Chicken And Egg, Bubbles And Troubles...

[pig]

So does Housing Benefit aggravate the housing bubble ? or do bubbles explode HB?

And is 'austerity' the answer to debt, or is it now aggravating it ?

Is it therefore a choice between slashing the state VS deflating asset bubbles and rebalancing the economy ?

Is reducing the state BY deflating asset bubbles and rebalancing the economy actually possible, or just too politically unpalatable ?

[wonderpup]

So does Housing Benefit aggravate the housing bubble ? or do bubbles explode HB?

And is 'austerity' the answer to debt, or is it now aggravating it ?

Is it therefore a choice between slashing the state VS deflating asset bubbles and rebalancing the economy ?

Is reducing the state BY deflating asset bubbles and rebalancing the economy actually possible, or just too politically unpalatable ?

The basic problem is that the bankers created more promises on wealth than there is wealth to meet those promises. Austerity simply reduces the amount of wealth still further and exacerbates the problem.

But austerity is preferred to the real alternative which is debt restructuring because most of the IOU's are held by the same people who get to decide the strategy- and they stand to lose most if the debt is restructured.

One rather obvious thing that is rarely mentioned is that if there is a vast mountain of debt on one side there must be a vast mountain of wealth on the other, since one persons liability is another persons asset- the two must equal out.

So if that debt is to be reduced this means that someone somewhere must take a loss- and no one want's to do that.

Hence the current desperate hunt for a way to preserve that mountain of debt without sinking the economy of the planet- but to date no such magical solution has appeared- just a slow slide into global insolvency.

[alexw]

The basic problem is that the bankers created more promises on wealth than there is wealth to meet those promises. Austerity simply reduces the amount of wealth still further and exacerbates the problem.

But austerity is preferred to the real alternative which is debt restructuring because most of the IOU's are held by the same people who get to decide the strategy- and they stand to lose most if the debt is restructured.

One rather obvious thing that is rarely mentioned is that if there is a vast mountain of debt on one side there must be a vast mountain of wealth on the other, since one persons liability is another persons asset- the two must equal out.

So if that debt is to be reduced this means that someone somewhere must take a loss- and no one want's to do that.

Hence the current desperate hunt for a way to preserve that mountain of debt without sinking the economy of the planet- but to date no such magical solution has appeared- just a slow slide into global insolvency.

Yup.

The austerity the UK is undertaking basically means taking productive workers and throwing them on unemployment and paying them some percentage of their prior incomes via benefits, while simultaneously telling them how worthless they are and that they should get a job.

But by doing this we destroy the very economic activity which is needed if debt claims are to be met. This is why austerity has been an absolute disaster for our nation.

[pig]

The basic problem is that the bankers created more promises on wealth than there is wealth to meet those promises. Austerity simply reduces the amount of wealth still further and exacerbates the problem.

But austerity is preferred to the real alternative which is debt restructuring because most of the IOU's are held by the same people who get to decide the strategy- and they stand to lose most if the debt is restructured.

One rather obvious thing that is rarely mentioned is that if there is a vast mountain of debt on one side there must be a vast mountain of wealth on the other, since one persons liability is another persons asset- the two must equal out.

So if that debt is to be reduced this means that someone somewhere must take a loss- and no one want's to do that.

Hence the current desperate hunt for a way to preserve that mountain of debt without sinking the economy of the planet- but to date no such magical solution has appeared- just a slow slide into global insolvency.

Sounds clear and interesting way of putting it - for something that sounds like a real mess that is befuddling my poor brain...

So, If buyers have bought (overpriced!) properties - sellers run off with the money (wealth) whereas the buyers are in an equal amount of debt to the bank, who has er... kind of invented the money from thin air albeit based on future wages. There aren't enough future wages to support this debt - which austerity - whose purpose ironically is to reduce (public) debt - aggravates even more.

It sounds like right wing state slashing is therefore woefully naive - but then i have to admit I'm a bit out of my depth too: Presumably this is what you mean by 'preserving' the mountain of debt - i.e. avoiding having to admit it can't be paid ? While the bank effectively owns the asset, what is in danger is future income (asset + interest) to the bank ?

If I've understood correctly, austerity leads to private debt destruction = bank profit destruction, leading to inability to lend, leading to the state stepping in to support private debt ?

I'm really hoping I don't understand this...

[goldbug9999]

The austerity the UK is undertaking ...

What austeristy would that be ? - exactly how much have we reduced gov spending by ?.

[wonderpup]

Sounds clear and interesting way of putting it - for something that sounds like a real mess that is befuddling my poor brain...

So, If buyers have bought (overpriced!) properties - sellers run off with the money (wealth) whereas the buyers are in an equal amount of debt to the bank, who has er... kind of invented the money from thin air albeit based on future wages. There aren't enough future wages to support this debt - which austerity - whose purpose ironically is to reduce (public) debt - aggravates even more.

It sounds like right wing state slashing is therefore woefully naive - but then i have to admit I'm a bit out of my depth too: Presumably this is what you mean by 'preserving' the mountain of debt - i.e. avoiding having to admit it can't be paid ? While the bank effectively owns the asset, what is in danger is future income (asset + interest) to the bank ?

If I've understood correctly, austerity leads to private debt destruction = bank profit destruction, leading to inability to lend, leading to the state stepping in to support private debt ?

I'm really hoping I don't understand this...

Austerity is the economics version of sacrificing a chicken to make the black magic work properly. The point of killing the chicken is to lend some degree of reality to the magic spell you wish to cast.

In a similar fashion the point of austerity is to lend some degree of reality to the idea that the debt will be paid back.

The problem is that a dead chicken lays no eggs.

[scepticus]

Yup.

The austerity the UK is undertaking basically means taking productive workers and throwing them on unemployment and paying them some percentage of their prior incomes via benefits, while simultaneously telling them how worthless they are and that they should get a job.

But by doing this we destroy the very economic activity which is needed if debt claims are to be met. This is why austerity has been an absolute disaster for our nation.

Austerity in the presence of a lower bound on rates is self defeating.

Wonderpup - 'debt restructuring' means negative interest rates in some shape or form.

Thinking that such a policy can apply only to the rich is deluded.

It has to apply globally and generally otherwise the sinews of society will collapse. It does not necessarily have to be applied linearly, but there does need to be a sense in which we are all in it together, otherwise the 'picking winners' narrative, whather the winners be rich or poor has disasterous consequences.

THis is what the EZ is grappling with.

[pig]

What austeristy would that be ? - exactly how much have we reduced gov spending by ?.

That would be austerity as a matter of policy: cutting public services, raising VAT, freezing/reducing/eliminating services etc.

Austerity as a state of mind: austerity the key agenda, austerity only affecting the undeserving anyway.

Austerity as the only self-evidently logical course of action: there is no money, its the only option, public borrowing is destructive, the markets don't like it.

But you're right: in spite of all that, for some reason its not happening and its not working.

Clearly it must be because despite idealogical inclination, the conservatives don't have the balls for 'proper' austerity ?

[porca misèria]

Sounds clear and interesting way of putting it - for something that sounds like a real mess that is befuddling my poor brain...

So, If buyers have bought (overpriced!) properties - sellers run off with the money (wealth) whereas the buyers are in an equal amount of debt to the bank, who has er... kind of invented the money from thin air albeit based on future wages. There aren't enough future wages to support this debt - which austerity - whose purpose ironically is to reduce (public) debt - aggravates even more.

It sounds like right wing state slashing is therefore woefully naive - but then i have to admit I'm a bit out of my depth too: Presumably this is what you mean by 'preserving' the mountain of debt - i.e. avoiding having to admit it can't be paid ? While the bank effectively owns the asset, what is in danger is future income (asset + interest) to the bank ?

If I've understood correctly, austerity leads to private debt destruction = bank profit destruction, leading to inability to lend, leading to the state stepping in to support private debt ?

I'm really hoping I don't understand this...

You're mixing different things. But you're in good company: it seems lots of mainstream media are, too.

First to what happened. We had a bubble where banks loaned out money that could never be repaid. Starting in 2009, some of that missing money was printed into existence. If you can deal with a metaphor, look up "pork futures warehouse".

Some people saw the bubble and warned around 2003 (when we could probably still have got away with a moderate bust as in the early '90s), but the markets as a whole and TPTB only noticed when the banks started going bust. Those intervening years were the really ruinous bit.

Austerity as contraction of the economy is what happened inevitably when the bubble proved unsustainable. Regardless of government action. That's why all the government pumping (money printing, funding for lending, etc) is pushing on a string. Stimulus can 'work' for a while, but only stokes a bigger bubble and eventual crash. A Ballsian stimulus in 2005 'worked' and kept the economy on a high for another couple of years, but it was a druggie's high: the phase before becoming a desperate junkie.

In 2005, government could (and did) still deliver apparent growth by spending. That option went away (unless you're Balls) when bust banks demonstrated the emperor's wardrobe malfunction. Hence all the extraordinary measures and the zombies. In 2007/8 the government shied away from the Iceland solution and picked Greece instead. What they've done since is a desperate attempt to go Japanese rather than Greek (or Weimar, if we persist with the sugar rush that delivered a pre-election pick-me-up in 2009).

If government spending had come down earlier we'd be in much less of a mess now. The more government spends today, the more trouble the future is in. The best thing government could do is get out of the way of the productive economy, but even that is horribly hampered by the spectre of zombie banks, and the political difficulty of writing off taxpayer bailouts. The worst thing it can do is create ever more perverse incentives, complex rules and red tape. We have one huge and chronic perverse incentive called the welfare state[1], and another one called bailouts that we all thought had been consigned to history until some idiot starting in 2007 wrote a blank cheque to the banks.

[1] Note that Beveridge's welfare state was a different beast: an altogether more spartan safety net.

[billybong]

Isn't it all why Carney has got the job. There are so many apparently incompatible angles to the crisis that a couple of days ago Carney was reported as emphasising that the UK is in (the excuses are starting to roll in already).

Austerity (along with re-balancing) would likely eventually be beneficial but in the short term the banks lose out through further business/personal bankruptcies etc, the UK loses businesses and jobs etc and the government loses out through further lost popularity.

Too much stimulation/QE etc and the banks lose out through devaluation of their lending book/mortgages etc, the country goes to desperate rack and ruin and the UK loses more businesses and jobs etc and the government loses out through further lost popularity

He's another of the squid so he'll be trying to balance the interests of the banking sector including its existing lending book etc, the government and its popularity and its debt. It's clearly something that Osborne and pals are/were completely floundering at and inept at. It remains to be seen whether Carney flounders at the balancing act as well and that's quite likely but it's also likely the short term fix will be more attempted stimulus until the general election for the government popularity angle and then maybe? something different for the banking interests angle.

Don't hold up too much hope of him trying to help to re-balance the UK economy for the UK's future general prosperity. That's evidently just government hot air - repeatedly demonstrated over years and years.

In the meantime he'll be a handy well paid scapegoat a bit like the BoE as a whole was when the BoE was handed the "independent" role on interest rates and inflation etc. On the other hand if things get really bad he might end up being a "technocrat" in charge of the UK.

Edited April 23, 2013 by billybong

[goldbug9999]

But you're right: in spite of all that, for some reason its not happening and its not working.

So what, then, is the point of advocating doing less of something we arnt really doing ?.

[pig]

So what, then, is the point of advocating doing less of something we arnt really doing ?.

Well, back to the OP, heres a suggestion: rather than the various attempts to reign in housing benefit (government induced 'austerity'), wouldn't it be a bit more sensible if it stopped supporting - and we stopped relying on - high house prices ?

This is not unrelated to the idea that we encourage a 'productive economy' rather than one that seems to be underpinned by housing bubbles that result in massive state spending at which... attempts at cutting are so hopeless that they result in people like you saying 'we aren't really doing' it ?

[goldbug9999]

Well, back to the OP, heres a suggestion: rather than the various attempts to reign in housing benefit (government induced 'austerity'), wouldn't it be a bit more sensible if it stopped supporting - and we stopped relying on - high house prices ?

This is not unrelated to the idea that we encourage a 'productive economy' rather than one that seems to be underpinned by housing bubbles that result in massive state spending at which... attempts at cutting are so hopeless that they result in people like you saying 'we aren't really doing' it ?

Reigning in housing benefit is one of the things that will bring prices down (although that is probably not the reason its being done).

[goldbug9999]

Well, back to the OP, heres a suggestion: rather than the various attempts to reign in housing benefit (government induced 'austerity'), wouldn't it be a bit more sensible if it stopped supporting - and we stopped relying on - high house prices ?

This is not unrelated to the idea that we encourage a 'productive economy' rather than one that seems to be underpinned by housing bubbles that result in massive state spending at which... attempts at cutting are so hopeless that they result in people like you saying 'we aren't really doing' it ?

Reigning in housing benefit is one of the things that will bring prices down (although that is probably not the reason its being done).

[pig]

You're mixing different things. But you're in good company: it seems lots of mainstream media are, too.

First to what happened. We had a bubble where banks loaned out money that could never be repaid. Starting in 2009, some of that missing money was printed into existence. If you can deal with a metaphor, look up "pork futures warehouse".

Some people saw the bubble and warned around 2003 (when we could probably still have got away with a moderate bust as in the early '90s), but the markets as a whole and TPTB only noticed when the banks started going bust. Those intervening years were the really ruinous bit.

Austerity as contraction of the economy is what happened inevitably when the bubble proved unsustainable. Regardless of government action. That's why all the government pumping (money printing, funding for lending, etc) is pushing on a string. Stimulus can 'work' for a while, but only stokes a bigger bubble and eventual crash. A Ballsian stimulus in 2005 'worked' and kept the economy on a high for another couple of years, but it was a druggie's high: the phase before becoming a desperate junkie.

In 2005, government could (and did) still deliver apparent growth by spending. That option went away (unless you're Balls) when bust banks demonstrated the emperor's wardrobe malfunction. Hence all the extraordinary measures and the zombies. In 2007/8 the government shied away from the Iceland solution and picked Greece instead. What they've done since is a desperate attempt to go Japanese rather than Greek (or Weimar, if we persist with the sugar rush that delivered a pre-election pick-me-up in 2009).

If government spending had come down earlier we'd be in much less of a mess now. The more government spends today, the more trouble the future is in. The best thing government could do is get out of the way of the productive economy, but even that is horribly hampered by the spectre of zombie banks, and the political difficulty of writing off taxpayer bailouts. The worst thing it can do is create ever more perverse incentives, complex rules and red tape. We have one huge and chronic perverse incentive called the welfare state[1], and another one called bailouts that we all thought had been consigned to history until some idiot starting in 2007 wrote a blank cheque to the banks.

[1] Note that Beveridge's welfare state was a different beast: an altogether more spartan safety net.

Thanks -yes you're right - I did confuse austerity policy and austerity as a result of economic issues (another chicken and egg problem!). Politically It is an interesting mistake to make though - especially if this is how the story is generally being told...

Surely the fundamental issue is not 'spending' however - there seems to me to be way too much reductio absurdum in this area of debate. We are spending large amounts on housing benefit because the economy is unbalanced - and as much discussed here practically unhinged by the housing market.

The 'cutting red tape' mantra is a complete 'red' herring, its over-used by politicians who have no ideas or vision and indeed ultimately led to a global financial crisis. Rather than the government 'getting out of the way' it needs to rebalance the economy into a productive version.

Germany's economic success is not founded on cutting red tape and high house prices.

[wonderpup]

Austerity in the presence of a lower bound on rates is self defeating.

Wonderpup - 'debt restructuring' means negative interest rates in some shape or form.

Thinking that such a policy can apply only to the rich is deluded.

It has to apply globally and generally otherwise the sinews of society will collapse. It does not necessarily have to be applied linearly, but there does need to be a sense in which we are all in it together, otherwise the 'picking winners' narrative, whather the winners be rich or poor has disasterous consequences.

THis is what the EZ is grappling with.

Debt restructuring is not a policy, it's an inevitability- austerity is a purely cosmetic exercise to allow extend and pretend to continue a while longer.

I'm not claiming that it's a good thing for anyone- but it's a disaster if your 'wealth' happens to be an expiring stack of never to be paid IOU's.

The issue of 'picking winners' does not arise in a situation where there is no real discretionary component.

Benanke and Co are like those little kids with toy steering wheels pretending to be driving the car- when in reality they are passengers. The real secret is that there is no secret- just a bunch of frightened men who really don't have any answers.

If debt = wealth and debt dies then wealth dies with it- attempting to preserve that debt based wealth by issuing more debt will not work- it simply leads to a larger destruction of wealth when the inevitable collapse comes.

Everyone know this but we are all too scared to really accept it- especially those whose 'net worth' consists largely of other people's debt obligations.

[pig]

Debt restructuring is not a policy, it's an inevitability- austerity is a purely cosmetic exercise to allow extend and pretend to continue a while longer.

I'm not claiming that it's a good thing for anyone- but it's a disaster if your 'wealth' happens to be an expiring stack of never to be paid IOU's.

The issue of 'picking winners' does not arise in a situation where there is no real discretionary component.

Benanke and Co are like those little kids with toy steering wheels pretending to be driving the car- when in reality they are passengers. The real secret is that there is no secret- just a bunch of frightened men who really don't have any answers.

If debt = wealth and debt dies then wealth dies with it- attempting to preserve that debt based wealth by issuing more debt will not work- it simply leads to a larger destruction of wealth when the inevitable collapse comes.

Everyone know this but we are all too scared to really accept it- especially those whose 'net worth' consists largely of other people's debt obligations.

Isn't that a little too simple ? The credit crunch did not affect just the hopeless bets - if we keep on reducing the discussion to a simplistic 'debt is bad' we really will end up in much worse trouble than any future debt collapse will inflict.

We do need to 'invest' in a more productive economy. But its not going to happen if we eliminate the concept of 'investment' by simply calling it 'debt' and then insisting that 'debt is bad'.

[wonderpup]

Isn't that a little too simple ? The credit crunch did not affect just the hopeless bets - if we keep on reducing the discussion to a simplistic 'debt is bad' we really will end up in much worse trouble than any future debt collapse will inflict.

We do need to 'invest' in a more productive economy. But its not going to happen if we eliminate the concept of 'investment' by simply calling it 'debt' and then insisting that 'debt is bad'.

There's nothing wrong with borrowing to invest in future productivity- the problems arise when you borrow to speculate on rising asset prices and those doing the lending have a huge personal incentive to misallocate capital into non productive assets.

The irony is that the bankers one claim to social utility has been their assertion that they are the best people to take societies precious capital and invest it wisely- and what did they do with that 'wall of money' that arrived from the east- they blew a massive housing bubble.

So I agree with you- the problem is that the bankers no longer need to invest in the real economy to make a profit- they have the shadow banking system to play in where billions can be traded on such abstractions as interest rate swaps and other 'instruments'.

Like the gambling addict they forgo the hard work of creating wealth in the real world, preferring instead to take their chances in the Casino- with the added benefit that should they lose big the taxpayer will be on hand to bail them out.

[pig]

There's nothing wrong with borrowing to invest in future productivity- the problems arise when you borrow to speculate on rising asset prices and those doing the lending have a huge personal incentive to misallocate capital into non productive assets.

The irony is that the bankers one claim to social utility has been their assertion that they are the best people to take societies precious capital and invest it wisely- and what did they do with that 'wall of money' that arrived from the east- they blew a massive housing bubble.

So I agree with you- the problem is that the bankers no longer need to invest in the real economy to make a profit- they have the shadow banking system to play in where billions can be traded on such abstractions as interest rate swaps and other 'instruments'.

Like the gambling addict they forgo the hard work of creating wealth in the real world, preferring instead to take their chances in the Casino- with the added benefit that should they lose big the taxpayer will be on hand to bail them out.

OK - more or less agree with the above analysis. So lets take a look at it moving forward,

So we are massively in the red because we spent it all bailing out the banks. And this was starting from a position of an unproductive economy that is for example p1ssing away money on housing benefit as a result of its bubbles of unproductive wealth, promoted by all political parties and the majority of the population.

The rather craven solution is to cut housing benefit. Some on this forum support this as they see it as a prop for house prices - thereby inverting the above analysis. I agree that in actual fact something of a vicious circle might be in operation which needs to be broken, but I suspect this is merely the idiotic and somewhat cruel extension of the equally idiotic policy drive over the last 30 years.

And we need to get away from the reductio absurdum debate on deficit/state reduction - even with so much at stake. Political reductio absurdum tends to be secretly unconcerned with potential catastrophic consequences anyway, 'either you're with us or against us' springs to mind as an example from another debate...

As an example, Labour are talking about diverting housing benefit to constructing houses. No doubt they will screw it up if given the opportunity - but surely this is a vast improvement to the debate ?

The Right may hate the idea of big government spending on infrastructure, when 'we have no money' and it well may increase government 'spending on housing' in the short term. But if in the medium to long term, it obliterates the housing benefit bill, creates jobs while easing pressure on wages, increases private money for investment in the productive economy, and makes us altogether more competitive - how does this compare to socialism for the banks and a ballooning housing benefit need ?

[wonderpup]

OK - more or less agree with the above analysis. So lets take a look at it moving forward,

So we are massively in the red because we spent it all bailing out the banks. And this was starting from a position of an unproductive economy that is for example p1ssing away money on housing benefit as a result of its bubbles of unproductive wealth, promoted by all political parties and the majority of the population.

The rather craven solution is to cut housing benefit. Some on this forum support this as they see it as a prop for house prices - thereby inverting the above analysis. I agree that in actual fact something of a vicious circle might be in operation which needs to be broken, but I suspect this is merely the idiotic and somewhat cruel extension of the equally idiotic policy drive over the last 30 years.

And we need to get away from the reductio absurdum debate on deficit/state reduction - even with so much at stake. Political reductio absurdum tends to be secretly unconcerned with potential catastrophic consequences anyway, 'either you're with us or against us' springs to mind as an example from another debate...

As an example, Labour are talking about diverting housing benefit to constructing houses. No doubt they will screw it up if given the opportunity - but surely this is a vast improvement to the debate ?

The Right may hate the idea of big government spending on infrastructure, when 'we have no money' and it well may increase government 'spending on housing' in the short term. But if in the medium to long term, it obliterates the housing benefit bill, creates jobs while easing pressure on wages, increases private money for investment in the productive economy, and makes us altogether more competitive - how does this compare to socialism for the banks and a ballooning housing benefit need ?

I suspect even the most anti labour people on here will agree that it makes more sense for the state to build houses if the alternative is to keep on paying a massive housing benefits bill.

But in many ways almost all the debates we have on this site are really just disagreements concerning deck chair arrangements- the economic ship is holed below the water line and sinking in an ocean of debt.

It was never a good idea to give the power to create near unlimited debt to people who could earn a commission on every loan they made- but that's what we did- and just to make sure it would all end in tears we also tore down all the controls our grandfathers had the wisdom to put in place to prevent this.

First we had bail outs- then bail ins- next comes the defaults. Too many people own too many claims on too little real wealth for this to end well.