Oh My Gosh!

[okaycuckoo]

Umm the answer is pretty clear. The eurozone is sinking into deflation with many economies either contracting or on the verge of doing so. German real wages fell last year with all that means for internal consumption and thus production despite it's massive trade surplus.

The contraction of european demand is also harming our economy as it means we need to stimulate internally and thus increase our deficit, otherwise we'd have 10% plus unemployment since we can't now "protect" our economy from european merchantalism due to treaties we have signed.

"Umm" doesn't make the answer clear.

If there has been excess in the EZ then deflation helps with sustaining a balance. It's a matter of definitions.

The UK economy is strictly irrelevant to the question, unless you think we have no choice but to import inflation. In that case we should consider ditching the £ or forcing London out of the £ zone.

[steve99]

+1

Many in the middle classes will simply swap places with those on lower rungs

Your not wanted down there. I found this out when my IT work went to India, was laughed out of the McJob interview room (if I got that far) when they read my CV, (yes, sometimes they only read your CV while they are interviewing you). They most certainly dont want people who have ever earned more than themselves, nor anyone with initiative, just blind obedient sheep thanks.

[bambam]

How did she raise a deposit when she had a sizeable student loan to pay off, plus paying rent in London?

Not sure how sizaeble her loan would have been. Tuition fees didn't kick in till a couple of years after she finished uni.

She would have finished Uni by 1995, trainee solicitor till perhaps 1997, then she did that for years, earned some dough, and went to work unpaid at the Grauniad in 2003 till they gave her a full-time job.

So she actually had six years earning lawyer wages I reckon.

A bit longer than she claims.

[StainlessSteelCat]

What is she complaining about? She is 39 and lying:

" House prices started to rocket before I left school and in most middle-class areas have hardly been dented since. "

As someone born in 1974, she would have left school in 1992. Prices started rising 1996/7. She bought a flat in her 20s for £80k, and I wouldn't be surprised if she owns a couple of BTLs by now (no telling)

If she was 10 years younger she would genuinely be f***ed.

She's a couple of years younger than me, although had a better start in life. It's all relative, of course - but house prices did rise extremely stronger during the late 80s (before crashing in the early to mid 90s).

She likely went to university for a degree and then further training. That might well have meant she wasn't buying until the late 90s when prices in London at least were beginning to take off again.

Maybe she had help from Mum & Dad or saved it up - but £80K on a flat was an sum that was basically unaffordable for me in nearly all of my 20s. Interest rates were higher too. My first job after graduating in 93 paid £8K/year - and I did better than most of my contemporaries as there was a recession in the early 90s and many took 2 years or more to find paying jobs.

She had it better than most, yes - but compared to her parents, maybe not.

But, yes your last sentence is still correct.

There's no such thing as "middle-class", or "those on lower rungs". if you need to work to earn your corn, then you are working-class..

This whole "middle-class" thing is just a social pretension. The only difference between operating a photocopier and operating a fork-lift truck is that the photocopier operator will earn a third of the wages of the fork-lift truck operator.

Quite so, having been part of the scumbag class growing up and now earning a middle class income and surrounded by the middle classes - they nearly all look like workers to me. Almost none could walk away from their jobs tomorrow, and if anything the middle classes live in more fear to due massive debts and keeping up appearances. I'm glad I don't feel the same pressures. I'd rather live a few steps below my income and worry free, than above it maxed out on credit.

Further, if you read Orwell's Keep the Aspidistra flying, you can see that the middle classes have always worried about diminishing lifestyles and made up the difference with debt (in the 30s it was the loss of servants that concerned them and they still had massive mortgages).

They might be getting their comeuppance, but I don't see much call to celebrate. Even if they don't know it, they are still part of the have-nots.

Edited February 22, 2014 by StainlessSteelCat

[MrPin]

There's no such thing as "middle-class", or "those on lower rungs". if you need to work to earn your corn, then you are working-class..

This whole "middle-class" thing is just a social pretension. The only difference between operating a photocopier and operating a fork-lift truck is that the photocopier operator will earn a third of the wages of the fork-lift truck operator.

I agree, but so many do not! It gives DM readers a nice demographic, to "look down" on!

[Ah-so]

I'm pretty sure he didn't mean that we should actually do that, it was just used as an illustrative example. Keynes put in practice is the US highway system and the hoover dam among other things.

Of course for our cretinous treasonous government stimulating demand means help to buy as opposed to the gov taking on the unemployed to build more houses....

You are right, he did not propose we do it. I have been on a thread before where that quotation from Keynes was used, and it was probably Biggus because I remember similar language being used about Keynes - I think he called him an "idiot". I doubt Biggus is an economist or has much knowledge beyond a few internet quotations.

Digging up money is exactly what we do with gold. You find gold, you dig it up. Like cash, its real purpose is as a store of value and can be used as a medium of exchange.

[okaycuckoo]

Chris Dillow looks at the same links and cites Marx:

The lower strata of the middle class...all these sink gradually into the proletariat, partly because their diminutive capital does not suffice for the scale on which Modern Industry is carried on, and is swamped in the competition with the large capitalists, partly because their specialised skill is rendered worthless by new methods of production. Thus the proletariat is recruited from all classes of the population.

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/02/the-middle-class-marxism.html

[Si1]

Not sure how sizaeble her loan would have been. Tuition fees didn't kick in till a couple of years after she finished uni.

She would have finished Uni by 1995, trainee solicitor till perhaps 1997, then she did that for years, earned some dough, and went to work unpaid at the Grauniad in 2003 till they gave her a full-time job.

So she actually had six years earning lawyer wages I reckon.

A bit longer than she claims.

It's that 1975 cutoff again!

[alexw]

I just quoted from his General Theory and you tell me I don't understand Keynes! Perhaps you would like to explain why Keynes was wrong in his understanding of Keynes?

Reducing consumption is necessary when less is being produced than consumed. Unless you have a way to magic stuff up?

I know you quoted from Keynes. But given your previous posts on his work it's obvious that you took his comments at face value thinking "he means if we give everyone 1 million quid we'd all be rich - how stupid", when in reality you missed the underlying concepts and precepts implicit in what he said.

I will try to explain.

In a depressionary spiral the economy is not self-correcting, or at least not self-correcting within time-frames tolerable to society and which it can survive intact. This led to Keynes infamous comment "In the long run we are all dead". We saw this non-self-correction in the great depression where initially absolutely nothing was done on the basis that it would self-correct - which it categorically did not. Instead economic liquidation - begat further liquidation since in a debt based monetary system as people en-mass liquidate to pay down debts, the money supply shrinks faster than the debt, cumulatively and paradoxically this means the real value of debts rise necessitating further and further liquidation.

I.e. If we have 1 million in money and 1.2 million owed that give us a money-debt ratio of 1.2. If we now use 500k of that money to pay down debt (or it is wiped out via default) we have 500k in debt and 700k in money giving us a money-debt ratio of 1.4 . In real terms therefore more is owed than at the start of paying that debt down.

Thus as the U.S government idly stood by and watched thinking it would self-correct, the 1930 recession turned into the 1933 world-wide great depression, crushing economies around the globe. We are now seeing something similar in action in greece, as they cut and cut incomes yet the debt burden continues to rise.

This set the stage for the Keynes comment you posted about burying money.

He suggested that the government create money from nothing to halt and reverse this liquidatory trend using the "buried money" example as an example. It would of course not solve everything, since the economic imbalances that gave rise to the depression would still need to be fixed (the US did this beautifully via glass-steagal and by making sure the gains from increased productivity were spread evenly across society). But it would end the self-feeding vortex, via stopping the contractionary bias in the money supply meaning that further liquidation would be halted.

The government would create money and spend it on things in the wider economy that people needed, but it would have to be done at a rate faster than the contraction in the money supply from the self-feeding vortex. Thus it would build a highway system, the hoover dam, etc, etc. All these would employee people creating true wealth (that still exists today), while pushing new money into the money supply. Those people would then have incomes to spend, so they would go out and buy the things they needed, clothes, food, shelter, transport. The providers of those goods would then have more income themselves which would be paid to their workers, who would in turn spend on other things they needed, and so on and so forth. This would reflate the economy in general, taking the unemployed and making them employed, increasing economic output, well-being, and making the economy function again, and above all it would halt the liquidatory self-feeding spiral. Nor would it create inflation as the new money is matched by new equivalent economic output.

Notably, the amount of new money the US gov initially created was not enough to compensate for that destroyed via economic contraction, it was only when the second world war broke out and the gov went full throttle that the system was flooded with new money to the extent that the economy reflated. This is exactly how the great depression ended - the war effort was one massive reflatory stimulus package.

Though it is not necessary for the government to spend the new money it creates on things that add value, i.e. the money could be just buried, this would certainly not be the most productive way to do this. So transferring this concept to the UK we should have used QE to fund an en-mass house building program. Note also that all this does is prevent the contractionary bias in the economy temporarily, it does NOT fix the underlying imbalances that cause that bias in the first place. All the major governments have categorically NOT fixed the underlying imbalances, they've made no more than a smidgin of an attempt to do so. So once QE ends we will all be contracting economically again. This does NOT mean that printing money to prevent the self-feeding deflationary vortex from taking hold has been a failure - it's done what it was intended to do, give a breathing space and reflate - though given the way QE has been handled it's been extremely poorly implemented. What it means is that the major governments have not used the breathing space provided by QE to fix the underlying economic imbalances. At this task they have been unmitigated disasters.

Edited February 22, 2014 by alexw

[LC1]

I will try to explain.

.

.

.

This does NOT mean that printing money to prevent the self-feeding deflationary vortex from taking hold has been a failure - it's done what it was intended to do, give a breathing space and reflate - though given the way QE has been handled it's been extremely poorly implemented. What it means is that the major governments have not used the breathing space provided by QE to fix the underlying economic imbalances. At this task they have been unmitigated disasters.

Good post, thanks.

[MarkG]

In a depressionary spiral the economy is not self-correcting, or at least not self-correcting within time-frames tolerable to society and which it can survive intact.

When a society is completely broken, the last thing we should want is for it to 'survive intact'. The productive segment of Roman society was much better off after it collapsed than they would have been if it 'survived intact'.

Keynes is all about preserving those in power, and damn the rest of us. Nothing will improve until the current system collapses, and we've already had more than five years of attempts to allow it to 'survive intact' which has only made things worse. How long do you expect us to tolerate that?

[tomandlu]

When a society is completely broken, the last thing we should want is for it to 'survive intact'. The productive segment of Roman society was much better off after it collapsed than they would have been if it 'survived intact'.

Keynes is all about preserving those in power, and damn the rest of us. Nothing will improve until the current system collapses, and we've already had more than five years of attempts to allow it to 'survive intact' which has only made things worse. How long do you expect us to tolerate that?

Tentatively agree. Keynes may well not be the best guide once you are actually in a crisis (which strangely seems to be the only time he's invoked). Did Keynesian economics solve the depression, or was it WWII?

I dunno - I'm conflicted. Building useful stuff using government debt during a private debt crisis doesn't seem the worst plan. Doing it when there's a government debt crisis sounds a little iffier, and is exactly the issue that the boom-time part of Keynes is meant to resolve (the saving bit that never happens except in Norway).

[MarkG]

Tentatively agree. Keynes may well not be the best guide once you are actually in a crisis (which strangely seems to be the only time he's invoked). Did Keynesian economics solve the depression, or was it WWII?

America removing many of its 'progressive' anti-business laws because they actually needed to produce stuff for the war brought the world out of the depression.

Building useful stuff using government debt during a private debt crisis doesn't seem the worst plan. Doing it when there's a government debt crisis sounds a little iffier, and is exactly the issue that the boom-time part of Keynes is meant to resolve (the saving bit that never happens except in Norway).

Keynes was a moron because he believed democratic governments could actually save money during a boom to spend in the bust, rather than spend during a boom and spend even more in a bust. As you say, that's almost never happened in the real world where politicians have to buy votes to get re-elected.

And, yes, I agree, there is some sense in governments spending money, even borrowed money, during a recession if they can spend it on useful infrastructure that would be much cheaper to build in a bust than a boom. But most actually useful infrastructure gets built regardless, so they mostly just build pyramids and white elephants that become yet another economic drain after the economy recovers.

[alexw]

When a society is completely broken, the last thing we should want is for it to 'survive intact'. The productive segment of Roman society was much better off after it collapsed than they would have been if it 'survived intact'.

Keynes is all about preserving those in power, and damn the rest of us. Nothing will improve until the current system collapses, and we've already had more than five years of attempts to allow it to 'survive intact' which has only made things worse. How long do you expect us to tolerate that?

So the ends justifies the means then? It doesnt matter that 1/3 of the population of europe died off after/during the roman empire's fall. After all 600 years later on people were much better off........

Perhaps after the global system falls apart, hundreds of millions (at a minimum) die, and we start to pull ourselves together again in 60-70 years time following a world wide depression lasting decades, we might if we are lucky have a better system than currently. But then as Keynes said "In the end we are all dead"

[alexw]

Tentatively agree. Keynes may well not be the best guide once you are actually in a crisis (which strangely seems to be the only time he's invoked). Did Keynesian economics solve the depression, or was it WWII?

I dunno - I'm conflicted. Building useful stuff using government debt during a private debt crisis doesn't seem the worst plan. Doing it when there's a government debt crisis sounds a little iffier, and is exactly the issue that the boom-time part of Keynes is meant to resolve (the saving bit that never happens except in Norway).

If the government spends the money on useful stuff the real government debt does not increase as the debt is matched by new wealth. Witness how the US gov debt as a percentage of GDP has now leveled off, versus the continued meteoric rise in europe.

[sleepwello'nights]

Reducing consumption is necessary when less is being produced than consumed. Unless you have a way to magic stuff up?

Do you think that the austerity measures being imposed on the European population are a good thing?

[alexw]

America removing many of its 'progressive' anti-business laws because they actually needed to produce stuff for the war brought the world out of the depression.

Keynes was a moron because he believed democratic governments could actually save money during a boom to spend in the bust, rather than spend during a boom and spend even more in a bust. As you say, that's almost never happened in the real world where politicians have to buy votes to get re-elected.

And, yes, I agree, there is some sense in governments spending money, even borrowed money, during a recession if they can spend it on useful infrastructure that would be much cheaper to build in a bust than a boom. But most actually useful infrastructure gets built regardless, so they mostly just build pyramids and white elephants that become yet another economic drain after the economy recovers.

What a load of total...... Any effect this had was absolutely minute and insignificant in comparison to the economic demand engendered in the US economy by the second world war. Indeed overall the amount of regulation and oversight on businesses increased because of the need to make sure the necessary war materials were being produced as required. For example the american government dictated in no uncertain terms that certain industries would be set up in this part of the country or that part. It effectively shifted large parts of the population from the east coast to the west. The amount of command and control in the economy was unprecedented. How's that for freeing businesses?

I don't even understand how you can even believe your own post. But then its obvious you desperately want to find a reason that is not the actual reason, so you choose something so ludicrous.

Edited February 22, 2014 by alexw

[Biggus]

I know you quoted from Keynes. But given your previous posts on his work it's obvious that you took his comments at face value thinking "he means if we give everyone 1 million quid we'd all be rich - how stupid", when in reality you missed the underlying concepts and precepts implicit in what he said.

I will try to explain...

Money is not destroyed during a deflation. The same amount of gold and silver or paper notes or whatever is used as money exists after a 'deflation' as existed before. What gets destroyed is credit. Credit that has been foolishly lent to people who cannot repay it. This is not a bad thing.

You see when credit is created it bids up the price of particular assets, such as houses or stocks, to levels way beyond their fundamental value. Rising prices indicate increased demand and investment floods into the area that has been bid up at the expense of other areas of the economy. In other words a bubble is created. As soon as the credit is withdrawn the bubble bursts, the asset prices falls and all of those businesses go bust. Boo hoo.

My argument is that they should be allowed to go bust. Resources can then be reallocated to productive enterprise and the economy recovers. This may take a couple of years with a housing bubble, but certainly the 2008 correction would have happened long ago and be just a memory now, if the state and BOE had not 'stimulated the economy' for us.

You are arguing that instead of allowing the correction to take place the state should step in and spend money on....whatever. Then demand will be stimulated and production will step up to meet demand and we will all get rich. Great! We never need to have a recession ever again! But wait a minute, where does the state get the money to spend? Oh, that's right. It takes it out of the economy by taxation or borrowing. So it puts money into the economy by taking it out of the economy then putting it back in again. Genius.

To counter this obvious faulty logic Keynes actually invented a 'multiplier'. He argued that an army of bureaucrats spend other people's money do much better than they spend it themselves. It's better to have half a million state busybodies sending each other memos than for people to use their money to buy stuff they want. Crackers, yes, but that's Keynes for you.

[MarkG]

What a load of total...... Any effect this had was absolutely minute and insignificant in comparison to the economic demand engendered in the US economy by the second world war.

America was much more economically free after WWII than it was at the start. That's why they were able to supply the post-war 'demand' they'd created by bombing the crap out of Europe.

If war makes you so rich, why don't you suggest that everyone smash up their houses and burn everything they own? Then they can have all the benefits of war without anyone dying in the process.

[alexw]

Money is not destroyed during a deflation. The same amount of gold and silver or paper notes or whatever is used as money exists after a 'deflation' as existed before. What gets destroyed is credit. Credit that has been foolishly lent to people who cannot repay it. This is not a bad thing.

You see when credit is created it bids up the price of particular assets, such as houses or stocks, to levels way beyond their fundamental value. Rising prices indicate increased demand and investment floods into the area that has been bid up at the expense of other areas of the economy. In other words a bubble is created. As soon as the credit is withdrawn the bubble bursts, the asset prices falls and all of those businesses go bust. Boo hoo.

My argument is that they should be allowed to go bust. Resources can then be reallocated to productive enterprise and the economy recovers. This may take a couple of years with a housing bubble, but certainly the 2008 correction would have happened long ago and be just a memory now, if the state and BOE had not 'stimulated the economy' for us.

You are arguing that instead of allowing the correction to take place the state should step in and spend money on....whatever. Then demand will be stimulated and production will step up to meet demand and we will all get rich. Great! We never need to have a recession ever again! But wait a minute, where does the state get the money to spend? Oh, that's right. It takes it out of the economy by taxation or borrowing. So it puts money into the economy by taking it out of the economy then putting it back in again. Genius.

To counter this obvious faulty logic Keynes actually invented a 'multiplier'. He argued that an army of bureaucrats spend other people's money do much better than they spend it themselves. It's better to have half a million state busybodies sending each other memos than for people to use their money to buy stuff they want. Crackers, yes, but that's Keynes for you.

Credit is to all intents and purposes money. It makes up 97% of our money supply. And in deflationary spirals you do not loose just unproductive parts of the economy or miss-allocated capital. I see people such as yourself holding to this erroneous belief time and time again. Yet it is untrue.

If you let them occur and continue unchecked you loose everything. For example in the great depression in the US industrial output fell by 46%. That is nearly half it's industrial capacity gone!

I'm not saying there should be no correction. I'm arguing that you let and indeed force the correction but you use stimulus spending to keep the system from undergoing general systematic economic liquidation, as happens in deflationary spirals.

Edited February 22, 2014 by alexw

[stormymonday_2011]

When a society is completely broken, the last thing we should want is for it to 'survive intact'. The productive segment of Roman society was much better off after it collapsed than they would have been if it 'survived intact'.

If you consider the almost complete collapse of urban life, a money economy and literacy in western Europe as being 'better off' then I suppose this would be true. It might also interesting to ask the peasants of the Dark Ages whether they thought the warrior feudal elite who came to dominate much of the western world could be remotely described as 'productive'. Extracting the surplus production from the tillers of the soil by force of arms looks pretty much like organised gangsterism to me. Of course, it could be said that the warrior class 'protected' the peasants, Sadly, what they were protecting them from was other thugs with swords ,spears and axes just like themselves. In fact 'protection racket' would be a pretty good description of how early mediaeval European society operated in the centuries after the collapse of the Roman Empire

Edited February 22, 2014 by stormymonday_2011

[Biggus]

Credit is to all intents and purposes money. It makes up 97% of our money supply. And in deflationary spirals you do not loose just unproductive parts of the economy or miss-allocated capital. I see people such as yourself holding to this erroneous belief time and time again. Yet it is categorically untrue.

If you let them occur and continue unchecked you loose everything. For example in the great depression in the US industrial output fell by 46%. That is nearly half it's industrial capacity gone!

I don't want to go all Injin on you, but credit really isn't the same thing as money. If a store gives you a store card credit is created. Is that money? No, it's credit at the store. And if the card is defaulted upon no money is destroyed, just as no money was created when the store gave you the credit.

The great depression in the USA is an example of government stimulus gone mad. The Federal Government confiscated gold and devalued it by 50%, essentially printing piles of money. They had all kinds of stimulus programs. They even went so far as burning food to stimulate food prices, causing people to go hungry. And guess what? The economy did not recover until they stopped meddling.

[@contradevian]

I don't want to go all Injin on you, but credit really isn't the same thing as money. If a store gives you a store card credit is created. Is that money? No, it's credit at the store. And if the card is defaulted upon no money is destroyed, just as no money was created when the store gave you the credit.

The great depression in the USA is an example of government stimulus gone mad. The Federal Government confiscated gold and devalued it by 50%, essentially printing piles of money. They had all kinds of stimulus programs. They even went so far as burning food to stimulate food prices, causing people to go hungry. And guess what? The economy did not recover until they stopped meddling.

Strange these large corporations don't refuse some of these projects. When NASA wanted to go to the moon I don't recall any of the private contractors who built the vehicles saying "ooh no, thats socialism, and meddling." Same with the Hoover dam etc and countless other infrastructure projects.

Here in the UK we are trying to get some nukes built. Once again the State has to guarantee the price per gigawatt. Not for energy companies, the vagaries of the market place.

But yes, maintain the myth of 19th century industrial capitalism

Edited February 22, 2014 by aSecureTenant

[alexw]

I don't want to go all Injin on you, but credit really isn't the same thing as money. If a store gives you a store card credit is created. Is that money? No, it's credit at the store. And if the card is defaulted upon no money is destroyed, just as no money was created when the store gave you the credit.

The great depression in the USA is an example of government stimulus gone mad. The Federal Government confiscated gold and devalued it by 50%, essentially printing piles of money. They had all kinds of stimulus programs. They even went so far as burning food to stimulate food prices, causing people to go hungry. And guess what? The economy did not recover until they stopped meddling.

Except what you said does not match reality. The government did absolutely nothing in terms of the contraction of the money supply, it fell 40% between 1929-33. Also government deficit spending amounted to a measly $3 billion between 1932 and 1941. Contrast that to the deficit spending of $23 billion in 1942 alone after the pearl harbor attack. Now that is economic stimulus. And not so coincidentally it's exactly the same time as the great depression is considered to have ended.

[wonderpup]

I don't want to go all Injin on you, but credit really isn't the same thing as money. If a store gives you a store card credit is created. Is that money? No, it's credit at the store. And if the card is defaulted upon no money is destroyed, just as no money was created when the store gave you the credit

I saw some ancient roman coins in the British Museum- but they weren't money either. They used to be- there was a time when those coins could have been spent and bought me something- but not any more.

So the 'moneyness' of money itself is not some intrinsic quality that exists in the coins or notes, it's more of a mutual agreement amongst a given group of people that a certain artefact represents money. And in our digital age we choose to designate electrons in the memories of computers as our way to represent money.

So as long as your credit is good it is exactly the same thing as money- they are fungible. Of course it can happen that times change and your credit may no longer be good- at which point it loses it's 'moneyness' and can no longer be spent. But the same can be said of notes or coins- time and circumstance can rob these too of their 'moneyness'

So it turns out that money is whatever we all agree it is at any given time and place- and if we all agree that credit is money then it is money- until we change our minds.

And the reality is that all our savings exist in the form of bank credit- and when someone asks you how much money you have you do not count only the notes and coins in your wallet do you? Most people will also include their bank credit as being part of their 'money'.

Nothing is more abstract than the arbitrary values we impute to notes and coins- after all those metal disks or oblongs of paper could have any numbers we chose printed on them. And as the Weimar Republic demonstrated, even when those numbers have been printed the agreed value they represent can change dramatically over a short period of time.

So there is really no such thing as 'money'- there is only moneyness- the property we attribute to a given artefact that allows it to fulfill the role of what we call money.

Edited February 23, 2014 by wonderpup