rise of deficit-hawking, in which the world's postwar social safety nets are shredded because the state "can't afford" them -- think of all the times you've heard of national debt being money that "the taxpayers" will have to pay back, and misleading comparisons between sovereign governments (who print their own money) to households and businesses (who don't), as though sovereign state finance was just a scaled-up version of balancing the family check-book.

    But a pushback has been quietly building against this trend, based in economic theories that treat money "not as a finite abstraction, but a limitless public utility that can be used to meet human needs." These ideas started to move outside of wonkish economic circles with David Graeber's Debt: The First 5000 Years, which became required reading during the Occupy Wall Street years. Graeber sets out the theoretical underpinnings of Chartalism, which holds that "money does not emerge from barter-based economic activities, but rather from the sovereign's desire to organize economic activity. The state issues currency and then imposes taxes. Because citizens are forced to use the state's currency to pay their taxes, they can trust that the currency will carry value in day-to-day economic activities."

    Chartalism became "Neo Chartalism," AKA "Modern Monetary Theory," whose core premise is that "The state can spend unlimited amounts of money. It is only constrained by biophysical resources, and if the state spends beyond the availability of resources, the result is inflation, which can be mitigated by taxation."

    MMT is the key to understanding how governments can pay for pensions, public education and universal healthcare, creating universal prosperity instead of brutal, wildly unequal, unstable states. It's gained so much currency that even archconservative economists are pushing its policies, even when they dare not speak its name.

    These ideas have been around since the early 1900s, growing up as a dissenting counterpoint to Keynesianism, pointing out that Keynes and the neoclassical economists assume that markets will be dominated by "active owners" -- companies run by the people who owned them. But the reality of corporatism is that the majority of companies are owned "passively," by investors whose interests are generally short-term and narrow, and who are willing to destroy the companies they invest in, provided they get a payday in the process.
    http://www.truth-out.org/opinion/item...d-democratic-socialism#15153656154571
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  2. After World War I the U.S. Government deviated from what had been traditional European policy – forgiving military support costs among the victors. U.S. officials demanded payment for the arms shipped to its Allies in the years before America entered the Great War in 1917. The Allies turned to Germany for reparations to pay these debts. Headed by John Maynard Keynes, British diplomats sought to clean their hands of responsibility for the consequences by promising that all the money they received from Germany would simply be forwarded to the U.S. Treasury.

    The sums were so unpayably high that Germany was driven into austerity and collapse. The nation suffered hyperinflation as the Reichsbank printed marks to throw onto the foreign exchange market. The currency declined, import prices soared, raising domestic prices as well. The debt deflation was much like that of Third World debtors a generation ago, and today’s southern European PIIGS (Portugal, Ireland, Italy, Greece and Spain).

    In a pretense that the reparations and Inter-Ally debt tangle could be made solvent, a triangular flow of payments was facilitated by a convoluted U.S. easy-money policy. American investors sought high returns by buying German local bonds; German municipalities turned over the dollars they received to the Reichsbank for domestic currency; and the Reichsbank used this foreign exchange to pay reparations to Britain and other Allies, enabling these countries to pay the United States what it demanded.

    But solutions based on attempts to keep debts of such magnitude in place by lending debtors the money to pay can only be temporary. The U.S. Federal Reserve sustained this triangular flow by holding down U.S. interest rates. This made it attractive for American investors to buy German municipal bonds and other high-yielding debts. It also deterred Wall Street from drawing funds away from Britain, which would have driven its economy deeper into austerity after the General Strike of 1926. But domestically, low U.S. interest rates and easy credit spurred a real estate bubble, followed by a stock market bubble that burst in 1929. The triangular flow of payments broke down in 1931, leaving a legacy of debt deflation burdening the U.S. and European economies. The Great Depression lasted until outbreak of World War II in 1939.

    Planning for the postwar period took shape as the war neared its end. U.S. diplomats had learned an important lesson. This time there would be no arms debts or reparations. The global financial system would be stabilized – on the basis of gold, and on creditor-oriented rules. By the end of the 1940s the Untied States held some 75 percent of the world’s monetary gold stock. That established the U.S. dollar as the world’s reserve currency, freely convertible into gold at the 1933 parity of $35 an ounce.
    It also implied that once again, as in the 1920s, European balance-of-payments deficits would have to be financed mainly by the United States. Recycling of official government credit was to be filtered via the IMF and World Bank, in which U.S. diplomats alone had veto power to reject policies they found not to be in their national interest. International financial “stability” thus became a global control mechanism – to maintain creditor-oriented rules centered in the United States.

    To obtain gold or dollars as backing for their own domestic monetary systems, other countries had to follow the trade and investment rules laid down by the United States. These rules called for relinquishing control over capital movements or restrictions on foreign takeovers of natural resources and the public domain as well as local industry and banking systems.

    By 1950 the dollar-based global economic system had become increasingly untenable. Gold continued flowing to the United States, strengthening the dollar – until the Korean War reversed matters. From 1951 through 1971 the United States ran a deepening balance-of-payments deficit, which stemmed entirely from overseas military spending. (Private-sector trade and investment was steadily in balance.)
    http://michael-hudson.com/2017/11/germanys-choice
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  3. 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.
    https://eand.co/econocide-a6ab1c808874
    Tags: , , , , by M. Fioretti (2017-11-23)
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  4. countries such as Bulgaria and Romania, which have recent histories of currency instability and financial crises, also are quite heavy users of cash.

    But the real point isn’t that Germans love cash. It’s that—for the same historical reasons—they loathe debt. (Armchair anthropologists have also long noted that German word for debt—Schulden—comes from the word for guilt, Schuld.)

    Levels of consumer debt in Germany are remarkably low. German aversion to mortgage debt is part of the reason why the country has some of the lowest homeownership rates in the developed world. Just 33% of Germans said they had a credit card back in 2011. And most of those hardly ever get used. In 2013, only 18% of payments in Germany were made via cards, compared to 50% in France and 59% in the UK.

    The national preference for cash, then, seems to be the flip side of aversion to debt, which, in turn, can be interpreted as a sign of deep-seated doubt about the future. (German businesspeople are also notorious for their pessimism about the future.) And fear of the future, of course, is rooted in the past.

    In other words, the German tendency to settle up in cash undeniably reflects the fact that for much of the last century, Germany has been either on the brink of, in the midst of, or struggling to recover from, disaster.
    http://qz.com/262595/why-germans-pay-cash-for-almost-everything
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  5. finance should, in an ideal world, be creating debt in order to finance growth of activity in the real economy. Instead, what has happened since the 1970s de-regulation of global finance, has been that finance has, over time, been increasingly financing…finance. That is, it has been financing itself. Indeed, in most of the western world, the growth of financial intermediation as a percentage of gross value added, has over the last two decades outpaced the growth of the real economy. That is until the bubble burst in 2007. Finding ways to redirect finance towards productive activity in the real economy is thus crucial.

    Third, in Italy, the effect of financialization has been made even worse by the presence of entrenched interests and “clientelismo” governing Italy’s economic system. Projects receiving loans are often not judged objectively, with criteria that are based on viable potential returns and the productive nature of an investment. Rather, they are often judged by clientilistic and nepotistic relations – as was made evident with the bank Monte Paschi di Siena (although this is really just the tip of the iceberg). Indeed, lets remember that the term “clientelismo” comes from the Latin clientes which means not modern day clients, but parasites feeding on presents (regalias) from the rich and powerful who, as described by the latin writer Giovenale, every day would visit their patronus for the morning salutatio. Italy’s sick banks are thus both a cause and a symptom of its never ending clientalist culture.

    Fourth, when growth is low—as it has been in Italy for the last two decades where both GDP and productivity have hardly grown at all—the above dynamic by which finance finances itself (or lends based on dodgy criteria in the real economy) becomes even worse. If finance has fewer good opportunities for investment in good companies and good projects in the real economy, then finding those opportunities in the speculative world of finance becomes even more appetizing. Indeed, research conducted in a large EC project on finance and innovation I coordinated some years ago showed that in many countries the problem is often not one of the supply of finance for firms, but the lack of good firms demanding finance. For example, most small medium enterprises that are innovative and productive, DO find the finance that they require. There are simply too few of those types of companies. Why? High growth innovative firms tend to prosper more in countries with dynamic innovation eco-systems, with strong links between science and industry, with high public investment in education and vocational training, high private spending on training programs for workers, strong R&D, and patient strategic long-term finance. When these are lacking growth will not follow – no matter how much emphasis a government puts on reducing red tape, or making labor markets less rigid (e.g. the Jobs Act). And when the real economy does not grow, finance becomes a betting casino.
    http://marianamazzucato.com/2016/08/1...ve-key-points-for-italys-banking-woes
    Tags: , , , , by M. Fioretti (2016-08-11)
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  6. Replacements for oil need to be profitable and be able to pay taxes, at currently available price levels–low $40s per barrel, or less.

    We need to be careful in aiming for high-tech solutions, because of the complexity they add to the system. High-tech solutions look wonderful, but they are very difficult to evaluate. How much do they really add in costs, when everything is included? How much do they add in debt? How much do they add (or subtract) in tax revenue? What are their indirect effects, such as the need for more education for workers?

    We need to be alert to the possibility that solar PV and most wind energy may be energy sinks, rather than true energy sources. The two hallmarks of providing true net energy to society are (1) being able to provide energy cheaply, and (2) being able to provide tax revenue to support the government. When actually integrated into the electric grid, electricity generated by wind or by solar generally requires subsidies–the opposite of providing tax revenue. Total costs tend to be high because of many unforeseen issues, including improper siting, long-distance transport costs, and costs associated with mitigating intermittency.

    Unless EROI studies are specially tailored (such as this one and this one), they are likely to overstate the benefit of intermittent renewables to the system. This problem is related to the issues discussed in my recent post, Overly Simple Energy-Economy Models Give Misleading Answers. My experience is that researchers tend to overlook the special studies that point out problems. Instead, they rely on the results of meta-analyses of estimates using very narrow boundaries, thus perpetuating the myth that solar PV and wind can somehow save our current economy.
    https://ourfiniteworld.com/2016/08/08...updated-version-of-the-peak-oil-story
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  7. Non è così esagerato dire che la teoria l’idea di Friedman è alla base della teoria macroeconomica moderna. Purtroppo, però, c’è un piccolo problema: è quasi certamente sbagliata. Non del tutto, ma in un certo senso è sbagliata. È probabile che esistano molti consumatori che si comportano esattamente come immaginato da Friedman. Ma il problema è che ce ne sono molti altri che agiscono in modo decisamente diverso. Lentamente, gli economisti stanno accumulando prove che dimostrano come quest’ultimo gruppo sia rilevante e consistente. Le prime verifiche diedero credito alla teoria del consumo permanente. Nel 1990, però, gli economisti John Campbell e Greg Mankiw stimarono che solo circa la metà dei consumatori seguiva il principio di Friedman. Il resto, secondo loro, aveva un consumo più “alla giornata”: se ricevono un premio al lavoro, un grosso rimborso fiscale, o un assegno da un programma di stimolo del governo, queste persone vanno a mangiare fuori in un bel ristorante, comprano nuovi mobili per la casa, o semplicemente spendono di più.

    Nel 2006, poi, un colpo alla versione matematica della teoria di Friedman arrivò dagli economisti della Georgetown Univesity Matthew Canzoneri, Robert Cumby e Behzad Diba, che pubblicarono uno studio in cui verificarono l’equazione del consumo di Eulero confrontandola con dati finanziari veri, una cosa che per qualche strana ragione apparentemente nessun economista aveva mai fatto prima. Secondo l’equazione presa in esame, quando i tassi di interesse sono alti, le persone risparmiano di più e consumano meno: è il loro modo per livellare il consumo, come aveva previsto Friedman. Ma Canzoneri e i suoi colleghi scoprirono che quello che succede in realtà è il contrario: per qualche strana ragione, le persone tendono a consumare di più quando i tassi sono alti.
    http://www.ilpost.it/2016/07/31/teoria-reddito-permanente-milton-friedman
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  8. Debt is a key factor in creating an economy that operates using energy.

    A generally overlooked problem of our current system is the fact that we do not receive the benefit of energy products until well after they are used. This is especially the case for energy used to make capital investments, such as buildings, roads, machines, and vehicles. Even education and health care represent energy investments that have benefits long after the investment is made.

    The reason debt (and close substitutes) are needed is because it is necessary to bring forward hoped-for future benefits of energy products to the current period if workers are to be paid. In addition, the use of debt makes it possible to pay for consumer products such as automobiles and houses over a period of years. It also allows factories and other capital goods to be financed over the period they provide their benefits. (See my post Debt: The Key Factor Connecting Energy and the Economy.)

    When debt is used to move forward hoped-for future benefits to the present, oil prices can be higher, as can be the prices of other commodities. In fact, the price of assets in general can be higher. With the higher price of oil, it is possible for businesses to use the hoped-for future benefits of oil to pay current workers. This system works, as long as the price set by this system doesn’t exceed the actual benefit to the economy of the added energy.

    The amount of benefits that oil products provide to the economy is determined by their physical characteristics–for example, how far oil can make a truck move. These benefits can increase a bit over time, with rising efficiency, but in general, physics sets an upper bound to this increase. Thus, the value of oil and other energy products cannot rise without limit.

    Research involving Energy Returned on Energy Investment (EROEI) ratios for fossil fuels is a frequently used approach for evaluating prospective energy substitutes, such as wind turbines and solar panels. Unfortunately, this ratio only tells part of the story. The real problem is declining return on human labor for the system as a whole–that is, falling inflation adjusted wages of non-elite workers. This could also be described as falling EROEI–falling return on human labor. Declining human labor EROEI represents the same problem that fish swimming upstream have, when pursuit of food starts requiring so much energy that further upstream trips are no longer worthwhile.

    If our problem is a shortage of fossil fuels, fossil fuel EROEI analysis is ideal for determining how to best leverage our small remaining fossil fuel supply. For each type of fossil fuel evaluated, the fossil fuel EROEI calculation determines the amount of energy output from a given quantity of fossil fuel inputs. If a decision is made to focus primarily on the energy products with the highest EROEI ratios, then our existing fossil fuel supply can be used as sparingly as possible.

    If our problem isn’t really a shortage of fossil fuels, EROEI is much less helpful. In fact, the EROEI calculation strips out the timing over which the energy return is made, even though this may vary greatly. The delay (and thus needed amount of debt) is likely to be greatest for those energy products where large front-end capital expenditures are r
    https://ourfiniteworld.com/2016/05/12...s-story-what-other-researchers-missed
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  9. The system acts as if whenever one pump dispenses the energy products we want, another pump disperses other products we don’t want. Let’s look at three of the big unwanted “co-products.”

    1. Rising debt is an issue because fossil fuels give us things that would never have been possible, in the absence of fossil fuels. For example, thanks to fossil fuels, farmers can have such things as metal plows instead of wooden ones and barbed wire to separate their property from the property of others. Fossil fuels provide many more advanced capabilities as well, including tractors, fertilizer, pesticides, GPS systems to guide tractors, trucks to take food to market, modern roads, and refrigeration.

    The benefits of fossil fuels are immense, but can only be experienced once fossil fuels are in use. Because of this, we have adapted our debt system to be a much greater part of the economy than it ever needed to be, prior to the use of fossil fuels. As the cost of fossil fuel extraction rises, ever more debt is required to place these fossil fuels in use. The Bank for International Settlements tells us that worldwide, between 2006 and 2014, the amount of oil and gas company bonds outstanding increased by an average of 15% per year, while syndicated bank loans to oil and gas companies increased by an average of 13% per year. Taken together, about $3 trillion of these types of loans to the oil and gas companies were outstanding at the end of 2014.

    As the cost of fossil fuels rises, the cost of everything made using fossil fuels tends to rise as well.

    3. A more complex economy is a less obvious co-product of the increasing use of fossil fuels. In a very simple economy, there is little need for big government and big business. If there are businesses, they can be run by a small number of individuals, with little investment in capital goods. A king, together with a handful of appointees, can operate the government if it does not provide much in the way of services such as paved roads, armies, and schools. International trade is not a huge necessity because workers can provide nearly all necessary goods and services with local materials.

    The use of increasing amounts of fossil fuels changes the situation materially. Fossil fuels are what allow us to have metals in quantity–without fossil fuels, we need to cut down forests, use the trees to make charcoal, and use the charcoal to make small quantities of metals.

    Once fossil fuels are available in quantity, they allow the economy to make modern capital goods, such as machines, oil drilling equipment, hydraulic dump trucks, farming equipment, and airplanes. Businesses need to be much larger to produce and own such equipment. International trade becomes much more important, because a much broader array of materials is needed to make and operate these devices. Education becomes ever more important, as devices become increasingly complex. Governments become larger, to deal with the additional services they now need to provide.

    f an increasing share of the output of the economy is funneled into management pay, expenditures for capital goods, and other expenditures associated with an increasingly complex economy (including higher taxes, and more dividend and interest payments), less of the output of the economy is available for “ordinary” laborers–including those without advanced training or supervisory responsibilities.

    As a result, pay for these workers is likely to fall relative to the rising cost of living. Some would-be workers may drop out of the labor force, because the benefits of working are too low compared to other costs, such as childcare and transportation costs. Ultimately, the low wages of these workers can be expected to start causing problems for the economic system as a whole, because these workers can no longer afford the output of the system. These workers reduce their purchases of houses and cars, both of which are produced using fossil fuels and other commodities.

    Ultimately, the prices of commodities fall below their cost of production. This happens because there are so many of these ordinary laborers, and the lack of good wages for these workers tends to slow the “demand” side of the economic growth loop. This is the problem that we are now experiencing.


    The Two Pumps Are Really Energy and Entropy

    Unlike the markings on the pump (gasoline and ethanol), the two pumps of our system are energy consumption and entropy. When we think we are getting energy consumption, we really get various forms of entropy as well.

    The first pump, rising energy consumption, seems to be what makes the world economy grow.

    The second pump in Figure 3 is Entropy Production. Entropy is a measure of the disorder associated with the extraction and consumption of fossil fuels and other energy products. Entropy can be thought of as a loss of information. Once energy products are burned, we have a portion of GDP in the place of the energy products that have been consumed. This is why there is a high correlation between energy consumption and GDP. As energy products are burned, we also have an increasing pile of debt, increasing pollution (that our sinks become less and less able to handle), and increasing wealth disparity.
    https://ourfiniteworld.com/2016/03/17...m-is-reaching-limits-in-a-strange-way
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  10. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that's become a thing of the past.

    One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008.
    Gushing IOUs

    Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9 percent higher than a 25-year low hit on Jan. 20.

    Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years' worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

    It's unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5 percent of the total assets of all the world's publicly traded banks. That doesn't seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1 percent of listed banks' assets at the end of 2007.
    http://www.bloomberg.com/gadfly/artic...ve-built-a-3-6-trillion-debt-mountain
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