Where Has Austerity Helped Restore an Economy to Health?

[moda0306]

stone,

Does this actually happen in practice?  It just seems odd to me that a bank, after having its ultra-safe, ultra-stable treasury bonds bought back from them for dollars, would go all "Wild West" with that money in commodities.

Also, I'd like someone to explain to me how speculators can consciously drive a market upward, then sell and make money.  Is there something collusive or monopolistic going on?  It seems to me that people should be able to come in and buy/sell commodities and reap the rewards without having their means/motives called into question.

[MediumTex]

The graph above provides another confirmation that it's impossible to have inflation when no one has any money.

As obvious as this insight may seem, people have been beating the inflation drum since 2007 or so without ever explaining where the average family is going to get the money to pay the higher prices.  With contracting credit, static wages and what looks to be high structural unemployment that will be with us for a while, I don't see the average family having a lot of extra money any time soon, which means that prices increases are going to be met with demand destruction, not a wage/price spiral.

I think that one of the biggest differences in the U.S. between today and the 1970s is the radical change in attitudes toward labor unions.  In the 1970s labor unions were still widespread and powerful enough to extract wage increases from employers even in a bad economy.  With the (IMHO) misguided embrace of free trade and the successful extermination of many pockets of organized labor, we find ourselves today in an environment where rather than competing with workers in neighboring towns or states, U.S. workers are competing with workers in the third world.  From the workers' perspective, guess who wins in that situation most of the time?  The consolation, of course, is that we get to buy cheap stuff at Walmart as a result of this arrangement, though I wonder if we won't look back on this period and see that it was a kind of economic Faustian bargain.

[stone]

moda, I thought that the whole point of "universal" banks was that they span the spectrum from retail banking that justifies bailouts to "wild west" trading which necessitates bailouts (and which if too big to fail also justify bailouts I guess). On zerohedge I thought that they said that the Fed POMO activity could actually be tightly correlated with immediate activity in other markets. Goldman Sachs definately sells treasuries to the Fed and definately is a major commodity trader. Hedge funds also commision banks to sell treasuries to the Fed. 

If you are trading commodities, isn't liquidity the only thing limiting the scale at which you conduct it? 

[moda0306]

stone... I think you just body-slammed that argument... I would say it deserves a bit of analysis in terms of 1) what percentage of the big banks activity is in commodity trading, and 2) how much that amount of commodity trading would have the ability to affect the market.... but you're right, if a bank is engaging in all kinds of trades, liquidity is all they need to go have fun on the risky end.

[Lone Wolf]

With the (IMHO) misguided embrace of free trade and the successful extermination of many pockets of organized labor, we find ourselves today in an environment where rather than competing with workers in neighboring towns or states, U.S. workers are competing with workers in the third world.

What's misguided about free trade?  Why wouldn't it benefit me to have as many potential trading partners as possible?

If I could only trade with my immediate family, we'd live an extremely meager existence.  I'd be much better off if I could trade with others that live in my neighborhood.

Better still would be to trade with those in the next town over.  They probably have resources, talents, and desires that are a bit different from my own.

The next state over might have an even more distinct set of goods and desires to offer.  I'd definitely not want to erect a trade barrier between myself and California or Ohio or New York.

Why does this break down when we get to national borders?  Why would I want to forbid myself from honest exchange with someone in Mexico or China or Germany?

[stone]

Something about POMO and commodity trading:-
http://www.financialsense.com/contribut ... ssing-link
"POMO goes first through the conduit of Primary Dealer trading accounts. And guess what else it is that they trade. Did you guess commodity futures? Congratulations! It only takes a few billion dollars spread around among the various complexes over time to keep the fires burning under these trends. This is pocket change to the dealer crowd, whose banking arms are also extending the credit to the leveraged speculating community to play this game. So it is that commodity prices move first and farthest, as the production behemoth lags farther and farther behind.  The dead stop in production over the past 6 months as prices accelerate is an ominous sign that inflation is overwhelming the production apparatus.
Note that when the Fed stopped its pumping operations in the first half of 2010, commodity prices again responded instantly, and stopped rising throughout the period during which the Fed was on hold. Industrial production continued rising for the first half of that period, then it too stalled and has remained stalled. But as soon as the Fed resumed heavy POMO buying in August, commodities began to move again.
It’s important to recall that the Fed actually started buying Treasuries from the Primary Dealers back in August to replace the MBS securities that were being paid down from its balance sheet. These initial cash infusions were the trigger for the resumption of the rise in commodity prices. Total Fed SOMA did not begin to increase until November when the Fed started QE2. That’s when the commodity price rises exploded. But the Fed began pumping cash into dealer accounts back in August. That’s when the commodities began to move.
Meanwhile, industrial production is dead in the water."

[stone]

moda, I guess if you put your mind to it you can get more bang for your buck in terms of moving the market with a given sized trade. The big plummets in gold price this summer had large sell offs on Sunday nights. Basically if the sell off is at the most illiquid time of day, then you can get a lot more market movement. If you trade options and physical and also control the warehouses, then it is well worth loosing a fair amount on a physical commodity trade if that gives a much bigger gain for an option trade or whatever. I thought that there was a big controversy about GoldmanSachs manipulating the aluminium market by way of their control of the warehouses.

[stone]

Lone Wolf, I think that free trade with the rest of the World would be great if everyone in our own country received a similar share of the profits. I do agree that it is tragic that forinstance only flowers and airfreight vegetables rather than all agricultural goods can be exported from Kenya to the EU. That means that if Kenyan farmers get a surplus, they can not sell it. To my mind it all gets messy when there is a distinct owning class who use free trade as a way to financially disempower everyone else. I'd rather attack that problem by avoiding the consolidation of a distinct owning class rather than by curtailing free trade.

[moda0306]

If these divisions of labor and skill were bases on equal footing it'd be one thing, but we're competing with countries that have very poor labor, environmental, and product regulations that make it immensely cheaper to do business with the lowest common denominator.

I'd think that a system of free trade that penalized those violations through tarriffs would probably be the ideal situation.

[stone]

About using excess liquidity to push up commodity prices:- From what I can see, commodity prices get pushed up until the economy grinds to a halt and stock and commodity prices plummet, then the banks swoop in and buy up first the bargins in stocks and then when stocks are no longer good value they buy up commodities until high commodity prices cause things to grind to a halt and prices plumet, then rinse and repeat.

As we find in our own little way with the PP, volatility capture can gather money even from assets that in themselves each have no real return. They just do that on a grand scale I guess but also orchestrate it too.

[Gumby]

I guess the very worst cases of inflation come when supply totally crashes.

I'd like to think you could also have a supply crash during a severe deflation (less supply from businesses going bankrupt due to lack of credit/funding, people without money, etc).

If a supply crash takes place and it sparks inflation, that implies that something else went terribly wrong (War, regime change, printing to pay for foreign-denominated debt, etc). Otherwise, if credit were available, businesses would just meet the demand with more supply (by hiring new workers to produce more).

Of course, once the robots take over all production, nobody will have any money to spend

In such a scenario even if only 1% of the population has any money, they will cough up all of that money inorder to buy essentials/passage out of the country, rather than starving.

Yes. But, again, this all implies an exogenous event went terribly wrong, to cut off the supply. Game over. Gold wins.

The government may then try and go into printing overdrive to pay the police etc enough to keep them OK and that will drive the spiral. I guess rationing (such as was done in the UK in the 1940s) is the only way to avoid such a scenario in the face of a supply collapse.

Well... Assume oil production can't keep up with demand over the next 10 years — an oil supply collapse. We would have no choice but to ration oil. Does that cause inflation or deflation? Maybe short term inflation, but then people would quickly drain their bank accounts and have no more disposable income to continue buying things. My head is starting to hurt.

[stone]

moda I'm not sure about whether in practice penalty tarifs actually would work well. To my mind if the benefit of offshoring went to everyone in our society then it would not cause such a problem. Imagine if the profits were partially harvested by an asset tax and distributed to everyone via a citizen's dividend. Then if someone wanted to work in a plastic moulding factory they did that to get some extra pocket money on top off their citizens dividend. Perhaps although wages for plastic moulding work might  be low, the resulting excessive profitability of the factory would go to them via the citizen's dividend and so all would be fine. There are costs to offshoring such as logistics etc etc. Apparently some US companies offshore manufacturing even when from a cost perspective it wastes money simply because they think it impresses Wall Street.

I think it is also important to have a global set up that facilitates people in the third world also achieving prosperity. Potentially, free trade on just terms may help with that.

[stone]

Gumby, about supply collapse and hyperinflation- I was meaning that rationing is the way to avert hyperinflation if faced by a collapse in supply due to whatever reason (war damage in the case of 1940s UK). The "exogenous event" that causes a collapse in supply could be austerity induced civil disobedience/general strikes etc. So it could be a result of the distressed economic condition itself.

[MediumTex]

I think it is also important to have a global set up that facilitates people in the third world also achieving prosperity. Potentially, free trade on just terms may help with that.

I think the question is whether we want a world of somewhat lower overall output with more equitable distribution of wealth, or do we want a world of maximum output at all times with no thought to how the output is being distributed across the world's populations.

The latter option is the one that has held an ideological grip on the world's economies in recent years, but I don't know if it is the correct one from an overall human well-being perspective.

Increasing amounts of wealth can be a wonderful thing, but increasing concentrations of that wealth can be very destabilizing politically, socially and culturally.  It seems to me that most political, social and cultural revolutions begin with large segments of a population being dissatisfied with the distribution of wealth and power in society.  Once that dissatisfaction reaches a boiling point, one often sees the wholesale destruction of the wealth generating capacity of a society, which makes one wonder if the initial laissez faire approach to the economy was really a good idea in the first place.

I think that in coming years China and Russia will have to deal with these issues as both systems appear to be dramatic examples of crony capitalism with the resulting destabilizing distributions of wealth that such systems encourage.  The U.S. was in a similar position a little over 100 years ago.  We chose to take the path of increased worker rights, along with many other consumer and labor protections, and I think this has made for a more stable and prosperous society.  Will the Chinese communists and members of the Russian "thugocracy" follow a similar path of enlightenment?  We'll see.

[moda0306]

MT,

Are those two wealth/growth options mutually exclusive??

Seems to me Keynesian policy tends to try to perpetually push growth through spending directed to the poor & middle class.

[stone]

Medium Tex, like moda, I'm not entirely convinced that there is necessarily a trade off between output and equality. Inequality can drive lack of output as far as I can see. Unemployment results in zero output. If everyone in the world who wanted a refrigerator and a toilet and everyone who wanted to work making and installing refrigerators and toilets was able to do that work to meet that demand, then that would be an enormous surge in global economic output.
If everyone on earth was equally able to afford oil, then it would be economic to invest in employing people to develop alternative energy etc.

[MediumTex]

MT,

Are those two wealth/growth options mutually exclusive??

Seems to me Keynesian policy tends to try to perpetually push growth through spending directed to the poor & middle class.

It's obviously a sliding scale, but at any given time one school of thought or the other seems to be predominant in an economy.

[stone]

Medium Tex, my problem with all of the prevailing schools of economic thought is that they are all about elite power. Either elite top down government or an elite owning class. To my mind the problem with both is the concentration of power and that that in itself leads to a dysfunctional economy.

[Gumby]

The U.S. was in a similar position a little over 100 years ago.  We chose to take the path of increased worker rights, along with many other consumer and labor protections, and I think this has made for a more stable and prosperous society.

I'm a little surprised that nobody noticed my comment about robots.

Every year, more and more unskilled labor is being replaced by robots. ATMs, sales associates, telephone operators. Even artificial intelligence (like Apple's "Siri") is reducing the demand for real jobs.

Here's a video of what a typical automated warehouse looks like today:

http://youtu.be/QhfDKeDUvbE

Warehouses that used to employ hundreds of full-time workers can be run with just a handful of temps now. Foxconn, which employes more than a million Chinese workers is hoping to replace many of these workers with robots in the coming years.

And the latest advancement in robotics are "Dark Warehouses," which are so automated that the companies who run them actually turn the lights off, to save energy, while the robots do their work.

Imagine a world where most of the workforce isn't needed. Then what? It's like the beginning of the Matrix.

[MediumTex]

Medium Tex, like moda, I'm not entirely convinced that there is necessarily a trade off between output and equality.

I don't think that there is necessarily a trade-off, but I think that there is frequently a trade-off.  It depends on other factors, of course, but one of the patterns through history seems to be increasing concentrations of wealth followed by periods of upheaval as those concentrations of wealth are redistributed through periods of political and economic chaos.

Inequality can drive lack of output as far as I can see. Unemployment results in zero output. If everyone in the world who wanted a refrigerator and a toilet and everyone who wanted to work making and installing refrigerators and toilets was able to do that work to meet that demand, then that would be an enormous surge in global economic output.

Assuming that there were necessary supplies of the natural resource inputs available, that would be true.  However, I don't know if there is enough metal and plastic for every person in the world to have their own toaster, and even if it was possible for everyone to have their own toaster today (that would be 7 billion or so toasters), I wonder if it will be possible for everyone to have their own toaster when there are twice as many of us in 50 or 100 years.  I don't know the answer to that question, but I think it's worth thinking about.

Maybe what I am really talking about is equitable wealth distribution within a society, and not among societies.

If everyone on earth was equally able to afford oil, then it would be economic to invest in employing people to develop alternative energy etc.

Can you expand upon this idea a bit?  I'm not following you exactly.  What you seem to be saying is that if everyone was equally able to afford a car, it would be economic to invest in employing people to breed faster horses.

[Gumby]

Of course, once the robots take over all production, nobody will have any money to spend

An old idea whose time has finally arrived:

Old Glory insurance.

Awesome. Too bad I don't qualify

[MediumTex]

The U.S. was in a similar position a little over 100 years ago.  We chose to take the path of increased worker rights, along with many other consumer and labor protections, and I think this has made for a more stable and prosperous society.

I'm a little surprised that nobody noticed my comment about robots.

Every year, more and more unskilled labor is being replaced by robots. ATMs, sales associates, telephone operators. Even artificial intelligence (like Apple's "Siri") is reducing the demand for real jobs.

Here's a video of what a typical automated warehouse looks like today:

http://youtu.be/QhfDKeDUvbE

Warehouses that used to employ hundreds of full-time workers can be run with just a handful of temps now. Foxconn, which employes more than a million Chinese workers is hoping to replace many of these workers with robots in the coming years.

And the latest advancement in robotics are "Dark Warehouses," which are so automated that the companies who run them actually turn the lights off, to save energy, while the robots do their work.

Imagine a world where most of the workforce isn't needed. Then what? It's like the beginning of the Matrix.

I guess that so far what has happened is that most of the people through history who have been displaced by machines have found employment higher up the industrial food chain (not all of them, of course).

The theory is that the machines will one day replace the humans, but the machines seem to have so many production, maintenance and service needs that people seem to stubbornly keep their relevance no matter how many machines we create.  Isn't it true that every factory that is taken over by machines means that there is a whole new team of humans that are needed to keep the machines running?   

It's kind of like the promise that computers would create "paperless" offices.  The opposite seems to have actually happened--the ease of creating new documents that the computer has provided has encouraged the creation of more documents than ever.  What used to be a pool of secretaries is now relatively fewer "administrative assistants", but there is now an IT guy, a copier repair guy, a bunch of call center reps and lots of other outside contractors, consultants and other people supporting the functions that go on in the typical office.  I don't know if headcounts have actually been reduced so much as they have been reallocated.

It's sort of like "Jevon's Paradox" in economics, where increasing efficiency never leads to overall reductions in consumption, but rather overall increases in output.  It's like technology has done the same thing--it has increased efficiency but the world in which the machines displace the humans has never arrived because on balance the machines have created as many new jobs as they have destroyed (more or less).

I would say American workers have more to fear from human workers in China than from the machines.

[MediumTex]

Of course, once the robots take over all production, nobody will have any money to spend

An old idea whose time has finally arrived:

Old Glory insurance.

Awesome. Too bad I don't qualify

It would be awesome if that kind of peace of mind was truly available, though I'm not sure it is.  It seems to me that some robot would just hack Old Glory's system and erase your policy right before you were attacked.

[Gumby]

The theory is that the machines will one day replace the humans, but the machines seem to have so many production, maintenance and service needs that people seem to stubbornly keep their relevance no matter how many machines we create.  Isn't it true that every factory that is taken over by machines means that there is a whole new team of humans that are needed to keep the machines running?

Typically, each new "team" of humans is always smaller than the previous team that was replaced. Otherwise there wouldn't be any incentive to automate the first team.

Also, the robots are now learning how to build and repair themselves:

YouTube: Self-Replicating Repairing Robots

YouTube: Self-Healing Chair

YouTube: Modular robot reassembles when kicked apart

The unskilled workforce is being replaced by robots. It will eventually happen. And lets not forget that many jobs have already been replaced by robots.

[MediumTex]

The theory is that the machines will one day replace the humans, but the machines seem to have so many production, maintenance and service needs that people seem to stubbornly keep their relevance no matter how many machines we create.  Isn't it true that every factory that is taken over by machines means that there is a whole new team of humans that are needed to keep the machines running?

Typically each new "team" of humans is smaller than the previous team that was replaced. Otherwise there wouldn't be any incentive to automate the first team.

Also, the robots are now learning to repair themselves:

YouTube: Self-Replicating Repairing Robots

YouTube: Self-Healing Chair

The unskilled workforce is being replaced by robots. It will eventually happen.

But 100 years ago there were probably 99% fewer machines and 80% fewer humans, yet humans have kept their relevance so far (some would say we have even thrived).

I agree, though, that we should keep our eye on the machines.  It would be a shame if it turned out that we were the Neanderthals to the machines' Cro-Magnon as we move ever-closer to The Singularity.

Of course, something less ambitious but no less dangerous could also occur.  You never know.