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Boom And Bust

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I think I have figured out how/why boom and busts work and wanted some comments.

I wont go into much detail and assume many of you will know the basics.

Money is debt, for every pound of debt there is a pound of savings somewhere.

There are generally two types of people, savers and spenders. Savers save and spenders spend.

In a boom the banks allow spenders to spend more and more by allowing them to borrow more and more. In effect this creates a boom as the banks trade the borrowers debt and give it to the savers. During a boom this continues and it is fairly basic to understand (you get a boom when banks lend more and people/governments/companies take on this debt)

The difficult part (which seems simple to me) is why this goes into a bust.

Well simply the spenders can not continue spending as they reach their debt limit. The banks and savers simply wont give them more credit so you get a bust. Now this is bad for everyone as trade grinds to a halt. The spender cant spend and the saver cant produce and save.

So what needs to happen? Well at that point naturally the saver and the spender must swap roles. Those who are savers need to become spenders and those who are spenders need to become savers. If that happened we would have a permanent boom and this is probably the holy grail of economics and business. However a saver is and will likely always be a saver and likewise a spender is and likely always will be a spender. They cannot or do not what to change roles.

Hence you get a recession or depression forming.

So the government has to in some way either swap the roles of these two groups (nearly impossible) or reset debt so the savers and spenders can continue doing what they do.

That means either inflate the debt away, default on the debt, accept a much lower level of trade or go into recession or perhaps even depression. The only realistic option here is to inflate away the debt.

So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

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I think I have figured out how/why boom and busts work and wanted some comments.

I wont go into much detail and assume many of you will know the basics.

Money is debt, for every pound of debt there is a pound of savings somewhere.

There are generally two types of people, savers and spenders. Savers save and spenders spend.

In a boom the banks allow spenders to spend more and more by allowing them to borrow more and more. In effect this creates a boom as the banks trade the borrowers debt and give it to the savers. During a boom this continues and it is fairly basic to understand (you get a boom when banks lend more and people/governments/companies take on this debt)

The difficult part (which seems simple to me) is why this goes into a bust.

Well simply the spenders can not continue spending as they reach their debt limit. The banks and savers simply wont give them more credit so you get a bust. Now this is bad for everyone as trade grinds to a halt. The spender cant spend and the saver cant produce and save.

So what needs to happen? Well at that point naturally the saver and the spender must swap roles. Those who are savers need to become spenders and those who are spenders need to become savers. If that happened we would have a permanent boom and this is probably the holy grail of economics and business. However a saver is and will likely always be a saver and likewise a spender is and likely always will be a spender. They cannot or do not what to change roles.

Hence you get a recession or depression forming.

So the government has to in some way either swap the roles of these two groups (nearly impossible) or reset debt so the savers and spenders can continue doing what they do.

That means either inflate the debt away, default on the debt, accept a much lower level of trade or go into recession or perhaps even depression. The only realistic option here is to inflate away the debt.

So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

Money is debt, for every pound of debt there is a pound of savings somewhere. Quick summary, Tosh!

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What we have just done by bailing the rich and those with surpluses out is actually the worst possible, as those with money have not had to be involved in re-balancing the system.

Well, obviously - I mean if you try and take money off the rich they just move abroad, and... Oh... hang on... they really shafted us, didn't they?

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So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

Although the perma boom would be nowhere near the level of boom-ness as the boom we just saw, it would just be very gentle growth

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Well, obviously - I mean if you try and take money off the rich they just move abroad, and... Oh... hang on... they really shafted us, didn't they?

The rich don’t really hold much capital in cash or cash derivatives. That would mainly be pension funds and the old pensioners queuing up at northern rock to pull out their £500k cash savings.

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Although the perma boom would be nowhere near the level of boom-ness as the boom we just saw, it would just be very gentle growth

I believe it would be even a greater boom than we have ever seen but importantly there would be no bust. All we have to do is to do is find a way for savers to convert to spenders and spenders to savers every so often. For example in 2007-8 if all the debt savers in the world, pension funds, china, Germany, old people decided to become spenders that would have continued the boom.

A bust only happens when we get to a limit where spenders can no longer take on any more debt and savers can not offer more debt. If the roles reversed you would continue the boom, just the net goods and services, debt and credit direction would change for a while.

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I think I have figured out how/why boom and busts work and wanted some comments.

I wont go into much detail and assume many of you will know the basics.

Money is debt, for every pound of debt there is a pound of savings somewhere.

So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

Unfortunately it appears there is not £1 of debt for each £1 on dposit.

This is what is causing the banking sector so many problems.

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I believe it would be even a greater boom than we have ever seen but importantly there would be no bust. All we have to do is to do is find a way for savers to convert to spenders and spenders to savers every so often. For example in 2007-8 if all the debt savers in the world, pension funds, china, Germany, old people decided to become spenders that would have continued the boom.

A bust only happens when we get to a limit where spenders can no longer take on any more debt and savers can not offer more debt. If the roles reversed you would continue the boom, just the net goods and services, debt and credit direction would change for a while.

However, for saver to be spender, the price needs to be right. Pretty sure if restaurant means are on £3 and house prices on £30k there will be plenty of demand.

It is not true that £1 of loan comes from £1 of saving - else the Monetary based will never grow! Say you deposit £100 in Halifax, I can actually borrow £200

from Halifax to use it to pay the plumber who also have a halifax account. Halifax simply update the accounting entries. If the plumber than transfer the £200

to HSBC, then it will either have to be funded by a saving elsewhere, or HSBC can create a new loan and loan it to Halifax. Alternatively, halifax can borrow

for 0.5% from the BoE. BoE than put a piece of paper in the left drawer saying '£200 loan to me' and then put a newly minted money in the right drawer which labeled Halifax.

To simplifing things, BoE can mail me a credit card and I go and spend it in the shop and new money is being created as I spend - no saving needed whatsoever (of course

the theory is that I am simply spending the future money that I would save to repay this back).

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Yep. Debt allows imbalances in trade to persist between entities be they people, companies or countries (as well as the development of a complex economy as opposed to a rather tedious barter economy).

When the limits have been reached the balance must be restored between the parties either through reversal of trade flows, default, transfer payments (perhaps through the taxation system) or inflation (possibly through the exchange rate mechanism).

What we have just done by bailing the rich and those with surpluses out is actually the worst possible, as those with money have not had to be involved in re-balancing the system.

With a more free market banking mechanism, it should balance itself.

If you have a chance of losing money from your 'savings' (investments in others' debt, not hoarded real savings) then over time the balance will move back and forth. If credit is given out irresponsibly, those giving it out would be stung and would lose a proportion of their savings.

The problem with state backed fractional reserve banking is that it doesn't allow savers to lose. Even the thought of them losing has caused huge bailouts, much reassurance etc. Even with free fractional reserve banking (no state backing), bank runs aren't a particularly fair way of matching risk to profit - those who see the problems and rush for the exits first lose nothing, while those remaining take a big haircut (maybe lose all their savings).

This is why I am a proponent of Limited Purpose Banking, with full reserves and/or timed savings accounts/mutual fund shares. Each individual chooses their investments, with the optional help of an advisor/fund manager, but they bear all risks, although take all returns. It is a system which correctly allocates risk, gives individuals responsibility for their own actions and doesn't require any bailouts, nor risk bank runs.

With LPB, should a crash happen, those with who have leant money into dodgy asset bubbles would lose. Those who stayed out or invested in other sectors, would be relatively untouched (although market dislocation could cause some contagion).

We need a banking system which can breath and can correctly appropriate risk or these situations are going to keep building up over time.

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That means either inflate the debt away, default on the debt, accept a much lower level of trade or go into recession or perhaps even depression. The only realistic option here is to inflate away the debt.

inflating only works when you can find yet more borrowers.

The only two solutions are:

austerity: allow the savers to keep their claims and eject failed debtors from the monetary economy all together. The failed debtors become actual slaves of the creditors. Many non debtors will become collateral damage and also become slaves. The creditor will take a nominal loss but get a slave or ten in exchange.

default: somehow reduce claims on future income to a sustainable level, then have failed debtors start from the beginning with no capital or assets but with the opportunity to redeem themeselves.

I like the second way better

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The bust occurs because the returns to land increase and starve the other factors of production (labour & capital) of investment. This simultaneously reduces productivty, lowers demand and ruins the banks' balance sheets, which all help create the recessionary environment.

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inflating only works when you can find yet more borrowers.

The only two solutions are:

austerity: allow the savers to keep their claims and eject failed debtors from the monetary economy all together. The failed debtors become actual slaves of the creditors. Many non debtors will become collateral damage and also become slaves. The creditor will take a nominal loss but get a slave or ten in exchange.

default: somehow reduce claims on future income to a sustainable level, then have failed debtors start from the beginning with no capital or assets but with the opportunity to redeem themeselves.

I like the second way better

Or just cut down on costs and promote productivity, this will at least give the indebted the chance to pay off what they owe.

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Or just cut down on costs and promote productivity, this will at least give the indebted the chance to pay off what they owe.

thats crap. the only chance of paying off what is owed is if the size of the money supply increases, which means someone needs to be borrowing even more money, or that the eastern mercantilists suddenly decide to run vast deficits.

debts that can't be repaid, won't be.

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I think I have figured out how/why boom and busts work and wanted some comments.

I wont go into much detail and assume many of you will know the basics.

Money is debt, for every pound of debt there is a pound of savings somewhere.

"no there isn't"

There are generally two types of people, savers and spenders. Savers save and spenders spend.

"And the majority who live month to month doing neither of the above"

In a boom the banks allow spenders to spend more and more by allowing them to borrow more and more. In effect this creates a boom as the banks trade the borrowers debt and give it to the savers. During a boom this continues and it is fairly basic to understand (you get a boom when banks lend more and people/governments/companies take on this debt)

"Thats about it"

The difficult part (which seems simple to me) is why this goes into a bust.

Well simply the spenders can not continue spending as they reach their debt limit. The banks and savers simply wont give them more credit so you get a bust. Now this is bad for everyone as trade grinds to a halt. The spender cant spend and the saver cant produce and save.

So what needs to happen? Well at that point naturally the saver and the spender must swap roles. Those who are savers need to become spenders and those who are spenders need to become savers. If that happened we would have a permanent boom and this is probably the holy grail of economics and business. However a saver is and will likely always be a saver and likewise a spender is and likely always will be a spender. They cannot or do not what to change roles.

"There aren't anywhere near enough spenders"

Hence you get a recession or depression forming.

So the government has to in some way either swap the roles of these two groups (nearly impossible) or reset debt so the savers and spenders can continue doing what they do.

That means either inflate the debt away, default on the debt, accept a much lower level of trade or go into recession or perhaps even depression. The only realistic option here is to inflate away the debt.

So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

After over 8000 posts 'cells' you appear to be going slightly mad!. Have a break, pester Mums.Net or take some other therapy!

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thats crap. the only chance of paying off what is owed is if the size of the money supply increases, which means someone needs to be borrowing even more money, or that the eastern mercantilists suddenly decide to run vast deficits.

debts that can't be repaid, won't be.

Most of the debt isn't held by sovereign wealth funds, it's held by British pension funds and savers who have cashed in on the housing market. These debts can be repaid, or significantly whittled down; but the underlying fiscal conditions need to change to make this possible.

So what if all the debt can't be paid back? That'll never happen under any system imaginable.

Edited by Chef

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Most of the debt isn't held by sovereign wealth funds, it's held by British pension funds and savers who have cashed in on the housing market. These debts can be repaid, or significantly whittled down; but the underlying fiscal conditions need to change to make this possible.

it is impossible for the british economy to pay ANY debt back in aggregate without a fall in the money supply, which at the same time makes it successively harder to pay back the remaining.

the only way to pay back debt without downing our own money supply is to pay it back by reducing the trade deficit until we happen to be in surplus.

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it is impossible for the british economy to pay ANY debt back in aggregate without a fall in the money supply, which at the same time makes it successively harder to pay back the remaining.

the only way to pay back debt without downing our own money supply is to pay it back by reducing the trade deficit until we happen to be in surplus.

And how do you propose we do that. 1st we got to stop running a deficit. Then our oil and gas slow to a trickle. Our foreign markets are in contraction. Then we run a trade surplus, somehow.

We can't pay it back. The reality is that no-one can pay theirs either. We're stuffed.

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I think I have figured out how/why boom and busts work and wanted some comments.

I wont go into much detail and assume many of you will know the basics.

Money is debt, for every pound of debt there is a pound of savings somewhere.

There are generally two types of people, savers and spenders. Savers save and spenders spend.

In a boom the banks allow spenders to spend more and more by allowing them to borrow more and more. In effect this creates a boom as the banks trade the borrowers debt and give it to the savers. During a boom this continues and it is fairly basic to understand (you get a boom when banks lend more and people/governments/companies take on this debt)

The difficult part (which seems simple to me) is why this goes into a bust.

Well simply the spenders can not continue spending as they reach their debt limit. The banks and savers simply wont give them more credit so you get a bust. Now this is bad for everyone as trade grinds to a halt. The spender cant spend and the saver cant produce and save.

So what needs to happen? Well at that point naturally the saver and the spender must swap roles. Those who are savers need to become spenders and those who are spenders need to become savers. If that happened we would have a permanent boom and this is probably the holy grail of economics and business. However a saver is and will likely always be a saver and likewise a spender is and likely always will be a spender. They cannot or do not what to change roles.

Hence you get a recession or depression forming.

So the government has to in some way either swap the roles of these two groups (nearly impossible) or reset debt so the savers and spenders can continue doing what they do.

That means either inflate the debt away, default on the debt, accept a much lower level of trade or go into recession or perhaps even depression. The only realistic option here is to inflate away the debt.

So the cause of busts, recessions and depressions….. savers who save capital in the form of others debts. If they saved in other forms we would have perma booms.

The propensity of certain individuals to be spenders isn't what causes the boom. The boom is caused by the increase in the money supply due to the process outlined by some previous posters ie if the bank lends someone £100 then they will eventually deposit it somewhere else where it can then be relent ie there's not £1 of debt for every £1 of saving. The boom is simply inflation which can either be cost of living inflation or asset price inflation.

Asset price inflation reinforces the boom ie if noone can get a mortgage for more than £100k then the maximum theoretical house price is £100k unless you have a house to sell which is valued at £100k in which case you can afford to pay £200k. This is how house prices have become so far out of step with incomes. House price inflation is self-perpetuating.

The crash happens when the money supply goes into decline either because people are repaying their debts or because default by borrower A means that borrower B can't pay borrower C who then can't pay borrower D etc.

The point of quantitive easing is to maintain the money supply at the pre bust levels but obviously it's impossible to print large amounts of money without it unfairly benefiting some parts of society at the expense of others and it provides a huge incentive to try and play the system rather than going to work for your bread and shelter.

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it is impossible for the british economy to pay ANY debt back in aggregate without a fall in the money supply, which at the same time makes it successively harder to pay back the remaining.

So paying down debt is something to be avoided??

the only way to pay back debt without downing our own money supply is to pay it back by reducing the trade deficit until we happen to be in surplus.

The money supply needs to be reduced. Money = debt, there's far too much money in our economy right now.

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The money supply needs to be reduced. Money = debt, there's far too much money in our economy right now.

yeah but if you reduce the money supply it makes it mathematically impossible to satisfy all the remaining outstanding claims unless you magically increase velocity at the same time to compensate.

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yeah but if you reduce the money supply it makes it mathematically impossible to satisfy all the remaining outstanding claims unless you magically increase velocity at the same time to compensate.

These debts don't all have to be paid back at the same time, but what needs to happen first is that those that are borrowing beyond their means (i.e the gov't) need to balance their books.

At the very least we need to stop digging ourselves a deeper hole, you agree with that, don't you?

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These debts don't all have to be paid back at the same time, but what needs to happen first is that those that are borrowing beyond their means (i.e the gov't) need to balance their books.

having the indebted balancing their books will prove to be impossible even straight off the bat unless there is someone on the other side of the trade.

consider actors A, B, C, D.

A = -5

B = -2

C =+3

D = +4

--

total outstanding debt = 7

now, for A to get hold of 1 to pay C, either C or D must pay him some money. Lets say D gives A the 1 for some service.

Now we have:

A = -4

B = -2

C = +2

D = +4

--

total debt outstanding =6

this only works because C has agreed to reduce its surplus position. Basically, C has consumed his surplus rather than invested it.

so debt repayment can only happen (assuming no NEW debt is created) if those holding surplus (savings) agree to spend them on consumption.

At the very least we need to stop digging ourselves a deeper hole, you agree with that, don't you?

I do agree, and there are only two ways that can happen:

1. debtors and savers swap roles, with the former saving and the latter spending (on consumption not investment)

2. simply have some defaults so we reduce net surplus AND deficit positions.

the madness of of austerity is that it suggests debt can be paid back while C and D retain their existing surplus positions.

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I believe it would be even a greater boom than we have ever seen but importantly there would be no bust. All we have to do is to do is find a way for savers to convert to spenders and spenders to savers every so often. For example in 2007-8 if all the debt savers in the world, pension funds, china, Germany, old people decided to become spenders that would have continued the boom.

A bust only happens when we get to a limit where spenders can no longer take on any more debt and savers can not offer more debt. If the roles reversed you would continue the boom, just the net goods and services, debt and credit direction would change for a while.

All the debtors available generated capital would be spent on servicing the debt (with interest), there would be no possibility of saving. Also, given existing fractional reserve banking ratio's, the saver's would need to spend at about 9.5 times the rate of an average spender just to make up the difference and cover the accrued interest. Perhaps, if the reserve ratio's were adjusted to 1\1 it might help, but the business cycle would then be compressed to an impractically short duration and massive financial dislocation would occur.

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  • 140 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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