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June 05, 2014

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Churm Rincewind

I'm rather taken aback. Who is it that thinks that the recession was payback for living high off the hog?

This is news to me. Chris Wilkes simply says that "many people" think this. Well all I can say is that I haven't come across them.

Giles

Thanks for the mention Chris. Good to be back.

In response to the question above, well, this person thinks so:

https://www.best4loans.co.uk/News/pay-off-your-credit-cards-and-store-debts-cameron-tells-uk-households.aspx

and this one

http://www.safehaven.com/article/18263/geithner-americans-have-spent-and-borrowed-too-much-and-save-too-little-what-happens-next (about the USA)

and you get lots of little life stories like this
http://www.dailymail.co.uk/news/article-1307853/Banks-forced-write-40m-day-family-debt.html

(not sure I agree with Chris about the Crisis in Capitalism, but that stems from a longstanding difference of opinion about whether the Central Banks could have kept nominal incomes rising faster...)

Churm Rincewind

I've looked at these links. As far as I can see, none of them argue that the recession was "caused" by people living high off the hog. Surely all them are primarily concerned with the impacts of the recession rather than the causes?

Luke

Given that the risk free real rate is about zero, I struggle with the idea that there are no or limited investment opportunities for firms. I am obviously missing something (not being sarcastic, genuinely missing something).

Any reading suggestions?

Metatone

@Luke

One issue is transaction costs. (They go on top of the risk free real rate.)

Another is the psychology of fear, esp. in the leadership of large corporations.

However, I suspect the biggest issue is that money is trapped in loops in the financial sector. You can earn better returns from financial transactions than investments in other sectors of the economy. Thus other sectors are starved of investment...

shoreline view

I think there is a problem with capitalism; too much wealth concentrated in the hands of too few people with too little in the way of good ideas for what to do with it and too few potential cash-rich or credit-worthy customers.

The obvious answer in my book is to revisit the 1920s, 1930s and 1940s, sharply raise taxes on the rich to the point that they're forced to restrain their personal consumption, but leave investment write-offs, especially in productive capacity, in place -- a sort of FDR/Stanley Baldwin/Progressive Era-style triage of capitalism. But politically getting there is a challenge; we don't want a rerun of the First World War and the Great Depression, but that was how we politically got there. If there are less painful or at least less life-threatening ways of getting the politicians to think outside the box, I'm all ears.

Boffy

It all seems like nonsense to me. 2008 was a financial crisis not an economic crisis. There was certainly a massive financial bubble prior to 2008, and it was the bursting of it that constituted the financial crisis. The bubble was created by the fact that contrary to Kliman et al, for 25 years prior to 2008, the general annual rate of profit was rising not falling!

That rising annual rate of profit was based on sharply rising global productivity, which increased the rate of turnover of capital, and also thereby released vast amounts of advanced capital, as Marx describes. This vast release of capital, plus the huge rise in the rate and mass of profit created a huge volume of potential money-capital that pressed down on the money market, causing interest rates to fall continuously from 1982.

The same rise in productivity slashed commodity values, so that to avoid global deflation, central banks printed huge amounts of money to devalue money tokens, and maintain nominal prices. The low interest rates caused by the massive rise in the volume of profits, and the money printing caused the blow up in asset bubbles, so that the Dow rose by 1000% between 1982 and 2000, and house prices in the US and Britain, in the 1980's soared, before soaring again after 1997.

The extent of the rise in the rate and mass of profit is the extent to which it also led to the massive growth in capital formation. From the 1980's the global working class has doubled in size. It increased by 30% in the first decade of this century. During that period, fixed capital formation also doubled, as did global GDP. Between 2002 and 2007, global trade rose by 15% p.a., which is five times the rate of the period between 1982-94!

Boffy

"What if capitalism can no longer generate decent increases in workers' incomes?"

I'd ask the 500 million additional workers in the world, who have been rescued from "the idiocy of rural life" in the last 20 years, whether they think that Capitalism can still raise workers incomes!

In China, the situation seems to be similar to that described in Russia more than 100 years ago that not only are they suffering from Capitalism, but also from not enough Capitalism. Millions of Chinese workers have seen their living standards rise massively, but unfortunately many millions more Chinese remain in rural poverty, because Capitalism has not reached them yet.

Boffy

"A lack of real investment opportunities meant that low interest rates fuelled what Austrians call malinvestments and Marxists "speculation and crises": mortgage derivatives grew in large part because there was a hunt for yield as bond yields declined. Stagnation generates bubbles, and bubbles burst."

Really? So, we haven't had the development of China from nowhere to being the world's largest economy on PPP? We haven't seen massive capital formation in other parts of Asia, and now in Africa? We haven't seen since the 1990's the development of whole new industries in technology, employing hundreds of thousands of people, we haven't seen the massive investment in the Internet, and the associated industries that have grown up on the basis of it? We haven't seen the development of space technology as a private business both in terms of satellites, and in industries such as Sat Nav and so on.

We haven't seen the development of massive new profitable industries in genetics, in biotechnology, in nano technology, in materials such as the development of carbon fibre, and now graphene? We haven't seen the investments in pharmaceuticals that now employ large numbers of very highly paid and skilled scientific workers like those employed at Astra-Zeneca?

We haven't seen the development of mobile devices from nowhere in just the last 20 years, and a massive industry around it? We haven't seen the change in production and consumption patterns that has led to "Leisure and Entertainment" now being a major component of household expenditure, with large amounts of money being spent on things like computer games, and people eating out at restaurants etc. We haven't seen the growth on the back of that of designer food and drink franchises where people are prepared to pay £5 for a cup of coffee?

Yes, what a dearth of investment opportunities their really has been. Its a wonder the Investors Chronicle could find any worthwhile investments to write about during all that period!

Andreas Paterson

@Boffy - I think Chris' point still stands in that the level of investment opportunities has not been enough to soak up the all the money chasing new investments. Despite all the amazing new technologies, development in China and so on, an awful lot of money was still ended up being invested in property, mortgage derivatives and the like.

dongately

I do agree with the point here, especially on the weakness of the capitalist system but there's still a way of keeping the "boom" narrative.

We were getting poorer but didn't cut back on our spending. A weasel can still frame that as extravagant.

Boffy

@ Andreas. No he doesn't, sorry. There is a huge difference between Capitalism being massively productive, and creating huge rates and masses of profits, that results in large scale accumulation of productive capital, but which is so huge that it cannot physically all be immediately accumulated, thereby feeding into global money markets, pushing down interest rates, and on the other hand, the narrative being presented here and by some of those quoted by Chris, that the rate of profit was falling globally for 30 years, and this falling rate of profit caused low levels of accumulation, and money to be diverted into speculation.

In fact, the situation that has been experienced during that period is almost identical to the period described by Marx and Engels from around 1842, and up to the financial crisis of 1847. After 1842, global and particularly British growth boomed. The rate and mass of profit was high. In Capital III, Engels describes this situation from his own experience as a manufacturer.

"But all the newly erected factory buildings, steam-engines, and spinning and weaving machines did not suffice to absorb the surplus-value pouring in from Lancashire."

Consistent with Marx's theory that it is only this excess of profits of potential money-capital, that can cause interest rates to fall - not money printing as is the current delusion - interest rates fell to record low levels. These record low interest rates, and the availability of credit then led to speculation in the Railway boom, despite the fact that large profits were available on productive-capital.

Engels goes on to describe how the speculation then created a frenzy, which led to manufacturers diverting funds from their actual businesses to finance their purchase of railway shares, and then to need to over their business costs via borrowing. When the agricultural crisis then caused Britain to have to pay for food imports by exporting gold, the 1844 Bank Act required a contraction of the money supply. The discount rate on Bills of Exchange soared - much as happened with the 2007 Credit Crunch - the financial bubble built on cheap credit and speculation was burst. What was as Marx points out purely a financial crisis then impacted the real economy drastically - much more drastically actually than did 2008. After the 1847 Financial Crash, the real economy contracted by 37%!!!

But, the Government was forced to suspend the bank Act, money was released into the economy, the credit crunch was resolved, and the boom continued until the onset of the new long wave downturn around 1865.

It has not been a dearth of investment opportunities during that period, or a falling rate of profit - it was in any case rising not falling - in fact, the crash was a direct result of profits being very high causing rates to fall, along with high rates of productivity slashing commodity values which prompted the need to devalue money tokens via money printing, which fuelled the massive speculation of the 1980's onwards, which created the conditions for that bubble to burst.

In fact, the solutions provided to 2008 have only recreated those conditions on an even larger scale, which is why there will be another even bigger financial crash.

Dipper

belated comment, but for the modern Labour Party it is all a morality tale. Having abandoned Clause IV and any ambition for reshaping the mechanisms and relationships of society, to liberate workers from the chains of their birth, they are reduced to having "fairness" as their guiding principle, whereby a provileged hereditary clique get to decide what is right and what is wrong for everyone else.

This Militant Social Democracy considers that the basic mechanims of political society are satisfactory, so bad outcomes occur because bad people are allowed to do bad things. The solution is for "good" people to punish the "bad" people until goodness is restored.

So I'm strongly agreeing with your last three paragraphs.

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