Wednesday 31 December 2014

On NOT understanding the 2008 economic 'crash'

More than six years have elapsed since 'something' happened in the world economy - but what it was, and what its significance was, I am less clear than I supposedly was then - Now I don't believe anybody at all knows (even if plenty think they know), and I don't really trust anybody on the inside to tell me even of what they do know!

What I personally know, from observation and experience, is that nothing useful at all has been learned from 2008.

Or if it has been learned, then it has not been acted-upon. Because absolutely nothing constructive has been done - and many, many anti-economic, anti-productive things have instead been done; and therefore I am sure that economically things now are in reality much worse than they were in 2008.

What I strongly suspect is that politicians in the West have learned multiple ways of invisibly inflating the currency and covertly stealing from the savings of their productive populace - by combinations of borrowing, printing money, and stealth taxes.

And this wholesale secret theft is incrementally increasing year on year to subsidise what are clearly massive (multi-million) expansions in the numbers of barely-productive and non-productive population who have luxurious standards of living; and in general to create a facade of fake prosperity based on confiscation/ borrowing-fuelled bribery, corruption and subsidy.



Nicholas Fulford said...

Structural debt is like an excrement sandwich, where the object is to spread it as widely and thinly as possible so that the debt is as uniformly distributed as possible. It is an attempt to bootstrap it out of existence, and yet somehow it always manages to rear its ugly head. Such techniques as qualitative easing are attempts to do precisely that - so that everyone holding a unit of currency has a built in discount on the value of the currency as a fixed offset that is proportional to how much the number of units of currency have increased. It is debt diminishment via inflation without the increase in interest rates that traditionally lag inflation to attempt to control it.

Without an increase in output but only an increase in the money supply the result is stagnant inflation (stagflation.) This acts as a very long-term brake on economic growth as people still have the same amount of money - on average - while currency depreciates. That is in a sense how the debt is repaid - very slowly, and it has a retarding effect on economic growth.

That is my limited understanding of these things work. The 2008 crisis was mainly a crisis born of insufficient regulation over commercial banks, such that they were allowed to repackage junk debt in aggregates which were misidentified as a higher grade of debt than they were. The inability to trace and identify what was in fact junk from what was not led to major commercial banks teetering on the edge of bankruptcy. Government interventions were required as they are the only pockets deep enough to backstop these instruments. To not do so would have paralysed the movement of monetary instrument due to the Emperor's New Bonds being known as worthless.

The followup to 2008 requires new and effective regulation of commercial banks to prevent this type of thing from happening again. Unfortunately, even good regulation is often effectively thwarted by ineffective enforcement, which is what happens when everyone acts as if the Ponzi scheme is in fact worthy of faith and trust. It is a classic example of selection bias based on a misguided belief that a few sins today will go unnoticed and not contain long shadows to be paid for down the line.

Bruce Charlton said...

@NF - Well that is how economists often explain things, but I don't believe it any more. In the early 2000s I read dozens of economics texts and about a dozen economics blogs every day - but after 2008 I was utterly disgusted, and gave up on the subject completely. Nowadays I regard politicians and economists as living in a delusional folie a deux of magical thinking about people and money.

George said...

Things are good enough to massively increase the number of unproductive people. Perhaps if something similarly was done when everyone was scared or in crisis mode, there would be more backlash.

Bruce Charlton said...

@George - Yes, things are good enough that confiscation and redistribution is still working.

John K. said...

They say the solution to too much debt is more debt. That is the very definition of insanity. It is not, it is less or no debt. They say the solution to too much government is more government. The solution is less government. The solution to too many parasites are more parasites, etc. etcetera ... This will continue up unto the point when it is no longer sustainable; and, by definition, it is already unsustainable, therefore, we are merely quibbling over semantics and timing at this point.

Leo said...

Take the words credit and debt, translate them into German, then translate them back again into English. The resulting cluster of words is very interesting and hardly limited to cold, financial terms. Some of those words are trust, standing, repute, merit, honor, faith, belief, trust, blame, guilt, and fault.

Our financial instruments (stocks, bonds, savings accounts) do have real value behind them, but their value, especially their future value, is hard to estimate or predict. A war, crisis, or scandal can cut their value drastically overnight. See Rev. 18:10-13 for a financial worst-case scenario.

Financial pundits and government officials are paid to sound confident about the future, and as Tevye sings in Fiddler on the Roof, “When you're rich, they think you really know!” We have markets, so be sure, but as Keynes put it, “"Markets can remain irrational a lot longer than you and I can remain solvent."

Therein lies my challenge, not to solve the world’s financial problems, which I cannot do, but to remain solvent, which currently looks possible, though by no means certain.

And money is not of eternal value, as Carl Sandburg put in his poem LIMITED:

I AM riding on a limited express, one of the crack trains
of the nation.
Hurtling across the prairie into blue haze and dark air
go fifteen all-steel coaches holding a thousand people.
(All the coaches shall be scrap and rust and all the men
and women laughing in the diners and sleepers shall
pass to ashes.)
I ask a man in the smoker where he is going and he
answers: "Omaha."

Santoculto said...

I never understand why ''economic crisis'' should happen!!! Never.

''A single death is a tragedy, one million is a statistic'' Stalin.

knifecatcher said...

Hedge fund manager Michael Burry predicted the 2008 crisis in detail and make a fortune from it.

He wrote an op-ed in the NYT and had to spend millions successfully defending himself from the subsequent IRS audit.

He has speeches on youtube.

Jonathan C said...

I think many of the top elite understand perfectly well the lessons of 2008. But these lessons present a dilemma. Federal government debts, state/local government debts and pension obligations, bank exposures and derivatives, and personal debts (especially student loans) have reached levels where many of them clearly can never be repaid. What to do?

At one extreme, the civilization-preserving option would be something like a debt jubilee. This would save international society from the crushing financial collapse to come, but in the short term it would ruin the fortunes of many of the world's most powerful players. At the other extreme, the elite can continue skimming wealth off every transaction as long as the music's still playing, at the cost of increasing the size of the coming collapse to civilization-leveling proportions.

I think many of the elite are perfectly aware that these are the choices. They're all very nervous, knowing what's coming. But the debt jubilee option (or even much lesser interventions) would require many elite around the world to give up their short-term glory and collaborate on doing what's right. We will get the latter, Tragedy of the Commons outcome by default.

Bruce Charlton said...

@JC - Yes, it's like governments are engaging in systematic and permanent coin clipping - but as a virtual act.

But by my calculation it is the mass media who are in charge, not governments - and the mass media are engaged in strategic destruction of The Good - so I suppose it is the long term civilization levelling outcome they must be aiming for.

Matias F. said...

For the mass media, it is very important to maintain the semblance of economic prosperity. Otherwise it might loose its grip, when people become more interested in reality.

Bruce Charlton said...

@Matias - Good point. I think the Mass Media can only survive if it grows, and it can only grow in an inflationary world - where value is continually being eroded. A world of inflation without growth or with declining production of real goods, while it lasts, is perfect from the mass media.

John K said...

JC: I generally agree with tragedy of the commons outcome you have stated; but I beg to differ with the thought that most elite understand that that outcome is inevitable. Generally I'd say it's more a case of not wanting to understand than complete inability (although many are not able to understand); in addition, it a strong case of cognitive dissonance with almost preprogrammed hindsight bias as the disaster hits. Do you remember how many politicians, for example, declared "who could have seen it coming" when the 2008 "financial crisis" 'hit'? Suffice it to say, I teach finance and economics at university and previously worked at a large financial institution in a position where I observed this. I can say that what I try to teach is common sense; and, yes, it is basic common sense that a debt jubilee in some form must happen as most countries currently have unsustainable and ultimately unpayable levels of debt, for example. In addition, many of the 'elite' you speak of often do not understand basic logic, and as Mr. Charlton has often pointed out have been put in their position not because of ability but because of other overriding reasons that have nothing to do with business ability, for example, in the case of basic business. In short, and not to be so gloomy, but the truth is that it is not simply a case of people knowing (although some do) the ultimate outcome based on the current direction; again, many have been put in key positions with no even basic ability or aptitude to discern even the most basic logical outcomes. Critical reasoning ability is not only in short supply in 'elite' circles but discouraged and seemingly selected against. Otherwise, how could we even end up in this position in the first place?

Bruce Charlton said...

@JK - I agree on the whole, but it is not really understanding that is in short supply but good motivation, honesty and courage - lack of which enables people to embrace magical thinking of many kinds (something for nothing, taking production for granted as something that just will happen, ignoring incentives etc).

A well motivated person of moderate intelligence who was honest and courageous would, if in authority, be able to do a more than adequate job.

But there is a considerable problem about what those motivations should be. For example, "One cannot simply" keep adding billions to the worlds population, especially when these billions of psychologically and hereditarily incapable of functioning productively in a modern society; and especially when both innovation and productivity (and human capability) are running down from a cocktail of causes including biological as well as deliberate policy.

There are no comprehensive answers, only tough decisions based n priorities. But instead we have dishonest evasion, magical thinking, and evil motivations. And nothing good can or will be done unless there is a Christian revival *first* - because only that could (in principle) provide the motivation, courage and honest - and these can only be provided as a secondary by-product of faith (faith is necessary but not sufficient).

Without prior faith, good analysis and good ideas are just another mass media diversion.

John K said...

BC: Yes; even if the ability to understand were there (and in many cases it is, although often limited), the motivation is largely lacking. Also, and as you mention, honesty and courage is lacking. For me I see the causal cycle to be more driven from what I would call the selection filter than a lack of morality and ethics. It may just be my own bias yet I cannot seem to let my mind drift from my focus on the process and related evil machinations behind that process that has consistently selected on personality traits for controlling positions in organizations, particularly large ones, that select out critical thinking and basic morality and by intent or default select psychopathic personality types that enforce and push essentially suicide of both the organization and the people they control.

I admit, all in all, this may be merely a reflection of my own biases on the matter than pure logic or the faith that I admittedly lack. On a personal note and trying not to digress too much, and in support of your point and against my own to a degree, I do have a childhood friend I reconnected with a few years ago that turned toward faith (Mormon by the way); and I would have to say that even though it is but one data point I am heartened by his example yet still have a hard time concluding that it is mostly or solely about faith. Furthermore, and contrary to the foregoing, the Morman Church has bought into one or more key suicidal memes promoted by the media (e.g., genocide of Europeans is fine; which I consider to be a non-starter by the way, and consider to be against not just basic morality but the most basic natural order). In short, I think I get your point but for me it's even more basic with the driving force being more the evil media and the evil people who control that medium driving the selection mechanism across all of western society (and increasingly non-western as well). I'll cut it there, but will state that unvarnished or unfiltered faith is good but most churches are so influenced by the evil that infects society generally that I do not think that organized faith at this time is the answer (maybe unorganized faith that turns into a more pure form of organized faith that produces the 'fruits' that, e.g., the Mormon Church mostly produces).

Ugh said...

Well I'd say you pretty much nailed it. To hear our politicians (everywhere) say they are "fighting" for us, the middle class, only reinforces the cynic is us all. They fight only for themselves and their crony's in big business. Cronyism is the cancer. They can claim capitalism and free markets are failing us all they want, but we have not been living under these types of systems for a hundred years.

And the absolute insanity of building up communist China at the expense of the American/European middle class is height of cronyist arrogance. It's not as if there is an end game - they don't care about the Chinese, they care about their money and power here and now, and our politicians are just along for the ride.