Perspectives on the global economic meltdown- (Nov 28 2010)

[shyam]

Debt Sustainability: Which Countries Are Beyond the Point of Return and Why



Kyle Bass says that Japan is toast and even Germany is not in good shape.

[ramana]

Spain gets new govt. Rajoy elected in landslide.

So another one bites the dust!

[VikramS]

shardula:

What is different is the time-frames. Some people buy and sell in ms, others after years, and some never sell in their life-time.

Singha:

A tax based on the result of the transaction is much better than a tax on the transaction itself. A tax on transactions will add a lot of friction into market operations. Not only will it decrease liquidity resulting in much wider bid and ask spreads, it will result in higher volatility. It will squeeze smaller players out of the market and the big kahunas will become even more powerful.

A transaction tax will squeeze out the ultra-short time-frame traders out of the market. A lot of traders make their living capturing a couple of ticks in the market many times a day. These traders will be shut out of the market if the transaction tax goes through.

One might argue what purpose these traders serve. What they do is create liquidity which results in tighter spreads. This means that when an longer time frame individual investor wants to buy or sell there is always a smaller-time frame trader willing to take on the other side. If these shorter time frame, small time traders are done away, the individual investors will be at the mercy of the big kahunas.

The flash-crash of 2010 was an example of what can happen when shorter term liquidity providers shut down their computers. The longer time frame players took time to react and figure out what is going on, and by that time the market had crashed 7-8% within 10 minutes.

In order to see what is likely to result, you should see the intra-day charts of low priced low volume stocks. You will often see the stock jump up 2-3% in a matter of minutes simply because a 1000 share order hit or vice-versa. This is because these stocks do not have an active market and the people taking the other side of the trade have to take the risk of being forced to hold on to the shares till they find some one else to close the trade. Because of the lack of liquidity the premium they demand is 2-3%, because the risk they take will increases.

A real life example of a less liquid market is the housing market. It is not uncommon to find two comparable homes sell within a few weeks with a price difference of up to 5%. There are a limited numbers of buyers and sellers and based on the existing market dynamics the price can fluctuate quite a bit. When the market is strong the seller can demand a premium and will find one buyer willing to pony up; vice versa on the flip side where a buyer can lower the price from a desperate seller.

If the transaction tax becomes a reality a lot more instruments will trade like small low volume stocks or the housing market. The days of penny spreads will be over. The only people who will benefit are the deep pocketed longer time frame players.

One of the best futures day trader I know makes about 5 ticks per ES contract on average, which is about 0.1% per trade. Add in a 0.025% transaction tax per execution, and you are talking a 0.05% tax per round trip, which is 50% of his gross profit! After you start adding the costs of trading (commission, computers, data-feed, newsletters and other tools needed to trade), his net will go down even more. Now he is one of the better ones in the game. Those who make 2-3 ticks per trade on average will be completely shut out

Many people confuse volume/volatility with HFTs who indulge in exchange arbitrage and other penny shaving techniques operating in the ms time-frame. There are a LOT of traditional day-traders and liquidity providers who hold their instruments for many minutes or even hours; they will be shut out of the market as the transaction costs go up. The millisecond HFTs are a more recent phenomenon; day-traders are very different from them. They have been around ever since exchanges operated and are called "locals". With electronic trading their role in the physical pit has diminished as market making also become electronic. But they have a valuable part to play in markets operate smoothly.

I will not be surprised if the TBTFs are behind the transaction tax proposals. It will squeeze out the others, and increase the cost and volatility of transactions. Then after the hue and cry the TBTFs will ride in with a proposal to exempt designated market makers from the transaction tax and we will be a back to a market of 30 years ago, where the bid-ask spreads on securities were as high as $1/8 (0.125) to 25c/share, with the TBTF raking it in, the day-traders wiped out, and the longer term investor paying the spread every time they want to buy or sell.

[vina]

VikramS,Yes indeed. Very wise words and a perfect recipe on how things will play out if this idiotic transaction tax is implemented. Even in India, now that the volumes are dropping, large no of brokers going seriously underwater, the SEBI and govt are looking at ways of rolling back /cutting down this STT .

In fact, the STT was a "lazy" tax imposed by the govt , driven by it's sheer incompetence in collecting long term and short term capital gains tax from the market players! They think of it as an easily implementable substitute. But I am not sure how it is in the US and Europe where there is both a short term and long term capital gains tax. The dividend distribution tax is another "short cut" tax in India, where a dividend ought to be taxed at the hands of the recipient, based on their individual circumstances and tax rates (pass thrus for MFs etc, full rate at HNIs, low rates for seniors,retirees etc), but rather a blunt instrument of some 15% at source is levied and a highly "unequal" and "unprogressive" flat tax is levied.. So, a 85% who gets a 1000cr check that suffered 15% tax, while a retiree who owns 100 shares will get a few rupees , that suffered the same 15% tax!

In India, the govt made a Faustian bargain due to the incompetence of it's enforcement and collection mechanism. i don't see why the US and Europe should do similar things and screw the small guys to favor the TBTFs.

[Prem]

http://liberalconspiracy.org/2011/11/21 ... xt-decade/
How likely is it Britain will stagnate for the next decade?
Sunny Hundal

They release new figures today to show that there are broadly two possible scenarios for wage growth for ordinary workers in Britain over the next decade.
1. a return to better times, with wages resuming the growth seen in the UK in the 1980s and 1990s
2. a US style nightmare in which wages return to the stagnation seen in the UK from 2002 to 2008.
RF say that even under the better scenario, median wages would only reach their pre-recession levels by the end of the decade. But under the ‘nightmare scenario’, British median wages would be no higher in 2020 than they were in 2001.In the 2000s, median income for working age US households fell by more than $6,000, a 10% real terms loss.Bernstein said: “For many US middle class families, the great recession was a problem on top of a problem. Their income was going nowhere in the 2000s expansion, even before taking a huge hit in the recession. The question for US policy makers is what must be done to address our long-term middle-class squeeze. The question for UK policy makers is what can be done to avoid it.”As I’ve said repeatedly – this will be the key issue for both parties over the next decade

(Basically, India's upward economic trajectory keep the pace ,meet and greet Critain in 2025-2027 for short period and then say bye bye by 2030 to go on the way to meet the real economic powers of that time )

[Pranav]

Chinese TV Host Says Regime Nearly Bankrupt

By Matthew Robertson On November 13, 2011 @ 11:46 pm In Business & Economy

China’s economy has a reputation for being strong and prosperous, but according to a well-known Chinese television personality the country’s Gross Domestic Product is going in reverse.

Larry Lang, chair professor of Finance at the Chinese University of Hong Kong, said in a lecture that he didn’t think was being recorded that the Chinese regime is in a serious economic crisis—on the brink of bankruptcy. In his memorable formulation: every province in China is Greece.

The restrictions Lang placed on the Oct. 22 speech in Shenyang City, in northern China’s Liaoning Province, included no audio or video recording, and no media. He can be heard saying that people should not post his speech online, or “everyone will look bad,” in the audio that is now on Youtube.

In the unusual, closed-door lecture, Lang gave a frank analysis of the Chinese economy and the censorship that is placed on intellectuals and public figures. “What I’m about to say is all true. But under this system, we are not allowed to speak the truth,” he said.

Despite Lang’s polished appearance on his high-profile TV shows, he said: “Don’t think that we are living in a peaceful time now. Actually the media cannot report anything at all. Those of us who do TV shows are so miserable and frustrated, because we cannot do any programs. As long as something is related to the government, we cannot report about it.”

He said that the regime doesn’t listen to experts, and that Party officials are insufferably arrogant. “If you don’t agree with him, he thinks you are against him,” he said.

Lang’s assessment that the regime is bankrupt was based on five conjectures.

Firstly, that the regime’s debt sits at about 36 trillion yuan (US$5.68 trillion). This calculation is arrived at by adding up Chinese local government debt (between 16 trillion and 19.5 trillion yuan, or US$2.5 trillion and US$3 trillion), and the debt owed by state-owned enterprises (another 16 trillion, he said). But with interest of two trillion per year, he thinks things will unravel quickly.

Secondly, that the regime’s officially published inflation rate of 6.2 percent is fabricated. The real inflation rate is 16 percent, according to Lang.

Thirdly, that there is serious excess capacity in the economy, and that private consumption is only 30 percent of economic activity. Lang said that beginning this July, the Purchasing Managers Index, a measure of the manufacturing industry, plunged to a new low of 50.7. This is an indication, in his view, that China’s economy is in recession.

Fourthly, that the regime’s officially published GDP of 9 percent is also fabricated. According to Lang’s data, China’s GDP has decreased 10 percent. He said that the bloated figures come from the dramatic increase in infrastructure construction, including real estate development, railways, and highways each year (accounting for up to 70 percent of GDP in 2010).

Fifthly, that taxes are too high. Last year, the taxes on Chinese businesses (including direct and indirect taxes) were at 70 percent of earnings. The individual tax rate sits at 81.6 percent, Lang said.

Once the “economic tsunami” starts, the regime will lose credibility and China will become the poorest country in the world, Lang said.

Several commentators have expressed broad agreement with Lang’s analysis.

Professor Frank Xie at the University of South Carolina, Aiken, said that the idea of China going bankrupt isn’t far fetched. Major construction projects have helped inflate the GDP, he says. “On the surface, it is a big number, but inflation is even higher. So in reality, China’s economy is in recession.”

Further, Xie said that official figures shouldn’t be relied on. The regime’s vice premier, Li Keqiang for example, admitted to a U.S. diplomat that he doesn’t believe the statistics produced by lower-level officials, and when he was the governor of Liaoning Province “had to personally see the hard data.”

Cheng Xiaonong, an economist and former aide to ousted Party leader Zhao Ziyang, said that high praise of the “China model” is often made on the basis of the high-visibility construction projects, a big GDP, and much money in foreign reserves. “They pay little attention to things such as whether people’s basic rights are guaranteed, or their living standard has improved or not,” he said.

Behind the fiat control of the economy, which can have the appearance of being efficient, there is enormous waste and corruption, Cheng said. It means that little spending is done on education, welfare, the health system, etc.

Cheng says that for the last decade the Chinese regime has accumulated its wealth primarily by promoting real estate development, buying urban and suburban residential properties at low prices (or simply taking them), and selling them to developers at high prices.

According to Cheng, the goals of regime officials (to enrich themselves and increase their power) are in direct conflict with those of the people–so social injustice expands, and economic propaganda meant to portray the situation as otherwise prevails.

Few scholars inside the country dare to speak as Lang has, Cheng said. And that’s probably because he has a professorship in Hong Kong.

http://www.theepochtimes.com/n2/china-n ... 41214.html

[ramana]

WSJ story on Bank Of America:

Get stronger

[shyam]

U.S. may lose second triple-A rating within months

I suspect, Fitch may do it this time.

[Neshant]

ratings are bogus.

S&P chief got fired after he lowered US ratings from AAA to AA which tells you none of the other rating agencies are going to be impartial.

Rating agnencies exists to give their own countries & allies high ratings so they can borrow cheaply while giving other countries like India low ratings to make borrowing expensive. Ironically, this has led to the former getting in over their heads into debt.

[ramana]

Its war by other means and we think the market is fair!

Any way can someone explain whats going on in the currency exchange rates? Looks like they are the new indicators. Start with US$ to Euro and Yen.

[Singha]

got a astonishing figure today in a discovery atlas program on Italy.

the avg italian woman spends annually $6000 on clothes and cosmetics

[vishvak]

Pictures of Protests: Debt, Civil Unrests and the Future of The West

Any comments if the blog looks accurate?

[Altair]

After WW2, economies flourished. There were jobs and buying power was high. Obviously, post war reconstructions efforts and the cold war helped a great deal in this boom. People were spending a great deal, feeding banks and businesses.

Then the bubble broke in the 70/80s, slow growth, higher unemployment and less revenues for the elite.
So they came up with the idea of consumer credit in the 80/90s.

Credit of course restarted the economy. People, still driven by the propaganda of consumerism, indebted themselves. Banks and corporations knew this bubble was meant to burst sooner or later, but they continued their practice of giving credit, certainly knowing they were too powerful, too big to fail.

The housing crisis set the next stage: Governments and people not only have spent too much but now owe a great deal of debt.
Powerless, the government's only option is to empoverish their citizen through austerity measures and have them pay the banks with more and more taxes.

What's next?
Right now in Greece a new law has passed. Income tax tied to electricity bill. You don't pay your debt, you go cold. This is an idea of what is to come for the rest of us: Slavery. Pay or die.
Those thieves knew since the beginning that money is not an infinite commodity, there has to be a time before the ceiling is reached.

However

The elite didn't expect the revolutions happening everywhere from Egypt to wall street. Their worst nightmare is people power. They now realize their grand scheme has failed and they won't be able to impose their dictate on us. The Internet (among other things) opened the sheep's eyes.

Now their only real option is to start WW3 and restart the vicious circle of destruction, construction, consumerism, debt, slavery.
If you remember who funded the Nazis and allies alike. Banks and in some cases they funded both. Also WW2 started after a short time of hyperinflation in Germany, lot of market speculation which went bad in 1929.

As history repeats itself, I feel that we are on the brink of WW3 and sincerely hope time will prove me wrong.

[shyam]

Wall street's cheer leader is having financial trouble....

Cash crunch at CNBC

[amol.p]

Fitch downgrades Portugal to junk status

http://economictimes.indiatimes.com/new ... 856481.cms

Portugal's credit rating was downgraded to junk status on Thursday just as a general strike virtually shut down public services and mass transit systems in the bailed-out eurozone country.

Fitch, one of the three leading credit rating agencies, blamed Portugal's ``large fiscal imbalances, high indebtedness across all sectors, and adverse macroeconomic outlook'' for its decision to cut the country's rating by one notch to BB+. That means Portugal is considered non-investment grade by Fitch and will likely mean it's even more difficult for the bailed out country to return to bond markets.

Income tax, sales tax, corporate tax and property tax are all being increased. At the same time, welfare entitlements are being curtailed. Falling living standards have stoked outrage at the austerity measures.

Unemployment is up to 12.4 percent and is forecast to hit 13.4 percent next year. The European Commission predicts the Portuguese economy will contract by 3 percent in 2012 _ the worst performance in the eurozone.

Fitch said that the recession is making it more ``challenging'' for the government to achieve its deficit-reduction plan much more challenging and will negatively impact bank asset quality.

[amol.p]

Keen: Government should print money to pay off our debts

http://news.bbc.co.uk/2/hi/programmes/h ... 641873.stm

He admits what he is advocating is radical but says it is time governments gave money to debtors to pay down debt instead of to creditors such as banks who have held onto it.
.....Will debtors pay debt if they get mone...???????

[JE Menon]

>>the avg italian woman spends annually $6000 on clothes and cosmetics

I don't think this is unusual at all... My experience with Mediterranean Rim countries suggests this would be the norm (if you consider the PPP equivalent) in countries like Lebanon, and probably the euro countries of Greece, Cyprus too... Although most likely the data on Italy is more likely to be accurate than in the other cases.

For us SDREs this might seem exhorbitant, but for these chaps it's par for the course... And branded cosmetics are bloody expensive.

[pgbhat]

Long and slighlty dated but an interesting read nevertheless. Apologies if it is a re-post.
The Outsider

At 6:30 his doorbell rang. He answered it to find a number of policemen and men in suits outside. An FBI agent named B. J. Kang told him he was under arrest for insider trading. There were five other agents with him, come to collect Rajaratnam. They asked if he had a gun, if he had drugs on the property. For a moment he was afraid they would plant something.

As they led him away from his family, Rajaratnam says Kang told him, “Take a good look at your son. You’re not going to see him for a long time.” He added, for good effect, “Your wife doesn’t seem so upset. Because she’s going to spend all your money.”

Two FBI agents, wearing prominently displayed guns, played good cop, bad cop. They thumped tables, jumped up and down, told him, “Just say you did it to one count!” But the suspect—who chose not to call a lawyer—was uncooperative. “In my head I was saying, ‘You can’t intimidate me! I’m from Sri Lanka’?”—where prisoners have to deal with much worse. They wanted him to turn in other hedge-fund managers. They wanted him, especially, to wear a wire and tape his conversations with Rajat Gupta, the former CEO of McKinsey. Gupta, whom Rajaratnam refers to as a “first-class guy,” was the most respected Indian executive in the U.S.

After Sussex, he decided to get an M.B.A. at Wharton. Of the 600-odd students there, 20 were South Asian. That’s where the Galleon network began. His roommate ended up being head of investor relations at Galleon; another classmate later oversaw Asia for Galleon. Altogether, four people from his class ended up working for him. Most ambitious South Asians at the time went to Silicon Valley. “Wall Street was tough to get into for us. Not to be crude, but there’s a Jewish mafia, and a WASP mafia, and an Irish mafia up in Boston.” He rattles off the names of the leading money houses, identifying each by the ethnicity it is stocked with. “They hire their own; they socialize among their own.” When it comes to the South Asians, he bemoans the fact that “for us as a group there’s no unity.” He mentions the microscopically specific matrimonial ads in India Abroad, a community newspaper. “A Punjabi Khatri wants to marry a Punjabi Khatri ...”

Wall Street attracted type-A personalities, “people who could say, ‘I want to make a million dollars before I’m 30.’ ” Rajaratnam found this strange. “Culturally, we couldn’t say that. We were too shy to say, ‘I want to make a lot of money.’ We were more coy.” He noticed, too, that “Americans are born salesmen and born negotiators.” When he was a kid, if he wanted to go to a movie and his father said no, that was it. With his American-born son, however, “if I say no, he starts negotiating.”

Part of Rajaratnam’s narrative is that of a man from a smaller South Asian country seduced and betrayed by people from the Big Brother country. Kumar had introduced him to Rajat Gupta. The two of them wanted to start an Indian School of Business in Hyderabad. “I gave them [the school] a million dollars. I later found out they never contributed any of their money, and are listed as the school’s founders. And I’m not even a ****** Indian.”

“There are two types of plea bargains. One is, you cooperate with the government. You finger 10 other people. The other is a plea bargain without cooperation.” The white defendants all pleaded without cooperating; they did not wear a wire. “The South Asians all did the plea bargain with fingering,” he notes sourly. “The Americans stood their ground. Every bloody Indian cooperated—Goel, Khan, Kumar.” He puts it down to “the insecurity of being an immigrant, lawyers bullying them into that position.”

[Singha]

S&P warns that a japan downgrade is around the corner...

[Hari Seldon]

Steve Keen is bang on target. Amongst the few (genuine) ones who saw the crisis as inevitable before it happened, among the first (outside the bankers themselves) to figure out that fractional reserve banking actually meant the commercial banks (not just the central bank) creating currency out of thin air, among the few who understands what is wrong and has little conflict of interest in stating what ought to be done (unlike the sarkari economystic class), I'd listen to what he says whenever he deigns to speak.

He's right that its way better for gubmints to print money to give away to the people so that they can pay down their debt and restart their stalled normal-consumption cycles. Much better than dumping money down bank black holes.

[Neshant]

Interesting speech by Howard Buffet (Warren Buffet's father) given in Congress back in 1948

http://www.fame.org/pdf/buffet3.pdf

[Neshant]

Steve Keen is bang on target. Amongst the few (genuine) ones who saw the crisis as inevitable before it happened.

Is there any proof that he saw anything prior to the crash? There's this annoying trend going around where economists who were spewing fancy boomtime jargon pre-2008 are suddenly claiming now to have foresaw & predicted the crisis. If he did see the crisis, in what capasity did he see it. These claims really need to be checked out.

Also if money is going to be printed up and paid for by the govt, what sense is there in doing any productive work. I find the ideas being put forth by economists are getting more and more absurd.

Is it just me or has the profession of economics has fallen into much disrepute. It looks increasingly like sourcery rather than a discipline worthy of study.

[amol.p]

Moody's cuts Hungary to 'junk', government sees it as 'financial attack'

http://economictimes.indiatimes.com/new ... 867040.cms

......seems by year end half of eurozone countries will be declared JUNK..

BUDAPEST: Moody's slashed Hungary's government bond rating to "junk" late on Thursday, citing high debt levels, weak growth prospects and uncertainty about its ability to meet fiscal goals, in what the government called part of "financial attacks" against the country.

Moody's cut Hungary's government bond rating by one notch to Ba1, below investment-grade, with a negative outlook hours after rival Standard & Poor's held fire on a flagged downgrade on news of Budapest's planned talks on getting international aid. Moody's cited rising uncertainty about Hungary's ability to meet fiscal goals, high debt levels and what it called increasingly constrained medium-term growth prospects as the main reasons behind the downgrade from Baa3.

"Moody's believes that the combined impact of these factors will adversely impact the government's financial strength and erode its shock-absorption capacity," it said in a statement.

"The rating agency's decision to maintain a negative outlook on Hungary's ratings is driven by the uncertainty surrounding the country's ability to withstand potential event risks emanating from the European sovereign debt crisis."

[Hari Seldon]

Steve Keen is bang on target. Amongst the few (genuine) ones who saw the crisis as inevitable before it happened.

Is there any proof that he saw anything prior to the crash? There's this annoying trend going around where economists who were spewing fancy boomtime jargon pre-2008 are suddenly claiming now to have foresaw & predicted the crisis. If he did see the crisis, in what capasity did he see it. These claims really need to be checked out.

Chill, bud. I've been following the guy's work since '06. I know what I'm talking about. Keen's no regular (read, establishment) economist besides. But, however, yet...gramaphone record kya jaane adrak ka swad....ciao, cheers n good luck with your next rant (which, surprise surprise, is the same as the last one). How kewl is that?

[Pranav]

Steve Keen is bang on target ... among the first (outside the bankers themselves) to figure out that fractional reserve banking actually meant the commercial banks (not just the central bank) creating currency out of thin air

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

[Sri]

^^^ Pranav jee, you hit problem on it's nail. The problem is that there isn't enough money to go around. What we see now is the game of passing the parcel, last one holding the instruments is the sucker. We will soon know his name. The whole system is dependent on the basic premise that all the depositors will not call the bank at the same time. But problem is that is exactly what is happening.

Need is to step back and identify the toxic loans. Write them off and save the ones who generate wealth or those who invest prudently. Alas easier said then done.

[Christopher Sidor]

It seems that the contagion has finally reached the Euro-Zones core. Germany was able to sell only 65% of the its AAA rated 10-year bonds recently. From what I gather Germans offered some 6 billion EUROS worth of bonds. These bonds were maturing in the year 2022, some 10 years from now. 35% of these bonds remained unsold.
Story is over here.

Further german ruling lawmakers rejected euro-bonds and fiscal union. The reason given was

Economy Minister Philipp Roesler, who is also vice chancellor, said today(i.e. on 24-Nov-2011) in parliament in Berlin. “A transfer union would be wrong because it would mean German taxpayers pick up the costs. Euro bonds are wrong because they would mean a rise in interest rates for Germany.”

Just to put things into perspective below are the various yields of some 10-year bonds
1) UK. 10-year yield 2.24%. S&P Ratings AAA
2) Germany 10-year yield 2.26%. S&P Ratings AAA
3) Australia. 10-year yield 3.85%. S&P Ratings AAA
4) France. 10-year yield 3.65%. S&P Ratings AAA
5) Switzerland. 10-year yield 1.17%. S&P Ratings AAA
6) Japan. 10-year yield 1.03%. S&P Ratings AA-
7) US. 10-year yield 1.92%. S&P Ratings AA+

Is this the tipping point?

[Hari Seldon]

Steve Keen is bang on target ... among the first (outside the bankers themselves) to figure out that fractional reserve banking actually meant the commercial banks (not just the central bank) creating currency out of thin air

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

Well, not quite. Keen certainly did point out the conflating of money with debt.

Here's how the FRB game worked - with $100 in deposits, and a fraction of that (say 10%) required by law to be held in reserve, the bank was free to lend out $90 and make money on the interest. But the banks were lending out $200, sometimes $400 etc on that $100 deposit base. Which is where FRB led to currency creation of sorts. Did money supply increase? On the face of it, certainly seemed so, but that 'money' was debt-based. Had to be returned. And when the creditors (in the construiction sector and consumer sector based on home equity) couldn;t repay, the banks came under strain because on their books, they'd lent out this huge much in capital that wasn't coming back.

Now it seems like there's no money in the system preciswely because the excess currency (debt based) which was in earlier is deflating to its actual size. Not a pretty sight that. There're no creditworthy borrowers plentyfully around anymore.

[johneeG]

The theory seems to be to take loan for investing and then make more returns, so that the loans can be paid and profit also be made.
Banks were supposed to lend to such ventures that would do the above. So where did it go wrong? Was the theory itself flawed? Were the bankers corrupt? Or did the borrowers messed up?

[Pranav]

Except that that isn't really true ...

For example, suppose Tom has 10 gold coins, out which he lends 8 to Dick, out which Dick lends 5 to Harry.

Has the money supply increased? No, if you are using the right definitions.

Well, not quite. Keen certainly did point out the conflating of money with debt.

Here's how the FRB game worked - with $100 in deposits, and a fraction of that (say 10%) required by law to be held in reserve, the bank was free to lend out $90 and make money on the interest. But the banks were lending out $200, sometimes $400 etc on that $100 deposit base. Which is where FRB led to currency creation of sorts.

Well, what happens is that with $100 in deposits, they lend out 90% i.e. $90, which gets deposited again, out of which they lend out $81 and so on.

From a $100 initial deposit, the total loans can be as high as $900. But the catch is that at every stage, loans are balanced by deposits. Nothing new is being created, it's the same gold coin getting counted again and again.

[Hari Seldon]

^^^ Sure, why would you borrow at 5% and deposit at 2%? The 9x possible upper bound on leverage was the academic argument for banks to lever up 9x not all of which was redeposited.

[Pranav]

^^^ Sure, why would you borrow at 5% and deposit at 2%? The 9x possible upper bound on leverage was the academic argument for banks to lever up 9x not all of which was redeposited.

No, what happens is that Tom borrows at 5%, goes and buys a Jacuzzi from Dick, who then deposits it at 2% in the bank, which then lends it out again.

At each stage the 10% CRR (cash reserve ratio) is maintained.

[Hari Seldon]

^^^ True. Problem is not all that was lent out was for investment activity from which returns could be expected higher than the cost of borrowing. Even when it seemed like it would be the case (the housing/construction industry, for example), it wasn't the case. The system was unsustainable without additional money being created to replace that which was being repaid (and hence, the debt there was extinguished).

Yup, this is from wikipedia but it brings out the essential point:

Critics of fractional reserve banking claim that since money creation requires loans from the banking system, people are required to go into debt in order for any new money to be created. They assert that this can debase the means of exchange. While there is no controversy over the fact that the commercial banking system expands the money supply, critics find it problematic that banks "create money out of nothing."[7]

One criticism posits that since debt and the interest on the debt can only be paid in the same form of money, the total debt (principal plus interest) can never be paid in a debt-based monetary system unless more money is created through the same process. For example: if 100 credits are created and loaned into the economy at 10% per year, at the end of the year 110 credits will be needed to pay the loan and extinguish the debt. However, since the additional 10 credits does not yet exist, it too must be borrowed. This implies that debt must grow exponentially in order for the monetary system to remain solvent. This was the argument of the Social Credit movement of the 1930s, who proposed to remove the job of money creation from banks and give it to governments.

Other criticisms relate to the potential fragility of bank liquidity in a fractional reserve banking environment, the financial risk of bank runs that depositors bear when depositing money with banks, and the impact that demand deposits have on the stock of money, and on inflation (that is, the implicit expansion of the money supply and its associated impact on prices and the exchange rate). An alternative to fractional reserve banking is full-reserve banking.[9] With full-reserve banking, some monetary reformers, such as Stephen Zarlenga of the American Monetary Institute, support the concurrent issuance of debt-free fiat currency from the Treasury, while others such as Congressman Ron Paul and some economists from the Austrian school, call for a commodity currency as existed under the gold standard.

It is the last bolded part which Keen had championed too in one of his earlier works, IIRC.

[Pranav]

^^^ A number of points -

1. Interest rate is market determined. It will tend to be less than expected return on investment, otherwise nobody will borrow.

2. It's true that you need to create additional money ... you should create money at the rate of economic growth to maintain zero inflation. Of course, newly created money should be injected into the economy in a fair and transparent way. One way to go about it is for the Central Bank to purchase government bonds in the open bond market.

3. Commercial banks appear to "create money out of nothing" only if your definition of money supply counts only the loans without subtracting the balancing deposits.

4. Full reserve banking is not practical. If the bank is just going to sit on my money, I might as well put it under the mattress. I put the money in the bank because I want to put the money to work.

5. Full reserve is also likely to lead to deflationary spirals.

6. Gold standard will not solve any problems, the 1929 Great Depression happened on the Gold Standard. In fact, it will exacerbate the problems, since banksters will have huge gold reserves with which they will play havoc with the money supply, and governments will have their hands tied.

7. Fiat currency per se is not a problem. The problem (in the US) comes from the fact that the banskters own the Fed and then jerk around the money supply, creating boom-bust cycles which they can milk. The solution is to nationalize the Fed, and then transparently regulate money supply to strictly keep inflation at a predetermined low value (say 1%).

[Hari Seldon]

^^ No argument with any of your points there. Point is what folks are doing currently isn't helping any. What needs to be done is a curious mix of initiatives that don;t fall neatly into any one rubric - Austrian, Keynsian, goldbuggered, or otherwise. Not that Keen's infalliable but he is bold enough to borrow from different schools and create a potent mix that may actually work.

A 24-Nov bbc hardtalk interview of Keen. Worth watching, IMO.

http://socialdemocracy21stcentury.blogs ... dtalk.html

[ramana]

Greece demands bigge haircut to the creditors. 75% vs ~60% agreed to in IIF. They are mostly getting 50%.

[sumishi]

Pranav & Hari Seldon saars,
If time permits, can you please look up this article and comment on its "soundness"?
Central Banks, Gold, and the Decline of the Dollar

[RamaY]

Story is over here.

Just to put things into perspective below are the various yields of some 10-year bonds
2) Germany 10-year yield 2.26%. S&P Ratings AAA
4) France. 10-year yield 3.65%. S&P Ratings AAA

Is this the tipping point?

I may be dumb. Why would I prefer to buy a German Euro bond when I can get a France Euro bond at better yield? Euros are Euros right?

The European Government Bond Markets
In Europe, Government Bonds are also called sovereign bonds. In the UK, Government Bonds are also called gilts; in France, OATs; in Germany, Bunds; in Italy, among other terms, BTPs. In the US, Government Bonds are also called US Treasuries or T-Bills.

Each government in Europe issues bonds and individual investors across Europe buy bonds in their country of residence, whether in Europe or abroad. But investors can also invest in government bonds issued outside their country of residence. With the development of the Euro currency, Euro-zone investors can also buy government bonds in other Euro-Zone countries without incurring additional currency risk (assuming they are bonds issued in those countries in Euros). At the same time, individual government bond issues need to be attractive to investors from different countries.

[Ambar]

I may be dumb. Why would I prefer to buy a German Euro bond when I can get a France Euro bond at better yield? Euros are Euros right?

The same reason why one would prefer German 10 yr bund at 2.25% vs a Greece 10 yr bond at over 27%! The currency might be a block currency, but their debt markets and ability to repay the debt,political stability,headline risks and other obligations are all different. Similarly in 2008, despite GM and Ford having similar credit ratings, the spreads for GM commercial paper was far wider compared to that of Ford, as GM was at a higher risk of defaulting with its gargantuan obligations.

[RamaY]

So it is all sovereign risk? So unless there is a fair chance of the sovereign default, the spreads should not be that high. So why are they not allowing the countries going down and instead are trying to sole the issue?

In other words why did Greece pay 4-10 times more interest on those bonds all these years, if it cannot default whenever they want?