(9 am. – promoted by ek hornbeck)
As I expressed in an essay earlier this week, I continue to try to understand the risk our economy is facing that has led to all the focus on whether or not to support a bailout plan. I don’t think that anyone has yet made a clear case to the American people about what’s at stake here. I must admit that I didn’t listen to the President last night and haven’t really read much about what he said. But I think that, like most Americans, I wouldn’t believe what he had to say anyway.
So I continue to try to read and learn what I can in order to better understand what’s happening. The reality I’m finding is that predictions are pretty garbled in econospeak and tend to be focused on what will happen to corporate America. But there are some themes that are getting through this non-economist’s brain that have me asking some questions.
Here’s an example from Steven Levitt’s Freakonomics column in the NYT.
The concern for the man on Main Street is…the collective inability of major financial institutions to find funding.
As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
This is going to slow growth. We have not seen this much stress in the financial system since the Great Depression, so we do not have any recent history to rely upon in quantifying the magnitude of the slowdown.
So basically, what I keep hearing is that there won’t be money to be borrowed in order to continue to grow the economy. But if you’re like me and not planning to borrow money in the foreseeable future, what’s the problem?
The problem, as I see it, is that the entire global economy has been built on an assumption of debt and growth. And when companies can’t borrow money to grow, they’ll die…leaving us with no products and no employment. To pile on, with no products or employment, there will also be no taxes paid, so local, state and the federal government will not be able to operate. That gets to be a pretty big problem.
But what strikes me are the original assumptions upon which all of this has been built. I know from experience in both my personal and professional life that there is a time and place to borrow money. But it looks to me like we’ve come to a place where the idea of saving money in order to be able to purchase something or expand a business is a quaint idea of the past. No matter what business you’re talking about, half the battle these days seems to be one of managing the debt you have accrued. Is it any wonder that an economy based on this kind of premise would eventually tumble?
Our economics also seem to be based on the assumption of perpetual growth. In order for that to be the case, there must be an endless supply of both markets and resources. I think that when it comes to markets, that assumption might be closer to the truth. But mother earth is beginning to tell us that there is a limited supply of resources…and in too many areas, we are starting to feel that constraint.
With all that said, I do understand that once a global economy has been built on these kinds of assumptions, any drastic change will lead to a crash that is sure to be felt very deeply by all of us. But it also speaks to me of the inevitability of a crash at some point. If that’s true, I see alot of wisdom in trying to slow the crash and do what we can to shore up those who will feel it the most. But that might be the best we can do.
Finally, I am not an economist, nor do I play one on the blogs. So my thinking on this stands a good chance of being completely wrong. If so, I hope those of you who are better informed will let me know.
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might be just the ignorant musings of a non-economist.
But its what’s been on my mind the last couple of days. So there it is…
As for:
The phrase “drown it in a bathtub” comes to mind.
…leaving the economic niceties aside…if you keep making people, but don’t keep (essentially) minting money through debt, what happens?
I was just expecting a big ol’ picture of George Bush.
as the need to avoid borrowing money sets in too. I’m self-employed, and I’m seeing customers pull way back on work just because they’re nervous. Their business may be OK for the moment, but they don’t want to commit to new projects in case they need the money for essentials later on, and they’re afraid if the need to borrow arises later they won’t be able to. The fear feeds on itself and filters down from Wall Street all the way to me and my ilk.
(or illiquidity), not having enough money, but the fact that many of the “assets” have no value. The derivatives for instance. I don’t see how injecting capital in these solves anything.
You nailed it here!
And the limiting resource here is cheap energy: without it, nothing goes. It is used to transform all other resources and transport those refined products to markets. For that reason, it is the overall governing resource.
This “crisis” is something that goes beyond just the credit markets–it goes to the heart of credibility itself, i.e., the credibility of everything in our society. All the major institutions in our society have proven themselves to be not credible. People have mainly resorted to pretending everything is ok in order to get through life. Now the underlying factor of the entire world systems is questioned and at the same time all the other illusions are brought into relief.
The underlying fact is that since 1971 or 2 (I can’t remember) the U.S. dollar is backed by nothing. It is a strictly fiat currency backed by only the credibility of the U.S. government and the credulousness of the rest of the world. Also the entire banking system is not based on assets of any kind but on debt. Debt creates a virtual asset. A mortgage is a debt instrument but it can be bought and sold as if it was an asset. But the fact is that it is not an asset it is a hope of a real asset. Eventually this unreal economic system has turned into a massive pyramid scheme that works very well only if everyone believes in it. The minute large numbers of people don’t believe, the whole thing must collapse. Thus the reason why there is so much urgency in the oligarchy to get this thing “fixed” with an infusion of imaginary cash (many times over), the longer people have time to grasp that the Emperor has no clothes; thus, the worse the result for them and, since we have given them our trust, for us.
The question to ask is: what will happen if the system collapses? Has any real wealth been lost? Can we reconstitute a system of exchange on the ruins of the current one?
… is that it has to be on a footing of a steady state material system. The growth has to be as a result of coming up with more efficient ways of doing things and better designed goods and services, as opposed to just “more stuff”.
And while that kind of economic growth really can and does happen, it does not happen at a steady rate.
While a debt-based system requires ongoing growth to occur each year. Hell, the way we’ve built our economy, we can see rising unemployment because we have growth but its not fast enough.
So we have a system that is addicted to material expansion.