The greed of the few harms all our futures
That is the title of Will Hutton’s editorial in the Guardian Weekly. He states:
Never in human affairs have so few been allowed to make so much money by so many for so little wider benefit. Across the globe, societies and governments have been hoodwinked by a collection of self-confident chancers in the guise of investment bankers, hedge and private equity fund partners and bankers who, in the cause of their monumental self-enrichment, have taken the world to the brink of a major recession. It has been economic history’s most one-sided bargain.
Thirteen years ago, I tried to blow the whistle on financial market liberalisation in my book The State We’re In. It was obvious then what is even more obvious now: financial market freedom embeds short-termism, guarantees lower investment, works against business building and innovation, generates booms and busts, inflates house prices, creates system-wide risk and excessively rewards those who work in them.
We don’t have any of those pressing finance related issues in this country, do we? 
I’ll ask what I asked yesterday. Do we want investment bankers, who Will Hutton has just called ’self-confident chancers’, running the country a year from now? (More than they do already?)
February 20th, 2008 at 12:57 pm
but surely some of this hearty richness will trickle down to us bottom feeders? too bad if we can no longer swim at the local river - we’ll be able to buy more stuff.
February 20th, 2008 at 1:27 pm
Infinitely preferable to the Marxists “running” anything. It didn’t work, remember. Free market capitalism, given all it’s faults, works.
What is the alternative? Please lay out your economic strategy for New Zealand?
You avoid doing this, for some reason….
February 20th, 2008 at 1:41 pm
I don’t think anyone (here) believes that there is only a choice between free-market capitalism and Marxism (where are these Marxists anyway?). There are all sorts of rules, regulations, incentives and loopholes involved with capitalism the world over - there are no credible cries for ‘revolution’, simply the extent to which capitalism is regulated to mitigate it’s negative effects.
February 20th, 2008 at 1:58 pm
BluePeter - The post talks about financial market freedom, the unrestricted and so called self regulation of the financial markets, which, when screwed up by the greedy, affects us all.
February 20th, 2008 at 2:05 pm
Again, let’s hear the alternatives.
And lets not pretend that greed and “screwing up” is limited to people involved in banking….
February 20th, 2008 at 2:52 pm
Agree with BluePeter,
Come on frog, you cannot put an alternative budget together, so how about painting a picture of the ideal financial system for the world (or New Zealand) plus what the commercial and business scene will be shaped like in your perfect world.
This side sniping at John Key is not scoring any browny points at all. Remember people dont buy on fear they buy on facts , figures and “what is in it for them”.
The electorate having decided these last 4 elections that all out capitalism and all out communism is not for New Zealand, what is your perfect scenario?
Another qustion you havent answered from way back. If the “gap” between the have and have nots is growing, what should that “gap” be in your perfect world?
What differentiation will you place on someone who gets out of bed and is a tax payer versus someone who stays in bed and is a tax recipient?
As an aside Cullen and Bollard keep telling us a tax cuts are inflationary , but how does that fit with the union demand for higher wages?
Is one not the same as the other, putting more disposable income into the tax payers pockets to spend (or save)?.
Or in your perfect world would you increase wages (decrease the shareholders ROI) and increase taxation on those increased wages so that all the tax recipients can get more. Closing the “gap” that way?
How do you feel about that “rich pr**k” donating money to the labour party? Is that OK?
February 20th, 2008 at 8:39 pm
# Gerrit Says:
February 20th, 2008 at 2:52 pm
> The electorate having decided these last 4 elections that all out capitalism and all out communism is not for New Zealand, what is your perfect scenario?
Broadly speaking, I support businesses competing within a framework of rules laid down by the government, and the government designs the framework so that the businesses competing within it will lead to the country meeting the economic, social and environmental objectives that the government sets. Where the costs of a business actuivity naturally do not accrue to the business, the government must impose charges so that they do. The government also needs to redistribute wealth so that the market can work efficiently in meeting people’s needs - if the gap between rich and poor gets too big, the market will serve the whims of a rich person over the needs of a poor person, because it’s more profitable.
> As an aside Cullen and Bollard keep telling us a tax cuts are inflationary , but how does that fit with the union demand for higher wages?
There has always been disagreement as to how important it is to keep inflation low. Unions have generally attached less improtance to keeping inflation low than some other people have.
> Or in your perfect world would you increase wages (decrease the shareholders ROI) and increase taxation on those increased wages so that all the tax recipients can get more. Closing the “gap� that way?
Generally, reducing ROI is a good thing. If you reduce the passive ROI from just having money to invest, you increase the proportion of the wealth in society that accrues to people for hard work, ingenuity and taking risks that pay off. This is generally a good incentive. However, decreasing the amount of money that people get simply from investing does not significantly change the incentive to invest.
> How do you feel about that “rich pr**k� donating money to the labour party? Is that OK?
I don’t know whether or not he’s a pr**k, but it’s certainly undesirable for any party to get such a large proportion of its money from one person or a small number of people, because it does have potential to influence policy. I think the electoral finance act should set the donation limit lower, and it’s possible that the fact that it doesn’t is itself evidence of donations affecting policy.
February 20th, 2008 at 9:34 pm
kahikatea,
- “I support businesses competing within a framework of rules laid down by the government, and the government designs the framework so that the businesses competing within it will lead to the country meeting the economic, social and environmental objectives that the government sets.”
What you are describing is actually the fascist model (that’s not an insult, you genuinely are describing the fascist model of ostensibly private enterprise forced to serve a supreme national purpose).
- “if the gap between rich and poor gets too big, the market will serve the whims of a rich person over the needs of a poor person, because it’s more profitable.”
There is absolutely nothing in theory or practise that supports such a ludicrous idea. Have you never heard of Walmart. They specialise in selling to the poorer end of the market and are, I understand, the biggest retailer in the world. I believe they announced record profits this week.
- “There has always been disagreement as to how important it is to keep inflation low. Unions have generally attached less improtance to keeping inflation low than some other people have.”
People like pensioners, for example? Perhaps you should look at what’s happening in Zimbabwe right now and their little inflation problem? I don’t see the workers thriving one little bit.
- “Generally, reducing ROI is a good thing. If you reduce the passive ROI from just having money to invest, you increase the proportion of the wealth in society that accrues to people for hard work, ingenuity and taking risks that pay off.”
Anyone investing in a company has the alternative of leaving their money entirely risk-free in the bank accruing interest. For someone to forego that security and invest instead in a company they must have a reasonable expectation of a return over and above the bank interest rate, commensurate with the perceived risk.
On the upside, the potential profitability of a company is limited because perceived excess profits are competed away by other companies and new entrants seeing an opportunity.
So just where is the potential, and what are the tools, for influencing this equation? How would you propose to artificially reduce profitability (and therefore shareholder ROI) without causing everyone to simply leave their money in the bank?
If you genuinely believe that investing is easy money, you are either a Buffet or a buffoon.
February 20th, 2008 at 9:44 pm
Mouldwarp said:
“Anyone investing in a company has the alternative of leaving their money entirely risk-free in the bank accruing interest. For someone to forego that security and invest instead in a company they must have a reasonable expectation of a return over and above the bank interest rate, commensurate with the perceived risk.”
I was actually including putting money in the bank as a form of investing. It is a form of passive investing, along with buying government bonds or low-risk shares. The difference in the payback between that and higher risk investing can come from either taking a risk that pays off, or being very clever in how you make your investment, both or which are things that would accrue a greater percentage of the wealth created in society if passive investing got less (as they should, because they, along with hard work and ingenuity, are what creates wealth).
> So just where is the potential, and what are the tools, for influencing this equation? How would you propose to artificially reduce profitability (and therefore shareholder ROI) without causing everyone to simply leave their money in the bank?
The profitability of simply putting your money in the bank needs to be reduced too, to free up more of the wealth created by society to be earned through those activities that create it. The obvious way to do this is to lower the official cash rate.
February 20th, 2008 at 10:16 pm
Kahikatea,
You are simply advocating a cheap credit policy.
February 20th, 2008 at 11:08 pm
No Mouldwrap, the qualities she mentioned are those that would be associated and made increasingly prominent with negligible inflation.
Quite the opposite of cheap credit, which comes about in our inevitable cycles of financial bubbles, that are hard wired into debt based capitalism as has been practised for the last one hundred years or so at least.
DSC policy incidently, is about “earnt credit”, one example being the National Dividend recently calculated as $14699.
DSC 08.
February 21st, 2008 at 5:38 am
Kahikatea
“- if the gap between rich and poor gets too big”
Can you quanify please because otherwise this is just an empty rhetoric statement.
Should there be a 20% gap or 50% ?
What is the target? Come on frog this is for you too.
Without a target you dont have anything but that empty rhetoric slogan “closing the gap”
Once you establish what that “gap” should be, please present a strategic plan (with action steps) to make it come about.
Similarly for even and the social creditors. What strategic plan would you put in place to achieve this?
even,
Is this “earnt credit” simply not a tax credit that would have been better of not collected in the first place? Saving the cost of the IRD bean counters time in collecting the taxes and then having to return it?
February 21st, 2008 at 7:31 am
Bluepeter
This isn’t ANY different from Marxism in the sense that a few are taking advantage of the many. If you remember the old joke it is quite clear.
The known alternative is a much more regulated Capitalism. The less traveled road is “something else” and I am no more comfortable with wrenching economic shifts than the next person. Despite all the pronunciations of all the Right Wing bloggers of the planet, we don’t aspire to the destruction of the economy.
Gerrit - The gap between rich and poor is damned important as I am sure you know. I like using the GiNI index
http://en.wikipedia.org/wiki/Gini_coefficient
to work out what sort of income inequality we have.
http://en.wikipedia.org/wiki/Economic_inequality
,,,, under which you can find the list of problems which are made worse by increasing inequality too much… and a very pointed observation of deToqueville
to work out what sort of “target” gini coefficient we should aspire to is a matter of some debate…. but I would aspire to something a bit below 0.3 and I would put THAT as a goal for our financial system rather than simply increasing the GDP or keeping inflation in check. Actually selecting a target rather than guessing one would be a good topic for us. I DO agree with that observation/suggestion. Perhaps we will manage to take it up.
The gini currently appears around 0.36 and rising in New Zealand
The rationale for selecting is up to the individual. One could quite possibly come up with an alternative measure of political economic opinion by scaling each individuals preferred gini index. It would be an interesting exercise as well.,
Mouldwarp .. how anyone can get things so absurdly and consistently wrong is almost beyond comprehension. Wal-Mart does NOT serve the needs of poor Americans… nor even the middle-class. It is an agent of the process of exporting better paying jobs to people abroad. It is an agent of the destruction of the middle class. Ford RAISED the pay of his workers because HE knew as you appear to have forgotten, that his customers had to be able to afford his products.
Not that I advocate complete isolationism, but the hundreds of major US companies who have home offices in small buildings dotted around the Caribbean tell those of us who pay attention in the US (a very small minority) quite clearly that we’re not serving ourselves very well.
Rich people and corporations CHEAT. They do not have to follow the same rules as the rest of the population and they don’t. Not necessarily by breaking the rules… more usually by bending and amending them. Lawyers are a powerful tool. Lawmakers even moreso.
Buffet pointed out with no small amount of exasperation, that HIS tax rate is LOWER and not just a little lower, than that of his secretary. That is not a result of rules that are fair to all.
http://business.timesonline.co.uk/tol/business/money/tax/article199673 5.ece
respectfully
BJ
February 21st, 2008 at 7:56 am
The NAtional Dividend is more than simply a tax credit Gerrit, as the effects of the logical changes in monetary system DSC want would reduce taxes alongside the National Dividend….many DSC types are not big on taxes i can tell you that!
I have to run, but if you want to know more just check out the websight or ask away.
DSC 08.
February 21st, 2008 at 9:27 am
>>This isn’t ANY different from Marxism in the sense that a few are taking advantage of the many. If you remember the old joke it is quite clear
It bothers me not that some have more than others - because no matter what the system, that will always hold true.
The difference is essentially the degree of personal liberty and choice (a good, imho). Free market capitalism provides that good, more so than the alternatives.
February 21st, 2008 at 10:50 am
# Mouldwarp Says:
February 20th, 2008 at 10:16 pm
> You are simply advocating a cheap credit policy.
Yeah, what I’m advocating is not unusual. It was the norm in New Zealand fifty years ago. I support more environmental protection and less trade protection than we had then, but a broadly similar monetary situation.
February 21st, 2008 at 11:32 am
The problem with the word “greed” is that it has bad connotations, whereas I see it as a good word. Greed is what makes trade and progress possible. Greed is good. Grredy people are the ones who get off their butts and make a difference.
The problem the world is in isn’t to do with greed; its to do with a far more fundamental issue, which is making money with money. Capital employed to add value to a raw material to create a higher value thing which generates returns is good, and is a system where the benefits extend beyond the investor; suppliers, employees and customers also benefit. Finding ways to make money make more money can only work in the short term, because ultimately there is no value added. With out value add, “gains” are purely illusionary.
Then there is that underlying problem that gains tend to end up in the hands of the few, whereas losses are socialized. I hate to use the word, as its so BigBro, but the benefactors of gain and their mates soon become indistinguishable from communists when the losses roll in. And that is because the free market is, in many ways, a fabrication, and is nothing of the sort.
February 21st, 2008 at 6:38 pm
even,
Firstly, the partial reserve banking system is inherently inflationary, the more so as interest rates are reduced, which is what is being advocated here.
Secondly, can you please explain how the state would artificially lower the interest rate without increasing the money supply and thus increasing inflation still further?
How can artificially low interest rates result in anything but significantly increased inflation?
bjchip,
Taken as a whole, absolutely everyone who lives in NZ is a winner in life’s lottery. Contrasted with the appalling mass poverty in the world, your obsession with the differences between a tiny group of rich people and a tiny group of slightly richer people is nothing short of obscene, and doubly so when you factor in all the benefits received in NZ - free schooling, free medical care etc etc which, when properly considered, massively erode even the slight remaining difference.
In reality you are campaigning because one group of highly affluent people has a little bit more than another group of highly affluent people. How can you be so blind? How can you be so utterly shallow? Never mind the poor and starving, that man over there can’t afford a daily double mocha latte with an extra shot! Man the barricades!
As for your rant against Walmart, it has been said that that company has lifted more people out of poverty than any other agent in the history of the world. Hundreds of millions of Chinese have been given something like a decent life thanks to Walmart. As for Americans, their standard of living has never been higher because, like us, they can buy masses of cheap stuff. The statistics just don’t back up your ugly xenophobic ravings. Why on earth do you expect me to favour Americans at the expense of, in this case, Chinese? Do you think it’s self-evident that other people should share your prejudices? Your complete lack of consideration, or even awareness, of the interests of - shall we say - our non-western neighbours, is appalling.
And when it comes to your point about the rich and powerful changing the laws to their own advantage, well, you’re absolutely right. As does every other special interest group, including the Greens. It is completely predictable and inevitable. You (the greens and the left) do it, so don’t complain when everyone else does it.
The only answer is to shrink and strip away those illegitimate state powers that facilitate such behaviour, so that it can no longer favour one group over another; but then you wouldn’t be able to use those same powers to further your own agenda, would you.
February 21st, 2008 at 8:13 pm
Great debate everyone! You are all fascinating.
Meanwhile back at the ranch…
As I see it NZ’s woes stem from a protracted period of balance of payment deficits.
While we as individuals and as a collective spend more than we earn we are inevitably going down the gurgler.
If there’s one thing Ruthless Richardson did right it was the Fiscal Responsibility Act. We now need a ‘National Responsibility Act’
A proposal….
Make all export earnings tax free. (So thats all money coming in via whatever means)
Load the true costs of producing those products/services on the producer, esp the environmental costs.
Let (sustainable) greed pull our Nation out of the hole. (Yes, yes thats an oxymoron I know, but you get my drift)
Feel free to pull this proposal to bits, I love to be abused!
February 21st, 2008 at 8:37 pm
Unfortunately, dbluckley, in this world greed is a very real problem. The rich are crapping out the earth and enslaving the poor, and their greed drives them and overcomes their conscience. That is truely evil.
Greed as a facet of human nature in itself is not bad. As you imply, greed may be related to facets such as motivation, taking responsibility for ourselves and joy of life. I don’t think it does us any good to focus on on particular aspects of human nature and say “this bit is good, this is bad”. That tends to lead to tunnel vision and out-of-balance behaviour.
However, greed among (many, all of?) the rich and powerful is an out-of-balance evil which allows them to ruin the earth.
Wealth imbalances would not be so bad if the rich were self contained. But the fact that they crap all over the earth and use the poor as their slaves makes it so totally wrong.
Our current “modern” economic and political systems enable the rich and powerful to control the world to their own benefit. Communism was too rigid and inflexible a system of control to survive in the face of Capitalism /neo-liberalism, which is a much more effective method of control.
Perhaps there are “modern” large scale economic systems which are resistant to capture and creaming, but I’m not aware of any.
By the way, NZ is part of the “rich” in this analysis. Generally speaking, the poor and the richest of the rich know what is going on, but those in between (like 99% of NZ) believe the marketing bullshit spread by the very rich. It’s in our interests not to think too hard about reality.
By the way, it is possible to organise our society such that we have a “GiNI index” of zero (nice concept, btw.), ie. spread income equally. Some traditional societies did this. These societies were probably better to live in than our own (I don’t know ’cause I never lived in one.) I don’t know what sharing wealth evenly would look like in a modern society either, but I’d sure like to try it.
We have a chance to fundamentally re-model our society and economy because of the economic/environmental shocks that are coming our way. We can either align ourselves with the richest of the rich and try to climb to the highest point on the Titanic, or we can design a system where we all work and share both the benefits and the costs equally.
February 21st, 2008 at 8:38 pm
Mouldwrap, yes the partial reserve banking system is inherently inflationary, we have agreement there right..?
“Artificially” lowering the interest rate will increase inflation, that much is true and no doubt is the rational for interest rates rising at the tail end of financial bubble cycles but interest rates were lower in the 50’s and 60s while inflation was also low; houses were $3000, a single wage-earner, usually the husband, could support the family(house,car, appliances, vacation, kids put through schooling) while the wife stayed at home n looked after the children etc etc
Increasing the money supply via the state’s exclusive prerogative to print(or just digitally enter) new money as a debt and interest free National Dividend, which is distributed to each individual in the population and totals the sum difference between the cost of G&S produced and purchasing power gained in their production, eliminates the compounding interest bearing debt component of the financial cycle-that’s what makes it anti-inflationary.
Anotherwords “financial credit” loaned by the banks is replaced by “social credit”, that part of the G&S earnings and prices gap which is largely the result of our shared inheritance of science and technology, thus it is the component of overall purchasingpower that is distributed evenly to everyone irrespective of status in society.
It was recently calculated as $14699.
DSC 08.
February 21st, 2008 at 9:29 pm
even,
I’m afraid I don’t understand a word of what you are proposing, but it sounds completely fantastic.
samian,
Perhaps you should first explain what you think NZ’s “woes” are? Economically, things have never been better in NZ, thanks to the painful reforms of Roger Douglas.
When you talk of the balance of payments deficit, you are presumably referring to the current account deficit - the trade deficit?
Rather than being a problem, it is actually a sign of a healthy economy - one worth investing in.
We should actually *expect* to run a trade deficit if the economy is in good health, because it implies that foreigners are seeking to invest in NZ. It is that inflow of funds to buy and develop assets in NZ and the NZ economy that constitutes the other side of the trade deficit - the capital account surplus of equal magnitude. The NZ economy is bigger that it otherwise would be without that inflow of capital. The natural interest rate is lower than it would otherwise be. We’re all wealthier than we would otherwise be.
It makes just as much sense to turn the point around and say that NZ’s capital account surplus in fact causes the trade deficit. It’s a good thing.
And it is worth saying that no debt is created or implied by the trade deficit.
February 21st, 2008 at 10:35 pm
I read in Otago Daily Times that work at Five Mile (Queenstown) a $2 billion development has (all but) stopped due to design problems.
February 21st, 2008 at 11:10 pm
It bothers me not that some have more than others - because no matter what the system, that will always hold true.
The problem is, and has always been, to what degree is it necessary for a human society. Not whether it will happen at all (Marxism) or whether it is the only thing that should happen. Some inequality of result is good, particularly if it reflects in some adequate manner, they inequality of contribution. Too much is bad. Too little is bad. How much is “enough” how much is too little. I know, it is only Wikipedia… flaming left-wingers all.
The question about “fairness” of a country is raised in the philosophical exercise… Imagine that you are about to be conceived but you are aware and able to choose the country you wish to be born into, but not the economic or social status of your parents within that country. This isn’t perfect but it does help separate wheat and chaff.
respectfully
BJ
February 21st, 2008 at 11:23 pm
You should hammer this point Frog (asset inflation, credit expansion and the shift in wealth to property investors. Renters and first home buyers are now expected to roll up their sleeves while they fly helicopters in Fiji.
February 21st, 2008 at 11:52 pm
Mouldwrap, i was going to end my blurb by saying i’m sure what i’ve just explained will be a waste of effort and ignored as that’s what politics is all about after all but since you asked sum questions i didn’t…..
So, trade deficits are good since they provide international “funds” to buy and develop New Zealand infra-structure……..well basic human history has a major dis-agreement with you and the major under-pinnings of rogernomics there……..why do wars get fought??????
Surely invaded countries should be welcoming with open arms foreign powers who invade them? Surely they wouldn’t be invaded if they didn’t have something of value to be developed would they?
Here’s a complicated idea: why don’t use our own funds to develop our own resources?
I could say alot more about the non-sensical dribble you put out but mayby it’s me, perhaps i just don’t have the power of imagination required for rogernomics?
DSC 08.
February 22nd, 2008 at 12:06 am
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/19/AR2008 021902593.html?sub=AR
February 22nd, 2008 at 12:17 am
Mouldwarp argued that “- the trade deficit? Rather than being a problem, it is actually a sign of a healthy economy - one worth investing in.”
Which explains why the Yuan is rising and the US dollar is falling - not! Mouldy, a trade deficit due to heavy investment in machinery would have the effect you claim but a trade deficit due to a credit card spending spree on luxury goods would have the opposite effect. Unless investors are really really stupid of course.
February 22nd, 2008 at 7:05 am
Mouldwarp said…
“Anyone investing in a company has the alternative of leaving their money entirely risk-free in the bank accruing interest.”
Banks, risk free? Ha ha ha. I guess they need people like you or the fractional reserve banking rort wouldn’t function.
February 22nd, 2008 at 6:50 pm
kevyn,
- “a trade deficit due to heavy investment in machinery would have the effect you claim…”
I get the impression that you still think that some sort of debt is implied by a trade deficit, and that it’s okay if we borrow to invest but not just to live above our means? But that would be quite wrong.
A government budget deficit is indeed debt, which may or may not be prudent, but a trade deficit is entirely different, because it is just one component of the balance of payments - with emphasis on the word “balance.” A trade deficit is precisely offset by a capital account surplus.
To believe that the trade deficit amounts to debt is on a par with someone else focusing just on the other half of the equation - the capital surplus - and assuming it somehow means we’re all multi-millionaires.
I say again, there is no debt created or implied by a trade deficit. Rather than “living beyond its means” it suggests instead that a country with such a balance of payments is creating wealth and has a good future in front of it.
- “…but a trade deficit due to a credit card spending spree on luxury goods would have the opposite effect.”
For that matter, it would also be bad if people murdered others and took their wallets to buy those luxury goods. But then the issues here are reckless credit card borrowing and murder, neither of which have anything inherently to do with the balance of payments.
even,
get a grip
February 23rd, 2008 at 12:25 am
Mouldwarp,
Where do I start?
Like you relative poverty wealth in the West doesn’t concern me at all, but what DOES concern me is when the politicians claim that they cannot provide proper healthcare or educational facilities for their citizens that will equip them for a rapidly changing world and the resulting uncertainty and turmoil.
“I say again, there is no debt created or implied by a trade deficit. Rather than “living beyond its meansâ€? it suggests instead that a country with such a balance of payments is creating wealth and has a good future in front of it.”
We only have a capital account surplus, because the Chinese government compels its people to save through its investment in foreign currency reserves now worth at least $2 trillion dollars. They allow us this questionable “privilege” because it suits their purposes, that being to challenge the United State’s hegemony of international affairs. They needed the West’s knowledge, techology, and skills, most of which they’ve already acquiring and are showing signs of surpassing us in those areas.
I guess they learnt from the Japanese, why fight wars to capture and control resources when people are willing to provide them freely under the aegis of trade and enterprise, lol?
February 23rd, 2008 at 1:47 am
“As for your rant against Walmart, it has been said that that company has lifted more people out of poverty than any other agent in the history of the world.”
Walmart isn’t the only way to lift people out of poverty or even the best its just one that best suits the interests of the Chinese communist government.
You’re neglecting the foremost condition upon which the wealth of New Zealand, Australia, Canada, the United States, Taiwan, Hong Kong, Singapore, and South Korea etc is built on. Increased bargaining power of labour due to the progressive land reform policies followed by successive government administrations e.g. Abraham Lincoln’s with the Homestead Act, those of John Ballance and Sir John Mackenzie etc providing EFFECTIVE demand for the goods produced by capitalist enterprises.
http://query.nytimes.com/mem/archive-free/pdf?_r=2&res=9C0DEED6103CE43 3A25752C2A9679D94699ED7CF&oref=slogin&oref=slogin
http://www.teara.govt.nz/1966/L/LandSettlement/LiberalLandPolicyForClo serSettlement/en
February 23rd, 2008 at 4:12 am
Mouldwarp. You seem to be treating the difference between borrowing for capital improvements and borrowing for operating expenses as insignificant. It is the future impact when it comes time to repay the borrowing that makes it a vital difference. With good management and a bit of luck a loan for capital improvement should be easily repaid out of increased income or profits depending on whether the objective was to improve production or productivity or both. On the other hand borrowing to fund a operational shortfall produces no extra revenue to repay the loan. It seems a dumb think for bankers to do which might explain why the capital markets have replaced banks as the primary source of credit instruments.
I’m not one for conspiracies but sleepy seems to identified a valid motive for the Chinese government to deliberately use debt enslavement to further it’s imperialist ambitions. A technique deftly used by the USA with it’s lend/lease and Marshall Plans.
February 23rd, 2008 at 6:40 pm
Sleepytreehugger,
- “what DOES concern me is when the politicians claim that they cannot provide proper healthcare or educational facilities for their citizens that will equip them for a rapidly changing world and the resulting uncertainty and turmoil.”
We are not “they’re citizens.” A government is just a group of people we employ to provide certain public goods. Why on earth would you, presumably an intelligent person, expect other people (particularly state bureacrats) to “equip you for the rapidly changing world”?
If you employed a gardener, would you expect him to “equip you for the rapidly changing world”?
- “We only have a capital account surplus, because the Chinese government compels its people to save through its investment in foreign currency reserves now worth at least $2 trillion dollars.”
If they are held as reserves they are not contributing to NZ’s capital account surplus, are they.
Economically speaking, more fool the Chinese if they ship boatloads of goods to us and then just tuck the money under the bed. From our point of view it’s like Manna from Heaven. It’s free stuff.
- “I guess they learnt from the Japanese, why fight wars to capture and control resources when people are willing to provide them freely under the aegis of trade and enterprise, lol?”
That’s “freely” as in “without compulsion” I take it? In which case, yes, spot on. Capitalism is the first and only system based on freedom and voluntary cooperation, even between people who otherwise despise each other. Everything else, from serfdom to communism to fascism and socialism, relies totally on threats and coercion.
As for your other piece, about land ownership, its central lesson is that property rights are a prerequisite for prosperity. As Communist regimes discovered, people won’t work to develop and enhance a property if they are not the owners and so won’t get the benefit. They’ll just do the bare minimum. In the worst Soviet days, people were too scared to improve the land because, not only did they not get to keep any of the extra harvest, but their quota was raised accordingly, and they risked execution if they failed to meet it in future.
See the difference when reforms are introduced which allow people to keep the fruits of their own labours. It is a complete transformation. Food importing nations become food exporting nations. *That’s* the essential point about the article you linked to.
And a quick point about unions. They are not the friend of the working class that you perhaps imagine them to be. For all their rhetoric, the ugly truth is that they are special interest groups seeking to benefit their paid up members at the expense of the rest of us.
A competitive economy is the best bet for higher wages all round: Companies have to bid against each other for workers and trim their profits accordingly, because if they don’t, some other company will in order to take some of that excess profit.
kevyn,
- ” You seem to be treating the difference between borrowing for capital improvements and borrowing for operating expenses as insignificant. It is the future impact when it comes time to repay the borrowing that makes it a vital difference.”
No, I’m saying that there is no borrowing. Period. Hence there is nothing to “repay.”
When shipments of goods arrive here from China and other countries, money changes hands. It’s all paid for. There is no debt created. Nothing to be repayed anytime in the future.
- “I’m not one for conspiracies but sleepy seems to identified a valid motive for the Chinese government to deliberately use debt enslavement to further it’s imperialist ambitions. A technique deftly used by the USA with it’s lend/lease and Marshall Plans.”
The US$2 trillion sleepy mentioned is not debt.
If the US *owed* China two trillion dollars, that would be debt.
Now, the profligate US government *has* been issuing heroic amounts of debt intruments to fund its vast spending; and China, along with others, has been buying that debt. But that’s a completely different issue to the balance of payments. That’s just out-of-control state spending.
February 23rd, 2008 at 11:23 pm
Mouldwarp
If I employ a gardener I DO expect him/her to prepare my garden for the changes of season and maintain the gardening implements or tell me I need new ones. I’m not reading much into this at the moment, just observing that the analogy isn’t doing what you seem to want it to do.
BJ
February 23rd, 2008 at 11:38 pm
Mouldwarp: Your political science is a bit rusty. You seem to be confusing totalitarianism, or Stalinism, if you will, with Communism or Marxism.
Marxism and communism are designed to end in a system with free exchange of necessities without any money at all- it’s actually a remarkably similar system to free market capitalism, except without any influence of investment or a manager-class.
Totalitarianism is where a central authority is responsible for all the major decisions, and where people essentially exist at the sufferance of said central authority. It hijacked revolutionary communism, and this hijacking is a key danger that all free and peaceful societies need to face and address, and I think the key lesson we’ve learned since that time.
Capitalism is by no means the only functioning system or the only path to freedom from oppression.
February 24th, 2008 at 12:03 am
When shipments of goods arrive here from China and other countries, money changes hands. It’s all paid for. There is no debt created. Nothing to be repayed anytime in the future.
Well.. that is TECHNICALLY true… as the debt is created elsewhere in the economic system, but there are damned few people capable of splitting so fine, and meaningless, a hair.
Here’s a data series on the trade deficit
http://www.census.gov/foreign-trade/balance/c5700.html
and here’s something about the debt
http://fpc.state.gov/documents/organization/99496.pdf
Probably unlike Mouldwarp, I regard the foreign exchange reserve of US $ that is held by China as a form of “debt” whether or not it has been converted into a government security. Some is converted to a corporate bond instead… or used to be. In any event, we are talking about debt that appears to approximate the deficit created… as I believe it must.
“There Ain’t No Such Thing As A Free Lunch”. I know you believe that in your soul, but you don’t seem to be applying it here. Maybe I’m wrong about these numbers, but somehow, someday, SOMEBODY will be paying for lunch.
respectfully
BJ
BJ
February 24th, 2008 at 12:03 am
Mouldwarp,
When I buy my groceries, money changes hands electronicly. As far as the supermarket is concerned it’s all paid for, there is no debt created, nothing to be repayed anytime in the future. As far as me and Visa are concerned it’s aint paid for yet, there is debt accumulated, something to be repayed sometime in the future - with interest.
That’s the reality of trade. You can pretend it isn’t happening if you like but that won’t stop it from actually happening.
February 24th, 2008 at 12:07 am
When shipments of goods arrive here from China and other countries, money changes hands. It’s all paid for. There is no debt created. Nothing to be repayed anytime in the future.
Well.. that is TECHNICALLY true… as the debt is created elsewhere in the economic system, but there are damned few people capable of splitting so fine, and meaningless, a hair.
Here’s a data series on the trade deficit
http://www.census.gov/foreign-trade/balance/c5700.html
and here’s something about the debt
http://fpc.state.gov/documents/organization/99496.pdf
Probably unlike Mouldwarp, I regard the foreign exchange reserve of US $ that is held by China as a form of “debt” whether or not it has been converted into a government security. Some is converted to a corporate bond instead… or used to be. In any event, we are talking about debt that appears to approximate the deficit created… as I believe it must. The books do eventually balance and the deficit must become SOMEONE’S debt… though it may not be the state that issues it.
“There Ain’t No Such Thing As A Free Lunch”. I know you believe that in your soul, but you don’t seem to be applying it here. Maybe I’m wrong about these numbers, but somehow, someday, SOMEBODY will be paying for lunch.
I’m not sure we aren’t agreeing in a way at this particular point. Except that I am expecting the books have to balance in the end.
respectfully
BJ
BJ
February 24th, 2008 at 12:10 am
Hmmph… posts being moderated…. y’all will have to wait. I agreed with Mouldwarp about something.
BJ
February 24th, 2008 at 9:10 am
“Hmmph… posts being moderated…. y’all will have to wait”
Indeed. I think it needs a mention at http://blog.greens.org.nz/index.php/policies/ so we know what’s going on and don’t have to guess.
February 24th, 2008 at 9:36 am
Not really…. I put in some links and while I am pretty careful I might have tripped a filter. It has happened before, will happen again and isn’t a big deal.
Thing is that Mouldy is technically correct. The debt and the trade deficit aren’t the same thing. I also pointed out, as Kevyn just did far more succinctly, that while they aren’t the same thing, they are going to balance eventually. The same amount of money IS being “created” as debt.
But they aren’t the same thing.
TANSTAAFL says nothing about WHO eventually pays for lunch.
respectfully
BJ
February 24th, 2008 at 9:58 am
A government is just a group of people we employ to provide certain public goods. Why on earth would you, presumably an intelligent person, expect other people (particularly state bureacrats) to “equip you for the rapidly changing world�?
Education IS a public good and a very important one at that. It is essential that the design of the school curriculum takes into account the rapid economic and social changes that are taking place so as to equip and prepare students to deal with them. We may disagree on who may be the best provider of education (public or private sector), but SOMEONE still must design a curriculum that adequately ensures that minimum education standards are met.
“If you employed a gardener, would you expect him to “equip you for the rapidly changing worldâ€??”
They’ve had to deal with the changes ushered in by previous government administrations haven’t they and will have to cope with more changes in the future so why not?
“If they are held as reserves they are not contributing to NZ’s capital account surplus, are they.”
Having a large amount of foreign exchange reserves gives them a greater capacity to allow us to have a current account surplus by artificially lowering the value of its own currency in combination with pegging its currency to the dollar.
The problem is threefold.
a) all fiat money is created as debt save perhaps for the mere 3% of our monetary supply that is government bank notes and coins, which comes at a cost of course.
b) China’s people are denied the investment in essential social infrastructure that they otherwise would have, healthcare, better wages to purchase more nutritious food, shorter hours of work to have more leisure time, more adequate housing etc, because of a geopolitically motivated decision to hold large amounts of foreign currencies.
c) A surplus on capital account is generally considered to be bad news; it represents an increase in a nation’s liabilities to foreign interests. The exception - when it is not bad news - is when foreign investments generate domestic incomes in excess of the costs of servicing the investments.
http://keithrankin.co.nz/krnkn_bop0def.html
“See the difference when reforms are introduced which allow people to keep the fruits of their own labours.”
Exactly. Being able to keep the fruits of their labour is a great incentive and a crucial condition for prosperity, especially when you contrast California in the US with the agricultural centres in Brazil where both protect property rights, but one government followed a more progressive approach to land ownership with policies that better ensured fairer access to land.
“If the US *owed* China two trillion dollars, that would be debt.”
A bond IS debt, especially a T bond. The Chinese won’t long be satisfied with holding an “asset” that is rapidly decreasing in value, because of as you say, stupid and profligate spending by the US government and consumers. They’ll be expecting to be able to buy far more valuable assets in the future.
February 24th, 2008 at 10:33 am
“Not really…. I put in some links and while I am pretty careful I might have tripped a filter. It has happened before, will happen again and isn’t a big deal.”
I’m assuming this is a response to my post. Not really…. what?
I wasn’t aware what held my post, and because http://blog.greens.org.nz/index.php/policies/ didn’t clear it up, I was left in the dark. I suspected a filter (there are possible “bad words” in my post), but it could have been moderation, and that would have really annoyed me given the stated policy of censorship on the blog, which all seems to be about removing some posts after the event.
I just googled for more info, and found this (at :
“[frogmaster: we actually have two filters:
* the Akismet spam filter over which we have no control, this often traps posts for no obvious reason - it was this which trapped your last post.
* the wordpress moderation filter which is a list of words that we do control. the list of words is mainly composed of profanities, misspellings of people’s names and few other terms. The intention of the list is certainly not to stop swearing on this blog, we allow the posts as is with swearwords intact. Rather the idea is that all the terms are indicative of bad behaviour, e.g. flaming, which we do not allow. We want to keep the discussion civil and not have fights breaking out, and the only way we can think of identifying abusive or inflammatory posts is to have this list of words that are often found in such posts.
We would certainly like to make the process more transparent and we welcome any suggestions you have.]”
Well here’s my suggestion frogmaster, put this information on your about page so we tadpoles aren’t swimming in murky water.
February 24th, 2008 at 1:07 pm
alexking
Yes… partly responding to you… and rushed to boot. Probably unfair as a result. Long term residents of the swamp know it to be just something that occasionally happens. Even the most benign and innocent buckets of information can wind up on hold because of external links. Most of us posting here have tripped the filters. I know how to get SOMETHING through the filters, but not for certain what triggers some of them. POM dependent code in the heuristics… but the combination is effective.
We don’t do threats or advocation of violence either. That WOULD get a post yanked but the filters won’t necessarily stop it from appearing. That also deserves a mention… but I don’t recollect reading the house-rules since I started here a few years ago.
I’m sorry I was casually dismissive… you ARE new here and its not easy to know what’s wrong when you hit submit and everything just “disappears” into limbo. I had forgotten how that disturbed me the first time and how long it took me to work out what was going on.
Nor have I welcomed you… so another apology and you ARE welcome. I don’t really care if you are a Green or not, or what your politics are. If you bring new information and new ideas or want to learn something about the science or the party… you are welcome.
respectfully
BJ
February 24th, 2008 at 1:16 pm
Pertinent to the sub-thread of debt and exchange….
http://news.goldseek.com/EuroCapital/1203701272.php
February 24th, 2008 at 5:18 pm
kevyn,
- “When I buy my groceries, money changes hands electronicly. As far as the supermarket is concerned it’s all paid for, there is no debt created, nothing to be repayed anytime in the future. As far as me and Visa are concerned it’s aint paid for yet, there is debt accumulated, something to be repayed sometime in the future - with interest.”
Well, quite. But the point here is that you have quite deliberately introduced an unnecessary element of borrowing into your example, and then said “look, I told you so.”
If you punch the cashier in the face in your example, would you then claim that it demonstrates that violence is an inherent part of trade?
If you had paid cash or used your EFTPOS card in your example, there would be no debt. So it is with the trade deficit.
SPC,
- “A surplus on capital account is generally considered to be bad news; it represents an increase in a nation’s liabilities to foreign interests. The exception - when it is not bad news - is when foreign investments generate domestic incomes in excess of the costs of servicing the investments.”
This is complete nonsense. It’s just plain wrong.
Take the US. The world and its wife want to invest in those great US companies. To do that they must sell goods to the US in order to obtain the dollars to buy into the US economy (i.e the rest of the world must run a big trade surplus with the US). Or maybe they they need to earn the dollars to open a factory in the US, like many foreign companies have done. Such inward investment is all part of the capital account surplus and is a sign of US economic virility, vigour and strength. Foreigners are *adding* to the US economy when they do this, at the expense of their own. New assets are being created all the time in the US economy, and people around the world want to buy into that success story.
Most of the countries running a trade surplus are the poor ones and many of them are basket cases. Nobody wants to invest in them, and the currency produced by the inevitable trade surplus is often invested overseas as well (in the US, perhaps).
- “A bond IS debt, especially a T bond.”
Yes, but you were specifically talking about US$2 trillion Chinese currency reserve - which is not debt.
Certainly the US government does issue a large amount of debt in the form of bonds, but that has nothing whatsoever to do with trade and the balance of payments, which happens to be the topic under discussion.
February 24th, 2008 at 5:51 pm
Mouldwarp, I fear you are being deliberately obtuse. Of course we could all express our discontent at prices by punching the checkout operator or the appliance salesperson or the used car dealer or the real estate agent. But almost nobody. But almost everybody resorts to credit to buy cars, houses and appliances and sometimes groceries. Punching out someone is an exception to the rules of civilised trade. Today paying cash has almost become an exception to the rule.
Your concluding sentences show that you are half way to understanding the flaw in your argument. “If you had paid cash or used your EFTPOS card in your example, there would be no debt. So it is with the trade deficit.” If is the most powerful word in that sentence. When I first started earning an income we didn’t have credit cards or easy finance in this country, so I would have paid cash for most purchases. Today we live in a completely different financial world. Anything can be bought on credit and most people eagerly use credit to save waiting rather than waiting and saving money like we did when I was a kid.
That is the reality that your theoretical argument is avoiding.
BJ’s link provides an accurate assessment of the impact of deficits and surpluses on attractiveness to financial investors.
February 24th, 2008 at 5:53 pm
oops, should have said “…estate agent. But almost nobody does. Whereas almost…”
February 24th, 2008 at 7:00 pm
kevyn,
I fear it is you being obtuse.
You deliberately invented a scenario where you borrowed some money on a credit card, then spent the money. And then you invited us to conclude from your contrived example that making a purchase involves taking on debt.
How absurd.
You seem to believe that the very existence of a trade deficit must mean that people are borrowing to fund it (more specifically, you seem to think that we must be borrowing from the countries that are running the trade surpluses; that we are somehow taking on liabilities with them which will have to be paid back “with interest” at a future date.)
Nothing of the sort is implied by a trade deficit.
But rather than argue with you, I’ll invite you instead to state precisely who is owed money. What form does the debt take? Where is all this foreign debt?
February 24th, 2008 at 9:41 pm
Mouldwrap says “And then you invited us to conclude from your contrived example that making a purchase involves taking on debt.
How absurd.”
Good grief Mouldwrap realized the truth of the situation…all be it briefly and against his best intentions. It is absolutely, with out a doubt, bats##t, pedal to the metal, bonkers. ANd it’s the way it is,
IF SOCIETY HAD NO DEBT THERE WOULD BE NO MONEY.
THe alternative, if the monetary system is going to enable a true realization of a democratic society, is earnt credit distributed to all, e.g. Economic Democracy. That means a National Dividend stipend for starters, recently calculated as $14699.
DSC 08.
February 24th, 2008 at 10:05 pm
- “IF SOCIETY HAD NO DEBT THERE WOULD BE NO MONEY.”
This statement doesn’t make any sense at all.
February 24th, 2008 at 10:08 pm
Cruelty to hobby-horses has taken over, chaps and chapesses. What Will Hutton (remember him?) was saying in a roundabout way was that oldest of Green truisms - there’s no such place as ‘away’.
A lot of the present financial problem is simply that: clevver people thought they had an ‘away’ - the off-balance sheet vehicles etc which hid a lot of the rot. No balance sheet entry, no visibility. A return to conventional accounting (and you may be interested to learn that the FASB are thinking of, at a stroke, abolishing the Qualifying Special Purpose Entities - QSPE’s - which were a prime vehicle for all these shenanigans) and transparency is whats needed, not new ways of transacting the entire world’s trading.
I’d stick to the precautionary principle in this game. Utopian thinking tends, when implemented, to lead rather quickly to Distopia, and the 20th C is an object lesson in this. The old, very biological, very human, very messy ways should be our guide. After all, Gaia has her booms and busts - just ask a spruce budworm, or check out the Mediaeval Warm Period.
The main human issue in the financial world right now is a massive loss of trust. And trust’s the one thing you cannot manufacture, legislate for, or make happen by fiat. It has to grow organically, bottom-up, in its own, new natural way. The wisdom of crowds, even though crowds get episodes of mass delusion, is still preferable to the pure vision of the unelected few.
In governments as well as in markets.
February 25th, 2008 at 12:29 am
Mouldwarp,
To accept your invitation with any precision would require a commitment on my part to produce a PhD thesis. I can’t make that commitment. Best I can offer is to substitute “in general terms” for “precisely”.
Who is owed money? Generally, foreign banks and financiers.
What form does the debt take? From the correlation between the national debt and aggregate capital value of dwellings over the last 60 years it is mostly in the form of mortgages.
Where is all this foreign debt? In other countries. Due to the complex nature of international finance I can’t be much more precise than that except to say that a significant proportion of OPEC revenues are not accounted in their national accounts indicating that the funds have been kept circulating in the international finance systems.
However there is one thing can I can say with absolute precision - you don’t know what current account means. Compare what you said to Samian with what the Reserve Bank says.
“When you talk of the balance of payments deficit, you are presumably referring to the current account deficit - the trade deficit?”
http://www.rbnz.govt.nz/keygraphs/Fig6.html
When there is a conflict between the real world and economic theory economists have a tendency to dismiss the real world because it is inconsistent with the “laws” of economics. In much the same way that managers tend have a tendency to dismiss the real world when it is inconsistent with management theory.
We systems analysts can’t afford to make those sorts of mistakes. If the system isn’t working in the real world it is amost always because the system was based on a theory of human behaviour that is false. The solution is always to remove the falsehood from the theory and redesign the system accordingly. If you think you can change human behaviour to fit the system you will just end up banging yourhead against a brick wall.
February 25th, 2008 at 12:38 am
Waymad, That’s the wonderful thing about hobby-horses. No matter how often you flog them to death they’re always ready to be trotted out again tomorrow.
February 25th, 2008 at 1:09 am
Mouldwarp. You were very close to being correct with your statement “And it is worth saying that no debt is created or implied by the trade deficit.” Debt certainly isn’t implied by the trade deficit. We could fund the deficit from savings. But if we don’t have enough savings then the only option is to go into debt. So debt can definitely be created by a trade deficit. While debt creation isn’t implicit in a trade deficit it will be explicit in the numbers when it does happen.
February 25th, 2008 at 1:11 am
See also
http://www.parliament.nz/NR/rdonlyres/EC87081D-F0F2-4A20-8320-1331DD42 46BB/462/994MerchTrade1.pdf
An oldie but a goodie.
February 25th, 2008 at 4:26 am
- “IF SOCIETY HAD NO DEBT THERE WOULD BE NO MONEY.�
This statement doesn’t make any sense at all.
C’mon …. every conservative worth his/her salt knows that fractional reserve banking and the central banks have “created” most of the money on the planet today out of thin air and imagination.
http://en.wikipedia.org/wiki/Fractional_reserve_banking
http://www.lewrockwell.com/rothbard/frb.html
http://www.financialsense.com/fsu/editorials/gnazzo/2005/1129.html
… leading to this absolutely wonderful run-on sentence
Apparently, things are looking grim these days as the debt crisis that was initially contained to subprime mortgages, and then contained to investors in assets collateralized by subprime mortgages, and then to all residential-backed mortgage securities, and then to structured investment vehicles filled with collateralized debt obligations, and then to the money center banks that sponsored these structured investment vehicles, and then to short-term enhanced money market funds, and then to the bond insurers that may have underestimated the risk of the bonds they were insuring, and then to short-term auction rate securities, and then to corporations, institutions, schools and municipalities that may have assets in short-term auction rate securities that no one wants to buy or sell, and then to the corporate bond market, and then to the municipal bond market, spreads to Main Street.
…which belongs to Kevin DePew and I wish I’d thought of it
http://www.minyanville.com/articles/index/a/16013
I can also use this opportunity perhaps to re-introduce a guy who you might find a kindred spirit of sorts… ( I do ) and at least he writes an amusing blue streak…
http://www.dailyreckoning.com/Writers/MogamboGuru.html
————————–
The point to this is that unlike the situation in the 30’s … actually any time before the US $ was decoupled from gold… the vast majority of the liquidity of the financial markets is based on debt. It is based on imagination. It is based on trust.
This is the great and unimaginably short-sighted sin of the “smartest guys in the room”. They burned the folks who trusted them. The “credit crisis” is all about the LOSS of trust, and the subsequent loss of value that the money created by it must now suffer is really starting to bite the USA in the shorts.
I hope that you find some of this amusing at least.
respectfully
BJ
February 25th, 2008 at 10:52 am
BJChip - You are getting moderated automatically because of the number of links in your posts. Perhaps spread them out a bit between comments, as i am loathe to fiddle with the spam filter and sometimes miss your comments in moderation…
February 25th, 2008 at 11:42 am
Frog
My apologies for tripping them… but don’t sweat the filters because of me. I am a 3 sigma outlier almost no matter what I do and I am used to being “different”. Given the hours I often post… if I tell people they’ll have to wait, they have to wait, and so do I.
I actually suspect that the “opaque” filter you mentioned earlier uses a heuristic that includes the timing of a post. Seems to me that I have had posts with multiple links sail right through in the past…
In any event, it does not trouble me at all.
respectfully
BJ
February 25th, 2008 at 12:01 pm
Waymad- I’d be tempted to say rather than utopian ideals leading to distopian practice, that utopia is a decisions with downsides that you like or don’t mind, and distopia is a decision with upsides that you don’t like or don’t care for
To summarise what BJ was saying- “paper” and “electronic” money practically necessitates debt. Thus, to eliminate debt, we’d have to eliminate or radically change our conception of money.
February 25th, 2008 at 9:26 pm
kevyn,
The point I have been trying to explain is that a current account deficit of itself does not represent debt or future liabilities or an accumulating amount that must be paid back (with interest) at a point in the future. This is because of the matching capital account surplus which, if anything, is the *reason* for the current account deficit, rather than being caused *by* it.
I thought the US example I gave was quite clear enough. You should be able to see that foreigners, wishing as they do to invest in the US, must use money from what will necessarily be trade surpluses to do this. Hence the US runs a significant current account deficit and a matching capital surplus (less foreign dollar reserves). Lucky US.
Where is the debt which you imagine to be accumulating as a result of the US trade deficit?
The answer, of course, is “nowhere.” The situation is the predictable result of US being a great place to invest.
I asked you, it that’s not the case, to identify who all that money is owed to. Who do kiwis have to pay back if it were true that the trade deficit represent debt.
And your answer? Domestic mortgages. I know what you’re thinking, but you are confusing two issues. Debt can exist without a current account deficit, and a current account deficit can exist without debt. So your answer does not refute the point that the trade deficit is not debt.
If you really want to stop NZ running a trade deficit you’ll have to stop all foreigners from investing here. Is that the way to prosperity?
As for the NZ bank piece you linked to, it is at best badly worded and at worst incorrect.
The key sentence is “the current account measures what a country saves minus what it spends or invests.” That’s true, but where it goes wrong is where it says “the current account deficit has reflected the amounts of other countries’ savings that New Zealand has had to borrow, in order to finance spending.”
It’s wrong because it implies that there is a fixed amount of investment that will take place and for which funding must be found, either domestically or from abroad. However, the reality is very different: The reality is that the foreign money is often *new* investment money driving *extra* investment. In other words, as the level of the capital account surplus various, so does the amount of investment activity. The bank’s explanation puts the cart before the horse.
As an example, Toyota invests hundreds of millions of dollars building factories in the US (so increasing the US current account deficit). Now, according to the bank piece, that expenditure was part of a fixed amount of economic investment that always going to happen one way or another, it’s just a question of where to get the money from. Of course the truth is completely different: It is specifically Toyota money which created this *new* investment (with dollars they obtained by running a trade surplus with Uncle Sam).
Thus, the amount of economic investment that takes place in NZ varies according to how great the capital account surplus is (i.e. how great the desire of foreigners to invest here is). There is not, as the bank piece implies, a fixed amount of investment which has to be paid for somehow or other. It’s not like, if foreigners stop investnig here, we’ll suddenly have to start funding Toyota factories ourselves; they just won’t get built.
Of course, foreigners can take the dollars they earn from running a trade surplus and *buy* US debt (or NZ debt), but that’s a different matter.
February 25th, 2008 at 11:06 pm
The US… is a great place to invest }}8-o !!!???
I am trying not to awaken the rest of the family with the great gasps of astonishment as I attempt to control my reaction to this assessment of what is going on there.
Every American I know is trying desperately to get their money in some OTHER form than US $, trying to get their investments into some global or foreign corporations and sh!tting bricks about both the near and long-term future. I am serious.
The home foreclosures last month in California outnumbered the sales. The M3 is running at about 14%… inflation is at LEAST 7% (the hedonically adjusted value of roadkill won’t ever turn it into a steak) and the Comptroller of the GAO just quit
http://www.dailypaul.com/node/38279
http://www.shadowstats.com/
There really isn’t much more to say… or there’s a good two decades worth of economic abuse that wants documenting. I don’t really have to do that though. Buffet and Soros and Ron Paul and the Comptroller General of the US can tell you that your assessment is likely to cost you money if you put any money on that bet.
You are getting a wrong answer on this… something is out of whack. I am not going to try to figure out what it is tonight, I am just observing a reality.
You may be partly right about other bits but this particular result you offer indicates that something is not right. The reality is that it is harder and harder for the US to borrow the needed funds from foreigners.
respectfully
BJ
February 26th, 2008 at 3:48 am
Mouldwarp, That clarifies your argument immensely.
Just two main questions though.
“If you really want to stop NZ running a trade deficit you’ll have to stop all foreigners from investing here. Is that the way to prosperity?”
If I understand your argument correctly, the answer would be yes. There are two other ways to stop NZ running a trade deficit. Stop buying foreign goods and start buying foreign companies. Or persuade foreigners to stop buying our companies and start buying our goods. It sounds to me like an equilibrium of flows, correct?
However your last comment suggests to me that there are six flows not four. Goods/services, capital and debt. Inbound and outbound.
“Of course, foreigners can take the dollars they earn from running a trade surplus and *buy* US debt (or NZ debt), but that’s a different matter.”
Why is it a different matter? If the capital account surplus matches the current account deficit then surely there is either no debt or it is masquerading as foreign investment? AFIC the only difference between lending money to a business and buying shares in that business is the method and certainty of making a profit.
February 26th, 2008 at 3:50 am
Sorry, AFIK not AFIC
February 26th, 2008 at 11:24 am
Ari - my main worry about a good deal of the discussion which I have used the ‘Utopian’ shorthand for (and your own comment about ‘taxing the stuffing out of petrol and getting us all on public transport’ is an example) is that it so thoroughly ignores human nature.
There is a great deal of ’stickiness’ about what people do, and when they ‘unstick’, there is an extended period of more-or-less chaos: the old model is broken/moribund/untenable, but there is no absolutely clear new one. Think of the end of any long-running dictatorship.
The new model comes from an emergent process, which is precisely why it cannot be planned in any fine detail. And there are hitherto unknown but powerful actors who may surface: criminals, opportunists, gangs, militias, factions of army or police - see Pakistan for a current example, especially when wholesale changes are being made.
So this pure, rational viewpoint which pervades so much of the discussion is, to my mind, little better than a collective delusion. Shakespeare (who lived through the tail end of the Reformation and was a Catholic in a vehemently Protestant reign) captured the messiness of humanity in his plays - a prime reason they are still so applicable everywhere.
If Green policy is to be taken seriously, it has to climb off the Pure Peaks of reason, and enage with the wielders of power, the messiness of human society, and start from the place where we stand now.