Back to the Future? The Shape of Reforms to Come…
Editor’s Note: A smaller version of this piece was published today by the Financial Times.
The largest financial crisis in history is morphing from private entities (the banking sector and the household sector) to sovereign entities. At best, fiscal cuts will hit the European recovery; the collapsing euro will subtract from growth in key trading partners – the U.S., UK, Japan and China. At worst, the financial system may come unhinged if the euro disintegrates or sovereign(s) default disorderly, precipitating a double-dip recession. Without an objective, 360-degree diagnosis and a resolute response, we may sink deeper or face larger crises that we clearly cannot afford.
First, a holistic historical analysis: Financial liberalization and innovation eased credit constraints on public and private sectors starting in the mid-1970s. Income and wealth challenged households in advanced economies – where real income growth was anemic – could use debt to spend beyond their means. Ever laxer regulation and supervision sustained leverage, fed by increasingly frequent and expensive government and IMF bailouts, which kept coming to the rescue in increasingly frequent and expensive crises since the 1980s, boosted by easy monetary policy since the 1990s. Political endorsement for this democratization of credit and wider homeownership compounded the trend after 2000, accelerated by the savings glut of demographically-challenged countries.
The debt-fueled global growth process was justified by paradigm shifts: from Cold War to Washington Consensus; re-integration of emerging markets into the global economy; the Goldilocks high-growth/low-inflation economy; a much-ballyhooed convergence ahead of EMU across Old and New Europe; and the widely-touted benefits of financial innovation.
The result: A consumption binge in deficit countries; an export surge in surplus countries; vendor financing courtesy of the latter; creditors and debtors on different sides of the same coin. Global output/growth, corporate profits, household income/wealth, public revenue/spending temporarily shot well above equilibrium.
Wishful thinking enabled asset prices to scale to absurd heights and pushed risk premia to incredible lows thanks to ever-widening access to credit. The private financial sector intermediated and compounded rising national indebtedness with its own borrowing. When the asset and credit bubbles burst, it became clear that the world is less wealthy, more indebted and faces a lower speed limit on growth than we had banked on.
Now, governments everywhere are re-leveraging to socialize private losses and to slow private-sector deleveraging. But public debt is ultimately a private burden: Governments subsist by taxing private income and wealth, or the ultimate capital levy of inflation or outright default. Thus public debt cannot substitute fully or indefinitely for excessive private leverage. Eventually governments must deleverage too, or else public debt will explode, precipitating further, deeper public and private sector crises.
This is already happening in the current frontline of the crisis, eurozone sovereign debt. Greece is first over the edge thanks to manifold sovereign risks: illiquid (fiscal deficit and maturities); insolvent (public debt); uncompetitive (trade deficits); and vulnerable (external debt). Ireland, Portugal and Spain trail close behind. Italy, while not yet illiquid, may face solvency risks. Even France and Germany have rising deficits. UK budget cuts are starting. Eventually Japan must cut, too. The elephant in the room is the United States…
Next, crisis management: The G20 coalesced after the global crash of 2008-09; we all were in the same boat together, sinking fast. Governments acted in unison to restore market confidence and economic activity with financial-sector backstops and reflationary policies.
But in 2010, national imperatives reasserted themselves, obstructing coordination. Few ponder solutions to rebalancing global growth; many prefer a return to business as usual. Coordination is lacking: Germany is banning naked shorts unilaterally and the U.S. pursuing its own financial sector reform. Surplus countries are unwilling to stimulate consumption. Deficit countries are building unsustainable public debt to paper over cracks in household or financial sectors.
Thus, the eurozone in 2010 offers the opposite object lesson of the G20 in 2008 – what not to do in a crisis of confidence, illiquidity, and insolvency that threatens contagion and systemic risk. Member states started off by going it alone just as they did when they carved up pan-EU banks along national lines in 2008. Ireland recognized the problem early and cut its budget; the eurozone signaled solidarity. But Greece signaled the opposite – it wanted just to be able to borrow at the same rate as everyone else, even though its debt and deficits were far larger than those of the rest, and larger than originally stated. Germany initially objected to a bailout, and all objected to the IMF. And everyone pointed out stark differences between Greece and the rest of the eurozone. The authorities insisted there need be no bailout, nor any risk of default. The ECB said there would be no change in its repo collateral rules, and certainly no change for the benefit of a single country.
After much dithering and denial, the eurozone pulled itself together for an overwhelming show of force – a trillion dollar bailout. It bolstered confidence for only a day. But in the months leading up to the day-long relief rally and the decades leading up to the crisis, the rules and treaties that underpin the eurozone and by extension, European integration, were progressively undermined. There was no fiscal or political union underpinning the eurozone, even though it is clear from history and theory that monetary unions do not survive without a few critical elements:
1. A lender of last resort, to absorb transitory liquidity shocks to the financial system.
2. Labor mobility and flexibility, to ensure a flexible real exchange rate, given a fixed nominal exchange rate.
3. Fiscal and political union to ensure that “asymmetric shocks” can be managed through transfers to the regions or sectors harder hit by these shocks.
Everyone understood that these were critical, Economics-100 type design flaws in the eurozone, so political compromises were hammered out to deal with the economic realities. However, the design flaws remained in an underlying sense.
- The ECB’s lender of last resort capabilities were limited to the financial system and did not extend to sovereign member states by design, and banks faced limits on how much collateral they could post for refinancing via repos with the ECB.
- Barriers to trade, investment and migration were all torn down, so there was labor mobility on paper, but not much in practice.
- Committees, qualified majority voting and treaties substituted for political union, and fiscal rules for fiscal union. Member states were subject to Maastricht treaty limits to harmonize fiscal policy via limits on public debt and deficits at 60% and 3% of GDP respectively. Violations were to be punished under the Growth and Stability Pact excessive deficit procedure with fines – but no member state wanted to fine another for what it might do later itself. The ultimate sanction was the no-bailout clause, enshrined in the Lisbon Treaty, as well as Germany’s national constitution. And here we are, staring a bailout in the teeth…
Now, all the rules, commitments and bravado have gone out the window, after repeated about-faces on what the eurozone would and would not do. The ECB did an about-face on the IMF, given Germany’s insistence, and eased its repo collateral rating rules. Sovereign bailouts are being legitimized under Article 122.2, a clause inte
nded to help deal with acts of God like earthquakes, not man-made excessive public debt and deficits. The ECB has begun monetizing government debt by secondary market purchases only days after insisting that it would not. It will sterilize its interventions in the government bond markets, but this might still amount to fiscal federalism by stealth. After all, much of the credit risk will be transferred from banks holding claims on eurozone sovereigns, to the ECB itself through these secondary market purchases. If the bailouts and fiscal adjustments fail, the ECB will bear the capital losses and will need to be recapitalized either by fiscal transfers from solvent creditor countries (Germany in particular), or via inflationary seigniorage (which is anathema to Germany). Perhaps this is part of the agenda – it may be politically easier to bail out Greece and the periphery, or recapitalize the ECB, than to further recapitalize the banks. But stealth is no basis for sustaining credibility.
Even now, too little structural reform is being promoted to contain the deflationary downside of the urgent fiscal adjustment, and to ensure that economic vitality will be restored beyond the socio-political pressures that lie ahead. Plus, the signs of tensions within the Franco-German axis that lies at the core of Europe and underpins the euro, are palpable.
We propose a comprehensive solution to reverse this incipient balkanization of national responses to a global problem of leverage run amok, a shortage of aggregate demand, fiscal and financial incontinence, and gradual erosion of the policy credibility of the institutions of state and those who manage them. We must be honest about the following political, regulatory and market failures and grasp the nettle of urgent solutions:
- The eurozone must get its act together. Starting right away expansion should be put on ice – after all, you don’t add floors or extensions to your house if the foundations are cracking. Whatever breathing room is conferred by the bailout should be used to deregulate and liberalize in the South and to stoke domestic demand in the North. The institutional design flaws in the eurozone need to be corrected, in particular by establishing Sovereign Debt Restructuring Mechanisms to limit the moral hazard created by the current bailout. There needs to be greater harmonization of structural and macro policies across the eurozone. And above all, there needs to be a significant structural reform effort to restore the economic dynamism and competitiveness of the eurozone.
- Debt must be forgiven and balance sheets cleaned up to restore any hope of growth anytime soon. There is too much debt concentrated in several countries. This is more than a liquidity problem, it is a solvency problem, and it requires a work-out on a grand scale. Greece is the tip of the iceberg in Europe; Spanish and other banks are knee deep in bad debt. Equity dilution and effective credit enhancement via debt socialization will very likely prove inadequate – either because there is just too much debt to do this comprehensively or because it will create expectations of future creditor bailouts that are simply unaffordable.
- Macro policies must be rebalanced. The current fiscal trajectory is unsustainable in most high-income countries. Sovereign risk is rising across the developed world. But timing is everything. Some countries, particularly in Europe, are having to tighten fiscal policy prematurely given their position in the economic cycle; this needs to be clearly offset with easier monetary policy – most importantly by the ECB. Most major high-income countries need to maintain large budget deficits and expansionary monetary policy now. So, they should credibly commit to substantial fiscal adjustments with a defined timetable. More important and effective than fiscal rules like Germany’s balanced budget law, the UK Golden Rule, the Maastricht debt/deficit limits – which are mostly observed in the breach anyway – would be a timetable and a set of alternative scenarios to deal with each component of the fiscal challenge:
o Crisis-related fiscal costs – automatic stabilizers, stimulus programs, and bailouts. (In the United States, Fannie and Freddie must be dealt with, as they may represent a potentially massive increase in federal debt.)
o Debt dynamics parameters like growth, interest rates and revenues.
o Age-related and other typically unfunded contingent liabilities.
o Contingencies for unexpected future increases in the stock of debt and flows of deficits.
- The Western financial system needs radical reform. The majority of proposals on the table are inadequate or irrelevant. Banning naked short selling and cracking down on hedge funds may play well politically and help shine light on the shadow banking system, but it ignores the larger reality. The formal banking system blew up because it was too big and too interconnected to fail, as did parts of the insurance industry, hedge funds within banks, and money market mutual funds. Not only does the old saw hold that if it’s too big to fail, it’s too big; the truth is that if it’s too anything to fail, it will fail. The costs will be spread across society as a whole, once the economic rents and business profits have been concentrated in the hands of a few. The Volcker rule is a step in the right direction, and the U.S. House and Senate bills have much to recommend them. But ultimately, different functions of the banking system need to be unbundled. It is clear that large complex financial institutions are not only too big and interconnected to fail, they are also too big and complex to manage. In this respect, they are no different than the vertically-integrated or horizontally-diversified corporate conglomerates built up during the 1960s-70s, particularly in the United States, and unbundled in the 1980s-90s. If shareholders want or need exposure, for example, to oil/gas, films, hospitality sectors, they can get that exposure in the equity and credit markets; there’s no reason to become a stakeholder in a Gulf & Western. Similarly, investors can find all the traditional banking, investment banking, hedge fund, mutual fund and insurance exposure they could possibly want in a purer form directly in the equity and credit market.
- The global economy requires rebalancing through a far-reaching and gradual structural reform. The deficit countries must rebalance toward savings and investment; the surplus countries must move to stimulate domestic demand. The quid-pro-quo for fiscal adjustment and financial sector reform in the deficit countries must be deregulation of product and service markets, labor market flexibilization, and wholesale corporate reform to improve the labor share of income in the surplus countries.
Without a comprehensive solution along these lines, we will condemn ourselves to lower growth, greater macro volatility, and a heavier burden on future generations than is necessary. We may well still be able to avoid financial Armageddon, but we will still perform well below potential globally and face the risk of further serious crises.
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No Responses to “Back to the Future? The Shape of Reforms to Come…”
i can’t help to think that the greek tragedy could’ve been less severe if the euro zone countries had the right to print the euro. Of course the printing machine sends fears of inflation but if allowed it would of helped pay off greece’s short-term deficits while appreciating the euro and keeping it from plummeting against the dollar.
Very informative analysis, there is a point I’m missing although.Western economy has shifted from one of production to one of services, and is further transforming into one of self-services. The question changed from what can we do for our customers (society) to how can we exploit them. By totally neglecting moral hazards, a cynical circle of taking more than positively contributing has established itself. Result: debts all over, no one held responsible. That process has to stop, if only because debt limits are reached, more of it will lead to total collapse.Deregulation and permissiveness has gone too far. God became a thief. Blankfein was right after all: we’re doing God’s work. From there, I cannot agree with your proposals for further deregulation. Rather, a seismic shift towards a moral revival and fairness in economic transactions is necessary to prevent disaster. Impossible to realize without tighter regulation. Recent history shows what happens without.
ooops we just though exonomy is recovering.. its seems we are having another crises.Interesting suggestions but what about China and the property buuble and over heating in Asiam economies ?
Can not understand how smaller & vertical financial companies alone can address the financial sector problems. Smaller firms can still take excessive risk – and at the same time (during same period). Collectively, the smaller firms potentially can create situation similar to what we had in 2009. Looks to me that controlling asset price bubble and preventing excessive risk taking too are essential (apart from not having too big to fail firms).
I’m not sure if what is being proposed is a controlled economy or something more akin to the book: Small Is Beautiful: Economics as if People Mattered by E. F. Schumacher? I hear the proposal for debt-repudiation to PIIGS along with an admonition to eliminate moral hazard? Not to be argumentative, but essentially the larger thesis of those countries exporting inflation to those countries accruing deflation is the underlying issue. I really think that incentives along the lines of the book is what is needed. Additionally we discuss wealth in the absence of energy which is the basis of it.I think that the Kyoto, global carbon tax, and a Bretton Woods III is needed. However I think that politically you meet many of the objectives if you create an incentive to circulate economies efficiently locally where the costs of transportation fuels is more efficiently met. As an example choose to buy the local brand of 10lbs of potatoes to support jobs, limit fuel consumption, and circulate the local currency.While I’m not a isolationist I think that trans-national trade in some cases is additionally the cause of the problem. Probably localizing economies similar to de-leveraging large banks, unwinding global assets is needed. While the book is very philosophical so is this article.I think that after we fail to perform the hard steps outlined in the article that economies similar to the book Small is Beautiful will emerge. It is the smart economist who looks at the larger trends and prepares for this who will inherit tomorrow. Out of the ashes will become localization.
WHERE’S THE MEAT?Nice abstract policy advice. Where’s the specifics?If you are offering “solutions,” you cannot just talk of “structural reforms” and similar vagueness. You should offer concrete examples of how the socializing-debt countries can take actions that will build future government revenues to sustain or pay back current borrowing.Crisis response in 2008/9 filled in the bottom of a “trench” in economic projections, but only by stealing from the opposite, upward side of the trench. This just kicks the can down the road.How do we climb up that far side of the trench faster than we pull it down to fill in the gaping hole we are sinking into?I visualize a man sinking in quicksand; he reaches out to grab more sand (debt) as far as his hands can reach to pull it under him as he sinks (toward default): if he pulls fast enough, and gains traction with it under him, he stops the sinking and pulls himself out; if he pulls too slowly, or doesn’t gain traction with it under him, he just postpones his descent into the quicksand.Where is the sand we can pull quickly and get traction from? And how do we (and who is the “we”?) pull it?I have asked Dr Roubini several times exactly ***what*** will reverse the contraction from global deleveraging into expansion again, and have never gotten a ***concrete*** answer. I wonder, do he and his staff have a concrete answer, or even a good guess? I, for one, would certainly appreciate and respect his best guess…
I agree with much of what is written here, but I’m a little saddened that Dr. Roubini is taking the speculative attack against sovereign debt seriously. It’s like thinking there was a real reason for oil to be $140/barrel a couple of years ago.Also, it would have been nice if a call to ban derivatives entirely had been included in this article, but the strong support for unbundling banks and the Volcker Rule is encouraging.But the real danger, not addressed by Dr. Roubini, is the fiscal austerity being put in place right now across the G-8. These policies, besides impoverishing millions of American citizens(among others) will cause suffering and misery on a scale not seen since the 1930s. Consequently, we will see a Second Great Depression beginning perhaps as early as next year.Why am I so certain? Well, what are the chances of Dr. Roubini’s ideas being adopted? No chance whatsoever.Conclusion: the OPTIMISTIC outcome is Japan of the 1990s, more likely the world will enter the nightmare of deflation and depression and very soon.
“The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.”Robert Reich May 24, 2010http://robertreich.org/post/628324698/obamas-regulatory-brainIndeed – there’s the rub.Regulations will do nothing without structural reform.When the size of Wall Street’s five largest is holding over 30% of US GDP they are too big too fail.Structural change means – no more too big tooo fail.Structural change means changing the structure of banking by resurrecting the Depression-era Glass-Steagall Act and force banks to separate commercial banking (the classic function of connecting lenders to borrowers) from investment banking.Structural change means force the banks to do their derivative trades in entities separate from their commercial banking.Robert Reich points out ”why the president, who says he wants to get “tough” on banks, has also turned his back on changing the structure of American banks — opting for a regulatory approach instead” is spot on in his analysis.
Nouriel and Arnab, it’s an interesting and useful analysis, but what I want to learn is not what happened and not what should happen but (a) what you predict will happen and (b) how that will impact individual nations, sectors, and industries.I appreciate that you have (contrary to what some of your commenters may think) provided quite specific recommendations: forgive debt in the PIIGS in exchange for budgetary and financial reforms, give money to consumers in surplus countries like Germany, break up the banks, and deregulate, at least outside of finance. I may disagree with provisions (especially on regulation as a problem), but it’s a specific policy recommendation.However, the system exists as it is because people are trying to protect things that they value, such as a clean environment, job stability, national integrity, and so on. These forces limit what is possible. So, the more useful analysis is asking what is politically possible and therefore what is likely to result. Perhaps the answer is gridlock, in which case the financial crisis will deepen. But without understanding the political overlay, it’s impossible to get a sense for what is really happening/going to happen.As for recommendations, I think there has to be an explicit and enforceable commitment by the north to improve living standards in the south in exchange for a cleanup of corruption in the south. I think that corruption is southern Europe’s biggest problem, and that the second biggest European problem is the tense relationship with the former colonies. That, too, needs to be resolved. In particular, I think there must be a commitment to support democratic movements and economic development in North Africa. The western-maintained near-dictatorship in Egypt is a disgrace, and the slowness of the west to accept nationalistic but reasonable leaders like Erdogan is a tragedy. The Palestinian crisis also must be ended, since that’s a major source of friction. The third largest problem is Europe’s dependence on Eastern (Russian, Iranian, Bananastanian) energy. Otherwise, it’s a very pleasant place, one that Americans would do well to examine and learn from.
I like the comment “…if anything is too anything…”, in relation to the “too big to fail”…, “it will fail.”As I read the last of the column, I was glad to see that someone else understands the severity of the economic situation we’re in. The politicians can keep on talking about “the recovery” we’re in, but it doesn’t change the facts of the matter. I majored in Economics in college, studied about the Great Depression and other economic cycles, and know we’re not out of the woods yet.I’ve been saying for nearly three months now that we’re in a double-dip recession, and so far, only the first dip has occured. The second one is just around the corner. Hang on, folks, it’s going to be far worse than the first! They always are.
Ed,By golly I hope you are right about deflation & depression becoming the world’s lot. Self serving to be sure since I am retired and living on a fixed income – thus it would be a blessing for me.Given all the debts why don’t the world “leaders” agree on a Jubliee – that time honored ancient Jewish law that every 50 years all debts are forgiven. Now, of course China with its unjust currency peg gains will scream NOOOOOOOOOO! But I would imagine the world will vote to hit the re-set button.The entire economic model is flawed. It is a Ponzi scheme since it relies on ever more increases in population and thus increasing consumption. I wish Roubini would get out of his comfort zone and talk about that problem. Instead he continues to try to micro manage the explosion of a Weapon of Financial Mass Destruction – blow by blow. It is becoming very boring to read all this crap.In quantum physics it is well known that the more accurately you know information about one aspect of matter (say its position) the less accurate you know its momentum. Like this Roubini presides over greater certainty about how to influence one outcome but misses more and more the real solution to the problem, i.e., the whole damn thing is unsustainable!LOOK OUT BELOW!
Morbid,Have you thought through the idea of jubliee? Are you really saying that the owners of the debt, which aren’t the TBTFs in most cases, get screwed. The widows and orphans fund needs to take a hit? while those who gambled get to win big time?Such nonsense would justify gambling and punish savers? Why bother to invest when you can just go way out on a limb and then have the government take from those who were prudent and give to you? You really think that would be a good plan?
why do i have that feelin youre new to the blog hehe i agree with you tho..
hi saver, you said:…the question changed from what can we do for our customers (society) to how can we exploit them……taking more than positively contributing……shift towards a moral revival and fairness in economic transactions is necessary…good ones, i think these are the keys factors that we all must observe
Ragvan has a big point. i think it is not correct to confine the problems in the West. the whole world is facing serious problems, and people from every corner should work hand in hand, helping each other to face the crisis.
…controlling asset price bubble and preventing excessive risk taking too are essential (apart from not having too big to fail firms)…logic, i agree.
seeing many people have sinked in the quicksand before, i sadly think the man will sink again, no matter where the sand is and how to pull it. the more fundamental question is why is he trapped, and how to prevent it in the future… i sadly think that we may not have the concrete tool that you desperately seek for saving the man this time. and i think Mr Roubini hasn’t the heart to tell…
Hi Ed,yes, “it would have been nice if a call to ban derivatives entirely had been included in this article”. i think fiscal austerity is inevitable, but it is unfair that relevant authorities and investors/traders/speculators who have involved in “causing” the crisis are not made accountable.an engineer will be made responsible (possibly jailed) if the building he design/construct collapse. the crisis is going to hurt mankind badly, but it seems like nations have no way to make “financial engineers” responsible for the damages caused, and i think this must change!Ed, we may enter a nightmare not long from now, but i think that is not the end of the world. if we work hard from now, and live a reasonable lifestyle, we have a good chance to live better and happier than now i truly think so…
I’m a student; so, I’m only allowed to watch the ‘Stew’. But, I’m very concerned about what’s appearing to rise to the surface, although I don’t see the media getting it. If 70% of the U.S. GDP is consumer spending, that in and of itself should speak volumes, but my concern is the disconnect between U.S. markets, and the actual economy.For instance, just using the SPX, corporate profits are driving the value; of course. But, although up year over year on a percentage basis, look at the huge drop in total revenue for those 500 companies. The cuts were made; not expressing an opinion on weather they were good or bad, but the fallout for total underemployment u6 is roughly 28,000,000. It is unclear how many of those jobs will be required going forward. It appears to be a paradigm shift; technology advances will allow corporation to operate more successfully, with less people; as is evident with a quick glance at the p&l’s of those 500 companies. Where does this leave the 30 million that are currently displaced? What % of the 70% of consumer spending do they account for? In my opinion, this dead cat bounce was in large, attributable to the governments stimulus spending. Once this finishes it’s ripple through the economy, where will GDP growth come from? How can spending resume, when there is nothing visible for the potential of job creation, or rehiring of those displaced? Corporations were forced to strip down, and now they see the huge benefits, and confirmation that they can operate very lean.
i think it is not enough for us to view the crisis solely from economic perspective, economic symptoms are only part of the matter. politics, social, education, morality/religion etc. perspectives will give us a better understanding to the problem.let’s ponder:lifestyle: it is a norm today for many people to live comfortably (often lavishly) without doing real work/service, and what/who will feed these people in the long run? We know there is no free lunch, and free lunch in the long term is impossible! of course this lifestyle is not sustainable, thus, unstability/adjustment/collapse/crisis follow.morality: people may laugh at this, silly idea. but deep in my heart, i know this the the mother of the crisis, am i wrong? can you appreciate?social politics: the democracy and capitalism that we are proud of are far from perfect and need overhaul…education: i think our education system today has serious flaws. look at the products produced (i am one); most of them are competitive, greedy and immoral; too many of them are good at destruction, but not construction job; many are ready to exploit situations for his/her advantage, but not benefiting the society/environment they are in.
The first challenge for the reform of the financial system is institutional. How are we going to enforce the regulations? is it possible after the experience of the last decade to put in place a capable SEC or grading agencies that can compete with the big financial institutions in terms of staff, salaries, brains etc. ? Corporations are outsmarting any branch of any government.
“Debt must be forgiven and balance sheets cleaned up”This ignores the underlying problems of to many on the public dole via the generous retirements allowed in the Mediterranean.Without severe reforms here, debt forgiveness will just kick the can down the road while adding an inflationary element. Which IMO subtracts from disposable income and leads to higher default rates and lower taxes collected and also leads to employment declining faster.If retirement benefits were reduced, many or most of these people would not have enough income to maintain their current standards of living.. This would reduce the velocity of money in that area, thus driving the economy much lower and further reducing the taxes collected.If you are suggesting to do both, print money to forgive the sovereign debt and reduce benefits, then you are promoting unrest as this type of policy harms the elderly and the poor the most.The only way out of this would be new jobs for these older ex workers. Decent paying productive employment and that is not a short term fix.I can not see any real short term fixes. And the continued kicking of the can is not a productive endeavor. Especially while interest and expenses accumulate.Jubilee doesn’t work either as that trashes the savers and investors alike while benefiting the scamers and gamers.What a mess!
Eco,I’m saying the whole thing is a Ponzi scheme – so the ill gotten gains of widows and orphans take a hit.You make a good point. WHY BOTHER TO INVEST? You are not investing – you are gambling!
Eco,It’s more than a mess – it’s hopeless.You do not address the issue of sustainability…Look Out Below!
Hi eco,…new jobs for these older ex workers. Decent paying productive employment…sounds good. Also, why not kids taking care of their old parents nowadays?
Hi Morbid,sustainability; let’s ponder:- planet earth’s ecosystem is naturally sustainable, but science, technology and industrialization is destroying it second by second, and people think they are smart in the proses of destroying….- people used to carry out a sustainable lifestyle for a long time, like those lifestyle of the Red Indian (i think we can search for more example), but what has destroyed it, greed? democracy? capitalism?
yeeehaaa and the solution is more debt??? i say yeeeehaaahttp://malaysia.news.yahoo.com/afp/20100603/tts-us-economy-finance-debt-972e412.htmlUS debt tops 13 trillion dollars for first timeAFPWASHINGTON (AFP) – – US debt has reached 13 trillion dollars for the first time in history, the Treasury Department has said, stoking a political furor over government spending.Amid vast government outlays designed to end the economic crisis, the debt reached a record 13,050,826,460,886.97 dollars on June 1, according to official figures.The debt has more than doubled in the last 10 years and now stands at just under 90 percent of annual gross domestic product.Against this backdrop, steaming the flow of red ink has become a contentious political issue in Washington, with Democrats and Republicans trading barbs about who is to blame.Earlier on Wednesday President Obama assailed Republicans for leaving him with the type of spiraling short-term deficits that fuel longer-term debt.The US government suffered its 19th consecutive month of budget deficit in April.
Or, with the words of Greenspan, former believer in free-roaming self-interest:There was “a flaw in the model … that defines how the world works,” said Greenspan. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told Congress. Unregulated markets “held sway for decades” … then “the whole intellectual edifice, however, collapsed.”That may be a hint… if some insiders in the intellectual edifice want to notice… which I doubt, things went too well for them…
Eco,Over population is destroying the planet in my opinion. Too many consumers, too much shitting in our own nest. Using finite resources way to fast. Unsustainable.The criminal elite support the Ponzi scheme economic model that can only succeed if there are ever more consumers. Like this the outcome is self prophetic. Why isn’t the ObamaNation screaming for more investment in Planned Parenthood centers across the nation?Oh, the horrors – of the ignorance of one’s intelligence – OBI is supposed to be very smart.Would we have to be drilling for oil in 5,000 feet of water if populations were only about 0.5 Billion? I don’t think so.What is the economic fallout of the Gulf Oil Spill? I’ll hazard a guess – it will lead the USA into the Greater Depression. The 2 Trillion dollar fishing economy of the four or five southern states will be ruined for 20 to 40 years – just like is unfolding in the Exxon Valdez disaster. BP will file for bankruptcy.ObamaCare will need to be moved ahead from 2014 to 2010 to deal with all the health problems and evacuation of populations from the Southern States. Who is going to pay for all that? Well, what are printing machines for? So easy.No charge for this investment information.
I am stuck in a loop. Every potential solution leads back to the same problems. To much debt to be serviced. Or distribution of incomes so messed up with the money and the debt are in totally different hands.Here is a recent speech by Mark Farber about this issue which includes some nice charts, including total debt to GDP. http://www.youtube.com/watch?v=H0sS6a9RW2E I just don’t see how this is going to be solved. More debt just doesn’t seem to be an answer. Especially when the benefits go to those who have the most and it is not invested in solving any of our real problems. Redistributing the income more equitably isn’t going to happen either.So I am firmly in the Doom Camp unless someone can show me a solution that I can believe in. In other words, the math has to work and it has to be moving us in the right direction. Borrowing more to continue consumption IMO is the classic definition of insanity. Doing the same thing and expecting different results.One major thing that most analysts are either overlooking or ignoring is the amount of people living on pensions that are severely underfunded.. This is no small group. Who was it that bought much of the securitized toxic waste? Pension funds drove both the hedge fund craze and the sub prime securitized toxic asset boom looking for unrealistic returns. Why? Because they have been massively underfunded for decades. Pension funds will not be able to maintain their outflows when neither their base nor their profit projections have been adequate for a decade or more. Only under very loose accounting rules have they been able to provide what they have been.To me, this is one of the Achilles heels of any supposed recovery. Not only are they underfunded by around a trillion$ but even if that was miraculously brought up to par, they still need to make extraordinary returns pr they’ll be back to where they were in a decade or less because of the demographics. This is a hidden sub prime issue that is going to be potentially more devastating than the housing deflation.Some suggest to solve this with inflation. Print our way out!And as I have pointed out before, inflation has a loop back effect of actually lowering the economy and transferring wealth and assets up the ladder of incomes. Those who own and control the assets do much better than those who have to borrow them.This can only work when there is capacity to create and service additional debt and as I and others have pointed out, this can’t work with the amount of debt currently being carried.So solving the pension issue is just like solving all these other economic issues, people and governments need to lower their consumption and quit borrowing more. Yet this is politically untenable. And maybe economically unfeasible because of the dislocation. Thus leaving us with the only solution is outright insolvency leading to bankruptcy for the majority.
see my post above to Guest on 2010-06-02 21:08:38watch the Farber speechI agree with the population issues but again, with religious zealots out numbering sane people, that issue will solve itself in war and famine.Humans want to believe they are smarter than animals but in the end, we are all animals.What part of physics and math don’t we get? Exponential growth in a finite system is not possible forever. This is in population or debt. Leaders are mostly followers with pretty faces with the backing of the elite (priests and priestesses of power). The world needs leaders and all we get are rhetoric and hype.. Same ole’ same ole’.
eco, i think you have pointed to the basic flaw in economic/financial models used by most speculators/traders/investors/savers; “..Exponential growth in a finite system is not possible forever..”. while constant/sustained growth is non-existent in reality, greed has led many people to assume unlimited economic growth in our ecosystem in order to pursue personal gain.
…cause parents are still taking care of kids who can’t find jobs and moved back home.Independent Contractor
Just wait untl the first hurricane comes slowly cruising up the Gulf, picking up all that oily H2O along the way as it biulds huge, billowing clouds to dump toxic rain as it moves inland. Yo, GA, TN, KY, OH! Like your thunderstorms well lubed?Independent Contractor
I C,you have a point. but what about those doing well but living like they don’t have parents…since when kids leave their parents when they finish college…if we want to explore, i think this is a real issue.