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.

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.

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

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.

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.

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

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