Is The Financial System Now Incompatible With Free Market Capitalism?

[wonderpup]

We know that deflation is a threat to the financial system because it amplifies debt relative to income and profits.

We know that free market capitalism is inherently deflationary in that it drives down prices via competition between suppliers- and this is even more true in an era of rapidly advancing technology.

So on the face of it we have a financial structure that needs inflation in order to function correctly-but the real world economy is a deflation machine that is pushing in the opposite direction.

This must always have been true to some degree-but are we reaching a point where the sheer level of debt combined with the sheer level of technological advance is creating a final showdown between the inflationary drive embodied in the policies of the Central Banks and the deflationary impact of technological change that has made the current levels of automation/ outsourcing and online retailing so toxic to that debt based financial infrastructure?

[cybernoid]

EDIT: deleted. It is so carp I can't put you through it.

What a pity wonderpup lacks such self awareness

[gf3]

I was just thinking how oil prices have halved. Was this down to supply and demand?

b**locks was it. It comes down to speculators betting one way and pulling out. This has corrupted the price signals. 40 billion people have been duped by the financial markets. This really needs to stop.

[silver surfer]

I was just thinking how oil prices have halved. Was this down to supply and demand?

b**locks was it. It comes down to speculators betting one way and pulling out. This has corrupted the price signals. 40 billion people have been duped by the financial markets. This really needs to stop.

Fundamentally I think it really is due to simple supply and demand. The oil price swings have no doubt been amplified by the actions of traders, but the real issue is that demand dipped at the same time as shale was delivering increased energy supply, and then a number of energy producers decided to turn the taps fully on in order to either meet their own desperate needs for short term revenue or to try and force high cost producers out of the market.

[PopGun]

I was just thinking how oil prices have halved. Was this down to supply and demand?

b**locks was it. It comes down to speculators betting one way and pulling out. This has corrupted the price signals. 40 billion people have been duped by the financial markets. This really needs to stop.

This. The emerging market demand guff was overstated IMHO. A fine excuse by the globalists to drive up prices and drive down wages. Deflation finally calls their bluff.

[gf3]

Fundamentally I think it really is due to simple supply and demand. The oil price swings have no doubt been amplified by the actions of traders, but the real issue is that demand dipped at the same time as shale was delivering increased energy supply, and then a number of energy producers decided to turn the taps fully on in order to either meet their own desperate needs for short term revenue or to try and force high cost producers out of the market.

Find that hard to believe. I still drive my car as much as I ever did. A 10% drop I can believe but half when China is putting more cars every day on the road. Didn't I hear about oil tankers being used to store oil for the speculators?

[Venger]

I was just thinking how oil prices have halved. Was this down to supply and demand?

b**locks was it. It comes down to speculators betting one way and pulling out. This has corrupted the price signals. 40 billion people have been duped by the financial markets. This really needs to stop.

Market participants get carried away in bull markets, and in bear markets too. You have to have balanced positions. Investors don't always win.

Prepare your excuses for losses in housing market, and this 'conspiracy' when millions of owners in the housing market, who could sell now, but content as expect more HPI, where other bulls have continued to currently pay ever higher prices for housing, betting one way in forever hpi - in the coming HPC. Or in tech firms with bubbled-out prices, in a stock market adjustment.

Everyone wins until they don't? Accept the don't times can happen, without lectures on how great investors are, and how mugs being ones who position themselves against overvalued positions when the markets turn hard.

When the volume of credit is large, investors can perceive vast sums of money and value when in fact there are only repayment contracts, which are financial assets dependent upon consensus valuation and the ability of debtors to pay. IOUs can be issued indefinitely, but they have value only as long as their debtors can live up to them and only to the extent that people will believe that they will.

The dynamics of value expansion and contraction explain why a bear market can bankrupt millions of people. At the peak of a bull market, assets have been valued upward, and all participants are wealthy, - both the people who sold assets and the people who hold the assets. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of financial assets has ballooned. When the market turns down, the dynamic goes into reverse.

Edited January 7, 2015 by Venger

[onlyme2]

Find that hard to believe. I still drive my car as much as I ever did. A 10% drop I can believe but half when China is putting more cars every day on the road. Didn't I hear about oil tankers being used to store oil for the speculators?

Pricing is at the margins - companies buying forward contracts to know exatcly what they will be paying in 6/12 months times, all that QE and play money for the banks. That causes huge overswings.

[Venger]

Find that hard to believe. I still drive my car as much as I ever did. A 10% drop I can believe but half when China is putting more cars every day on the road. Didn't I hear about oil tankers being used to store oil for the speculators?

Store oil... did it occur to you, it might be because they've got more than they can sell to market, at high prices?

Sep 8, 2014

Global Oil Glut Brings Back an Old Trade

[..]Abundant global oil supplies have been a major factor in driving the price of Brent crude below $100 a barrel. [..]estimates there are 50 million barrels of oil in floating storage at the moment, the highest level since 2008-2009, the last time this pricing pattern emerged. Recently, tankers of crude from northern and Western Africa were circling around the Atlantic, looking for buyers.

Coming 'oil Glut' May Push Global Economy Into Deflation

Jan 16 2014

'One piece of the jigsaw puzzle is missing to complete the deflation landscape across the West: a slide in oil prices. This is becoming more likely each month. Turmoil across the Middle East and parts of Africa has choked supply over the past two years, keeping Brent crude near $110 a barrel despite a broader commodity slump. Cotton and corn prices have halved, as has the UBS index of industrial metals. Such anomalies rarely last.

"We estimate that crude oil is now the mostly richly priced commodity in the world," says Deutsche Bank in a fresh report.

[..]A sudden slide in oil prices against this background may not be entirely benign. While it will boost spending power in the US and Europe, we also know from academic studies that oil shocks are asymmetric at first.

[..]Albert Edwards, from Societe Generale, said investors are strangely nonchalant about the deflation risk, seemingly taking it for granted that there is no risk of recession and that central banks can and will bail out equities. "They do not seem to care that they are sitting on the edge of a cliff. They believe with all their heart that we are at the start of a self-sustained recovery," he said.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10575292/Coming-oil-glut-may-push-global-economy-into-deflation.html

Maybe some of the victims on this 'conspiracy' should have sold positions, through early 2014 and into September. Bears were giving you the risks when prices were super high.

There's millions of market participants all reading markets differently, including perhaps yourself, with this view of 'raging oil demand' at $100+ barrel, and speculators storing oil being a 'price positive' signal for values going forwards in time.

Edited January 7, 2015 by Venger

[ProleStore]

Find that hard to believe. I still drive my car as much as I ever did. A 10% drop I can believe but half when China is putting more cars every day on the road. Didn't I hear about oil tankers being used to store oil for the speculators?

Cars can become more efficient, but also industry uses oil, so a slowdown in industry will affect prices, even if car use is static:

Petroleum products and their relative share of total U.S. petroleum consumption in 2013:

• Gasoline 46%
• Heating Oil/Diesel Fuel 20%
• Jet Fuel (Kerosene) 8%
• Propane/Propylene 7%
• NGL & LRG¹ 6%
• Still Gas 4%
• Petrochemical Feedstocks 2%
• Petroleum Coke 2%
• Residual/Heavy Fuel Oil 2%
• Asphalt and Road Oil 2%
• Lubricants 1%
• Miscellaneous Products/Special Naphthas 0.4%
• Other Liquids 1%
• Aviation Gasoline 0.1%
• Waxes 0.04%
• Kerosene 0.02%

[Traktion]

I don't think it is just that.

I think money gets 'stuck'. People hang onto the stuff as they build up surpluses. They have to keep issuing more and more simply so there is enough for transactions in the economy, so people can repay their debts.

Banks etc. may take those surpluses but largely re-lend it out against assets, but that does little for 'trade' in the normal economy as such. It seems to get stuck in some kind of constant upward bidding vortex where the assets have to keep on rising and rising.

A similar thing happened in the City in the run up to the crisis. Everyone in the City was making out like bandits as the banks lent money to each other and constantly kept booking profits against the same paper being traded between them. Yes, a lot of money did leech out as bonuses to bankers over a very long period but what we were left with was a huge amount of worthless paper.

This is why I always pull people up who blindly state that shares are a nil sum game. They're not. Everyone wins. (until they don't, en masse).

Allow free market currencies to compete on the same playing field and the problem will go away. If people horde currency X, then others switch to currency Y.

Equally, badly managed currencies will not get much use at all. Why would you use a currency which isn't ideal?

There needs to be a separation of state and money. Thankfully, we are living through an era when this will become a reality over the next decade, whether governments like it or not.

When we have free market currencies, I am certain that we will witness the similar gains in progress to that which other advances in technology delivers.

[Wurzel Of Highbridge]

Is The Financial System Now Incompatible With Free Market Capitalism?

There is no 'free market', so how would we know?

[Venger]

I was just thinking how oil prices have halved. Was this down to supply and demand?

b**locks was it. It comes down to speculators betting one way and pulling out. This has corrupted the price signals. 40 billion people have been duped by the financial markets. This really needs to stop.

I am pretty sure we'll have same conspiracy claims from you, and the other left-wing-investing and property VI on hpc, when low-mid-high prime housing markets crash. "Banks made them borrow. They didn't know what they were doing" as in 2008 during the 'until they don't' markets crash, leading to the cheat of QE (pile it on future generations and future renters) against those who had saved in expectation of hpc.

For the record gf3, many of those owning over-valued properties in London/SE/South Manchester/Cheshire and many other locations, could sell to money at high prices now. If they hold to the bottom of the market in a hpc, they made their own decisions. Those making their own decisions include those still buying at higher prices, on a daily basis, and all the landlords "It's not earning anything in the bank - BTLers" who you don't seem to have much of an issue against.

Markets move at the margin, and just as one investor in a bull market can bid up oil price to over $100 a barrel in a 1 buy side 1 sell side transaction, values can move at the margin downwards in cascades with few transactions. Stop claiming those holding overvalued assets are victims when prices turn down sharply.

You seem to be against young people that pay too much and out bid you. You also seem to be against BTL LL. and against people who didn't pay too much because they bought years ago.

Am I right in saying you're against anybody that owns a house?

or is there a sub set I haven't thought of that you think should own houses?

I am surprised you give BTL LL such a hard time over speculators that just leave houses empty or land bankers that have millions of pounds worth of building land and choice to just sit on it.

[Exiled Canadian]

Surely the fact that a number of large financial institutions in the UK, US and elsewhere had to be bailed out in 2008 (when they were the very definition of bust - ie. unable to meet liabilities as they fell due) because they were "too systematically important to fail" demonstrates that free market capitalism and the current financial system are incompatible?

[Venger]

Find that hard to believe. I still drive my car as much as I ever did. A 10% drop I can believe but half when China is putting more cars every day on the road. Didn't I hear about oil tankers being used to store oil for the speculators?

Did you also know we're on a small island, and not enough houses, and growing population, so that means forever hpi?

[Venger]

Until those holding that simplistic view, with houses at painfully high prices, discover market prices are set at margin.

That credit availability, over-hanging debt all are part of what can make for a sudden change in market conditions and outlook.

When sellers begin to accept lower prices from buyers, bringing all values down for the other owners and more recent buyers... who obviously will have been 'duped' - when they could have sold for fortunes.

[zugzwang]

What came first, inflation or deflation? The inflationary bias in developed economies since the 1930s is a New Keynesian construct (Keynes would have taken issue with much of it but it's been done in his name just the same). What began as a sound, progressive response to the crisis of the Great Depression grew over three decades to become an unsupportable burden, ultimately necessitating a US default from the gold standard, and the first burst of uncontrollable inflation in the West in the early '70s. Freidmanite monetarism and deregulation under the guise of laissez faire was the reaction to these policy failings. Things really started to go downhill after that - the credit creating excesses of the Keynesian welfare state now conjoined with the credit creating excesses of investment banking, derivatives origination and globalisation. The repeal of the Glass-Steagall Act in 1999 can be identified as a kind of culminating folly. Three decades of ponzi financing and bubble growth came to an abrupt halt in 2006 with the collapse of the subprime mortgage market.

Just as asset prices were artificially inflated, I'd argue, so too was the speed of technological progress. Without the bubble these advances would have happened much more slowly, or not at all.

[wonderpup]

There is no 'free market', so how would we know?

What I am suggesting is that there is kind of battle going on between what remains of the free market in terms of competition and innovation and the ongoing attempts of Central Bankers and the financial sector to manipulate and control that market.

On the face of it the idea that falling prices should set alarm bells ringing in the corridors of the ECB or the Federal reserve is odd- don't these institutions claim to be embedded in a system that allows prices to rise and fall in response to supply and demand? So there is no real justification for them to be meddling in the first place, at least in terms of their own professed world view.

Unless- of course- their previous meddling has created a level of debt so out of proportion to the real economy that they no longer dare let it function autonomously and so meddling begets further meddling until it becomes increasingly difficult to tell where the meddling ends and the free market begins.

It's massively ironic that an era in which so much lip service was paid to the idea that the markets are self regulating ends with a degree of Central Bank intervention on a scale undreamed of by previous generations.

[gf3]

Market participants get carried away in bull markets, and in bear markets too. You have to have balanced positions. Investors don't always win.

Prepare your excuses for losses in housing market, and this 'conspiracy' when millions of owners in the housing market, who could sell now, but content as expect more HPI, where other bulls have continued to currently pay ever higher prices for housing, betting one way in forever hpi - in the coming HPC. Or in tech firms with bubbled-out prices, in a stock market adjustment.

Everyone wins until they don't? Accept the don't times can happen, without lectures on how great investors are, and how mugs being ones who position themselves against overvalued positions when the markets turn hard.

I think I can speak for everybody that only owns one house. I don't care what my house is worth. The price may go up the price may go down I still only own one house.

But I will let you into a little secret. I would like house prices to go up another 2% I want to go on to Zoopla and see my house is worth £200,000 my plan is to print the page and after that I don't care if the price halve I will still only own one house that I live in.

I could of course do equity release in which case the more expensive my house is the better. However the deals are so bad I would rather do a dump in a bankers mouth than do that.

I hope house prices fall and you get what you want. I will be voting for UKIP in the hope that with less people in Britain will drive down demand and let the young have a chance at buying a house.

[Venger]

I think I can speak for everybody that only owns one house. I don't care what my house is worth. The price may go up the price may go down I still only own one house.

But I will let you into a little secret. I would like house prices to go up another 2% I want to go on to Zoopla and see my house is worth £200,000 my plan is to print the page and after that I don't care if the price halve I will still only own one house that I live in.

I could of course do equity release in which case the more expensive my house is the better. However the deals are so bad I would rather do a dump in a bankers mouth than do that.

I hope house prices fall and you get what you want. I will be voting for UKIP in the hope that with less people in Britain will drive down demand and let the young have a chance at buying a house.

When I ran the numbers, 6-7% by the main equity release companies seemed reasonable from a commercial view, on their side, given risks and complexity and need to make a profit. You go lend someone a chunk of money against their house, where they have no under no obligation to pay you a penny back for years, and other commercial risks. Equity release companies can also lose out when the borrower lives on way beyond average. HPC is another commercial risk.

You claim you wouldn't care if your house loses 50% value for it is still a house (which is good to read from my point of view). Although why are you even looking at equity release? Are you suggesting your own savings are short for your future needs? Martin Lewis re equity release 'equity release is expensive - downsize sooner' (item 4.. but it's expensive for good reasons). If you have empty bedrooms and actually believe a 50% hpc is a near term risk... why not bank £10Ks now in a downsize, or STR. You can't have it both ways if you're short of cash for the future. Eg: cash in the bank as hefty savings to fall back on, and house, and you'll get less for your money both in equity release or downsizing after hpc.

UKIP? It's not a 'too many people' issue for me, for high house prices, but a financial one. There a very few low-skill people in country in position to outbid anyone in my family for a house in the areas we seek to buy in - and all the HMOs in some areas will take the hpc even deeper when is comes in as buyers become more picky with less money around and more choice - and I mostly welcome many high-skill earners. Just as it's mostly good news when larger businesses set up in UK (should we be anti them too coming to UK)- unless it's with a chunky Government grant.

Look at how many BTLers there are, who continue to outbid others. Will you really be claiming, "How could they possibly have seen it coming" when falling prices test their positions, and perhaps force many of them to sell their main homes at lower prices. I will be delighted. At least we have lenders scraping the bottom of the barrel with teaser deals, for those with hefty deposits to risk to find last of the regular private buyers.

[Bruce Banner]

Free market economy ... well we have the government Help To Buy adverts on prime time TV for their 5% property deposits and George threatening oil companies if they do not reduce their prices. At least the Bank of England is independent with Carney in charge ... Carney who was appointed by George.

Fortunately, we can do something about it. I discovered yesterday that as a result of one of my Christmas "lectures", another family member will be voting UKIP in May .

[Bruce Banner]

Oh joy. At family Christmas get togethers in hpc homes up and down the country, the relatives soaked themselves in alcohol as a means of escape.

Sad I know but it had to be done as it was me who convinced them all to vote Conservative last time, error now corrected.

[gf3]

When I ran the numbers, 6-7% by the main equity release companies seemed reasonable from a commercial view, on their side, given risks and complexity and need to make a profit. You go lend someone a chunk of money against their house, where they have no under no obligation to pay you a penny back for years, and other commercial risks. Equity release companies can also lose out when the borrower lives on way beyond average. HPC is another commercial risk.

You claim you wouldn't care if your house loses 50% value for it is still a house (which is good to read from my point of view). Although why are you even looking at equity release? Are you suggesting your own savings are short for your future needs? Martin Lewis re equity release 'equity release is expensive - downsize sooner' (item 4.. but it's expensive for good reasons). If you have empty bedrooms and actually believe a 50% hpc is a near term risk... why not bank £10Ks now in a downsize, or STR. You can't have it both ways if you're short of cash for the future. Eg: cash in the bank as hefty savings to fall back on, and house, and you'll get less for your money both in equity release or downsizing after hpc.

UKIP? It's not a 'too many people' issue for me, for high house prices, but a financial one. There a very few low-skill people in country in position to outbid anyone in my family for a house in the areas we seek to buy in - and all the HMOs in some areas will take the hpc even deeper when is comes in as buyers become more picky with less money around and more choice - and I mostly welcome many high-skill earners. Just as it's mostly good news when larger businesses set up in UK (should we be anti them too coming to UK)- unless it's with a chunky Government grant.

Look at how many BTLers there are, who continue to outbid others. Will you really be claiming, "How could they possibly have seen it coming" when falling prices test their positions, and perhaps force many of them to sell their main homes at lower prices. I will be delighted. At least we have lenders scraping the bottom of the barrel with teaser deals, for those with hefty deposits to risk to find last of the regular private buyers.

I have looked at down sizing but around my area a one bed roomed detached houses are the same price as my 3 bed roomed detached house. There are cheaper houses about but they aren't any smaller and are horrible terraces in bad areas.

Equity release. What is the point of living poor and dying rich? ideally you want to die having spent all your money not having hundreds of thousands tied up in a house. However I can't see why the interest rates on equity release should be any higher than a standard mortgage. The risk of someone living till 120 is there but If you have hundreds of people doing it the risks are spread. You must remember the money the banks give you comes out of thin air. It's not like you giving me your money and having to go without.

[wonderpup]

Another take on the conflict between the need of the financial system for inflation and the inherently deflationary nature of technological progress;

Meanwhile, all those screaming in terror at the prospect of deflation should note that deflation is the natural consequence of rising productivity in a competitive economy. What does rising productivity means? It means more gizmos/services are produced with less capital, labor and expense.

Rather than being the Monster Under the Bed in central bank nightmares, deflation is the natural result of a competitive economy experiencing productivity gains. isn't this the ideal environment for innovation, enterprise and consumers? Yes, it is.

Is deflation the nightmare scenario for central banks, debtors, central states, monopolies and cartels? Yes. That all these entities share the same interests--anti-competitive monopolies, governments, debtors and central banks--should give us pause.

http://charleshughsmith.blogspot.co.uk/2015/01/the-achilles-heel-of-global-status-quo.html

So we find ourselves in a scenario in which the financial system and the VI's it represents are actively trying to subvert the gains offered by technological progress by the use of financialization and market manipulation as weapons- they cannot stop technology but they can manipulate the system to attempt to neutralize it's deflationary impact- an impact that would translate into cheaper goods and services for the great unwashed.

Our role- it seems- is not to enjoy the fruits of progress but to service our debts- and it is our function as debt servicers that take priority in the minds of the PTB- all of their efforts are thus directed to preventing the lower prices and improved living conditions that free market driven innovation and competition are supposed to deliver.

The BofE targets inflation- not human well being. Who do they work for again?