[phaster]

Just wondering how do you explain what's happening in the economy?

The reason I was asking is because I've been getting lots of stuff via eMail about the economy, go figure...

So a few days ago I started working on a page on my site that actually tries to put what's happening to the economy in terms and experiences people not really into economics, might actually understand and relate to. Check it out and tell me what ya think... actually kinda hoping if I made any major errors, you'll let me know!

The reason I started it, is because it seems all the talking heads on CNBC, are mostly free market idiots IMHO because they didn't see this mess happening in the first place. Perhaps its the format of TV, but all those sound bytes IMHO don't have much intellectual substance.

I've also kinda poked around various economic sites, trying to figure out if there was any theory that would accurately model the downfall, and show how far down the economy might go. Anyway I'm not an economist, but find the topic pretty damn interesting. FYI I also have a morbid fascination with "peak oil" which is why I drop by this forum, every so often.

What I'm kinda thinking about right now is adapting models of how a forest fire spreads, and substituting in various amounts of "credit" in place of fuel loads which is one major factor in determining how large a wild fire becomes. Figure this would be a pretty cool tool for an "amateur" economist to look at financial markets.

So anyone else on this forum (regulars, semi-regulars which is what I consider myself, or lurkers), trying to model the economy or stuff related to peak oil?

[perdition79]

That was a great primer. I think that link you gave is easier to understand for just about anyone. You should send it to some high-school teachers, to help educate the youth about this issue.

I try to explain it to educated people in terms of Gaussian distributions, exponential growth and exponential decay. Include the whole doubling period and the Malthusian catastrophe in the discussion.

[Micki]

Phaser, I repeate what I've said many times before;
Free market idiots didn't see this coming because we don't have a free market. US for instance hasn't had a free market for decades.
If yo dig through my posts you can for instance find links to Fed Reserve documents from 1961 discussint the value of intervening in FX markets. Then we have Summers (Geithner's mentor. The other wone is Mr Strong Dollar Rubin) who came out with his paper "Gibsons paradox and the gold standard" where he concluded that surpressing gold price helps keep down interest rates. We have constans adjust ment of inflation statistics with substitution and hedonic adjustment, we have birt&death models to massage unemployment numbers, the federal reserve/Greenspan kepe interest rates artificially low for way too long, we have SEC and CFTC ignoring their responsibilities and turning blind eyes to obvious sscams and manipulations etc etc. (and I would be extremely surprised if there wasn't a PPT)
To quote or paraphrase Chris Powell of GATA; We no longer have markets, only intervention.
Free markets can only operate in a free environment. What we have here is a fascist model where government works with big business and supporting them in every way.
And it sadens me to know that free market model is going to be made a scapegoat for this mess so that governments get carte blanche to grab more powers and most people are going to fall for the rethoric.

[mefistofeles]

What happened is very simple. The US consumer simply borrowed too much and finds himself unable to pay back all the money he owes.

In the process he has destroyed the world's financial system.

The graph is a bit dated but I think it tells the story quite well:



Princeton's economic Department has also done an excellent presentation on the economic collapse.

Roubini has also written a comprehensive piece on the collapse .

However the basic principle is still the same I would call the financial equivalent of Malthus's Law .

Debt increased geometrically and income increased arithmetically. The end result was going to be disaster.

Of course another theory is Minsky's theory of Ponzi finance. You can actually download Minsky's Paper in the form of a .pdf

[JoeW]

$this->bbcode_second_pass_quote('mefistofeles', 'W')hat happened is very simple. The US consumer simply borrowed too much and finds himself unable to pay back all the money he owes.

In the process he has destroyed the world's financial system.

[TreeFarmer]

I think that to adequately explain what happened to someone they first need to watch Money as Debt. Just Google "Money as Debt" and watch the 47 minute animated video. It explains quite simply how the debt train works.

Once firmly on the debt train the US consumer's evergrowing debt load powered the world economic expansion. That debt load is no longer growing so the US and world economy is no longer growing.

TF

[BlueGhostNo2]

The thing I think you're missing is this debt problem does not actually put the USA in a big hole.
This is because the US can and will cheat by printing money. (it's already talking about it, and the currency has been de-valuing anyway)

What happens if you do that?
Your currency debases and you're forced to stop running a current account deficit (who loans money to a printer?!).
Well that sucks, Americans will have to drastically reduce their consumption of imports.

As in this model the USD starts to change in value drastically we'll use 2007 figures.
In 2007 the US Deficit was 700 Billion dollars.
There are around 300 Million Americans.

SO, in order for the US to balance it's trade deficit you all need to stop buying imported crap to the tune of 2,200 US 2007 Dollars.

Of course some people will consume markedly less than that and others markedly more.
But the figure shows that the world is not going to collapse just because you can't keep running up the credit card.
It gets even better, with every $ that US citizens stop consuming the over production in the rest of the world gets more acute and they're forced to sell at lower and lower prices.

So everythings hunky dory... Nooo.

The option is not so cut and dried, as the US _the_ major player if they took such drastic steps the world economy would likely crash.
Which leads us to the current situation, they continue to borrow all the whilst holding the threat of default / printing. The rest of the world takes it because they need the US to consume some of the over capacity to try and beat the deflationary spiral.

SO, the deflationary spiral is the real threat. Because either way the US current account deficit cannot last, and this way you get to keep your internal economy functioning before you print off / default the debt.

[kuidaskassikaeb]

I just finished reading Krugman’s return of depression economics and the original post by Phaster, and I have to say that Krugman’s version makes a lot more sense. There are some overlaps but Krugman’s story is different.

Krugman’s story, but it’s probably typical of economist thinking, goes something like this. The credit default swaps CDSs mentioned in the Phaster’s post are just a small part of an enormous shadow banking system, which collapsed. In fact one of the very frightening things about the book is that in October 2008, when he wrote it, traditional bank lending had actually increased. Economists redefined banking as any activity which transfers money between short term liquid assets to long term illiquid assets. A lot of banking happened under the rubric of money markets. Hedge funds, which are typically short in T-bills and long in things like Russian bonds, were acting as banks too. One of the things that bugged me about the post was the use of the word “fractional reserve banking,” all banking has been “fractional reserve banking” since the Renaissance. The shadow system had a lot smaller “fractions” than the more regulated banks, and they are just as subject to runs. The shadow system was also not a side show, but actually bigger than traditional banking. In some circles, not regulating the shadow banking system is considered the prime cause of the collapse.

Krugman also talks about some of the problems caused by globalization and how they make business cycles more volatile. When Asia, and Mexico, and Russia collapsed they were unable to do the standard economic thing and run deficits and lower interest rates. It turned out that the world currency system has a problem with exchange rates. Basically countries have had to choose between stable currencies, but with constraints on monetary policies, and free monetary policies with unstable currencies. The U.S. tried to force stable monetary policies, through the IMF, which caused deeper recessions than were absolutely necessary, but protected investors to some extent. Up till now the U.S. has decided to float its currency and have a free monetary policy. As the constant talk about a dollar run show, that period may be coming to an end. This probably means that Obama won’t be able to borrow enough money to dig out of the recession.

I also disagree with the constant moralizing about debt. If anybody remembers, one of the reasons Greenspan said that he didn’t pop the housing bubble is that the rest of the economy wasn’t doing very well, and housing was about the only growth industry. Low demand was the major problem in the developed world, due to demographic factors, not skyrocketing consumption.

One of the excuses for the bubble, according to Bush and company, was that there was too much savings. This savings, because of low growth of demand, had too few productive outlets. If you remember all the graphs about how if you save enough, you’re retirement will be just huge. Well the world is full of savers that are expecting that. But it only makes sense if there are enough places to put the money. When there aren’t enough real productive assets, you get bubbles or asset inflation, whatever you want to call it. The financial markets become what everybody thinks they always are, which is a casino. Essentially Wall Street managed to dress up gambling on interest rates, as bonds. The brokers only needed people willing to buy houses to make the chips. The casino was the shadow banking system mentioned earlier. History is full of bubbles, and their collapse leads to recessions.

[bratticus]

$this->bbcode_second_pass_quote('phaster', 'J')ust wondering how do you explain what's happening in the economy?

[bratticus]

$this->bbcode_second_pass_quote('bratticus', '')$this->bbcode_second_pass_quote('phaster', 'J')ust wondering how do you explain what's happening in the economy?

[rangerone314]

I can describe what's happening with one sentence:

"The chickens are coming home to roost"

[phaster]

$this->bbcode_second_pass_quote('perdition79', '
')That was a great primer.

[unseeNaxiom]

The Baby Boomers through the use of 401(k)s and less money replacing the retired money coming out, Flippers that bought 6 houses, OIl Reaching 150 dollars a barrel, A Shadow "unregulated" banking system, an uninformed moronic "American Idol" consumer, Lifetime politicians, Decreased percentage of productivity with the increased use of "free trade" NAFTA styled agreements to increase profits while killing the American worker, technology and the replacement of humans with computers, overpopulation in relation to "actual" sustainability, world wide conflict, drought and food shortages, fundamentalist "religious" ideologies, no Gold standard, changing weather conditions, and good old fashioned Greed are just a few of the problems that got us to this situation.

The Bubble that is now bursting has been in the works for at least twenty years (more like 25 -30 years.) If you take a look at the macroeconomic indicators of production, and subtract the debts and obligations (ie Social Security, Medicare, etc) there isn't a chance in hell that we can "inflate" our way out of this problem. The national debt has exploded on both a governmental and consumer level. The ONLY way to correct this imbalance is allow for a depression. The politicians knew this years ago. The only question is how to allow for the correction, hard landing or "end of everything as we know it landing". The powers that be have opted for the hard landing, in a hopes that the "end of everything as we know it landing" is actually unavoidable. I guess only time will tell, but I have little faith that it can be avoided.

We need to do away with money. We need a fundamental change in how we treat each other, how we view our place in the universe, how we care for our planet, etc..etc. I'm not so blind as to think that we can get rid of greed, but I am optimistic that we can put into place a system that doesn't foster greed. If someone was addicted to drugs, letting them work in a pharmacy wouldn't be a good idea. We continually allow greedy people to have access to all the drugs they want, in fact we continue to elect them in to positions of being in charge of the pharmacy. It would only be worse if they were in charge of the companies that made the drugs in the first place....oh crap, they are already.

[kuidaskassikaeb]

Kuidaskassikaeb wrote
$this->bbcode_second_pass_quote('', 'T')he credit default swaps CDSs mentioned in the Phaster’s post are just a small part of an enormous shadow banking system, which collapsed.

phaster wrote in reply
$this->bbcode_second_pass_quote('', 'F')YI the money spent on bail outs is still pretty small in the grand scheme of things IMHO because to put things into perspective size perspective, consider the following ball park figures:

[rangerone314]

There is another aspect to economics I don't see discussed very often: population increase.

I personally believe that much of our economic system is based on population increase. Countries like Japan that don't have population increase essentially feed off of those that do like the US by an export-driven economy.

Being dependent upon population increase and cheap energy essentially makes the US economy a big pyramid scheme. When a much larger percent of the population becomes non-productive economically (i.e. retired), the scheme will probably collapse.

Also a large world population has been supported by the petroleum-based "green revolution". That will probably be coming to an end.

Energy, food production and population are all interdependent... and the economy will contract when all of these inevitably contract. In turn, energy, food production and population will probably contract as the economy contracts. It will probably become a self-reinforcing spiral until it reaches a more stable state.

I'm not sure what this stable state will be like, how many people it will support, how long it will take to get there, and what energy production will be by then.

[shady28]

$this->bbcode_second_pass_quote('phaster', 'J')ust wondering how do you explain what's happening in the economy?

[phaster]

$this->bbcode_second_pass_quote('kuidaskassikaeb', 'K')uidaskassikaeb wrote
$this->bbcode_second_pass_quote('', 'T')he credit default swaps CDSs mentioned in the Phaster’s post are just a small part of an enormous shadow banking system, which collapsed.

phaster wrote in reply
$this->bbcode_second_pass_quote('', 'F')YI the money spent on bail outs is still pretty small in the grand scheme of things IMHO because to put things into perspective size perspective, consider the following ball park figures:

[kuidaskassikaeb]

Krugman and your self are obviously on the same page at least economically. I looked back at the book, and although there are a lot of different acronyms the size of the insurance market was mentioned. Some of the difference is due to the fact that this is a reissue of a book written in 1999 and updated. There is obviously a certain amount of “I told you so” in it and the details have changed.

Where the book surprised me is that it seems that our entire financial crisis can be explained by fractures in the economic system. We all have our unified field theories of collapse, which go something like over-population leads to peak oil and over-shoot. But I really thought that the economic system was well understood, at least within its own terms. The interesting problems in economics were all externalities, that economics really can’t deal with. Things like peak oil and environmental disaster. But while we were all waiting for that to happen, the economy collapsed on its own. When reading the book I got the sense that he was really relieved that economics had something to contribute.

[phaster]

$this->bbcode_second_pass_quote('kuidaskassikaeb', 'K')rugman and your self are obviously on the same page at least economically. I looked back at the book, and although there are a lot of different acronyms the size of the insurance market was mentioned. Some of the difference is due to the fact that this is a reissue of a book written in 1999 and updated. There is obviously a certain amount of “I told you so” in it and the details have changed.

Where the book surprised me is that it seems that our entire financial crisis can be explained by fractures in the economic system. We all have our unified field theories of collapse, which go something like over-population leads to peak oil and over-shoot. But I really thought that the economic system was well understood, at least within its own terms. The interesting problems in economics were all externalities, that economics really can’t deal with. Things like peak oil and environmental disaster. But while we were all waiting for that to happen, the economy collapsed on its own. When reading the book I got the sense that he was really relieved that economics had something to contribute.

[kuidaskassikaeb]

Phaster wrote

$this->bbcode_second_pass_quote('', 'T')he reason I don't follow any one school of economics, weather its the chicago school of economics, the supply side school, the austrian school, the keynes school, etc., is because I realized long ago when I started gaining an interest in the subject, that each economic philosophy was based on a small data set. Unlike a hard science such as physics, where one can look at multiple events and write out an equation describing an event.