Trifecta

January 17th, 2013

If there were still magazine stands, I’d be all over them today. Three pieces of mine have (coincidentally) come out on in the last day or so, in fairly disparate publications

* In Aeon (a new British “digital magazine of ideas and culture, publishing an original essay every weekday”), I have a followup to my first essay there, which argued the case for a Keynesian utopia, with a drastic reduction in market working hours. In my follow-up, I look at the environmental sustainability of the idea. The tagline for the essay “For the first time in history we could end poverty while protecting the global environment. But do we have the will? ”

* Continuing on the utopian theme, Jacobin magazine has published The Light on the Hill, a reply to Seth Ackerman’s piece on market socialism

* And, at The National Interest, a piece with the self-explanatory title, Will Banks Finally Be Brought to Heel?

While I’m plugging my own work, I thought some readers might be interested in this paper on financial liberalisation and asset bubbles, written in the leadup to the global financial crisis. There’s not much I would change now, and it’s still a pretty good summary of how I think about the financial bubble that created the crisis. The linked working paper version is from 2004, and it eventually appeared in the Journal of Economic Issues, the main journal of the institutionalists who carry on the tradition started by Veblen and Commons in early C20. Not surprisingly, given this obscure outlet, it hasn’t had a lot of attention.

  1. Ikonoclast
    January 19th, 2013 at 06:50 | #1

    Too many people these days conflate capitalism and democracy. I use “conflate” here to mean “merge together and then incorrectly consider them to be the same thing”. In fact many people now believe erroneously that capitalism generates democracy and generated it historically. This view is completely false, completely refuted by studying history and also refuted today by analysing social relations under capital. Those who have clearly read no history of (even) the 18th, 19th and 20th centuries need to do so.

    Let us get on to the second point (analysing social relations under capital). The confusion of capitalism with democracy typically occurs with those who see only the market and only the consumption side of the market. There they see (by conflation) a “democracy” where people “vote” with their money. Free choice is deemed to occur and what is produced is assumed to match the “democratic” demand for goods. This process is assumed to be beneficial for personal freedoms and overall economic efficiency.

    What this view fails to see, while concentrating on the social relations of consumption, are the social relations of production. The consumer who appears so “free” when purchasing the (generally gimcrack and tacky) array of consumer goods must be visited as the worker in the factory, the office, the mine, the gravel pit, the trucking company and the toilets of the trucking company (meaning the cleaner of those toilets)*. Further, as Chris Warren points out, the worker must also be visited in the third world factories of Nike (Indonesia) and Apple (China) and the small to medium businesses where child labour is still very common (Indian sub-continent).

    It is in these places that we see the erstwhile “free” consumer now in compulsory drudgery. The drudgery is compulsory because, depending on country, unemployment is usually high (anything over 2% frictional unemployment is high), welfare benefits are non-existent to inadequate and the worker has no real alternative. It is drudge for the rich man or starve or at the least lead a very narrow and straightened existence.

    I know what I am talking about. I worked in a James Hardie fibro factory. I don’t have mesothelioma… yet. I worked in both bank offices and public service offices as a low paid clerk. I worked in gravel pits, on farms and and as a casual builder’s labourer. I worked as a cleaner in a trucking company. You have not seen filth until you have cleaned a trucking company’s toilets. In several of these jobs in my early work life (I mean the 1970s and early 1980s) I was paid under award wages and worked under illegal, unsafe conditions.

    The point is that under capitalism those were my work relations (and Australia was perhaps relatively enlightened at that time compared to many countries) and work is a big part of one’s life. There is no freedom in all that. If I had been free to choose and not under the compulsion of being without capital and forced to work for the man with capital would I have chosen that for myself?

    The only reason that proper implementation of award wages, safety standards and so on made any progress was due to unionism (worker solidarity) and social democracy. It had absolutely nothing to do with capitalism. The capitalists resisted every advance in wages, conditions and autonomy for the workers and still do. In fact, with neoliberalism they have been winding progress back since about 1985.

    It is not capitalism’s efficiency at allocation and production that has created the concentrations of wealth you see today. It is capitalism’s efficiency at exploitation that has lead to these concentrations. Any good that exists in social relations under capitalism has come from the forces of worker organisation and social democracy which wrested some concessions from predatory capital. Science (pure and applied) is the prime initiator of technological progress not capitalism. And most of the teaching of science and science R&D was paid for by governments i.e. it was socialised progress.

  2. kevin1
    January 19th, 2013 at 07:31 | #2

    @Ikonoclast #39
    The lack of an credible economic “model” to capitalism can’t be underestimated as a paralysing factor. Isn’t it like a club where the leaders are known as duds but no-one else will stand for election? So we have to make the most of the cards we are dealt. Albert Hirschman’s idea of voice and exit suggests that not having a way out forces the group to reform and improve from within. Without a change in the balance of power, towards radical democracy (including diminution of institutional power and deliberative decisionmaking) then these changes might be made. Radical democracy as an ideal has a fighting chance, socialism none at all.

    I used to think the JK Galbraith comment about markets being a good servant but a bad master was a nice approach, but it doesn’t take us very far. It really only rules out the outlier models to a mixed economy, which is what we’ve got everywhere anyway.

  3. Chris Warren
    January 19th, 2013 at 08:07 | #3

    @Ikonoclast

    I tend to agree. Capitalism may appear to have kicked-off today’s form of ‘democracy’ but under the tawdry banner of Liberalism. This was a project to gain freedom from old English forms of pre-capitalist political economy constrained with Royal Charters and Livery Companies such as the Worshipful Company of Cutlers etc. Fortunately capitalism was not allowed to create the regime of freedom it desired, and there were many battles involving various interests to produce the historical compromise we now live under. If you want a look at capitalist ‘democracy’ (!?) – have a look at any of the banal websites under “Objectivism”.

    Capitalists are still trying to destroy this historical compromise – Campbell Newman in Queensland, Nick Minchin supporting current High Court challenge, and Bronwyn Bishop’s campaign to eliminate preferences.

    Gina Rinehart knows what sort of democracy she wants – the Berlusconi version where capitalist media jingoism drives voters into a frenzy – and she appears to be taking steady steps to grab control of Australia’s media.

    It was interesting to see what happened when representative democracy conflicted with capitalism in the City of Sydney Council. Democracy was abolished and they established a set of Commissioners – a true Junta under Eric Neal and Nicholas Shehadie.

  4. BilB
    January 19th, 2013 at 09:53 | #4

    Ike @2/1,

    You kick off a good point, but draw the wrong conclusion. Democracy is observed to automatically come about in a population with 80% literacy, freedom of speech, and 20 years duration. I believe that there are several other important riders the most important one of which is individual land ownership. But how “systems” originate and maintain themselves is worthy of study.

    Some noteable examples.

    The Catholic Church maintains itself and expands with indoctrination from birth. One is born into the Catholic Church and the church works aggressively to maintain control of its members throughout life. This is why the Vatican will never allow birth control as it is through birth that it acquires new mwmbers and large families are its method of expansion.

    The Church of England utilised national identity as its method of recruitment and empirical expansion as its method of expansion.

    Islam utilises bribery of the impoverished for recruitment then religious domination of politics as its means and expansion and threat of death for its method of retention.

    Marxism saw its opportunity window as being economic collapse due to crushing exploitation initiating the spontaneous acceptance of a philosophy of common ownership and and all performing for the common good. Did it ever really work anywhere?. I think that one of its requirements is a weak or nonexistent regime of personal property ownership to ever have the chance of taking hold. It is a huge leap for people to give up their right to own property and take on the essential philosphy of common sharing.

    Socialism, total socialism where it exists, is largely tribal with indoctrination at birth. Very common in primitive communities. Socialism is not in conflict with democracy but has limited scope for maximum human performance.

    Capitalism is a natural consequence of individual property ownership, but does not require an overarching philosophy. It does however require a parcel of enablers for stability. Private property, uniform education, a regulating body of some form, and free communication. Capitalism does not require democracy, but its enablers induce democracy automatically.

    Hybrides. I think it is obvious that a blend of capitalism, socialism and democracy is the most successful and efficient arrangement for the management of human affairs, but its success is dependent on the constrainment of extreme influences of all forms. And one of the many of those extremes is, as Ike you suggest, is media domination for the purposes of self interested coersion. Fortunately effectiveness of this vehicle for perverting democracy is rapidly waining under the power of individual communication with direct information sharing anabled by the internet.

    I might suggest a new form of human interconnection that might arise in the coming century and that is Environmental Socialism. New but also ancient, as only our Aborigines will appreciate.

  5. BilB
    January 19th, 2013 at 10:00 | #5

    Afterthought. Socialism also has a nomadic vector of origin.

  6. Ikonoclast
    January 19th, 2013 at 10:11 | #6

    @Chris Warren

    Yes, we can see where Gina Rinehart (a typical capitalist) is coming from.

    “World’s richest woman calls for Australians to take a pay cut – ‘because African workers are willing to earn just $2 a day’ – Mail Online, 5 Sept 2012.

    In Gina’s view all workers should be willing to work for $2 a day. This is the clear meaning of her message. So while she should be able to amass billions via exploiting national assets and workers, the workers themselves should live on $2 a day.

    She makes her statement at a time when the worker’s shared of national income is getting lower and lower every year and the profit share of national income is getting higher and higher. Clearly no amount of wealth (even a currently obscene amount of wealth in Gina Rinehart’s case) is ever enough for capitalists. They always demand, oppress and expolit more and more and more. They will not stop until all the workers of the world are reduced to $2 a day. They will not stop unless the workers themselves stop them. There is no other politcal economy force to stop them. That is plain fact.

  7. BilB
    January 19th, 2013 at 10:14 | #7

    Something that I was thinking about the other day is that whereas Russian style communism could operate at a high level, particularly in the sciences, it always looked to the capitalist west for guidence on what could be achieved. Marxism, communism, and socialism all suffer through limiting the full extention of human creativity.

    “what do you give up for the common good”

  8. BilB
    January 19th, 2013 at 10:21 | #8

    Ikonoclast @6,

    …….whereas in communism and Chris Warren’s economic socialism we should all work for a small flat in a huge state owned building complex and the food we eat. I don’t see much of a difference between that and Commissar Reihardt’s vision.

  9. Chris Warren
    January 19th, 2013 at 10:43 | #9

    @BilB

    I suggest people just ignore this.

  10. Jim Rose
    January 19th, 2013 at 11:00 | #10

    John, Breaking up banks seems to me to have many risks and is poor problem definition

    The fragmented American system is unstable. Bank failures are common even in good times because, until recently, no inter-state branch banking was allowed and there were even strict limits on intra-state branch banking. some states limited banks to one branch.

    Canada, and I think Australia, had not bank failures in the 1930s because their banks were few in number and they had nation-wide branch banking to diversify risk.

    The Kareken and Wallace moral hazard theory of bank panic prediction is that if a government sets up even implicit deposit insurance and lender of last resort and does not regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    Peltzman found in the 1960s that bank capital ratios halved after deposit insurance was introduced in the USA in 1934.

  11. BilB
    January 19th, 2013 at 11:33 | #11

    Jim Rose,

    I think JQ was predominately refering the conflict in objectives between retail banking and investment banking.

    “a man in command of a fortune must be in need of a wife” from Austins time translates to

    “an institution in command of a fabulous accumulation of liquid assests must be in need of a Harvard graduate”

    This is where Akerman’s socialised capital falls in a screeming heap. Headline, “Noble objective falls foul of corrupt officials”. The GFC equivalent is where the merchant banking sector said to the retail sector “Oh, you’ve got some problematic investments? give them to us and we will see if we can dispose of them for you”.

    It is a property of human nature that accumulations of wealth are a magnet for creative thinkers. That is never a good thing for the owners of that wealth.

  12. may
    January 19th, 2013 at 13:16 | #12

    chatting to and ex small country town businessman recently

    the story went-

    farmers left caravans in caravan park year round for a small annual fee.
    weekends the family hung out and did some fishing.
    the park was populated and had a respectable cash flow so it was well maintained.
    the park had an excellent name on the round OZ and interstate grapevine.
    town businesses ticked over nicely.
    the caravan park was sold.
    instead of an owner there was a manager.

    some one somewhere (it must have looked so goood on the spreadsheet)decided to free up sites for more visitor traffic by cleaning out the farmers vans,upping the annual fee to the point the farmers buggered off.

    the steady cash flow employing workers for maintainance evaporated.
    the park deteriorated,the manager could not do everything that needed to be done.
    the word went out on the travellers circuit and traffic became a slow trickle.
    the town businesses no longer had the steady custom.
    the person who told me this went from employing 12 people in the busy times to only 2.
    the business closed.
    the people of the town now must travel to the nearest central town or have sent in,the product they once had just up the street.
    and the caravan park is a mess.

  13. may
    January 19th, 2013 at 13:25 | #13

    oops.
    the caravan park is open(sort of)
    the person i was chatting to, closed.

  14. kevin1
    January 19th, 2013 at 13:44 | #14

    @may
    What are your conclusions about this, May?

  15. BilB
    January 19th, 2013 at 15:24 | #15

    May’s story highlights the folly of business. It also talks to the subject of perceived value. This is very much a case where on knowing that the caravan park was for sale, the benefitting businesses should have pooled their funds and bought the park. But they didn’t I would suggest because they were not organised on the one hand and had a common opinion undervaluing the park on the other. Also the park’s new buyer could well have paid way too much, another common story and one being played out in Rio Tinto right now.

    There are many situations where a common ownership, or in the capitalist ethos shared ownership, is very much to local advantage. All of those collapsed businesses may very well not realise just how much the original owner of the caravan park gave up for their common good. Arrogance, greed, competitive intolerance, are all human traits, and certainly all present and active in economies of all forms.

  16. Chris Warren
    January 19th, 2013 at 16:15 | #16

    @BilB

    Nonsense.

    If capitalists expect to make more profits selling fewer items but at higher prices or by cutting costs – this is what they will do – even if they wreck their own enterprise in the long-run.

    The capo-motive appears to have run amok in this case.

  17. BilB
    January 19th, 2013 at 17:00 | #17

    There you go, Chris. You are trapped in a one dimensional understanding eneterprise. There are many, many ways of calculating ones advantage, and many kinds of rewards. Watching an article here on Thatcherism the comment was made by one novelist that Economic under Thatcher elevated money and wealth form being a means to an end, to that of being an end in itself. That is possibly the best way of understanding this, and the GFC for that matter.

    In May’s example I suspect that there is a huge degree of context. Depending on the timing I suspect that the owner, wearied by the years of drought and hard times took the wet spell and La Nina’s regreening as an opportunity to either retire of find a new start elsewhere.

    Capo-motive? I think more ego than money. Examining business failure is a hobby of mine, particularly those where a business person who has done well in an earlier enterprise attempts, after cashing up and some years later, to recreate their earlier successes. I find these failures particularly fascinating. One of the fundamental understandings of business is that greed breeds competition, that is the fallacy of your overiding money motive. Not everone remembers the rules.

  18. Chris Warren
    January 19th, 2013 at 18:10 | #18

    @BilB

    You miss the point – the damage to the enterprise was not linked to drought, wet spells or La Nina’s. It was linked to cutting services and maintenance, and instead of owner making a wage, a manager was inserted who had to make their wage plus give a return to whatever funds were used to buy the park.

    So the original enterprise was sustainable and supported jobs and a community but as soon as a more rapacious capitalist gets into the game – collapse eventuates.

    And then the capitalists blame everything else they can possibly dream up:

    the drought
    the wet weather
    whatever….

    The previous owner is probably laughing his head off.

  19. BilB
    January 19th, 2013 at 18:23 | #19

    As May said “it must have looked good on a spreadsheet somewhere,
    ” and I said “the folly of business”.

  20. Jordan
    January 19th, 2013 at 18:58 | #20

    @BilB
    The most probable reason for collapse of an enterprise today is buying it on debt which adds interest cost on income fllow. Without antagonistic approach to capitalist or to employees you will come to this conclusion.
    Retail sector debt is dependent on refinancing and credit is set up as ballon payment. Enterprise’s cash fllow is suficient for interest cost payments only with principal requierd at the end of the term. If refinancing hits in period of crisis when cash flow is low or negative there is no option for refinancing whole principal and enterprises default and close. At the bottom of the crisis enterprenuers with cash buy properties at discount and open the business with positive cash flow.
    This is called Business Cycle.

    Acces to credits allow for increased price of properties, which is another factor in business collapse. Credits allow for higher demand when buying. Steve Keen has excellent presentations on how debt is a cause for economic growth, housing prices. Debt growth is hence, a cause of capitalist succes and collapse.

  21. Chris Warren
    January 19th, 2013 at 19:09 | #21

    @Jordan

    Yea if debt gets into the game – the picture is worse.

    Now you have to extract value to pay the manager, the investor plus the lender.

    However if interest paid is tax deductible, the urge to borrow may be exaggerated.

  22. Jordan
    January 19th, 2013 at 19:52 | #22

    I would want to point to Soviet example of socialism as state capitalism. In Soviet block, ownership of production was in workers hands, but distribution was in state hands. Just as in capitalism workers did not have a say in distribution of income/ profits. Soviet block practiced more coercive form of state capitalism then present China and did not concentrate on stealing developement in inovation as China. With passing time, Soviet block also stoped using money printing as enabling new production and developement but to secure enrichement of Army and state buearocracy while organizing further developement stagnated.
    As you can read, China is switching to in state consumption as economic motivator since external AG is collapsing.

    Closest to fully socialist system was in Yugoslavia from 1948-1980. I am wondering why JQ skipped this example in The Light on The Hill? was it for lack of centralized archives of socialist developement, or Serbia still baning acces to it, or because it will really endanger capitalist dogma?

    From slavery to capitalism one thing did not change; who decides on distribution of production income. Only thing changing is how much is distributed where and by what phylosophy. In developement of distribution process, workers have more and more to say so systems changed.
    In state capitalism workers also have litle to say on how to distribute products of production.

    In Titoizm/ self-directed enterprises/ co-operatives/ collective association/ Barcelona Commune workers decide on distribution helped by expert input. Tito and Kardelj really tried to implement Barcelona Commune system that he experienced during Spanish Civil War and which Stallin destroyed, but was pressured by Stallin and later on with domestic stallinists to implement state capitalism. After killing and sending to jail many stallinists he still did not succed in erasing stallinist idea from population.

    Reforms of 1965 which aimed at giving more distribution power to individual enterprises did not work. Middle level state barocracy did not allow it. Those that had distribution power did not allow reduction in their power. They enjoyed higher benefits due to that system of distribution.

    The real reason that “socialist” system failed is in invention developement that is in state hands, in socialism and in capitalism and what JQ pointed in his reply to Ackerman. State organizes incentives for invention and developements and “socialist” block had huge failings about that. Today’s China is thinking about that and it is openly stealing inventions from developed world.
    While most of the developements came from military and space exploration in capitalist world, those inventions were readilly accesed by private interests and exploited almost for free for purpose of profit.
    That was a huge surprise for me when i moved to USA. In Yugoslavia, millitary developements were highly guarded secrets and were almost never alloved to be used in private sector. Other matter that significantly contributed to that separation of developement was lifetime job. In socialism, once you find a job, it is your job for life. In USA, millitary personel that developed new inventions would easilly switch to private sector employment bringing with them the new technologies. Besides that state was intentionally offering public sector technologies to private sector just after few years of achieving it.
    That was forbiden in socialist states supported by ideology of defense from capitalist world as primary goal. Paranoia that had grounds in real world was preventing state developement of technology to be used for private purposes, no matter how old that technology and how unimportant that was comparing it to capitalists military technology.

    There were plans to achieve new technological developements by sending workers to West and then get them to implement them in Yugoslavia, but political turbulations changed that into ad-hoc adjustments and forgeting the purposes of doing that, making emigrants sort of public enemy due to double thinking in intelligence agencies. China is not making such misstakes, their emigrants come back and implement new technologies with success.

    Yugoslavia is only good example of socializm because also it enjoyed free trade with both blocks, which Cuba did not have. Only Yugoslavia had acces to the trade as most of the countries have in their environment when analyzing economic impact and comparing the systems.

    Why is the technological developement important for a system succes is clear almost to everyone, but in a printing currency environment it is important to prevent large trade defficits which will disloge benefits of money printing and cause damaging high inflation. Instead of developing its own economy, money printer will benfit foreign economy by large trade deficit instead of its own.

  23. BilB
    January 19th, 2013 at 19:53 | #23

    I know what you are saying, Jordan, but I disagree.

    Finance charges are just a cost, and not necessarily a particularly high one. Consider the option to borrowing the money, accruing it over time. This process involves significant losses as the money devalues during the accrual process (+interest -tax on interest -inflation -loss of opportunity), and tax is paid on the accrual funds. Then when you buy the business you get to depreciate the purchase funds but over a longish period. In the alternative the business startup is immediate, the interest on the loan is tax deductible and tax is paid on the principle repayments as the business earns.

    Businesses fail when they under perform. Interest payments become mor significant as income drops, but it is rarely the cause of the failure. A properly run business will self liquidate with a positive outcome when business becomes difficult and unpredictable. That is the correct and complete business cycle. Not all businesses “collapse”. You tend to not remember the ones that shut down in a controlled manner.

    Can I top up your glass now?

  24. Jordan
    January 19th, 2013 at 20:01 | #24

    @BilB
    I was not talking about interest cost as a cause of business cycle, but a need to refinance full principal in times of crisis as a cause. Interest cost is just another cause of badly run businesses in normal times, or businesses that lost their market share not due to their own making but due to environment change.

    The problem is retail credit conditions. Business credit is mostly ballon payment credit, it is not as private credit where your monthly payments include principal and interest cost. Private credits are fully amortized trough credit term, while business credits are not amortized. It makes it almost impossible to refinance it in time of economic crisis.

  25. sdfc
    January 19th, 2013 at 20:23 | #25

    Debt growth is hence, a cause of capitalist succes and collapse.

    That’s a good line.

    BilB

    When income falls, the burden of carrying pre-existing debt rises. This becomes a particular problem when debt levels are high and rising levels of bad loans put pressure on bank balance sheets.

    Even if firms are shut down efficiently unless a buyer can be found, the owners continue to carry the debt only now they have to find the income to service the debt. There are not likely to be many buyers or banks willing to finance buyers in a crisis.

  26. BilB
    January 19th, 2013 at 20:25 | #26

    Some good information on the Yugoslavian experience there, Jordan.

    I worked with a Yugoslav guy in a furniture factory in the seventies. When the “oh what a night” song come up on radio he would stop and go dreamy eyed and softly nodding say “what a woman, …….what a night”. And you imagine this long remembered wonderful experience just from his body language.

    On the other, well if a business is allowed to go heavily negative then it will be a mess. That is life. In manufacturing we have to constantly be aware of our degree of agility when trading conditions become difficult. If you do not have the ability to rejuvenate in a more favourable direction then you should self liquidate.

    My mother always said “never put all of your eggs in the one basket” and she was right.

  27. January 19th, 2013 at 20:29 | #27

    John: The BZE stationary energy plan (http://media.beyondzeroemissions.org/ZCA2020_Stationary_Energy_Report_v1.pdf) provides one credible plan for converting all electricity produced in Aus to 100% clean power over the next 10 years without having to use nuclear without destroying the economy. This plan is based on technologies that are commercially available right now.
    There is also a technology available right now that can produce what I call “electro fuels” These are fuels that are produced using clean electricity and clean raw materials. (http://pragmatusj.blogspot.com.au/2013/01/electro-fuels-part-of-clean-future.html) For example,
    1. Clean hydrogen can be produced using electrolysis powered by clean electricity. (4% of the worlds hydrogen is produced this way.)
    2. Clean hydrogen can be combined with clean nitrogen extracted from air to produce clean ammonia.
    3. Clean hydrogen can be combined with clean carbon dioxide extracted from the air and converted to methanol.
    4. Methanol can be converted to gasoline by removing the oxygen in methanol.
    Liquid ammonia, methanol and gasoline can all be used as transport fuels with, at most only minor engine modifications.
    Dirty hydrogen, ammonia and methanol produced from fossil fuels are currently used to produce a wide range of chemicals. The list could be expanded if fossil fuels were no longer acceptable.
    Unlike bio-fuels, unlimited quantities of electro fuels could be produced without reducing food production or damaging the environment.
    In terms of transport, clean electro fuels can be used for applications where the direct use of electricity (and batteries) is not practical. (Think long distance air and sea transport.)
    In terms of chemical production, clean electro fuels would be an essential part of any credible plan to clean up major chemical industries such as the petrochemical and fertilizer industries. Clean hydrogen could also be used to do things like clean up the production of steel.
    You need to be more optimistic re what could be achieved by currently available technologies.

  28. sdfc
    January 19th, 2013 at 20:31 | #28

    Business people generally do put all their eggs in one basket. They are the risk takers, where would we be without them.

    You forget most businesses are small.

  29. BilB
    January 19th, 2013 at 20:36 | #29

    sdfc,

    Self liquidating a business involves selling off the assets in a controlled manner at realistic (not fire sale) values. This is a calculation business always has at hand, usually from the positive aspect of growth, but also in the negative situation of contraction. There is no residual debt.

  30. Jordan
    January 19th, 2013 at 20:38 | #30

    @BilB
    I am aware of benefits of inflation to eat up the cost of borrowing, but are you aware of impact of low inflation and deflation on the ability to eat up the cost of borrowing.

    Last 40 years interest rates and inflation were falling. Lower inflation keeps the cost of borrowing leveled while benefits of inflation eating up debt is lowered. It is represented in Real interest rates. Even tough Real Interest Rate is dificult to calculate but it represents difference in benefits of inflation as destruction of debt to cost of debt.

    Even tough, interest rates fall as inflation falls but also RIR rises due to lag in interest rate fall. Interest rates are calculated with predictions of inflation in the future. Deflation raises RIR to such levels that borrowing becomes too expensive. In deflation, while nominal debt is fixed, nominal prices and incomes are lowered making it impossible to pay off the debt.

  31. Jordan
    January 19th, 2013 at 20:45 | #31

    @sdfc
    I stole that conclusion from Steve Keen. It is all his and confirmed with my experience as enterprenur.

    Sorry to rewrite your point of deflation in my last post, but you posted it while i was writing about. Your writing is more expressive then mine.

  32. sdfc
    January 19th, 2013 at 20:45 | #32

    BilB you’ve got to find a buyer for those assets in a falling market. The value of a business generally goes beyond its tangible assets. Not all businesses that fail in a downturn deserve to, falling sales can test the best run business.

  33. sdfc
    January 19th, 2013 at 20:46 | #33

    What point was that Jordan?

  34. BilB
    January 19th, 2013 at 20:54 | #34

    Jordan,

    You’re focussing on failure scenarios. Unemployment is under 5%. Business is doing OK. Our economy is doing fine.

  35. sdfc
    January 19th, 2013 at 21:09 | #35

    That’s why the RBA has been cutting rates for the past year or so, because the economy is going gangbusters.

    Employment growth has been crap for a couple of years now.

  36. Jordan
    January 19th, 2013 at 21:09 | #36

    @BilB
    Yes there are multitudes of benefits and costs to borrowing, and they probably cancel each other in total, but what is important is that borrowing in total makes it dependent on future borrowing in total. If borrowing increases costs of business, it also increases buying power, so net benefit or cost is 0, but if times come when one side or both are not able to borrow more, then both collapse and GDP falls.
    Economy is dependent on debt growth, constant debt growth.

    Another way to look at it is, if capitalist earns more profits and keeps it saved, that money is dead. in order to compensate for saved dead money consumers have to borrow to keep the flow going.

    By allowing capitalists to save more and put it in bank, there is more ability to borrow by consumers by reducing interest rate by increased supply of capital. This increased borrowing enable consumers to buy more and support Nominal Surplus Circulation other way besides income. Capitalist savings increase even more while due to stagnation in income, consumers borrow more till the line of max indebtness.
    Debt increase have to be followed by income increase that can service thet debt. YOu can also increase borrowing by lowering interest rates but only down to 0, not bellow it. Liquidity trap/ Zero lower bound/ savings supply glut whatever you want to call it.

    But capitalist also invest savings into financial assets that does not increase income of consumers, but increases their savings which lowers interest rates even further enabling more borrowing. But it can lower IR only down to 0, not further.

  37. sdfc
    January 19th, 2013 at 21:11 | #37

    A zero cash rate is a prime example of policy failure.

  38. sdfc
    January 19th, 2013 at 21:11 | #38

    Or near zero before someone jumps on me.

  39. Jordan
    January 19th, 2013 at 21:29 | #39

    @BilB
    I am mostly talking about conditions in USA and interstate EU. Australia has kept mean income growth comparing to USA and EU interstate comparison. Weather proces of of Nominal SUrplus CIrculation is within individual producers and individual consumers is at matter, same monetary laws are applied to individual states within monetary union that does not have money printing ability. Same laws apply with currency users / no printing ability.

    Export led deficit prevention in Australia is only nominal/accounting problem for USA, Japan, UK so they all have the same interest rates due to CB controling it. In monetary sovereignty CB is controling interest rates. So export in Australia is not a cause for good employment, but increasing mean income of consumers.

    Larger deficits enable larger savings trough additional income in interest rates, so with it enables interest rates to reach 0% faster then with smaller deficits.

    What is important is to keep Nominal Surplus Circulation flowing, whether trough debt increase or income increase. Australia still has some room for debt increase due to income increase.
    In USA debt increase stoped after a fear of defaults first in banking sector and then in personal sector was awakened. Obama administration is calling this a investor (bank) confidence which prevents further debt increase. There is no acctual limmits to debt increase, only psychological and accounting numbers. Otherwise, withouth this psychological fears, debt increase could grow as long as there are numbers awailable for accounting spreadsheets. Forewer.

    This is the crux of MMT.

  40. rog
    January 19th, 2013 at 21:59 | #40

    @sdfc Those good at business are risk adverse, that’s why they are good at business. Understanding and then avoiding the risks is the key.

  41. sdfc
    January 19th, 2013 at 22:31 | #41

    Being in business is about the least risk averse investment you can make.

  42. Jordan
    January 19th, 2013 at 22:42 | #42

    @sdfc
    Being in business means that your liability toward debt is reduced, so you are right in that way. You can make your own income by increasing debt onto corporation for quite a few years.
    In USA about 20% corporations pass 2 year mark.

    But rog is right on what is a key to good business; Understanding and then avoiding the risks. Avoiding the risks can take many and many of shapes, including accesing good credit line.

  43. Jim Rose
    January 19th, 2013 at 22:58 | #43

    @sdfc 20-40% of new small businesses fail in their first two years.

  44. rog
    January 20th, 2013 at 05:11 | #44

    @sdfc Adverse/averse.

  45. sdfc
    January 20th, 2013 at 21:32 | #45

    Jordan

    The debts of a failed company are every bit a bad debt to a creditor as the liability of a sole trader or partnership.

    Business owners make decisions based on imperfect information. Some risks are almost impossible to avoid by even good business owners.

    Jim

    Exactly, setting up a business is a risky undertaking.

    Rog

    Don’t worry I wont hold the d against you.

  46. Jordan
    January 20th, 2013 at 23:27 | #46

    @sdfc

    The debts of a failed company are every bit a bad debt to a creditor as the liability of a sole trader or partnership.

    On sole traders and partnerships is true, and thats why i said corporations which have limited liability on owners for debts and mistakes.

    On bad debt to a creditor is even a positive thing if creditor is a bank and most of the time it is a bank that is creditor. It is positive, since it prevents destruction of money by repyment of debt. Banks make credits out of thin air and destroy it when debt is paid off.

    In a bad debt situation, banks loose only in projected income and in allready paid commisions to bank officer. Bank officers receive bonuses from projected income, no matter how credit that income is based on ends up, with debt default or not. Credit balance did not come from someone’s savings, but it is brand new money.

    This is what a lot of bank regulators and bank officers claim, only economists perpetuate the myth that credits come from savings.

  47. Jordan
    January 20th, 2013 at 23:46 | #47

    I have to fix my last post, because there is no mentioning of the cause of financial collapse in 2008.

    Another problem for banks that came up with debt defaults to banks is that they also sold this projected income to other investors, not the whole mortgage with principal but only projected income from interest rates paid on principal. And investors who bought that projected income used money that came from someone’s savings and other banks. There was additional commision paid out for such sale.

    Then investors also sold that projected income again and paid out a commision. Then a new buyer bought insurance (CDS) from AIG to protect the projected income. No doubt that every transaction also involved buying insurance for themselves even tough they sold the liability that insurance covered later on. So you end up with multiple insurances on the same liability. And every transaction piled up additional bonuses paid out. I believe there were so many bonuses paid out every step that exceded projected income on a particular credit.

    Once a particular debt defaulted AIG had to pay out multiple times for a single lost projected income.

    If banks did not sell mortgages that they originated there would be no such a mess, only issues described in my fomer post.

  48. sdfc
    January 21st, 2013 at 15:42 | #48

    Jordan

    We’re not talking about the ramifications of one bad debt on the banking system (though how even one can be called a positive is beyond me), but cascading defaults as a result of a general crisis.

    The issue of bank created, debt backed money is what makes such a situation so dangerous. In the interests of simplicity let’s leave aside the issue of the creation of higher orders of money. When the banking system extends a loan, it creates a deposit, increasing the money supply. Therefore it is only logical that a general deleveraging, be that through a retirement of debt or bankruptcy, will see a decline in the money supply.

    A monetary deflation such as this is necessarily accompanied by an income deflation which when the economy is carrying a high level of debt is sure to push the economy further away from full employment rather than being the ultimately stabilising process crude economic theory assumes.

  49. Jordan
    January 21st, 2013 at 17:33 | #49

    General deleveraging can be by paying off the debt or default. Paying off the debt shrinks the money supply while default does not, so it is positive.
    If banks create money then stoping the repayment of debt stops destruction of that creation, hence positive. Just as inflation is positive in terms of buying power.

  50. sdfc
    January 21st, 2013 at 19:04 | #50

    Jordan

    While a loan default will not in isolation cause the money supply to fall outside of the liquidation of the tangible assets of the defaulter, it does have a detrimental effect on bank balance sheets.

    These days we no longer have the threat of large scale deposit liquidation, however the impairment of bank balance sheets has wider ramifications for private sector borrowers and the money supply as a whole as banks withdraw credit. Business and household credit outstanding in the US fell consistently through the recession, that M1 itself did not fall is likely the result of the huge rise in public sector borrowing.

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