The Economy

[cells]

[1] As individuals we produce and we consume our own products/capital. We trade some of this production with others products. We may also save in the form of infrastructure or savings of real capital (for example producing a store of food). There is no debt and there is no savings in the form of other peoples debt. In theory you could have an infinite amount of capital but reality means you will chose free time over more capital as productivity is very low so we choose free time. This is largely the economy of 3rd world countries.

[2] Some individuals produce more than they consume and others produce less than they consume. There is a debt owed by those who consume the excess of those who produce more. This is good as there is more production and consumption than there would otherwise have been and productivity is increased. A form of imagined capital is saved, the promises of one to the other. If producers and consumers swap frequently you get economy [1] but a lot more productive with more work and less free time. Often this is good because the free time in [1] was at a great loss of comfort from low productivity and trade. (in my experience the people of this economy are the most content, usually only the husband works and the wife stays at home. A lot of people own their own homes outright no mortgage or rent for very reasonable sums.) If the producers and consumers of this economy swap roles very frequently you get economy [3] where production and consumption is very high but without increasing debt. this is what economies strive for but due to human nature never achieve.

[3] Some individuals continually consume more than they produce and others continually produce more than they consume. The system is geared to allow this to happen. There is a big debt that grows and grows from the consumers to the producers. This is good to a degree in that consumption & production is far higher than it would otherwise be. This increase trade also results in a large increase of productivity as it is more efficient to build 5 million cars per car than it is to build half a million. This is a very productive economy where employment and consumption and production is very high but often free time is low. This economy can only exist while one group overproduces and the other over consumes…while the debt grows. This economy can only function with increasing debt and in a non perfect illiquid market will result in bubbles with negative social consequences.

The end game of this economy is either the writing off of debt by the overproducers as the under producers cannot pay and revert to economy [2] (arguably what happened in the great depressions) or for the overproducers and under producers to come to an agreement whereby they keep the debt and charge no interest or lower interest (today and arguably the last recession) and revert partly to economy [2] while productivity can catch up to start the debt build up once more. This is called a first world economy.

[Human nature]

A saver is a saver by nature and this is hard to change

A spender is a spender by nature and this is hard to change.

So for both groups to swap roles is difficult.

To have full employment, high productivity, high consumption and high production you need these two groups to swap roles periodically. If that happened you get economy [3] with no debt. In essence economy [2] on steroids.

Just something that popped into my head. As far as I can see it, this isn’t a house price bubble it is a debt bubble purposely in place to keep us in economy [3]. There will always be unfairness in economy [3] and booms and busts. However if you like high production and consumption you have to keep it alternative is to become a second world economy.....Wouldn’t be that bad really, im sure we would on average be happier.

[scepticus]

To have full employment, high productivity, high consumption and high production you need these two groups to swap roles periodically. If that happened you get economy [3] with no debt.

no, if that happens you get an economy with peak debt, and an interest rate of 0.

there is no money any more and never will be again, and the only way to maintain such high level of output is with peak debt, because there is no other mechanism besides totalitarian central planning for allocating the distribution of todays surplus and maintaining the activity level of the workforce.

[libspero]

Why can't the answer just be something really simple.. like we all produce as much as we need in order to consume as much as we need?!

Or is that too stupid..

[pandora's box]

there is no money any more and never will be again

what does that mean

[scepticus]

Why can't the answer just be something really simple.. like we all produce as much as we need in order to consume as much as we need?!

Or is that too stupid..

that notion is indeed noble and goes by the name of social credit.

and this is indeed the direction we are all headed.

of course there is no room in such a society for risk free returns of any kind.

[cells]

no, if that happens you get an economy with peak debt, and an interest rate of 0.

there is no money any more and never will be again, and the only way to maintain such high level of output is with peak debt, because there is no other mechanism besides totalitarian central planning for allocating the distribution of todays surplus and maintaining the activity level of the workforce.

I don’t agree, you don’t need any debt to produce nor do you need any debt to produce a lot. You just need lots of trade without an increase in debt. it is possible and practical and to a large extent exists today. For example we don’t add 100% of GDP to debt each year because a large part of our trade isn’t dependant on debt.

In fact you could work it out. I don’t know the figures but for arguments sake lets say America has a GDP of $10T. That is trade worth $10T that year. If total debt, ie government, companies, and individuals etc increases by say 10% of GDP it means 90% of trade wasn’t dependant on debt increasing only 10% was.

[cells]

Why can't the answer just be something really simple.. like we all produce as much as we need in order to consume as much as we need?!

Or is that too stupid..

Depends what you mean by that. If as individuals we do that, ie we produce all our needs and consume them as individuals or families or small groups you get a 3rd world economy because productivity is too low. That is to say you as a family or village cant produce and consume certain goods because you cant build say a power station or a computer chip plant.

If you mean as a country or planet we largely do. We just seem to want more than that and add debt to the system so we can have more consumption and production than is simply possible with no debt growth.

Instead the first world chooses debt growth which is fine no problem at all but only if that debt reverses and excess producers become excess consumers and vice versa. However human nature makes it hard for a prolific spender to become a saver and a prolific saver to become a net spender. Because of this the imbalance continues until the debtor can no longer take on more debt and service it. At that point you get a recession/depression or a failure of the economy completely.

[libspero]

that notion is indeed noble and goes by the name of social credit.

and this is indeed the direction we are all headed.

of course there is no room in such a society for risk free returns of any kind.

I find it incredibly difficult to unpick your logic sometimes.

I'm not sure social credit is the only mechanism that rewards production with consumption.. but ok.

As far as "risk free returns" go. Any society can offer risk free returns.. it's simply a mechanism for removing wealth from those who have produced but not consumed.

As long as "risk free returns" are below the rate of monetary expansion those "risk free returns" are actually risk free slowly eroding savings.

We can continue to inflate the money supply indefinitely.. but you know all that already

Edited November 25, 2010 by libspero

[libspero]

If you mean as a country or planet we largely do. We just seem to want more than that and add debt to the system so we can have more consumption and production than is simply possible with no debt growth.

Indeed, but as you say.. there is imbalance between those who produce and those who consume.

I'm not saying I know the answer.. I don't. I guess we just need the Chinese to realise that simply accumulating American debt is a bit of a pointless exercise and that they should let their currency rise and start consuming something for themselves.

[cells]

Indeed, but as you say.. there is imbalance between those who produce and those who consume.

I'm not saying I know the answer.. I don't. I guess we just need the Chinese to realise that simply accumulating American debt is a bit of a pointless exercise and that they should let their currency rise and start consuming something for themselves.

I’m not sure it is the Chinese that are the problem. It is the issuers of the debt. if it isn’t china it will be someone else be it a country or a company or citizens on the other side of the equation. However if you don’t issue debt the other side can’t force you.

Plus world debt is something like 100T. Even if china spent all its cash it isn’t going to change things greatly.

Oh and debt isn’t a problem in itself, it is the one way nature of it. If the spenders and savers swap sides periodically it wouldn’t be a problem.

[Authoritarian]

[Human nature]........

You probably overestimate the importance of human nature because man's inclination to save or spend can be distorted by other factors. Take my landlord for example, there's him, his wife & 4 kids and they run a v.small seasonal business for 5-6 months a year. Their consumption levels outstrip their production levels many times (3-4 cars, all latest technological gadgets and 2-3 holidays a year etc) because they own a place in a v.lucrative location. Are they net spenders or savers by nature? It doesn't matter because they're able to fund their lifestyle risk free.

Some of his student tenants -aka my housemates- are quite prudent by nature and I suspect would be net savers given the chance, but they're in loads of debt and are currently watching their opportunites to become savers vanish before their very eyes.

Saver/debtor has less to do with your nature and more to do with;

1) when you were born, and

2) what side of the tenant/landlord fence you sit.

Edited November 26, 2010 by Chef

[Authoritarian]

Instead the first world chooses debt growth which is fine no problem at all but only if that debt reverses and excess producers become excess consumers and vice versa. However human nature makes it hard for a prolific spender to become a saver and a prolific saver to become a net spender. Because of this the imbalance continues until the debtor can no longer take on more debt and service it. At that point you get a recession/depression or a failure of the economy completely.

If the human nature theory of economics was correct then I'd expect to see a constant interplay between savers and debtors, with a steady trickle of bankruptcies right through the business cycle.

Instead we experience a huge boom in savings followed by an equally large debtor bust. Is it just a coincidence that human nature is syncronised and runs like clockwork over about 14 years? It looks like something else is driving the boom.

Edited November 26, 2010 by Chef

[Self Employed Youth]

A very interesting thread.

I consume, but can also produce.

I consumed less when I produced,

Now I consume more, I produce nothing.

I have no debt. - Anomaly?

I should be producing but it is uneconomical. Please help!

My life is better being a drain upon society, than what it was contributing.

Could somebody please explain this crazy situation I am in.

[Meat Puppet]

The human nature theory is, I think, flawed. The lifecycle model fits much better in that young adults are generally borrrowers who slowly mature into net savers in middle age and then become dis-savers or pure consumers in old age.

This would then indicate that demographic differences between nations drive macro savings and debt levels.

Like most theories, probably doesn't work in practice. Any economic historians out there who know how it went down in the 19th century? From what I understand the UK was a very large next exporter of capital and this must have been because returns and hence growth were higher abroad. So the difference in technological levels and the ability for underdeveloped nations to play catch up, ie expand at a rate beyond what their demographies imply, must impact the macro equation as well.

[aa3]

Works on the country level too, Germany is always exporting and the PIGS are always consuming. At some point the roles have to reverse and the PIGS have to sell things to Germany. If they are not allowed to do this, then eventually they must default on their loans from Germany.

[cakehead]

The greatest con that was perpetrated was to elide human contentment with the consumption of the products of capital. Progress exists only in the abstract and usually at great expense.

[Bloo Loo]

there is no debt in a World of giving.

[Bloo Loo]

Works on the country level too, Germany is always exporting and the PIGS are always consuming. At some point the roles have to reverse and the PIGS have to sell things to Germany. If they are not allowed to do this, then eventually they must default on their loans from Germany.

this would work without end if there was no DEBT in the system.

Debt is the concept of repayment of a loan. If the items were gifted, or paid for in full...German financiers A would rely on profits for their rewards, and B: wouldnt be at risk on non payment.

SO, the idea you GIVE your capital to a venture is a true investment....and makes you truly an owner.

In todays stupid system, you buy shares....yet the shares are a LIABILITY on the company....

Edited November 26, 2010 by Bloo Loo

[Stars]

Just something that popped into my head. As far as I can see it, this isn’t a house price bubble it is a debt bubble purposely in place to keep us in economy [3]. There will always be unfairness in economy [3] and booms and busts. However if you like high production and consumption you have to keep it alternative is to become a second world economy.....Wouldn’t be that bad really, im sure we would on average be happier.

The important dynamic is not the taking on of debt by non producers in order to enjoy production, but that rising house prices acts to legally transfer the right to consume production from the producer to the owner of real estate. Producers then have to take on debt to consume their own production and this leaves most of the debtors being the productive (as opposed to the non-productive) and most of the ultimate debt owners being the relatively non productive (large scale previous owners of real estate, who rode the bubble)

As to wether we need it..you have to be kidding right? The whole process reduces the incentive to produce by removing production from the act of production

[Stars]

Why can't the answer just be something really simple.. like we all produce as much as we need in order to consume as much as we need?!

Or is that too stupid..

Not remotely stupid, ideally that is the way the economy would work; producers consuming or trading their production

This is not in the interests of some very influential non-producers, though

[Stars]

And given that bank shareholders i.e. our pension funds are no longer are getting any dividends and have suffered catastrophic falls in share values - you can see who the true enemy really is.

Those who miss-sell risk and extract extraordinary value from the enterprise.

It seems to me you look left and look right, but just can't see the target in front of you

Edited November 26, 2010 by Stars

[Bloo Loo]

And given that bank shareholders i.e. our pension funds are no longer are getting any dividends and have suffered catastrophic falls in share values - you can see who the true enemy really is.

Those who miss-sell risk and extract extraordinary value from the enterprise.

this is my point...investors are not really owners...they dont GIVE the Company anything....and they expect to trade and make a profit on that ownership.

My lawnmower owes me nothing....but it does cut the lawn when I ask it too. ( so far).

[Stars]

Really. There are several targets. They all involve people.

In housing (land) there is massive potential for coerced wealth transfer and people get paid for being an ancillary to this transfer. But remember, the lubrication charges only exist because of the transfer potential. Most of the banking shenanigans wouldn't have happened without millions needing to borrow ever increasing amounts to house themselves.

Edited November 26, 2010 by Stars

[PopGun]

Those who miss-sell risk and extract extraordinary value from the enterprise.

I agree with this.