What history really teaches
from Lars Syll
For all those who still don’t grasp the simple fact that demand – and not debt – is the greatest problem of today’s economies, a reading of Christina Romer’s article The Hope That Flows From History is recommended. Economic history and “natural experiments” can sometimes be very instructive:
One reason the Depression dragged on so long was that the rapid recovery of the mid-1930s was interrupted by a second severe recession in late 1937. Though many factors had a role in the “recession within a recession,” monetary and fiscal policy retrenchment were central. In monetary policy, the Fed doubled bank reserve requirements and the Treasury stopped monetizing the gold inflow. In fiscal policy, the federal budget swung sharply, from a stimulative deficit of 3.8 percent of G.D.P. in 1936 to a small
surplus in 1937.The lesson here is to beware of withdrawing policy support too soon. A switch to contractionary policy before the economy is fully recovered can cause the economy to decline again. Such a downturn may be particularly large when an economy is still traumatized from an earlier crisis.
The recent downgrade of American government debt by Standard & Poor’s makes this point especially crucial. It would be a mistake to respond by reducing the deficit more sharply in the near term. That would almost surely condemn us to a repeat of the 1937 downturn. And higher unemployment would make it all that much harder to get the deficit under control.
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Real-World Economics Review Blog 
“Demand” is a circular argument. Demand comes from supply and supply comes from demand. The problem is lack of effective demand and that arises because some people cannot supply, ie they are locked out of the process of production.
Not take a look at your local shopping centre or industrial area and count the number of vacant properties. Rents and land prices do not fall to market clearing levels. This creates a blockage in the cycle of production.
Demand clearly comes but from one source: Income. If there are too many unemployed with reduced social payments, then demand declines. We’re talking about basic demand not luxury demand which shows no problem whatsoever. From the business’ POV there is no reason to produce when you got no demand perspective. Without paying customers business goes down or turns abroad (exporting goods and jobs).
Justaluckyfool asks, “What if 99% of the people were to receive an approximate increase (@14%) in their present income, would that increase demand, jobs and production and being spread so wide also not create inflation pressure.?
P.S. it would also lower production cost and increase profits.
Simple solution? Stop FICA tax !
Don’t dare ask, “How would we raise the revenue lost ?
There is a simple answer there.
As bpth Romney and Obama agree-To lower taxes, you must raise revenue somewhere else.
Causes of problems today:
1. Emerging demographic drag effects in two-thirds of the world’s economy.
2. Peak crude oil production and exports.
3. Population overshoot of carrying capacity.
4. Extreme wealth and income concentration.
5. Unserviceable private and public debt levels.
6. Falling tax receipts and fiscal constraints resulting from 1-5.
Demographics is destiny. Economists avoid the effects, because they don’t want to be perceived as sociologists or anthropologists.
Moreover, economists have a blind spot regarding biophysics and exergetics, because they don’t want to be seen as physicists, biologists, or ecologists.
But Peak Oil and falling net energy per capita in a so-called “full world” with population overshooting carrying capacity is exerting an exergetic log-limit bound on growth, i.e., growth has become “uneconomic” (Herman Daly). During the 1930s, the constant-dollar price of oil was less than $20/bbl, whereas the US was producing oil at a rate of 4-5%/year and was a net exporter of oil. The average price of oil has tripled since Peak Oil in ’05, but global crude oil production and exports have contracted per capita. Historically, there is no sustained growth of 5- and 10-year average real GDP per capita with the price of oil above $20-$30.
As in Japan since the ’90s, the US, EU, and soon China-Asia will experience the peak Boomer drag effects lasting into the early to mid-’20s, and then permanently thereafter as real GDP per capita decelerates from the long-term 2% to contraction from the effects from Peak Oil and population overshoot.
Finally, wealth and income concentration in the US is at a Gilded Age extreme, which is characteristic during Kondratieff/Long Wave Trough and debt-deflationary regimes (1780s-90s, 1830s-40s, 1930s-40s), an effect of generational hoarding of accumulated wealth, reducing money velocity to private GDP below 1.0 and overall real GDP per capita.
There is little that can be done with fiscal or monetary policy to mitigate the effects of the global peak Boomer demographic drag, Peak Oil, and population overshoot.
There are no economic theories to instruct us about how to deal with the end of growth of real GDP per capita and the end of capitalism’s unsustainable perpetual growth on a finite planet. Fiscal, monetary, social, and foreign policies that attempt to increase growth of population and consumption without acknowledging and taking into account the hard limit bound of biophyscial and mathematical constrains will fail to achieve the desired results.
BC said, “Moreover, economists have a blind spot regarding biophysics and exergetics, because they don’t want to be seen as physicists, biologists, or ecologists. ”
I would change that quote this way, “economists have a blind spot….because they don’t understand physics, biology, or ecology.”
When people say Demographics is destiny — I think they fail to recognize this requires setting demographics relative to productivity.
Oftyen one hears the argument that “Social Security is fueling our debt crisis. It is like a Ponzi scheme: When Social Security began, we have 16 workers for every retiree. Now we have only 2 workers for each retiree. Something’s got to give.”:
My response is (as I once told Congressman Fred Tompson and also Senator Bil Frist from Tennessee in a debate at the University of Tennessee about privatizing social security):
“If this debate took place a 100 years ago and I told you that in 1901 it took 16 people working in food production and food distribution industries in America to feed ever 20 mouths — and that in the year 2001 there would be less than 4 persons working in the food production and food distribution industries for every 20 mouths in the USA — would you say people in the USA were going to starve in 2001???
If so why do we have an obeisity problem in the USA?
The answer is that productivity has increased so much that what 4 workers produce today is more than enough to feed everyone in America!! The same type answer can be given to your 16 workers per retiree to the forecast 2 workers per retiree.
I do not understand why no one else has ever used this argument! to question an unrestrained forecast based on demograpghic growth alone.
.
Regarding Peak oil production –
– please be advised that I was the assistant director of the economics division of the Continental Oil company at one time in my career
So I was one of the few academic economists who had “met a payroll” or at least knew something about the oil industry from the inside.
. Accordingly when the first oil price spike occured in the 1970s, Brookings commissioned me to do a study of whether we were running out of oil globally.
The study was published in the Brookings Papers on Economic Activity, Summer 1974. and is there for anyone to see today
With help of a graduate student and an assitant professor we demonstrated that there was no Malthusian problem in oil production. We predicted the 1980 price of oil in 1974 dollars to be less than $5 per barrel while most economic forecasts at the time suggested 1980 prices were anywhere from $12 to $20 per barrel and rising to more than $100 a barrel (in 1974 prices) by the year 2000.
It turned out that we had overestimated the price of a barrel of oil in 1980.And the price of oil still has not reached $100 per barrel in 1974 dollars.
The price of oil depends on the degree of monopoly in the crude producvtion industry– as the cost of production is way below the posted price in the Middle East and elsewhere — and competition that could be created by global production outside of OPEC could limit OPEC’s monopoly power. But they still had a good deal of monopoly power..
Our studies showed that from a 1974 perspective there is unlikely to be a Malthusian problem in the forseeable future. That is still true today
***************For all those who still don’t grasp the simple facts that:
“paying interest on our own money that is made legal currency by private for profit banks (PFPB) is the greatest problem of today’s economies as well as the possible future collapse
(systemic failure) of capitalism.
Challenge, Improve, then use as your guide that which you feel to be true and that which would benefit mankind .
Read more:
What William Black has to say about banks.
What Michael Hudson has to say about compound interest.
What Frederick Soddy said in 1926, 1933 about “The Role of Money”,
PUT IT TOGETHER !
Post it “for the betterment of mankind”.
It’s funny coming from Christina Romer, because her classic paper on the recovery from the Great Depression suggests that fiscal policy was NOT relevant. Monetary inflows, that were not sterilized, is what she thinks caused the recovery. She also complained about monetary contraction in 37, not fiscal. I deal with that here (http://www.levyinstitute.org/publications/?docid=1397). Oh well, she is learning!
It seems that Paul Davidson thinks we can have infinite growth on a finite planet.
BTW,the increase in farm productivity was primarily due to mechanization – burning fossil fuels.
There has latterly been an increase in yield/hectare partly due to improved plant varieties but largely due to chemical fertilizers which are made using fossil fuels.
It seems that Paul regards fossil fuels as inexhaustable.
It is a pity when ideology gets in the way of rational thought which takes account of the big picture
it is strange that Portargus accuses me of ideology — when my Brookings study was full of historical and econometric numbers and facts — and my Brookings study and forecast proved to be more realistic than any other that was made at the time.
The idea of spaceship planet Earth is clearly one of ideology. BTE, the only fuels that economies ever ran out of were not the finite fossil fuels of coal, oil and gas [ of my goodness we have a huge surtplus of natural gas today] but rather of renewable energy resources such as timber.— rememberi the deforestation of England?
IF we want to have a discusaaion of when we exhaust the planet of all its energy — let us start with when the Sun is going to burn out —)
Paul
Davidson is an ideologue and wrong. Malthus was right. if the new world had not been discovered and plundered europe would have collapsed. Rome collapsed because its resources were depleted. Foresters have written about Greece, Rome, Anatolia, Phoenicia ceding power as they destroyed their forest resources. All of Europe was on that path had the Americas not been an escape valve for the over population. Julian Simon was wrong, Ehrlich was right; it was just the time frame was off by 20 years, which in the scale of world history is not significant. America is still one of the few places in the world where change could affect human survival and prosperity, but the opportunity is evanescent.
HIstory unfortunately can be selectively used to prove anything, but nothing about the future.
justa, yes, “money” should be a costless medium of exchange reserved at 100% that facilitates velocity of ~1.0 to wages and production, not fractionally reserved from which a private banking cartel can leverage 9-30 to 1 to extract future labor product, profits, and gov’t receipts for a generation or more.
Paul, it is not about “running out of oil”, it’s about the price of oil we can afford to burn (borrowing Jeff Rubin’s phrase) to sustain or grow real GDP per capita. The 10-year average rate of US real private GDP per capita has actually contracted. There has not been a net new private sector full-time job created in the US since ’85, which not coincidentally was the point at which the US fell off the peak domestic crude oil production plateau from ’70. The increasing nominal or constant-dollar price of oil no longer results in growing crude oil production or global crude oil exports to permit an oil- and auto-based real GDP per capita to grow in the US, and certainly not in China-Asia.
Put another way, we can’t have $80-$100 oil that permits profitable extraction of tar sands, Bakken, and deepwater crude AND have growth of real GDP per capita. Without growth or real GDP per capita, neither can private investment, production, employment, purchasing power, and gov’t receipts grow.
Central banks printing trillions of dollars to bail out banks’ balance sheets to permit banks to liquefy their balance sheets and to fund gov’t deficit spending will only result in the increase in nominal prices of commodities and the pass-through effects to business inputs, profit margins, and food prices, reducing purchasing power of wages and incomes for 99% of the population WITHOUT increasing production, wages, and purchasing power.
This is not “the future”, it’s been happening in the US for 12 years, and in Japan for 22 years. Demographic drag effects will only exacerbate the structural effects of Peak Oil and population overshoot hereafter, as the peak Boomers begin to draw down on Social Security and Medicare transfers en masse beginning next year into the early to mid-’20s.
BC,
**”justa, yes, “money” should be a costless medium of exchange reserved at 100% that facilitates velocity of ~1.0 to wages and production, not fractionally reserved from which a private banking cartel can leverage 9-30 to 1 to extract future labor product, profits, and gov’t receipts for a generation or more.
**”Central banks printing trillions of dollars to bail out banks’ balance sheets to permit banks to liquefy their balance sheets and to fund gov’t deficit spending will only result in the increase in nominal prices of commodities and the pass-through effects to business inputs, profit margins, and food prices, reducing purchasing power of wages and incomes for 99% of the population WITHOUT increasing production, wages, and purchasing power.
WELL STATED. Perhaps this explains where we went wrong.Now, how to fix it.
*A Monetary Sovereignty must have exclusive control of the issuance of its currency.
*A Monetary Sovereignty must be able to control the quality and quantity of its currency.
*A Monetary Sovereignty must use its currency as a -REDISTRIBUTION system.
The amount of currency that can be issued by a MS is equal to all the goods and services
that the Monetary Sovereignty has available, this issuance is the ” demand for redemption”
that the currency uses as its “good faith and credit”. It must be a variable amount for the “goods and services ” are in constant change.
As Frederick Soddy wrote (1926,1933)
” Money… is the NOTHING you get for SOMETHING before you can get ANYTHING”.
Once that initial currency is issue, it must remain whole. It is already owned by the giver of the SOMETHING, who is waiting for it to be redeemed at a future date for that ANYTHING.
Challenge, improve, then take as your guide much of what Frederick Soddy has written in “The Role Of Money”.
Perhaps you may reach the conclusion justaluckyfool has:”The Wealth Of A Nation is in Its
Redistribution of that Wealth”.
I’ve enjoyed these posts, but I’m frustrated that people are stil not distinguishing between real debts and monetary debt. Real debts to each other and to nature. Monetary debt: too often falsifiably accounting for an imaginary debt to a financier, as if it were a loan rather than a gift of real resources by a benefactor.
What history really teaches? That depends on one’s timescales. Looked at over evolutionary timescales, what it teaches me is the cyclic nature of nature’s production. Seasons when we can enjoy the weather but need to work to help nature reproduce what we are using. Seasons when the weather is foul but the harvest is in, where it shouldn’t be sitting uselessly in strong men’s barns but distributed so they can enjoy our company and celebrate the good times with each other: like nature, resting an regenerating ourselves for next year’s work.
“I’ve enjoyed these posts, but I’m frustrated that people are stil not distinguishing between real debts and monetary debt. Real debts to each other and to nature. Monetary debt: too often falsifiably accounting for an imaginary debt to a financier, as if it were a loan rather than a gift of real resources by a benefactor.” Davetaylor1
As per Frederick Soddy, “The Role Of Money” (1926,1933):
” Instead of lending notes, the banks, in effect, now lend cheque- books and the right to draw cheques up to limited sums beyond what the borrower possesses. For
nearly a century, until the revelations of the War made it impossible to conceal the truth from the general public, the bankers stoutly denied that they were creating money at all, and claimed that they were merely lending the deposits their
clients were not using. The President of the Bank of Montreal not a year ago continued to repeat this, but, nearer the centre of things, all this was known and admitted by the orthodox apologists for this monstrous system even before the War, usually by some such lying phrase as ” Every loan makes a deposit “.
Genuine and Fictitious Loans. For a loan, if it
is a genuine loan, does not make a deposit, because
what the borrower gets the lender gives up, and
there is no increase in the quantity of money, but
only an alteration in the identity of the individual
owners of it. But if the lender gives up nothing
at all what the borrower receives is a new issue
of money and the quantity is proportionately
increased. So elaborately has the real nature of
this ridiculous proceeding been surrounded with
confusion by some of the cleverest and most
skilful advocates the world has ever known, that
it still is something of a mystery to ordinary
people, who hold their heads and confess they
are ” unable to understand finance “. It is not
intended that they should. ..
…THE EVOLUTION OF MODERN MONEY 65
We have only to substitute physical counters
or receipts to show the utter dishonesty of the
accounting. For if a man surrenders a physical
money token, whether to lend it to somebody else
or to buy something with it from somebody else,
there’s an end of it so far as he is concerned. He
cannot ever lend or spend it again. He has to
earn another or wait till his loan falls due before
he can get another back to lend or spend again.
But a man who deposits his money in a cheque
account can lend or spend it exactly as though he
had not deposited it at all, by using a cheque for
the amount, and yet it is this same money the
bank pretends it lends out. ”
What history really teaches:
What history really teaches:
As Soddy in 1926,1933,stated,
“The Correct Procedure.. The proper thing to
do, of course, would be for the Government
to issue as many pounds as the citizens have
given up gratis pound’s worth of goods and
services, not one-tenth as many, and it should
require the banks to hold for ever after unit of
national money for every unit in the current
accounts of the banks’ depositors.
Since banking became in reality minting by
issuing cheque-books instead of notes, the banks
have never been solvent, but have been liable
to have to stop payment so soon as they were
asked for more than one-tenth of the money (legal
tender) they owed to their current account
depositors. The measure proposed above would
make them solvent for the first time in the modern
phase of their history. The money being always
in the banks, there would be an end of the frenzied
shipments of gold back and forth, to raise the
value of money here and depress it there, to throw
goods intended for export suddenly on to the
home market and as suddenly to drain the home
market and ship the goods abroad, and all the
nefarious and unscrupulous devices which, in the
course of a century’s experience of this secret
private minting, have been invented to keep the
world poor and maintain the supply of hard-
working borrowers in an age of plenty.
Outside of this real explanation, the sole
ostensible reason of it all is to prevent people
from asking for the money for which they have
had to give up the equivalent value in goods
and services, but for which the Government
has hitherto omitted to issue proper receipts.
True the Government has not done so because
it has as yet not received the goods and services,
but the hard-working borrowers have received
the money and have moreover furnished ample
security in the way of collateral for every pound
they have borrowed. The proposal, therefore,
is that the Government should issue the necessary
money to the banks in exchange for the borrowers’
collateral, so that henceforth these borrowers
owe, not the banks, but the nation which, not
the banks, has supplied the goods. They can
then repay their debts without destroying the
nation’s currency and making it impossible for
them to find the money to pay. For as the loans
fall due and are repaid, the Government should
put the money back into circulation (or into the
pound-for-pound deposits of cheque users) by
buying with it National Debt securities and
destroying them. Thus an equivalent of interest-
bearing National Debt would be destroyed for
the non-interest bearing National Debt that is
money. For this money has been secretly issued
by the banks through the cheque system. This
occurred when the Government stopped them
from issuing bank-notes and sought to restrict
and control this form of currency through the
Bank of England. It is time the legality of these
operations was tested in the Courts. It is a
curious kind of law that makes the open issue of
money treason and its secret issue under a
camouflaged name, as bank-credit, so immune
from penalty that it was, till recently, treason
even to question its legality. But that is now all
out-of-date.
You’re not Justaluckyfool, you’re a public benefactor bringing all this to light.
I encountered Soddy as the man who discovered sub-atomic isotopes and the displacement law in radioactive decay, which made it possible to discover the potential energy released by the fusion of hydrogen atoms into helium. In 1932 he wrote of Victorian chemists what ought equally to have applied to Victorian economists:
“After many vicissitudes and the most convincing apparent disproofs, the hypothesis thrown out so lightly by Prout, an Edinburgh physician, in 1815, has, a century later, become the corner-stone of modern theories of the structure of atoms. There is surely something akin to if not transcending tragedy in the fate that has overtaken the life work of that distinguished galaxy of nineteenth century chemists, rightly revered by their contempraries as representing the crown and perfection of accurate scientific measurement. Their hard-won results, for the moment at least, appear as of little interets and significance as the determination of the average weight of a collection of bottles, some of the full and some of them more or less empty”.
Thank you for your kind words, but I must mention: What is a LUCKY FOOL.
Anyone that attempts to predict a future movement is a fool, if by chance correctly then they are just lucky fools, albeit still a fool.
Even Newton is justaluckyfool as we may discover with our outer space ventures-What goes up maynot necessarily come down.
Anyone that attempts to predict a future movement is a fool if the movement is not embedded in an error-correction system. (See my exchange with Robert Locke on “How capital went” etc). When I drive home I almost invariably arrive there.
Yes, the point is “almost ” invariably. It is by chance (luck) that an outside force or any other remotely variable intervenes. Far too many to mention.
Would you say, “But for the grace of God (justaluckyfool says, “chance or luck) go I.”
Even for “The Redistribution Of Wealth” one must consider that for mankind the possibilities of it being , BETTER, WORST, or THE SAME . Unintended consequences could change its final result. We must safeguard against moral hazard and be ever vigalente.
Thought for the day: Stay away from the peyote dip during social hour.