Wednesday, June 29, 2011

Gloomy thoughts.

As a conservative, it's with quite a bit of dismay that I read of other supposed conservative commentators calling for Greece to restructure (not to pay back) it's debts. Others are calling for Greece to opt out of the Euro and to go back to the drachma, thereby being able to manipulate its currency to pay back its debt. Amongst far too many commentators there is the notion that a bit of inflation is not too bad a thing, as it makes stealing paying back debts easier.

The problem with this line of thinking is that they haven't thought about the problem very deeply, else they wouldn't be advocating such a stupid notion.

We need to remind ourselves one of the ways that banks make money is by lending out other peoples money. That "other peoples money" is usually someone else's saving or investment. Hence, when commentators are advocating that Greece give the bankers "the finger" what they're advocating is that Greeks give the finger to the bankers,........and the little old lady who saved up for their retirement..........and the nurses pension fund...........and the couple saving for their first home.

The biggest losers of any debt restructuring will be both the Greeks, whom afterwards no one will want to lend to(austerity then won't be an option), and some baby boomers whose retirement funds will be vapourised in the process. It's a lose/lose situation.

However it would be a mistake to think that this is just a Greek Crisis. I've got the feeling that the birthplace of democracy will also end up having its burial of it there.

The problem is that nearly all the western countries have borrowed more than prudent, and at the moment, systemic debt is so great that there is simply no way to pay it back. The net result of this is that a lot of people, particularly baby boomers who were encouraged to save for their retirement, are going to be poorer--a lot poorer--as a result of global debt "restructuring". 

Previously, given the pyramidal demographic structure of the West. Inflation which eroded the savings of retiree's could be compensated for by increasing taxation and hence spending on social security.  However as birth rates collapsed, the pyramidal demographic structure has become a rectangle, the ratio of workers to retirees is much smaller.


The cultural and political implications of this make for unsettling prognostication for  a conservative. The baby boomers, who are still a very large demographic block,  are not going to give up the retirement which they were counting on just because their own funds vapourised, rather they will vote for politicians who promise them "social justice". Just as there was in the Great Depression, there will be a cultural and political lurch to the left. The New Deal would have been impossible without the Great Depression.

Futhermore, taxation social security spending will continue to remain high for a long time yet, a least until the baby boomers cease being viable political force. 

We're in this recession for a long long time.

13 comments:

Viliam Búr said...

Democracy is doomed at the moment the voters realize they can vote themselves more money. :-(

Keoni Galt said...

We need to remind ourselves one of the ways that banks make money is by lending out other peoples money. That "other peoples money" is usually someone else's saving or investment.

Not really. We need to remind ourselves that the primary way banks make money is by the process of fiat creation under the fractional reserve system.

Don't know if that's how it works in AU, but in America, they Federal Reserve System basically admits this straight up. See here:
http://hawaiianlibertarian.blogspot.com/2011/06/how-banks-create-moneyout-of-thin-air.html

What we really need is for Jesus to come back and throw all the money changers from the temple once again.

Red said...

Default would be the best solution for everyone. Banks that made bad loans get burned, people who took bad loans can't borrow anymore, and people in generally people loose money due to the whole mess. It will suck for the people who loose their money in the banks but their going to loose it anyways though extra taxes/inflation. Remember it's primary the rich who own debt and it will primary be the rich who take it on the chin if we let the house of cards fall.

Just get the problem over with and let us get back to work as normal.

Country Lawyer said...

People are going to have a massive drop in their standard of living, one way or another and there's no stopping the direction its taking.

They couldn't stop the bread and circuses of Rome. They couldn't stop the giveaways in athenes.

And although people equate Democracy equals freedom.

That is not true and is quite obviously the reverse as the bloated system with its millions of regulations puts the screws to everyone.

mdavid said...

Great blog.

Galt's comment about money creation via fractional reserve lending is spot on. Banks create most of our money - this money belongs to nobody, and has been created out of thin air by fractional reserve lending. In fact, it's a mathematical impossibility to even pay the interest on these loans without further money creation through direct printing.

The US is sitting on a $50T debt bubble that simply cannot be paid back without more direct money printing (this is a mathematical reality of fractional reserve lending systems). Truth be told, the best thing that could happen at this stage would be to abolish the dollar and exchange it with a gold standard, another asset-based currency, or growth-pegged currency. No matter what, the dollar is history, either through repeated haircuts or utter collapse. We've had 40+ years of full fiat, and it's a miracle it's lasted that long.

The Social Pathologist said...

@Viliam

When thinking about democracy I'm always reminded of the comment by H.L. Mencken;

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

@Keoni,

Thanks for dropping by.

There are several mechanisms by which money is created. In some instances it is credit driven,, in some money supply driven. In fact a lot of credit creation can occur outside the fed influence, securitisation of debt which shipped debt off the bank balance sheets was a prime example.

I agree that the money changers need a whipping but so do the customers, as Dalrymple has repeatedly said, no one was forced to borrow over their heads. People have always hated the bankers due to their obscene salaries but hardly anyone objected to their practices until they personally started loosing money.

Here's a thought experiment. If you had propose in 2007 to massively tax capital gains on "house flipping", what chance do you think you would have gotten the legislation through? No hope in hell and you would have been pilloried by the public, Bernie Madoff was right, even when he tried to dissuade people from "investing" with him, they begged him to take their money.

“Everyone was greedy,” he continues. “I just went along. It’s not an excuse.” In his mind, the hedge funds and the banks were little more than marketers, skimming their 1 to 2 percent off the top, a fee for their supposed “due diligence,” though they exercised little oversight. “Look, there was complicity, in my view,” Madoff told me.

The Social Pathologist said...

@Red

Default would be the best solution for everyone.

Yeah, but what happens when welching on your debts becomes accepted practice is that the risk premium goes up, since it is far more risky to lend out money and eventually getting it back. Money supply contracts for a long long time.

Remember it's primary the rich who own debt and it will primary be the rich who take it on the chin if we let the house of cards fall.

Ahm, No. I understand that 401k plans are just like Australian superannuation schemes. Average peoples retirement savings have been funneled into these and one of the reasons that that the banks were propped up is to keep these things viable. Unfortunately they're not going to be. When the house of cards falls, nearly everyone is going down.

Country lawyer.

And although people equate Democracy equals freedom.

Stupid men are free to enslave themselves. I agree. Hard times are a'comin.

mdavid.

We've had 40+ years of full fiat, and it's a miracle it's lasted that long.

Thanks

No one with any real skin in the game wants it to fail. That's why the Chinese are propping up the euro. Everyone is hoping to hell ,that given time, the mess will fix itself up. It won't.

Keoni Galt said...

Thanks for dropping by.

My pleasure. I always read your latest.

There are several mechanisms by which money is created. In some instances it is credit driven,, in some money supply driven. In fact a lot of credit creation can occur outside the fed influence, securitisation of debt which shipped debt off the bank balance sheets was a prime example.

While you raise a good point...the entire concept of "fiat currency" and "fractional reserve banking" reeks of corruption.

If you think about it on a conceptual level, any banker who is a member of the cartel, has the ability to create cash out of "thin air" (in the banks database records) and lend it out.

They have the ability to create DEBT. Not money earned and saved through honest labor. It's a system of modern day debt serfdom. Why should this select class of "professionals" have that privilege of creating debt out of thin air? If Usury is a sin...usury from fiat created debt is usury on steroids.

However, I do understand your point on a personal responsibility level, a man is as only as good as his word. If you say you're gonna pay something back, you should strive as hard as you can to keep your word.

I just take issue with the tone of this post in which you make it seem like the bankers are being victimized by all the defaulting borrowers.

That's like feeling bad that a syndicate of organized crime was victimized.

The Social Pathologist said...

I just take issue with the tone of this post in which you make it seem like the bankers are being victimized by all the defaulting borrowers.


It certainly not how I wanted it to appear. What irks me is non-thoroughness with which people are analysing this banking crisis. Sure, a lot of the bankers are evil, but to argue that they soley screwed over the people is stretching things too far, the people themselves were all too willing to go along for the ride.

I agree that the bankers should be made to wear their losses, but so should the homeowners who borrowed imprudently. Too many people threw caution to the wind when it came to borrowing money. Why we need to bail them out is beyond me.

James A. Donald said...

There has to be default and/or hyperinflation. Governments have lived too far above their means for too long.

The Social Pathologist said...

@James.

Default is to be preferred to hyperinflation. Default screws the person who made the loan, hyperinflation screws everyone.

Anonymous said...

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