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Escaping recession

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David Greenwich View Drop Down
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    Posted: 02 Aug 2012 at 10:35
Euro-america has been suffering a pretty bad recession/depressed economic state since 2007/8.
Of course much of the rest of the world has been booming.
 
I am wondering whether people think there are any examples from history that will help us get out of this recession? Any ideas?
 
What is past is not necessarily settled.
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Production in real goods is the only way out of recession. Time has gone when Europe could exploit foreign lands and prosper at home. Today it has to compete working hard. I am afraid, it will have to get used to it.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 02 Aug 2012 at 22:24
Easy, go back to the 30s and see what they did back then.
 
The reason why the collapse of 08 was not total like that in 29 was that governments quickly reacted to the crisis and used techniques that although they were not the best possible ones none the less they addressed the primary cause of the crisis which was over leveraged banks in a recession stricken economy. They basically flooded the markets with money. But that was not enough. It stopped the crash but did not kick start the economy. Corporations and banks are awash with cash right now yet they don't spend nor do they lend. Which is why Keynes was right, deficit spending was the best way to go. Instead we got austerity.
 
That was the diagnoses for the US. For europe the situation is even worse. People there are simply clueless.
 
The ECB can easily solve most of the problems there by following on the American model used in this crisis like issuing and then buying Eurobonds. Yet politicians especially in Germany refuse to do so and insist on bailouts and austerity alone. The result is 25% unemployment rates and extremely high bond yields that are simply unsustainable with or without austerity.
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote David Greenwich Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 00:37
Originally posted by pinguin pinguin wrote:

Production in real goods is the only way out of recession. Time has gone when Europe could exploit foreign lands and prosper at home. Today it has to compete working hard. I am afraid, it will have to get used to it.
The era of exploitation is certainly over. But wouldn't it be easier for Euro-america to form its own protective zone - with maybe Latin America and parts of Africa as well? 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote David Greenwich Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 00:45
Originally posted by Al Jassas Al Jassas wrote:

Easy, go back to the 30s and see what they did back then.
 
The reason why the collapse of 08 was not total like that in 29 was that governments quickly reacted to the crisis and used techniques that although they were not the best possible ones none the less they addressed the primary cause of the crisis which was over leveraged banks in a recession stricken economy. They basically flooded the markets with money. But that was not enough. It stopped the crash but did not kick start the economy. Corporations and banks are awash with cash right now yet they don't spend nor do they lend. Which is why Keynes was right, deficit spending was the best way to go. Instead we got austerity.
 
That was the diagnoses for the US. For europe the situation is even worse. People there are simply clueless.
 
The ECB can easily solve most of the problems there by following on the American model used in this crisis like issuing and then buying Eurobonds. Yet politicians especially in Germany refuse to do so and insist on bailouts and austerity alone. The result is 25% unemployment rates and extremely high bond yields that are simply unsustainable with or without austerity.
 
 
Al-Jassas
The crash was more catastrophic, but wasn't the recovery stronger as well? Certainly that is the case in the UK. We are struggling.
 
I am not sure more debt is the answer. I think inflation, specifically wage inflation,  might be part of the answer.
 
Not sure about Eurobonds but in the UK a huge amount of Quantative Easing is already  taking place which I think does involve the Bank of England printing money to buy bank bonds.
 
Looking back at history I think there are some little tell tale signs about how best to proceed. I like the way the Germans got out of the hyper-inflation cycle. They created a new Mark and claimed it was backed by German land. Of course that was pure fiction, but it was a psychologically strong idea for Germans and they were ready to believe it. I think we need a few psychologically strong ideas to restore confidence. 
 
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote ralfy Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 02:50
The problem was caused by increased money supply through unregulated derivatives (according to the BIS, now more than $700 trillion, but one expert argues it is more than a quadrillion dollars). Only a trillion dollars' worth of subprime lending from that was needed to vaporize over $30 trillion worldwide. Even then, as much of money actually has no value, nothing was actually lost, but speculation led to higher oil and food prices.

What this problem masked was peak oil, which the IEA has just acknowledged. As BP has shown, conventional oil production has not been able to meet demand since 2006, forcing us to use non-conventional production. And various sources (e.g., Lloyd's of London, the U.S. military) believe that conventional production may soon.

What makes matters worse is that demand has gone up considerably due to a growing global middle class, and although this has been dampened by the current crisis, the effect is the same, the latter has led to chronic unemployment, lower income levels, and higher prices.

Then there are the effects of global warming, which scientists how acknowledge they have overestimated, as floods, droughts, and heat waves affect manufacturing, mining, and food sources worldwide. That is why together with oil prices food prices have also gone up considerably.

Given such, there will be no solution to the current recession. As more debt is created to solve a problem caused by increased debt, speculation will only increase further, leading to one credit crunch after another. Lack of oil combined with speculation will lead to the same, as oil demand hammers at a production ceiling that can barely go up.

Finally, for the same reasons there is no comparison between the current economic crisis and previous ones. Less recent articles like this reveal such:



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Post Options Post Options   Thanks (0) Thanks(0)   Quote Captain Vancouver Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 03:04
There are indeed examples from the past, quite obvious ones. The capitalist economy was one long roller coaster throughout the nineteenth and early twentith centuries, culminating in the great depression of the '30s. There are many individuals who crave money and what it will buy, and will go to lengths to get it, even if this is detrimental to the economy at large. Bust has followed boom as herds of lemmings have raced this way and that across the economic landscape, chasing the mirage of wealth on the horizon.
 
The '30's were bad enough that some began to see the light, and divert resources towards more redeeming uses. We had the New Deal in the US, the rise of Labour in the UK, and the emergence of left wing parties in Canada and other places. Greed is a powerful motivater however, and it returned with the Reagan and Thatcher administrations in the '80's. We are seeing the follow on of that today, as current politicians  accept the idea that unbridled business will lead to the most efficient and worthwhile outcomes for society. Cut taxes, and money will flow to the best uses. We have seen were that has taken us. Deregulate banks- they know how to best proceed. We have also seen that outcome. Some, even in postions of power, are slow learners though, or in some cases no doubt have their own personal motivations and incentives, ones not in tune with the larger society.
 
Wealth has been privatized to a great extent today. Many trillions of dollars zip around the planet in search of easy gain, resources that would have been taxed in years gone by. That bubbles form in all sorts of investment vehicles is not too surprising considering this volume of free cash. There is a basic dicotomy here. Private wealth is resonsible to no one except its owner. Public resources are, at least in theory, intended for certain philosophical ends, and the managers of these are, again at least nominally, responsible to a larger constituency.
 
There are answers here, but they run counter to the spin of the last three decades.
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Originally posted by Al Jassas Al Jassas wrote:

Easy, go back to the 30s and see what they did back then.
 
Although many parts of that system was able to save the economy, things such as making it illegal to own more than a certain amount of gold is a little extreme. That part of the system, although gave a little money to the original owners, forced me to hide a lot of my heirlooms that were gold plated, 18ct gold wedding band, his highness' decree for the annexation of my family to the Outer Court (which was a ringing gold plated orb in a green box, and a longbi jade disc), and many others, while police officers took me to the station so they could take th rest (if it had gems in it, they were taken out and the gold was taken while I got the gems back, which means that the gold was given to the government in exchange for small amounts of money. I hid them in a safe behind my sheets in a linen closet. That law of gold limmitations was finally overturned in the 1970s.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote David Greenwich Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 04:39
Originally posted by ralfy ralfy wrote:

The problem was caused by increased money supply through unregulated derivatives (according to the BIS, now more than $700 trillion, but one expert argues it is more than a quadrillion dollars). Only a trillion dollars' worth of subprime lending from that was needed to vaporize over $30 trillion worldwide. Even then, as much of money actually has no value, nothing was actually lost, but speculation led to higher oil and food prices.

What this problem masked was peak oil, which the IEA has just acknowledged. As BP has shown, conventional oil production has not been able to meet demand since 2006, forcing us to use non-conventional production. And various sources (e.g., Lloyd's of London, the U.S. military) believe that conventional production may soon.

What makes matters worse is that demand has gone up considerably due to a growing global middle class, and although this has been dampened by the current crisis, the effect is the same, the latter has led to chronic unemployment, lower income levels, and higher prices.

Then there are the effects of global warming, which scientists how acknowledge they have overestimated, as floods, droughts, and heat waves affect manufacturing, mining, and food sources worldwide. That is why together with oil prices food prices have also gone up considerably.

Given such, there will be no solution to the current recession. As more debt is created to solve a problem caused by increased debt, speculation will only increase further, leading to one credit crunch after another. Lack of oil combined with speculation will lead to the same, as oil demand hammers at a production ceiling that can barely go up.

Finally, for the same reasons there is no comparison between the current economic crisis and previous ones. Less recent articles like this reveal such:



Have you got a citation for those figures of $700 trillion and a quadrillion?
 
I find that difficult to believe as total world GDP is only about $60 trillion. So you are talking about over ten years of world production there.  Most countries don't have debt levels beyond 100% of GDP.
 
 
 
 
 
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote David Greenwich Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 04:44
Originally posted by Captain Vancouver Captain Vancouver wrote:

There are indeed examples from the past, quite obvious ones. The capitalist economy was one long roller coaster throughout the nineteenth and early twentith centuries, culminating in the great depression of the '30s. There are many individuals who crave money and what it will buy, and will go to lengths to get it, even if this is detrimental to the economy at large. Bust has followed boom as herds of lemmings have raced this way and that across the economic landscape, chasing the mirage of wealth on the horizon.
 
The '30's were bad enough that some began to see the light, and divert resources towards more redeeming uses. We had the New Deal in the US, the rise of Labour in the UK, and the emergence of left wing parties in Canada and other places. Greed is a powerful motivater however, and it returned with the Reagan and Thatcher administrations in the '80's. We are seeing the follow on of that today, as current politicians  accept the idea that unbridled business will lead to the most efficient and worthwhile outcomes for society. Cut taxes, and money will flow to the best uses. We have seen were that has taken us. Deregulate banks- they know how to best proceed. We have also seen that outcome. Some, even in postions of power, are slow learners though, or in some cases no doubt have their own personal motivations and incentives, ones not in tune with the larger society.
 
Wealth has been privatized to a great extent today. Many trillions of dollars zip around the planet in search of easy gain, resources that would have been taxed in years gone by. That bubbles form in all sorts of investment vehicles is not too surprising considering this volume of free cash. There is a basic dicotomy here. Private wealth is resonsible to no one except its owner. Public resources are, at least in theory, intended for certain philosophical ends, and the managers of these are, again at least nominally, responsible to a larger constituency.
 
There are answers here, but they run counter to the spin of the last three decades.
I think most historians now agree that the New Deal did not stop the depression. The economy had in fact gone into another nosedive around 1937 before the rearmament programme seems to have produced the required stimulus.
 
That said, I agree with you that the depression did boost ideas about planning, welfare and labour activism, which really came to fruition in the post war period.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Al Jassas Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 05:36
Originally posted by David Greenwich David Greenwich wrote:

The crash was more catastrophic, but wasn't the recovery stronger as well? Certainly that is the case in the UK. We are struggling.
 
 Which one, this recent one or that of 29?
 
 
Originally posted by David Greenwich David Greenwich wrote:

I am not sure more debt is the answer. I think inflation, specifically wage inflation,  might be part of the answer.
 
 
The best way to creat inflation is to print more money that is covered by bonds, ie more debt. The most serious thing about a depression is the unemployment it causes. With less people employed you creat a vicious cycle that reduces spending and thuscrunches businesses even more leading to ever increasing unemployment. Deficit spending helps alleviate this since an increase in employment will definitely lead to increase consumer spending which normally accounts for 70% of advanced economies spending.
 
 
Originally posted by David Greenwich David Greenwich wrote:

Not sure about Eurobonds but in the UK a huge amount of Quantative Easing is already taking place which I think does involve the Bank of England printing money to buy bank bonds.
 
 
The quanitative easing the Bank of England is doing is actually a good thing in my opinion given the dismal numbers this year. However with no monetary expansion through government spending it is only a half measure. Austerity will write off any good coming since corporate investment and consumer spending is stil contracting.
 
 
 
Originally posted by David Greenwich David Greenwich wrote:

Looking back at history I think there are some little tell tale signs about how best to proceed. I like the way the Germans got out of the hyper-inflation cycle. They created a new Mark and claimed it was backed by German land. Of course that was pure fiction, but it was a psychologically strong idea for Germans and they were ready to believe it. I think we need a few psychologically strong ideas to restore confidence. 
 
 
Hyper inflation is a complex issue and has no relation in what europe is facing. Europe is in a state of deflation. A general reduction of prices and wages coupled with high unemployment and ultra low interest rates. It also has the world's strangest currency, a currency not controlled by the ECB but by the individual central banks of member nations which results is disparity between the union's interest rates from near zero in Germany to 8% in Spain. Europe needs a single fiscal policy with a single central bank like any country with a single currency or else break this union.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 07:01
What gets overlooked in the inflationary answer to depression, is that in the familiar MV=PT equation there is no point in increasing M if it is accompanied by a drop in V. That is, the new money is simply stacked up in bank accounts, instead of leading, as it is intended to do, to an increase in T.

Thus the bank bailout in the US recently was ineffective since it simply increased bank balance sheets and stayed out of circulation (even the incredibly high percentage that went to executive remuneraton didn't much help since it ended up being saved in monetary assets (thus still lowering V).

Better would have been the government paying off delinquent mortgages which woud have had the dual effect of increasing the spending power of people who would spend it, and also solidifying bank balance sheets since their dicey assets would stop being dicey.

Of course the trouble with all this is that instead of increasing T, P would shoot up and the effort be wasted and leave T unaffected or possibly even down.

In any case this is a crisis in the real economy not the financial one, and is essentially due to increasingly productive technology inevitably leading to increased unemployment. In situations where there is insufficient welfare support for unemployment, or no state plan increasing employment, directly or indirectly, it cannot be got out of.

The best historical parallel to the current situation (which has been developing for decades) is the effect on western economies of the agricultural revolution which killed off agricultural jobs. That includes of course some of the factors behind the 30s depression. 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote Captain Vancouver Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 07:58
Originally posted by David Greenwich David Greenwich wrote:

I think most historians now agree that the New Deal did not stop the depression. The economy had in fact gone into another nosedive around 1937 before the rearmament programme seems to have produced the required stimulus.
 
That said, I agree with you that the depression did boost ideas about planning, welfare and labour activism, which really came to fruition in the post war period.
The economy did  indeed take a dip in '37, not because of the New Deal, but because the naysayers temporarily got their way, and the US started moving to a balanced budget too soon.
 
Agreed thought that it was only WW2 that finally finished off the depression in the US. But in a sense, the rearmament program was only the New Deal ramped up into overdrive. That is, a serious threat to society was percieved, and comprehensive government spending was authorized to counter it. The only reason this wasn't done in the face of economic threat was the political philosophy of the time, which dictated that government's role was limited, and the chips must fall where they may. Other countries has already had more success  by not taking such an idealogical view.
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Post Options Post Options   Thanks (0) Thanks(0)   Quote David Greenwich Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 09:17
Originally posted by gcle2003 gcle2003 wrote:

What gets overlooked in the inflationary answer to depression, is that in the familiar MV=PT equation there is no point in increasing M if it is accompanied by a drop in V. That is, the new money is simply stacked up in bank accounts, instead of leading, as it is intended to do, to an increase in T.

Thus the bank bailout in the US recently was ineffective since it simply increased bank balance sheets and stayed out of circulation (even the incredibly high percentage that went to executive remuneraton didn't much help since it ended up being saved in monetary assets (thus still lowering V).

Better would have been the government paying off delinquent mortgages which woud have had the dual effect of increasing the spending power of people who would spend it, and also solidifying bank balance sheets since their dicey assets would stop being dicey.

Of course the trouble with all this is that instead of increasing T, P would shoot up and the effort be wasted and leave T unaffected or possibly even down.

In any case this is a crisis in the real economy not the financial one, and is essentially due to increasingly productive technology inevitably leading to increased unemployment. In situations where there is insufficient welfare support for unemployment, or no state plan increasing employment, directly or indirectly, it cannot be got out of.

The best historical parallel to the current situation (which has been developing for decades) is the effect on western economies of the agricultural revolution which killed off agricultural jobs. That includes of course some of the factors behind the 30s depression. 
One good way of stoking inflation is to increase pensions and welfare benefits for the poorer people in your community, the reason being that rather jetting off on holiday abroad they tend to spend money on home produced goods - turn up the heating, go to the local cinema, buy another cake from the local bakery, have that room decorated etc.
 
I think we really haven't yet been hit by the real tsunami - robotisation. Amazon have recently announced plans to automate their shelf picking operation.  We are going to thousands of these applications .  The latest version of the new Honda Asimo has some incredible ability. In London we are talking about automating the local train services (already a feature in many parts of the world).
Robot operation of cars and trucks is already a reality. Imagine if all long distance lorry drivers were put out of employment.
 
What would help is some international agreements on minimum wages and minimum working hours related to countries' GDP - so the richer you get the more you have to raise your wages and reduce working hours.
 
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Post Options Post Options   Thanks (0) Thanks(0)   Quote gcle2003 Quote  Post ReplyReply Direct Link To This Post Posted: 03 Aug 2012 at 20:57
That's OK but GDP isn't the relevant measure.
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