debt deflation

38 results back to index


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Observing that phenomenon firsthand, Irving Fisher explained it in a famous 21-page article published in Econometrica in October 1933. The article was titled “The Debt-Deflation Theory of Great Depressions.” The crisis the world faces today is very much like the one that crushed the global economy in 1930. Both were caused by extraordinarily large fiat-money-denominated credit bubbles. Fisher’s article clearly describes the debt-deflation dynamics that now threaten to drive the global economy into a New Great Depression. This important article will therefore be considered at some length because there is no clearer explanation of the manner in which our economy would collapse should government intervention cease. Fisher’s Theory of Debt-Deflation Fisher believed that overindebtedness and deflation were the two dominant factors in the great booms and depressions.

Alternatively, a political swing toward protectionism, resulting in high trade tariffs, could also cause high rates of inflation. There should be no doubt that the natural tendency for the economy—following a 40-year credit boom—is to collapse into a debt-deflation depression. Policy makers understand that. They have read Fisher’s article. That is why they are determined to prevent that outcome from recurring. Try as they might, however, it is far from certain that they can prevent it. Moreover, their attempts to reflate the economy could go astray and actually generate very high rates of inflation or even hyperinflation. In that case, the cure could prove to be just as deadly as the disease. Therefore, over the years ahead, the U.S. economy could suffer either severe debt-deflation or severe inflation. Either scenario would inflict enormous damage on the economy and, therefore, on society. However, the impact that deflation would have on asset prices would be very different from the impact that inflation would have.

U.S. home prices have fallen by more than 30 percent on average since the crisis began and they could fall further, even significantly further in the case of a severe debt-deflation scenario. Even then, if well located, rental properties would continue to generate rental income. In a worse-case scenario, rents would fall significantly from current levels. If they do, however, most other prices would also tend to be much lower, leaving the owner relatively just as well off. 5. Financing rental properties with fixed-interest-rate debt adds a further element of portfolio diversification. Borrowing at fixed interest rates provides a hedge against inflation. Should inflation move higher, the rents would adjust upward, but the debt owed would remain the same, which would effectively reduce the burden of the debt. The risk, however, is that in a severe debt-deflation, rents would fall so much that the rental income would be insufficient to service the mortgage.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Chiefly, the long-run dynamic implications of credit creation were ignored, such as the self-reinforcing nature of asset price bubbles, the long run implications of increasing debt, the speculative behaviour of individuals and businesses, and the potential for recessions, depressions, financial crises and debt deflations. This section corrects that omission by outlining Hyman Minsky’s Financial Instability Hypothesis. Minsky’s Financial Instability Hypothesis Hyman Minsky developed the ‘financial instability hypothesis’ as an explanation of how financial crises are endogenously created by a modern capitalist economy. Minsky’s fundamental insight was that periods of stability led to greater risk taking and debt – that is, that stability was itself destabilising. Furthermore this instability tended to be upwards – capitalism tended towards booms. Over time these boom and bust cycles and the response of the authorities to them lead to changes in the vulnerability of the economy to financial crises, which, if they occur, can lead to depressions and debt deflations. Minsky’s analysis begins in a growing economy that has just emerged from a prolonged recession.

Essentially, banks will favour lending to firms with market power, as their ability to constrain downward price movements during recessions and depressions decreases the risk of them defaulting on a loan. Due to the negative effect of debt deflations on small firms and banks favouritism in lending to firms with market power, once the economy recovers prices are likely to increase, as the remaining large forms exercise their market power in order to increase prices. With government intervention: Alternatively, the government may choose to intervene and attempt to increase cash flows to prevent the debt deflation and associated depression. The most visible interventions in the most recent crisis were the bank bailouts, which were mainly designed to ensure the continual functioning of the financial markets and prevent the spread of panic.

In effect profits are privatised and losses are socialised.9 Consequently, while the government may offset the worst of a financial crisis, its actions may have unintended consequences, namely increasing inflation and making a future crisis more likely: “the economic relations that make a debt deflation and a long-lasting deep depression like that of the 1930s unlikely in a Big Government economy can lead to chronic and, at times, accelerating inflation. In effect, inflation may be the price we pay for depression proofing our economy.” (Minsky, 1986, p. 165) The Financial Instability Hypothesis To sum up, the essence of the Financial Instability Hypothesis is that booms and busts, asset price bubbles, financial crises, depressions, and even debt deflations all occur in the normal functioning of a capitalist economy. What is more, periods of relative stability increase the likelihood of instability and crisis by increasing returns and thus the desirability of leverage.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, open economy, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave

He devoted slightly more space to Irving Fisher and his debt-deflation theory, but what he presented was likewise a parody of Fisher’s views, rather than a serious consideration of them: The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed. Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors).

The crisis of the late 1980s thus occurred in a milieu of low inflation, raising the specter of a debt deflation. (Keen 1995: 611–14) I added the following qualification about the capacity for government action to attenuate the severity of a debt deflation – while not addressing its underlying causes – to my précis of Minsky in the first edition of Debunking Economics: If a crisis does occur after the Internet Bubble finally bursts, then it could occur in a milieu of low inflation (unless oil price pressures lead to an inflationary spiral). Firms are likely to react to this crisis by dropping their margins in an attempt to move stock, or to hang on to market share at the expense of their competitors. This behavior could well turn low inflation into deflation. The possibility therefore exists that America could once again be afflicted with a debt deflation – though its severity could be attenuated by the inevitable increase in government spending that such a crisis would trigger.

However, this accidental success may not last long if the pressures which have been clearly growing in the financial side of the economy finally erupt (Keen 2001a: 213). Possibility of debt deflation in the USA If a crisis does occur after the Internet Bubble finally bursts, then it could occur in a milieu of low inflation (unless oil price pressures lead to an inflationary spiral). Firms are likely to react to this crisis by dropping their margins in an attempt to move stock, or to hang on to market share at the expense of their competitors. This behavior could well turn low inflation into deflation. The possibility therefore exists that America could once again be afflicted with a debt deflation – though its severity could be attenuated by the inevitable increase in government spending that such a crisis would trigger. America could well join Japan on the list of the global economy’s ‘walking wounded’ – mired in a debt-induced recession, with static or falling prices and a seemingly intractable burden of private debt (ibid.: 254).


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional

See mortgage lenders; savers credit-rating agencies, 103–4 currency in circulation, 154–57 Daley, Suzanne, 119–21 Davidson, Adam, 131–32, 200n21 Davis, Steven, 70 debt, 12–13, 17–30, 39–45, 166; animal spirits view of, 80–81, 196n8; as anti-insurance, 29–30; bubbles and, 110–16, 149, 169–70; equity-like financing of, 168–70, 180–87, 206n13; forgiveness programs for, 60, 135–51, 205n19; government subsidy of, 181–82; in the levered-losses framework, 50–52, 70–71, 134, 170; marginal propensity to consume levels and, 39–44, 194n5; in neglected risks frameworks, 114–15; optimists’ use of, 111–13; risk-sharing principle of, 168–87; risks of home ownership and, 2, 12–13, 17–30, 39, 168–69; spending declines and, 38–41; for student loans, 167–69, 182–83, 206n9; wealth inequality and, 18–21, 23–25, 71. See also household debt debt-deflation cycle, 55, 152–53, 162 “Debt Deflation: Theory and Evidence” (King), 7 debt financing system, 21, 50, 111–13, 180–85 debtors. See borrowers default, 150; probabilities of, 100–101; rates of, 101–5, 198n18 deflation, 55, 152–53, 162 “Deleveraging Myth, The” (Surowiecki), 38–39, 193n4 Del Ray, Elena, 206n9 demand-driven economic activity, 54 DeMarco, Edward, 140–42 Demyanyk, Yuliya, 104 Depression, the, 70, 197n12; bank failures of, 127; central bank policy of, 155–57; debt-deflation cycle of, 55, 152–53, 162; debt forgiveness programs of, 144–45; household debt prior to, 4–5, 44; household spending and, 5–6; personal savings rate prior to, 5 Detroit’s west side, 75–76, 79, 104–5, 196n1 distribution of housing-based losses, 150–51.

The basic argument put forward in these studies is simple: If you had known how much household debt had increased in a country prior to the Great Recession, you would have been able to predict exactly which countries would have the most severe decline in spending during the Great Recession. But is the relation between household-debt growth and recession severity unique to the Great Recession? In 1994, long before the Great Recession, Mervyn King, the recent governor of the Bank of England, gave a presidential address to the European Economic Association titled “Debt Deflation: Theory and Evidence.” In the very first line of the abstract, he argued: “In the early 1990s the most severe recessions occurred in those countries which had experienced the largest increase in private debt burdens.”16 In the address, he documented the relation between the growth in household debt in a given country from 1984 to 1988 and the country’s decline in economic growth from 1989 to 1992.

However, a wage cut crushes indebted households who have debt burdens fixed in nominal terms. If an indebted household faces a wage cut while their mortgage payment remains the same, they are likely to cut spending even further. This leads to a vicious cycle in which indebted households cut spending, which leads firms to reduce wages, which leads to higher debt burdens for households, which leads them to cut back even further. This was famously dubbed the “debt-deflation” cycle by Irving Fisher in the aftermath of the Great Depression.9 There are several other important frictions that prevent the economy from adjusting to a severe spending shock. For example, borrowers tend to buy different types of products than savers. If borrowers start buying less, the economy would need to ramp down production of goods that borrowers like and ramp up production of goods that savers like.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

., 83, 198, 232–33, 237 Cowen, Brian, 88 credit booms, 65 credit crunches: of 2008, 41, 110, 113, 117 Great Depression and, 110 credit default swaps, 54, 55 credit expansion, 154 currency, manipulation of, 221 currency, national: devaluation of, 169 disadvantages of, 168–69, 170–71 flexibility of, 169–73, 179 optimum currency area and, 171–72 see also euro Dakotas, high employment in, 37 debt, 4, 34, 131 deregulation and, 50 high levels of, 34, 45, 46, 49–50, 51 self-reinforcing downward spiral in, 46, 48, 49–50 usefulness of, 43 see also deficits; government debt; household debt; private debt “Debt-Deflation Theory of Great Depressions, The” (Fisher), 45 debt relief, 147 defense industry, 236 defense spending, 35, 38–39, 148, 234–35, 235, 236 deficits, 130–49, 151, 202, 238 Alesina/Ardagna study of, 196–99 depressions and, 135–36, 137 exaggerated fear of, 131–32, 212 job creation vs., 131, 143, 149, 206–7, 238 monetary policy and, 135 see also debt deflation, 152, 188 debt and, 45, 49, 163 De Grauwe, Paul, 182–83 deleveraging, 41, 147 paradox of, 45–46, 52 demand, 24–34 in babysitting co-op example, 29–30 inadequate levels of, 25, 29–30, 34, 38, 47, 93, 101–2, 118, 136, 148 spending and, 24–26, 29, 47, 118 unemployment and, 33, 47 see also supply and demand Democracy Corps, 8 Democrats, Democratic Party, 2012 election and, 226, 227–28 Denmark, 184 EEC joined by, 167 depression of 2008–, ix–xii, 209–11 business investment and, 16, 33 debt levels and, 4, 34, 47 democratic values at risk in, 19 economists’ role in, 100–101, 108 education and, 16 in Europe, see Europe, debt crisis in housing sector and, 33, 47 income inequality and, 85, 89–90 inflation rate in, 151–52, 156–57, 159–61, 189, 227 infrastructure investment and, 16–17 lack of demand in, 47 liquidity trap in, 32–34, 38, 51, 136, 155, 163 long-term effects of, 15–17 manufacturing capacity loss in, 16 as morality play, 23, 207, 219 private sector spending and, 33, 47, 211–12 unemployment in, x, 5–12, 24, 110, 117, 119, 210, 212 see also financial crisis of 2008–09; recovery, from depression of 2008– depressions, 27 disproportion between cause and effect in, 22–23, 30–31 government spending and, 135–36, 137, 231 Keynes’s definition of, x Schumpeter on, 204–5 see also Great Depression; recessions deregulation, financial, 54, 56, 67, 85, 114 under Carter, 61 under Clinton, 62 income inequality and, 72–75, 74, 81, 82, 89 under Reagan, 50, 60–61, 62, 67–68 rightward political shift and, 83 supposed benefits of, 69–70, 72–73, 86 derivatives, 98 see also specific financial instruments devaluation, 169, 180–81 disinflation, 159 dot-com bubble, 14, 198 Draghi, Mario, 186 earned-income tax credit, 120 econometrics, 233 economic output, see gross domestic product Economics (Samuelson), 93 economics, economists: academic sociology and, 92, 96, 103 Austrian school of, 151 complacency of, 55 disproportion between cause and effect in, 22–23, 30–31 ignorance of, 106–8 influence of financial elite on, 96 Keynesian, see Keynesian economics laissez-faire, 94, 101 lessons of Great Depression ignored by, xi, 92, 108 liquidationist school of, 204–5 monetarist, 101 as morality play, 23, 207, 219 renewed appreciation of past thinking in, 42 research in, see research, economic Ricardian, 205–6 see also macroeconomics “Economics of Happiness, The” (Bernanke), 5 economy, U.S.: effect of austerity programs on, 51, 213 election outcomes and, 225–26 postwar boom in, 50, 70, 149 size of, 121, 122 supposed structural defects in, 35–36 see also global economy education: austerity policies and, 143, 213–14 depression of 2008– and, 16 income inequality and, 75–76, 89 inequality in, 84 teachers’ salaries in, 72, 76, 148 efficient-markets hypothesis, 97–99, 100, 101, 103–4 Eggertsson, Gauti, 52 Eichengreen, Barry, 236 elections, U.S.: economic growth and, 225–26 of 2012, 226 emergency aid, 119–20, 120, 144, 216 environmental regulation, 221 Essays in Positive Economics (Friedman), 170 euro, 166 benefits of, 168–69, 170–71 creation of, 174 economic flexibility constrained by, 18, 169–73, 179, 184 fixing problems of, 184–87 investor confidence and, 174 liquidity and, 182–84, 185 trade imbalances and, 175, 175 as vulnerable to panics, 182–84, 186 wages and, 174–75 Europe: capital flow in, 169, 174, 180 common currency of, see euro creditor nations of, 46 debtor nations of, 4, 45, 46, 139 democracy and unity in, 184–85 fiscal integration lacking in, 171, 172–73, 176, 179 GDP in, 17 health care in, 18 inflation and, 185, 186 labor mobility lacking in, 171–72, 173, 179 1930s arms race in, 236 social safety nets in, 18 unemployment in, 4, 17, 18, 176, 229, 236 Europe, debt crisis in, x, 4, 40, 45, 46, 138, 140–41, 166–87 austerity programs in, 46, 144, 185, 186, 188, 190 budget deficits and, 177 fiscal irresponsibility as supposed cause of (Big Delusion), 177–79, 187 housing bubbles and, 65, 169, 172, 174, 176 interest rates in, 174, 176, 182–84, 190 liquidity fears and, 182–84 recovery from, 184–87 unequal impact of, 17–18 wages in, 164–65, 169–70, 174–75 European Central Bank, 46, 183 Big Delusion and, 179 inflation and, 161, 180 interest rates and, 190, 202–3 monetary policy of, 180, 185, 186 European Coal and Steel Community, 167 European Economic Community (EEC), 167–68 European Union, 172 exchange rates, fixed vs. flexible, 169–73 executive compensation, 78–79 “outrage constraint” on, 81–82, 83 expansionary austerity, 144, 196–99 expenditure cascades, 84 Fama, Eugene, 69–70, 73, 97, 100, 106 Fannie Mae, 64, 65–66, 100, 172, 220–21 Farrell, Henry, 100, 192 Federal Deposit Insurance Corporation (FDIC), 59, 172 Federal Housing Finance Agency, 221 Federal Reserve, 42, 103 aggressive action needed from, 216–19 creation of, 59 foreign exchange intervention and, 217 inflation and, 161, 217, 219, 227 interest rates and, 33–34, 93, 105, 117, 134, 135, 143, 151, 189–90, 193, 215, 216–17 as lender of last resort, 59 LTCM crisis and, 69 money supply controlled by, 31, 32, 33, 105, 151, 153, 155, 157, 183 recessions and, 105 recovery and, 216–19 in 2008 financial crisis, 104, 106, 116 unconventional asset purchases by, 217 Federal Reserve Bank of Boston, 47–48 Feinberg, Larry, 72 Ferguson, Niall, 135–36, 139, 160 Fianna Fáil, 88 filibusters, 123 financial crisis of 2008–09, ix, x, 40, 41, 69, 72, 99, 104, 111–16 Bernanke on, 3–4 Big Lie of, 64–66, 100, 177 capital ratios and, 59 credit crunch in, 41, 110, 113, 117 deleveraging in, 147 Federal Reserve and, 104, 106 income inequality and, 82, 83 leverage in, 44–46, 63 panics in, 4, 63, 111, 155 real GDP in, 13 see also depression of 2008–; Europe, debt crisis in financial elite: political influence of, 63, 77–78, 85–90 Republican ideology and, 88–89 top 0.01 percent in, 75, 76 top 0.1 percent in, 75, 76, 77, 96 top 1 percent in, 74–75, 74, 76–77, 96 see also income inequality financial industry, see banks, banking industry financial instability hypothesis, 43–44 Financial Times, 95, 100, 203–4 Finland, 184 fiscal integration, 171, 172–73, 176 Fisher, Irving, 22, 42, 44–46, 48, 49, 52, 163 flexibility: currency and, 18, 169–73 paradox of, 52–53 Flip This House (TV show), 112 Florida, 111 food stamps, 120, 144 Ford, John, 56 foreclosures, 45, 127–28 foreign exchange markets, 217 foreign trade, 221 Fox News, 134 Frank, Robert, 84 Freddie Mac, 64, 65–66, 100, 172, 220–21 free trade, 167 Friedman, Milton, 96, 101, 181, 205 on causes of Great Depression, 105–6 Gabriel, Peter, 20 Gagnon, Joseph, 219, 221 Gardiner, Chance (char.), 3 Garn–St.

What may be less obvious is that when many people and businesses are highly leveraged, the economy as a whole becomes vulnerable when things go wrong. For high levels of debt leave the economy vulnerable to a sort of death spiral in which the very efforts of debtors to “deleverage,” to reduce their debt, create an environment that makes their debt problems even worse. The great American economist Irving Fisher laid out the story in a classic 1933 article titled “The Debt-Deflation Theory of Great Depressions”—an article that, like the Keynes essay with which I opened chapter 2, reads, stylistic archaisms aside, as if it had been written just the other day. Imagine, said Fisher, that an economic downturn creates a situation in which many debtors find themselves forced to take quick action to reduce their debt. They can “liquidate,” that is, try to sell whatever assets they have, and/or they can slash spending and use their income to pay down their debts.

He argued that this was the real story behind the Great Depression—that the U.S. economy came into a recession with an unprecedented level of debt that made it vulnerable to a self-reinforcing downward spiral. He was almost surely right. And as I’ve already said, his article reads as if had been written yesterday; that is, a similar if less extreme story is the main explanation of the depression we’re in right now. The Minsky Moment Let me try to match Fisher’s pithy slogan about debt deflation with a similarly imprecise, but I hope evocative, slogan about the current state of the world economy: right now, debtors can’t spend, and creditors won’t spend. You can see this dynamic very clearly if you look at European governments. Europe’s debtor nations, the countries like Greece and Spain that borrowed a lot of money during the good years before the crisis (mostly to finance private spending, not government spending, but leave that aside for now), are all facing fiscal crises: they either can’t borrow money at all, or can do so only at extremely high interest rates.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

So the growth of the stock of money in the hands of the public declines when the growth of bank lending falls. The fourth reason why post-crisis economies are weak is that inflation may become too low or, worse, deflation may set in. Deflation, or falling prices, creates the danger of what the great American economist Irving Fisher called ‘debt deflation’ in the 1930s – rising real level of debt and debt service within a collapsing economy.61 Such debt deflation is already, alas, in progress in parts of the Eurozone. Yet deflation is not only dangerous because of what it does to the real burden of debt; it is also dangerous if it pushes the real rate of interest too high. Equilibrium real interest rates may become strongly negative in a highly leveraged, crisis-hit economy. But with deflation, the real interest rate will be positive even if the nominal rate that the central bank controls is brought down as low as zero.

A clash must also arise, within this low-inflation Eurozone, between improving competitiveness and managing the debt overhang. This is because a rapid restoration in competitiveness of countries like Italy or Spain requires falling wages and prices. But falling wages and prices also raise the real burden of debt. The relatively high interest rates on both private and public debt that characterize these economies make the problem of managing debt even harder. This is ‘debt deflation’ – a condition in which debtors are forced to save an ever higher share of their incomes in order to pay down debt, because the latter’s real value is rising over time. The more countries struggle to restore competitiveness and the weaker their growth, the worse the debt trap into which they will fall. As the IMF’s 2013 report on the Eurozone underlines, ‘Persistent financial market fragmentation, weak bank balance sheets, low demand, and creeping uncertainty, as well as structural weaknesses, all reinforce each other and contribute to the contraction of real activity.’34 Not least, a financial crisis starves businesses, on which growth depends, of the credit they need to finance investment.

This used to happen in the nineteenth century. It has happened, more recently, in small open economies, such as Hong Kong after the Asian financial crisis and the Baltic states after the crises that began in in 2007. This is, in effect, the old gold-standard mechanism. If, however, the authorities let the peg go, the adjustment would be accompanied by a depreciation of the nominal exchange rate. That would obviate debt deflation and the need to cut nominal wages and prices. It is likely, though not certain, that the result would be a swifter and less painful adjustment, without a tidal wave of defaults. All this would have been a big economic mess, but it would not have generated a continent-wide maelstrom. Under such an adjustable-peg exchange-rate system, economic adjustment would have occurred and life would have gone on.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

They should have printed more money and been more aggressive, yet they screwed up by taking baby steps because they were terrified of gold at $1,000, of the dollar collapsing, and of the Chinese pulling the money away. Yet they are creatures of habit, they don’t like being unorthodox. When the Germans and the Chinese said this is wrong, they all listened. Wouldn’t it be ironic if we find out later that there is only one chance against debt deflation and they all missed it? We are spending all of our time looking for inflation because the Fed will be slow in raising interest rates while the roof is caving in. The private sector’s desire to unburden itself of debt is so great that debt deflation seems much more likely. And if it rolls over with everyone loaded up on risk again, playing commodities and inflation expectations, bonds could go parabolic. The bull market in government bonds is one of the greatest bull markets of all time, and bull markets of that magnitude do not end with a whimper.

Debt-fueled overconsumption has historically resulted in a depression, a deep and prolonged recession, or in the case of Japan, a very long stagnation. The common argument, put forward especially by monetarists, is that these episodes occurred and persisted because monetary policy was not eased fast enough or far enough. The Great Macro Experiment, therefore, is an attempt to use aggressive reflationary policies to overcome the effects of debt deflation after the equity bubble burst. We still seem to be in the midst of the Great Macro Experiment, although it is the next phase. It is a hyper-experiment now. The Experiment started with Greenspan, who preemptively and aggressively cut interest rates to head off the looming recession/depression in 2001-2003. It was a real-time experiment; it had never been done before. From 2003 to 2007, it appeared to have worked as easy money helped fuel another leg to the property and asset boom.

If something has gone up 43 times, it is difficult to ignore. We have institutionalized a behavior that defines risk taking as being a function of market deviations rather than the likelihood of losing clients’ money. Things may have changed, and the next 30 years will prove more challenging, especially when viewed through the prism of the last three decades. Today we are faced with the prospect of debt deflation, which we last experienced globally after the crash of 1929. My argument is that it took 30 to 40 years for society to correct for the previous financial excesses. For instance, did you know that in the absence of dividends, there was no real appreciation in the Dow Jones from 1906 to 1974 (see Figure 13.3)? This is what happens when society develops revulsion for debt and seeks to live in a nonleveraged world—asset prices take the brunt of it and it takes a long time to work off.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, capital asset pricing model, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, moral hazard, mortgage tax deduction, naked short selling, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

Part 2 begins by discussing what our monetary system looked like prior to the last hundred years, when it was based upon silver and gold. Then moving into the modern era, accepted monetary theory is critically examined. Its applicability to understanding financial crises is weighed. The current meltdown has challenged its basic underlying assumptions, and it was predicted by not a single academic close to the Fed. Either debt deflation or inflation might occur, depending upon how monetary authorities interpret these theories and what this implies for their policy actions. While the political will to print could build in momentum, it may be difficult to ignore the downside pull of having established excess debt relative to our national income that is on the order of $20 trillion to $25 trillion. The idea that the Fed would lag behind pressure building that would be deflationary to asset prices is developed in Part 2, for providing credit has T 33 34 ENDLESS MONEY not restored equity and direct monetization has been small relative to funds advanced during multiple decades of credit inflation.

Only at that moment was there a sharp jump in the private sector’s demand for credit—a break from its intense preference for less-risky uses for savings and the extinguishment of debt. Whatever the storyline, the experience of the United States is that the Great Depression earned its name not only from the depth to which the economy fell by 1932, but also because of its length. While the observations of Higgs are trenchant, if one instead views the period through the simpler explanation of Fisher’s debt deflation theory, the recovery from the Great Depression can be explained by economic actors having repaid debt or had debt extinguished through bankruptcy by 1942, making them feel freer to make use of low interest rates and exploit profitable business expansion. In 1942 total debt including federal, state, and household had fallen to less than 160 percent of GDP from a peak of 300 percent in 1932. That low level had not been seen since 1918, well before the roaring twenties.

Between Roosevelt’s coming to power in 1933 and the recession of 1937-1938, the economy grew strongly.”19 However, many think the downturn of 1938 was the direct product of the Fed’s having raised reserve requirements. Economic activity remained depressed through 1941 at the earliest and 1946 at the latest. The Academic Orthodoxy There have been a series of papers dealing with the transmission of the Great Depression, like a disease, through the gold standard. What this orthodoxy does is downplay the true cause as identified by Irving Fisher, debt deflation theory. It is a bit like celebrating the genius of those who strung power lines instead of acknowledging Thomas Edison for inventing the light bulb, Anyos Jedlik the dynamo, or Michael Faraday the alternator. Although the transmission mechanism was also described by Fisher in the 1930s, the first economists to trumpet this new thesis in recent times were Ehsan Choudhri and Levis Kochin in their paper: The Exchange Rate and the International Transmission of Flat-Earth Economics 95 Business Cycle Disturbances.20 In this article, regressions show what Bernanke states in his speech and has echoed in his academic work, that nations remaining on the gold standard were worse off, and those that recovered sooner had abandoned gold earlier.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

U.S. theories of, 137 function, 59 as "fundamental" (Marx), 244 information asymmetry, 172 market share by lending institution, 81 structure, 58-62 subordination to production (Marx), 237 U.S. international position, 61 see also bond markets; debt; money, psychology of credit crunch 0989-92), 158-161 credit gratuitiVioudhon), 302 credit rationing, 172 in Keynes's Treatise, 193-194 crime, business, 252 crises, corporate, financial interests assert power during, 265 crises, financial, 265 financiers' political uses of, 294-297 increasing prominence starting in 1970s, 222 money and, 93-94 Keynes, 202-205 Marx, 232-236 Third World, 110, 294-295 see also bailouts Crotty, James, 229 crowd psychology, 176-177, 185 currency markets, 41^9 crises, economic causes, 44 gold, 46-49 history, 41^4 mechanics and trading volume, 45—46 during trading week, 130-131 underlying values, 44-45 currency swaps, 35 Dale, James Davidson, 104 Davidson, Paul, 242, 243 Debreu, Gerard, 139 debt appropriate underlying assets, 247 as conservatizing force, 66 ideal level, pre-MM, 150 and 1930s depression, 155-158 and political power, 4, 23 reasons to shun, 149 by sector, 58-59 by type (table), 60 see also credit/credit markets; specific sectors debt deflation (Fisher), 157 modern absence of, 234-235 why there was none in early 1990s, 158-161 deficit financing, 297 deflations. See debt deflation (Fisher) Delaney, Kevin, 265 Democratic Party, 87 deposit insurance, 88 Depository Intermediary Deregulation and Monetary Control Act of 1980, 87 depreciation, 140 Depression, 1930s financial mechanisms, 155-158 Friedman and Schwartz on, 200 derivatives, 28-41 custom, 34-37 defined, 28 early, 29 economic logic, 37-41 market-traded standardization and centralization, 32-33 technical details, 29 more complex strategies, 31 motives for, 31 and risk, individual and systemic, 40-41 short selling, 29-30 trading prowess, 32 winners, long-term, 32 development, 322 protectionism and, 300 Dickens, Edwin, 219 DiNapoli, Tom, 180 direct investment vs. portfolio investment, 109 Third World, 110-111 in U.S., dismal returns, 117 disclosure requirements, corporate, 91 discounting, interest rates and, 119-120 distribution Gini index, 115 income CEO vs. worker pay, 239 Manhattan's inequality, 79 polarization in 1920s, 200 wealth, 4, 64-68 dividends, 73, 135 changes in, and excess volatility, 175 payout ratios, and investment, 154 retention ratio, 75 unexpected changes in, 169 yields, 125 dollar, U.S.

Financial crisis, in other words, translated into a decline in demand for housing and durable goods, purchases that typically require both borrowed funds and faith that there will be sufficient income in the future to service the loans. In a classic paper, Irving Fisher (1933) argued that financial involvement made all the difference between routine downturns (not yet called recessions) and big-time collapses like 1873 and 1929. Typically, such a collapse followed upon a credit-powered boom, which left businesses excessively debt-burdened, unable to cope with an economic slowdown. The process, which he labeled a debt deflation, was fairly simple, and makes great intuitive sense, but it was an argument largely forgotten by mainstream economics in the years after World War II. A mild slowdown, caused perhaps by some shock to confidence, leaves debtors unable to meet their obligations out of current cash flows. To satisfy their creditors, they liquidate assets, which depresses the prices of real goods. The general deflation in prices makes their current production unprofitable, since cost structures were predicated on older, higher sales prices, at the same time it increases the real value of their debt burden.

Even the extraordinary fiscal stringency of recent years can be seen in this light, as the U.S. government's own financial capacity was severely strained, and deficit reduction kept the brake on real economic activity from the 1990 budget deal onwards (the mirror image of the intensely stimulative Reagan deficits of the 1980s).^^ When the early 1990s recession officially began in July 1990, it was not unreasonable to expect the first debt deflation in 60 years. Total debts of MARKET MODELS nonfinancial corporations (NFCs) were almost 15 times pretax profits, compared with under 11 times in 1929. Interest payments claimed 39% of pretax profits, compared with 14% in 1929.^^ Here again, Bernanke and colleagues (Bernanke and Campbell 1988; Bernanke, Campbell, and Whited 1990 — BCW) have done illuminating work. BCW discovered that the increase in corporate debt averages was not across-the-board, but was instead concentrated among a small number of firms.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Wave and Pay, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

It was first used by Paul McCulley (of the California-based investment management company, Pimco) to describe the 1998 Russian crisis. “Yesterday’s 50 basis-point Fed funds rate cut was a very positive signal that Fed policy makers grasp that we’re facing a debt-deflation Minsky Moment,” he warned in January 2001 (McCulley 2001a: 4). Three months later, he wrote, “Macroeconomic life after bubbles is not a self-correcting process of renewal, but a self-feeding process of debt deflation—to wit, it’s a Minsky Moment” (McCulley 2001b: 4). 40 This expression was first used in relation to the bailout of Continental Illinois in 1984. 41 Irving Fisher also captured the dynamics of debt deflation in “The Debt-Deflation Theory of Great Depressions” (Fisher 1933). 42 Money manager capitalism refers to an economy dominated by fund managers as opposed to banks. For example, the bank share of all financial assets fell from around 50 percent in the 1950s to around 25 percent by the 1990s.

This speculation is simply what banks rationally do: substituting time deposits for demand deposits, replacing lines of credit with actual credit, varying the efficiency with which reserves are used through interbank transactions in reserves, and selling debt as commercial paper in the open market, further activating short-term cash balances.37 According to Minsky, trouble always starts for Ponzi finance as inflation builds and the authorities try to exorcise it through monetary restraint. Rising interest rates lead to rising debt costs, whereupon “the net worth of previous Ponzi units will quickly evaporate” (Minsky 1992: 8). This situation leads to debt deflation, as units short of cash try to sell out their positions, and asset values rapidly fall. From this point onward, the very financing techniques that had been used to fuel the credit expansion now exaggerate the speed and severity of the contraction. In the later stages of the boom, loan terms would have risen sharply and would increasingly have been financed with short-term borrowings. Those high financing charges would now feed back upon and adversely affect the value of earlier deals as they come up for refinancing (Minsky 1975: 121).

For Minsky, in finance the present always rules: particularly during periods of radical optimism or pessimism, there is a built-in tendency for loans to be made on the assumption that, to use Keynes’s expression, “the existing state of affairs will continue indefinitely” (Keynes 2008: 136). Keynes described this assumption as a tendency to fall back on convention. It is caused not by an underlying belief that nothing ever changes. Rather, it is an expectation that nothing will change in the near future.38 Just as investors feel relatively secure during a boom, during the subsequent debt deflation, the guiding wisdom is that all debts lead to disaster: “Each state nurtures forces that lead to its own destruction” (Minsky 1975: 126). In April 2006, the IMF’s “Global Financial Stability Report” noted a “growing recognition that the dispersion of credit risk by banks to a broader and more diverse group of investors, rather than warehousing such risks on their balance sheets, has helped to make the banking and overall financial system more resilient” (IMF 2006: 51).


pages: 376 words: 109,092

Paper Promises by Philip Coggan

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

Say each crisis involves the default of one-in-ten debtors; at a 100 per cent debt-to-GDP ratio, this puts 10 per cent of output at risk. At 400 per cent of GDP, 40 per cent of output is in danger. The second problem was outlined in the last chapter. A lot of debt is secured against asset values. If debtors have to sell assets to repay loans, the price of those assets will fall, lowering the collateral of all lenders. The value of the debt is fixed; the value of the assets is variable. The danger is a debt-deflation spiral, first described by Irving Fisher in the 1930s,22 in which falling prices depress activity. Consumers never spend today on the grounds that goods will be cheaper tomorrow. Fisher described a process with nine links. Debt liquidation leads to distress selling, followed by a contraction of the deposit currency, a fall in prices, a greater fall in the net worth of businesses, a decline in profits, falls in output and employment, resulting in loss of confidence, hoarding and disruptions to interest rates.

What makes this crisis different in scale is the interaction with the international monetary system. The combination of paper money and the adoption of floating exchange rates, in the developed world at least, facilitated a massive increase in the volume of debt. While individual countries can recover from debt crises, global debt crises are much more dangerous. The problems experienced in the 1930s – the debt/deflation spiral, the paradox of thrift – have returned. Let us start with some simplified sums. Assume that a country has government debt equivalent to 100 per cent of its GDP, or annual output. And let us assume that the average interest rate on its debt is 5 per cent. This means the government pays out 5 per cent of economic output in interest payments. If the economy is growing at just 4 per cent a year, it is going to be impossible to get the debt total down, unless the government runs what is called a primary surplus of revenues over expenditures (a primary surplus excludes interest payments).

Legatum Institute paper, December 2010. 19 Jagadeesh Gokhale, ‘Measuring the Unfunded Obligations of European Countries’, Cato Institute policy report no. 319, January 2009. 20 Stephen Cecchetti, M. S. Mohanty and Fabrizio Zampolli, ‘The Future of Public Debt: Prospects and Implications’, Bank for International Settlements, Working Papers 300. 21 Quoted in Arnaud Mares, ‘Ask Not Whether Governments Will Default, But How’, Morgan Stanley research note, 20 September 2010. 22 Irving Fisher, ‘The Debt-Deflation Theory of Great Depressions’, Econometrica , 1 (4), 1933. 23 Reinhart and Rogoff, in ‘Ask Not Whether Governments Will Default’. 24 For a sweeping critique, see John Irons and Josh Bivens, ‘Government Debt and Economic Growth: Overreaching Claims of Debt “Threshold” Suffer from Theoretical and Empirical Flaws’, Economic Policy Institute briefing paper no. 271, July 2010. 25 Antonio Afonso and Davide Furceri, ‘Government Size, Composition, Volatility and Economic Growth’, School of Economics and Management, Technical University of Lisbon, working paper ISSN 0874-4548, January 2008. 11 .


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

Those price declines then add further economic stress, leading to additional asset sales, more unemployment, and so on in a feedback loop. In deflation, the real value of cash increases, so individuals and businesses hoard cash instead of spending it or investing in new land, plant, and equipment. This entire process of asset sales, hoarding, and price declines is called a liquidity trap, famously described by Irving Fisher in his 1933 work The Debt-Deflation Theory of Great Depressions and by John Maynard Keynes in his most influential work, The General Theory of Employment, Interest and Money. In a liquidity trap, the response to money printing is generally weak, and from a Keynesian perspective, fiscal policy is the preferred medicine. While the response to money printing may be weak, it is not nil. Working against potential deflation has been a massive money-printing operation by the Federal Reserve.

The nominal peak in 1973 was followed in 1974 by one of the worst stock market crashes in U.S. history. Past is not necessarily prelude; still, the combination of extreme leverage, economic weakness, and a looming recession all put the stock market at risk of a historic crash. Any such crash would result in a blow to confidence that no amount of Fed money printing could assuage. It would trigger an extreme version of Fisher’s debt-deflation cycle. In this scenario, deflation would finally gain the upper hand over inflation, and the economic dynamics of the early 1930s would return with a vengeance. Another factor that could contribute to a worst-case result is the hidden leverage on bank balance sheets in the form of derivatives and asset swaps. The concern here relates not to a stock market crash but to a counterparty failure that triggers a liquidity crisis in financial markets and precipitates a panic.

. : See Eerik Lagerspetz, “Money as a Social Contract,” Theory and Decision 17, no. 1 (July 1984), pp. 1–9. The contract theory of money has philosophical and legal roots as old as Aristotle and, in more recent centuries, John Locke and Samuel von Pufendorf. It is presented here in an updated version for the purpose of illuminating the intrinsic rather than extrinsic value of money. the quantity theory of money . . . : Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica (1933), available from the Federal Reserve Bank of St. Louis, http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf; and Milton Friedman, Studies in the Quantity Theory of Money (Chicago: University of Chicago Press, 1967). the state theory of money . . . : Georg Friedrich Knapp, The State Theory of Money (San Diego: Simon, 2003). John Maynard Keynes adopted chartalism . . . : John Maynard Keynes, Treatise on Money, vol. 1, The Pure Theory of Money, and vol. 2, The Applied Theory of Money (London: Macmillan, 1950).


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve

In short, Asia in 2010 looks nothing like most Western markets, which are confronting two very serious problems. The Western World’s Two Distinct Problems The first problem the OECD faces is that from 2000 to 2010 the private sector created a lot of assets (real estate in the United States, Spain, the United Kingdom, Ireland, etc.) against which a considerable amount of debt has been collateralized by commercial banks. As the prices of these assets fall, a Fisher-like “debt deflation” looms. The second problem is that, for structural reasons, a growing number of OECD countries are confronting a very challenging budgetary situation. The credit crunch, bank bailouts, and recession only account for 9 percent of the increase in long-term public debt burdens in major advanced economies. The remaining 91 percent of the long-term fiscal pressure is due to the growth of public spending on pensions, and health and long-term care.

CURRENT ACCOUNT: A country’s trade deficit plus interest payments on what the country borrows from foreigners to finance the trade deficit. CUSTOMS UNION: A free trade area that also establishes a common tariff and other trade policies with nonmember countries. DAVOS: Annual meeting held by the World Economic Forum that gathers politicians, business leaders, economists, and other luminaries to discuss key issues facing the global economy. DEBT DEFLATION: Economic theory originally articulated by Irving Fisher that holds that recessions and depressions are due to the overall level of debt shrinking. DEBT SPIRAL: The phenomenon of a country’s debt load growing rapidly, which leads to even more debt in the form of increased interest payments. The increased interest payments lead to bigger deficits, which in turn lead to an increased national debt load.

See credit default swaps (CDSs) Central Africa, 126 central banks, Asia, 82–83; asset buying by, 81; demand for gold by, 169–170, 174–175; money supply and, 246–248; selling public debt to, 259 Chile, 8, 33, 48, 49, 51 China, xv, xx; Australian exports to, 145–146; climate change and, xxvi, 225; consumption in, 89–90; currency intervention by, 10; economic growth in, 10, 52; economy of, xxiii, 24; equity markets, 83–84, 85; excess of thrift in, 88–89; as financial capital, 245–246; financial sector in, xxvii; fiscal deficit, 257; gold market in, 170–171; gold reserves, xxv, 168–169, 170, 174; household incomes in, 89; influence of, in Africa, 122–123; labor costs in, 86–87, 89–90; monetary policy, 10; savings rate in, 245–246; structural shift in, 84–85 Citigroup, 272 Clean Development Mechanism (CDM), 225 climate change, adaptation to, 227–229; Canada and, xviii, 27–28; future outcomes for, 224–225; international agreements on, 220–223; oil industry and, xxv, 189–191; public policy and, xxvi–xxvii, 219–230; South Africa and, xxii coal, 125 Coates, John, 290 cognitive abilities, 293–294 cognitive biases, 287, 288–289 collateralized debt obligations (CDOs), 275 Colombia, 33, 48, 49 commodity prices, xv, xxii, 50, 52–54, 117, 195 Common Market for Eastern and Southern Africa (COMESA), 122 compensation plans, 277 composite currencies, 161–163 Conference of the Parties to the Convention (COP), 222 confirmatory evidence, 288 conflicts, in Sub-Saharan Africa, 123–124 Congdon, Tim, xxvii Constitutionalist Revolution (1906), 206 consumer debt, 18–19 Consumer Protection Financial Bureau, 267, 269 consumer spending, 8, 18 consumption-based taxes, 261–263 Copenhagen Accord, 222, 225 Cordero, Ernesto, 45 corporate compliance, xxviii–xxix, 271–282 corporate governance, 267, 268 corporate profits, 8 corporate sector: Canada, 20; US, xvi, 4, 8 corporate taxes, 260 cortisol, 290 Costa Rica, 48 Côte D’Ivoire, 127 credit default swaps (CDSs), 275 creditor status, 156 Creel, Santiago, 37, 45 crime, in Mexico, 43 culture of ethics, 276–280 currencies: African, 122; composite, 161–163; domestic, 155; international, 155–156; synthetic, 161–163. See also dollar; reserve currency currency intervention, 9–10 currency speculation, 250–255 Daragahi, Borzou, 209 Davos consensus, 285–286 debt deflation, 80–81 Decalogue, 39–44 Deepwater Horizon oil spill, 41, 185–186 deficit reduction, xvii, 5, 10–11 deflation, xxi, 96–97, 100, 173, 247 Democratic Party, 6, 12–13 Democratic Party of Japan (DPJ), xxi, 102–104, 106, 109–111, 113–114 Democratic Republic of the Congo (DRC), xxii, 126 Demographics: in Canada, 25–26; fiscal imbalances and, 258; in Latin America, xx, 51 Denmark, 113 derivatives, 267, 268 developing countries, climate change and, 225, 226 Dodd, Christopher, 264 Dodd-Frank Wall Street Reform and Consumer Protection Act, xxviii, 264–270 Dollar: Australian, 146; Canadian, 23; devaluation of US, xvii, 7, 25; US, as reserve currency, xxiv, 153–165; weakening of US, and commodity prices, 53 domestic currency, 155 DPJ.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, mortgage debt, new economy, Northern Rock, paper trading, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

But since, at the level of the national economy, society’s overall demand is the sum of private and public expenditure, when a large segment of the business community tries to reduce debt (by cutting expenditure), overall demand declines, sales drop, businesses close their doors, unemployment rises and prices fall. As prices fall, consumers decide to wait for them to fall further before buying costly items. A vicious debt–deflation cycle thus takes hold. Now, since this is a deficit country, the government is more likely than not to be labouring under an already considerable budget deficit (with tax revenue less than expenditure) and a large accumulated public debt. The recession squeezes taxes, boosts the state’s deficit and forces the government to pay higher interest rates to service its increasing debts. Politicians react instinctively by cutting public spending in the midst of the recession.

The proposal was both simple and audacious: the ICU would grant each member country an overdraft facility, i.e. the right to borrow at zero interest from the international central bank. Loans in excess of 50 per cent of a deficit country’s average trade volume (measured in bancors) would also be made, but at the cost of a fixed interest rate. In this manner, deficit countries would be given the flexibility to boost demand in order to arrest any debt–deflation cycle without having to devalue the currency. At the same time, there would be a penalty for excess trade surpluses: recognizing that a systematic surplus is the obverse of a systematic deficit, Keynes’ proposal stipulated that any country with a trade surplus that exceeded a certain percentage of its trade volume should be charged interest, which would force its currency to appreciate. These penalties would, in turn, finance the loans to the deficit countries, acting as an automatic GSRM.

., 149, 156, 157 Byrnes, James, 68 capital, and the human will, 18–19 capitalism: dynamic system, 139–40; free market, 68; generation of crises, 34; global, 58, 72, 114, 115, 133; Greenspan and, 11–12; Marxism, 17–18; static system, 139; supposed cure for poverty, 41–2; surplus recycling mechanisms, 64–5 capitalists, origin of, 31 car production, 70, 103, 116, 157–8 carry trade, 189–90 Carter, Jimmy, 99, 100 CDOs (collateralized debt obligations), 141–2, 147–8, 149, 150, 153; for crops, 163; eurozone, 205; explanation, 6–9; France, 203; function, 130–2; Greece, 206 see also EFSF; Geithner–Summers Plan CDSs (credit default swaps), 149, 150, 153, 154, 176, 177 CEOs (chief executive officers), 46, 48, 49 Chamber of Commerce, British, 152 cheapness, ideology of, 124 Chiang Kai-shek, 76 Chicago Commodities Exchange, 120 Chicago Futures Exchange, 163 China: aggregate demand, 245; Crash of 2008, 156, 162; currency, 194, 213, 214, 217, 218, 252; economic development, 106–7; effects of the Crash of 2008, 3; financial support for the US, 216; global capital, 116; Global Plan, 76; growth, 92; rise and impact, 212–18, 219–20 Chrysler, 117, 159 CIA (Central Intelligence Agency), 69 Citigroup, 149, 156, 158 City of London: Anglo-Celtic model, 12; Crash of 2008, 148, 152; debt in relation to GDP, 4–5; financialization, 118–19; under Thatcher, 138; wealth of merchants, 28 civilization, 27, 29–30, 128 Clinton, Hillary, 212, 215–16 Cold War, 71, 80, 81, 86 collateralized debt obligations see CDOs commodification: resistance to, 53–4; rise of, 30, 33, 54; of seeds, 175 commodities: global, 27–8; human nature not, 53; labour as, 45, 49, 54; money as, 45, 49; prices, 96, 98, 102, 125; trading, 31, 175 common market, European, 195 communism, collapse of, 22, 107–8 complexity, and economic models, 139–40 Condorcet, Nicholas de Caritat, marquis de, 29, 32 Congress (US): bail-outs, 77, 153–4, 155; import tariff bill, 45 Connally, John, 94–5 council houses, selling off, 137, 138 Crash of 1907, 40 Crash of 1929, 38–43, 44, 181 Crash of 2008, 146–68; aftermath, 158–60; chronicle, 2007, 147–9; chronicle, 2008, 149, 151–8; credit default swaps, 150; effects, 2–3; epilogue, 164–8; explanations, 4–19; in Italy, 237; review, 160–4; in Spain, 237; warnings, 144–5 credit crunch, 149, 151 credit default swaps (CDSs), 149, 150, 153, 154, 176, 177 credit facilities, 127–8 credit rating agencies, 6–7, 8, 9, 20, 130 crises: as laboratories of the future, 28; nature of, 141; pre-1929, 40; pre-2008, 2; proneness to, 30; redemptive, 33–5, 35 currency unions, 60–1, 61–2, 65, 251 Cyprus, Britain’s role in, 69, 79 Daimler-Benz, 117 DaimlerChrysler, 117 Darling, Alistair, 159 Darwinian process, 167 Das Kapital (Marx), 49 de Gaulle, Charles, 76, 93 Debenhams, takeover of, 119 debt: and GDP, 4–5; unsecured, 128; US government, 92; US households, 161–2 see also CDOs; leverage debt–deflation cycle, 63 deficits: in the EU, 196; US budget, 22–3, 25, 112, 136, 182–3, 215–16; US trade, 22–3, 25, 111, 182–3, 196, 227 Deng Xiao Ping, 92, 212 Depressions: US 1873–8, 40; US Great Depression, 55, 58, 59, 80 deregulations, 138, 143, 170 derivatives, 120, 131–2, 174, 178 Deutschmark, 74, 96, 195, 197 Dexia, 154 distribution, and production, 30, 31, 54, 64 dollar: devaluing, 188; flooding markets, 92–3; pegging, 190; reliance on, 57, 60, 102; value of, 96, 204; zone, 62, 78, 89, 164 dotcom bubble, 2, 5 Draghi, Mario, 239 East Asia, 79, 143, 144, 194 see also Asia; specific countries East Germany, 201, 202 see also Germany Eastern Europe, 108, 198, 203 ECB (European Central Bank): aftermath of Crash of 2008, 158; bank bail-outs, 203, 204; Crash of 2008, 148, 149, 155, 156, 157; European banking crisis, 208, 209–10; Greek crisis, 207; LTRO, 238; Maastricht Treaty, 199–200; toxic theory, 15 economic models, 139–42 Economic Recovery Advisory Board (ERAB), 180, 181 Economic Report of the President (1999), 116 ECSC (European Coal and Steel Community), 74, 75–6 Edison, Thomas, 38–9 Efficient Market Hypothesis (EMH), 15 EFSF (European Financial Stability Facility), 174, 175–7, 207, 208–9 EIB (European Investment Bank), 210 Eisenhower, Dwight D., 82 Elizabeth II, Queen, 4, 5 ERAB (Economic Recovery Advisory Board), 180, 181 ERM (European Exchange Rate Mechanism), 197 EU (European Union): economies within, 196; EFSF, 174; European Financial Stability Mechanism, 174; financial support for the US, 216; origins, 73, 74, 75; SPV, 174 euro see eurozone eurobonds, toxic, 175–7 Europa myth, 201 Europe: aftermath of Crash of 2008, 162; bank bail-outs, 203–5; Crash of 2008, 2–3, 12–13, 183; end of Bretton Woods system, 95; eurozone problems, 165; Geithner–Summers Plan, 174–7; oil price rises, 98; unemployment, 164 see also specific countries European Central Bank see ECB European Coal and Steel Community (ECSC), 74, 75–6 European Commission, 157, 203, 204 European Common Market, 195 European Exchange Rate Mechanism (ERM), 197 European Financial Stability Facility (EFSF), 174, 207, 208–9 European Financial Stability Mechanism, 174, 175–7 European Investment Bank (EIB), 210 European Recovery Progam see Marshall Plan European Union see EU eurozone, 61, 62, 156, 164; crisis, 165, 174, 204, 208–9, 209–11; European banks’ exposure to, 203; formation of, 198, 202; France and, 198; Germany and, 198–201; and Greek crisis, 207 exchange rate system, Bretton Woods, 60, 63, 67 falsifiability, empirical test of, 221 Fannie Mae, 152, 166 Fed, the (Federal Reserve): aftermath of Crash of 2008, 159; Crash of 2008, 148, 149, 151, 153, 155, 156, 157; creation, 40; current problems, 164; Geithner–Summers Plan, 171–2, 173, 230; Greenspan and, 3, 10; interest rate policy, 99; sub-prime crisis, 147, 149; and toxic theory, 15 feudalism, 30, 31, 64 Fiat, 159 finance: as a pillar of industry, 31; role of, 35–8 Financial Crisis Inquiry Commission, 166 financialization, 30, 190, 222 First World War, Gold Standard suspension, 44 food: markets, 215; prices, 163 Ford, Henry, 39 formalist economic model, 139–40 Forrestal, James, 68 Fortis, 153 franc, value against dollar, 96 France: aid for banks, 157; colonialism criticized, 79; EU membership, 196; and the euro, 198; gold request, 94; Plaza Accord, 188; reindustrialization of Germany, 74; support for Dexia, 154 Freddie Mac, 152, 166 free market fundamentalism, 181, 182 French Revolution, 29 G7 group, 151 G20 group, 159, 163–4 Galbraith, John Kenneth, 73 GATT (General Agreement on Tariffs and Trade), 78 GDP (Gross Domestic Product): Britain, 4–5, 88, 158; eurozone, 199, 204; France, 88; Germany, 88, 88; Japan, 88, 88; US, 4, 72, 73, 87, 88, 88, 161; world, 88 Geithner–Summers Plan, 159, 169–83; in Europe, 174–7; results, 178–81; in the US, 169–74, 170, 230 Geithner, Timothy, 170, 173, 230 General Motors (GM), 131–2, 157–8, 160 General Theory (Keynes), 37 geopolitical power, 106–8 Germany: aftermath of the Second World War, 68, 73–4; competition with US, 98, 103; current importance, 251; and Europe, 195–8; and the eurozone, 198–201, 211; global capital, 115–16; Global Plan, 69, 70; Greek crisis, 206; house prices, 129; Marshall Plan, 73; reunification, 201–3; support for Hypo Real Estate, 155; trade surplus, 251; trade surpluses, 158 Giscard d’Estaing, Valery, 93 Glass–Steagall Act (1933), 10, 180 global balance, 22 global imbalances, 251–2 Global Plan: appraisal, 85–9; architects, 68; end of, 100–1, 182; geopolitical ideology, 79–82; Germany, 75; Marshall Plan, 74; origins, 67–71; real GDP per capita, 87; unravelling of, 90–4; US domestic policies, 82–5 global surplus recycing mechanism see GSRM global warming, 163 globalization, 12, 28, 125 GM (General Motors), 131–2, 157–8, 160 gold: prices, 96; rushes, 40; US reserves, 92–3 Gold Exchange Standard, collapse, 43–5 Goodwin, Richard, 34 Great Depression, 55, 58, 59, 80 Greece: currency, 205; debt crisis, 206–8 greed, Crash of 2008, 9–12 Greek Civil War, 71, 72, 79 Greenspan, Alan, 3, 10–11 Greenwald, Robert, 125–6 Gross Domestic Product see GDP GSRM (global surplus recycling mechanism), 62, 66, 85, 90, 109–10, 222, 223, 224, 248, 252–6 HBOS, 153, 156 Heath, Edward, 94 hedge funds, 147, 204; LTCM, 2, 13; toxic theory, 15 hedging, 120–1 history: consent as driving force, 29; Marx on, 178; as undemocratic, 28 Ho Chi Minh, 92 Holland, 79, 120, 155, 196, 204 home ownership, 12, 127–8; reposessions, 161 Homeownership Preservation Foundation, 161 Hoover, Herbert, 42–3, 44–5, 230 House Committee on Un-American Activities, 73 house prices, 12, 128–9, 129, 138; falling, 151, 152 human nature, 10, 11–12 humanity, in the workforce, 50–2, 54 Hypo Real Estate, 155 Ibn Khaldun, 33 IBRD (International Bank for Reconstruction and Development) see World Bank Iceland, 154, 155, 156, 203 ICU (International Currency Union) proposal, 60–1, 66, 90, 251 IMF (International Monetary Fund): burst bubbles, 190; cost of the credit crunch, 151; Crash of 2008, 155–6, 156, 159; demise of social services, 163; on economic growth, 159; European banking crisis, 208; G20 support for, 163–4; Greek crisis, 207; origins, 59; South East Asia, 192, 193; Third World debt crisis, 108; as a transnational institution, 253, 254 income: distribution, 64; national, 42; US national, 43 India: Britain’s stance criticized, 79; Crash of 2008, 163; suicides of farmers, 163 Indochina, and colonization, 79 Indonesia, 79, 191 industrialization: Britain, 5; Germany, 74–5; Japan, 89, 185–6; roots of, 27–8; South East Asia, 86 infinite regress, 47 interest rates: CDOs, 7; post-Global Plan, 99; prophecy paradox, 48; rises in, 107 International Bank for Reconstruction and Development (IBRD) see World Bank International Currency Union (ICU) proposal, 60–1, 66, 90, 253 International Labour Organisation, 159 International Monetary Fund see IMF Iran, Shah of, 97 Ireland: bankruptcy, 154, 156; EFSF, 175; nationalization of Anglo Irish Bank, 158 Irwin, John, 97 Japan: aftermath of the Second World War, 68–9; competition with the US, 98, 103; in decline, 186–91; end of Bretton Woods system, 95; financial support for the US, 216; global capital, 115–16; Global Plan, 69, 70, 76–8, 85–6; house prices, 129; labour costs, 105; new Marshall Plan, 77; Plaza Accord, 188; post-war, 185–91; post-war growth, 185–6; relations with the US, 187–8, 189; South East Asia, 91, 191–2; trade surpluses, 158 joblessness see unemployment Johnson, Lyndon B.: Great Society programmes, 83, 84, 92; Vietnam War, 92 JPMorgan Chase, 151, 153 keiretsu system, Japan, 186, 187, 188, 189, 191 Kennan, George, 68, 71 Kennedy, John F., New Frontier social programmes, 83, 84 Keynes, John Maynard: Bretton Woods conference, 59, 60, 62, 109; General Theory, 37; ICU proposal, 60, 66, 90, 109, 254, 255; influence on New Dealers, 81; on investment decisions, 48; on liquidity, 160–1; trade imbalances, 62–6 Keynsianism, 157 Kim Il Sung, 77 Kissinger, Henry, 94, 98, 106 Kohl, Helmut, 201 Korea, 91, 191, 192 Korean War, 77, 86 labour: as a commodity, 28; costs, 104–5, 104, 105, 106, 137; hired, 31, 45, 46, 53, 64; scarcity of, 34–5; value of, 50–2 labour markets, 12, 202 Labour Party (British), 69 labourers, 32 land: as a commodity, 28; enclosure, 64 Landesbanken, 203 Latin America: effect of China on, 215, 218; European banks’ exposure to, 203; financial crisis, 190 see also specific countries lead, prices, 96 Lebensraum, 67 Left-Right divide, 167 Lehman Brothers, 150, 152–3 leverage, 121–2 leveraging, 37 Liberal Democratic Party (Japan), 187 liberation movements, 79, 107 LIBOR (London Interbank Offered Rate), 148 liquidity traps, 157, 190 Lloyds TSB, 153, 156 loans: and CDOs, 7–8, 129–31; defaults on, 37 London School of Economics, 4, 66 Long-Term Capital Management (LTCM) hedge fund collapse, 13 LTCM (Long-Term Capital Management) hedge fund collapse, 2, 13 Luxembourg, support for Dexia, 154 Maastricht Treaty, 199–200, 202 MacArthur, Douglas, 70–1, 76, 77 machines, and humans, 50–2 Malaysia, 91, 191 Mao, Chairman, 76, 86, 91 Maresca, John, 106–7 Marjolin, Robert, 73 Marshall, George, 72 Marshall Plan, 71–4 Marx, Karl: and capitalism, 17–18, 19, 34; Das Kapital, 49; on history, 178 Marxism, 181, 182 Matrix, The (film), 50–2 MBIA, 149, 150 McCarthy, Senator Joseph, 73 mercantilism, in Germany, 251 merchant class, 27–8 Merkel, Angela, 158, 206 Merrill Lynch, 149, 153, 157 Merton, Robert, 13 Mexico: effect of China on, 214; peso crisis, 190 Middle East, oil, 69 MIE (military-industrial establishment), 82–3 migration, Crash of 2008, 3 military-industrial complex mechanism, 65, 81, 182 Ministry for International Trade and Industry (Japan), 78 Ministry of Finance (Japan), 187 Minotaur legend, 24–5, 25 Minsky, Hyman, 37 money markets, 45–6, 53, 153 moneylenders, 31, 32 mortgage backed securities (MBS) 232, 233, 234 NAFTA (North American Free Trade Agreement), 214 National Bureau of Economic Research (US), 157 National Economic Council (US), 3 national income see GDP National Security Council (US), 94 National Security Study Memorandum 200 (US), 106 nationalization: Anglo Irish Bank, 158; Bradford and Bingley, 154; Fortis, 153; Geithner–Summers Plan, 179; General Motors, 160; Icelandic banks, 154, 155; Northern Rock, 151 NATO (North Atlantic Treaty Organization), 76, 253 negative engineering, 110 negative equity 234 neoliberalism, 139, 142; and greed, 10 New Century Financial, 147 New Deal: beginnings, 45; Bretton Woods conference, 57–9; China, 76; Global Plan, 67–71, 68; Japan, 77; President Kennedy, 84; support for the Deutschmark, 74; transfer union, 65 New Dealers: corporate power, 81; criticism of European colonizers, 79 ‘new economy’, 5–6 New York stock exchange, 40, 158 Nietzsche, Friedrich, 19 Nixon, Richard, 94, 95–6 Nobel Prize for Economics, 13 North American Free Trade Agreement (NAFTA), 214 North Atlantic Treaty Organization (NATO), 76 North Korea see Korea Northern Rock, 148, 151 Obama administration, 164, 178 Obama, Barack, 158, 159, 169, 180, 230, 231 OECD (Organisation for Economic Co-operation and Development), 73 OEEC (Organisation for European Economic Co-operation), 73, 74 oil: global consumption, 160; imports, 102–3; prices, 96, 97–9 OPEC (Organization of the Petroleum Exporting Countries), 96, 97 paradox of success, 249 parallax challenge, 20–1 Paulson, Henry, 152, 154, 170 Paulson Plan, 154, 173 Penn Bank, 40 Pentagon, the, 73 Plaza Accord (1985), 188, 192, 213 Pompidou, Georges, 94, 95–6 pound sterling, devaluing, 93 poverty: capitalism as a supposed cure for, 41–2; in China, 162; reduction in the US, 84; reports on global, 125 predatory governance, 181 prey–predator dynamic, 33–5 prices, flexible, 40–1 private money, 147, 177; Geithner–Summers Plan, 178; toxic, 132–3, 136, 179 privatization, of surpluses, 29 probability, estimating, 13–14 production: cars, 70, 103, 116, 157–8; coal, 73, 75; costs, 96, 104; cuts in, 41; in Japan, 185–6; processes, 30, 31, 64; steel, 70, 75 production–distribution cycle, 54 property see real estate prophecy paradox, 46, 47, 53 psychology, mass, 14 public debt crisis, 205 quantitative easing, 164, 231–6 railway bubbles, 40 Rational Expectations Hypothesis (REH), 15–16 RBS (Royal Bank of Scotland), 6, 151, 156; takeover of ABN-Amro, 119–20 Reagan, Ronald, 10, 99, 133–5, 182–3 Real Business Cycle Theory (RBCT), 15, 16–17 real estate, bubbles, 8–9, 188, 190, 192–3 reason, deferring to expectation, 47 recession predictions, 152 recessions, US, 40, 157 recycling mechanisms, 200 regulation, of banking system, 10, 122 relabelling, 14 religion, organized, 27 renminbi (RMB), 213, 214, 217, 218, 253 rentiers, 165, 187, 188 representative agents, 140 Reserve Bank of Australia, 148 reserve currency status, 101–2 risk: capitalists and, 31; riskless, 5, 6–9, 14 Roach, Stephen, 145 Robbins, Lionel, 66 Roosevelt, Franklin D., 165; attitude towards Britain, 69; and bank regulation, 10; New Deal, 45, 58–9 Roosevelt, Theodore (‘Teddy’), 180 Royal Bank of Scotland (RBS), 6, 151, 156; takeover of ABN-Amro, 119–20 Rudd, Kevin, 212 Russia, financial crisis, 190 Saudi Arabia, oil prices, 98 Scandinavia, Gold Standard, 44 Scholes, Myron, 13 Schopenhauer, Arthur, 19 Schuman, Robert, 75 Schumpter, Joseph, 34 Second World War, 45, 55–6; aftermath, 87–8; effect on the US, 57–8 seeds, commodification of, 163 shares, in privatized companies, 137, 138 silver, prices, 96 simulated markets, 170 simulated prices, 170 Singapore, 91 single currencies, ICU, 60–1 slave trade, 28 SMEs (small and medium-sized enterprises), 186 social welfare, 12 solidarity (asabiyyah), 33–4 South East Asia, 91; financial crisis, 190, 191–5, 213; industrialization, 86, 87 South Korea see Korea sovereign debt crisis, 205 Soviet Union: Africa, 79; disintegration, 201; Marshall Plan, 72–3; Marxism, 181, 182; relations with the US, 71 SPV (Special Purpose Vehicle), 174 see also EFSF stagflation, 97 stagnation, 37 Stalin, Joseph, 72–3 steel production, in Germany, 70 Strauss-Kahn, Dominique, 60, 254, 255 Summers, Larry, 230 strikes, 40 sub-prime mortgages, 2, 5, 6, 130–1, 147, 149, 151, 166 success, paradox of, 33–5, 53 Suez Canal trauma, 69 Suharto, President of Indonesia, 97 Summers, Larry, 3, 132, 170, 173, 180 see also Geithner–Summers Plan supply and demand, 11 surpluses: under capitalism, 31–2; currency unions, 61; under feudalism, 30; generation in the EU, 196; manufacturing, 30; origin of, 26–7; privatization of, 29; recycling mechanisms, 64–5, 109–10 Sweden, Crash of 2008, 155 Sweezy, Paul, 73 Switzerland: Crash of 2008, 155; UBS, 148–9, 151 systemic failure, Crash of 2008, 17–19 Taiwan, 191, 192 Tea Party (US), 162, 230, 231, 281 technology, and globalization, 28 Thailand, 91 Thatcher, Margaret, 117–18, 136–7 Third World: Crash of 2008, 162; debt crisis, 108, 219; interest rate rises, 108; mineral wealth, 106; production of goods for Walmart, 125 tiger economies, 87 see also South East Asia Tillman Act (1907), 180 time, and economic models, 139–40 Time Warner, 117 tin, prices, 96 toxic theory, 13–17, 115, 133–9, 139–42 trade: balance of, 61, 62, 64–5; deficits (US), 111, 243; global, 27, 90; surpluses, 158 trades unions, 124, 137, 202 transfer unions, New Deal, 65 Treasury Bills (US), 7 Treaty of Rome, 237 Treaty of Versailles, 237 Treaty of Westphalia, 237 trickle-down, 115, 135 trickle-up, 135 Truman Doctrine, 71, 71–2, 77 Truman, Harry, 73 tsunami, effects of, 194 UBS, 148–9, 151 Ukraine, and the Crash of 2008, 156 UN Security Council, 253 unemployment: Britain, 160; Global Plan, 96–7; rate of, 14; US, 152, 158, 164 United States see US Unocal, 106 US economy, twin deficits, 22–3, 25 US government, and South East Asia, 192 US Mortgage Bankers Association, 161 US Supreme Court, 180 US Treasury, 153–4, 156, 157, 159; aftermath of the Crash of 2008, 160; Geithner–Summers Plan, 171–2, 173; bonds, 227 US Treasury Bills, 109 US (United States): aftermath of the Crash of 2008, 161–2; assets owned by foreign state institutions, 216; attitude towards oil price rises, 97–8; China, 213–14; corporate bond purchases, 228; as a creditor nation, 57; domestic policies during the Global Plan, 82–5; economy at present, 184; economy praised, 113–14; effects of the Crash of 2008, 2, 183; foreign-owned assets, 225; Greek Civil War, 71; labour costs, 105; Plaza Accord, 188; profit rates, 106; proposed invasion of Afghanistan, 106–7; role in the ECSC, 75; South East Asia, 192 value, costing, 50–1 VAT, reduced, 156 Venezuela, oil prices, 97 Vietnamese War, 86, 91–2 vital spaces, 192, 195, 196 Volcker, Paul: 2009 address to Wall Street, 122; demand for dollars, 102; and gold convertibility, 94; interest rate rises, 99; replaced by Greenspan, 10; warning of the Crash of 2008, 144–5; on the world economy, 22, 100–1, 139 Volcker Rule, 180–1 Wachowski, Larry and Andy, 50 wage share, 34–5 wages: British workers, 137; Japanese workers, 185; productivity, 104; prophecy paradox, 48; US workers, 124, 161 Wal-Mart: The High Cost of Low Price (documentary, Greenwald), 125–6 Wall Street: Anglo-Celtic model, 12; Crash of 2008, 11–12, 152; current importance, 251; Geithner–Summers Plan, 178; global profits, 23; misplaced confidence in, 41; private money, 136; profiting from sub-prime mortgages, 131; takeovers and mergers, 115–17, 115, 118–19; toxic theory, 15 Wallace, Harry, 72–3 Walmart, 115, 123–7, 126; current importance, 251 War of the Currents, 39 Washington Mutual, 153 weapons of mass destruction, 27 West Germany: labour costs, 105; Plaza Accord, 188 Westinghouse, George, 39 White, Harry Dexter, 59, 70, 109 Wikileaks, 212 wool, as a global commodity, 28 working class: in Britain, 136; development of, 28 working conditions, at Walmart, 124–5 World Bank, 253; origins, 59; recession prediction, 149; and South East Asia, 192 World Trade Organization, 78, 215 written word, 27 yen, value against dollar, 96, 188, 193–4 Yom Kippur War, 96 zombie banks, 190–1

When the Money Runs Out: The End of Western Affluence by Stephen D. King

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

But driven by a desire for faster growth, combined with a fear of being left behind, 29 4099.indd 29 29/03/13 2:23 PM When the Money Runs Out the rest of the world is starting to embrace the benefits of a technology-­driven expansion.16 That story, however, went wrong only a few weeks later. Stock markets collapsed, the technology sector was no longer able to raise funds and recession threatened. Keen to avoid a repeat of Japan’s ongoing stagnation, and confident that they had the tools to do so, Western policy-­makers offered massive monetary and fiscal stimulus: interest rates tumbled, budget deficits rose and the threat of debt deflation – of falling prices that would increase the real value of debt – was averted. However, all was not well. With low interest rates and gossamer-­thin regulation, housing markets boomed, as did the issuance of mortgage-­backed securities, which offered higher returns than government bonds and, so it seemed, more safety than jittery stock markets. Economic growth returned but millions upon millions of unsuspecting people – whether borrowers or lenders, whether Americans or foreigners – found themselves directly or indirectly owning a stake in an apparently ever rising US housing market.

Britain was basically bust, thanks to huge debt-­fuelled increases in public spending. Krugman is quick to emphasize the similarities with the 1930s but silent on the many differences. Back then, the collapse in US nominal demand – the value of national income – was far greater than the collapse in real demand – the volume of national income. In other words, the US in the 1930s was suffering from what Irving Fisher described as debt deflation. Today, the situation is entirely different. Relative to the expectations of economists whose job it is to forecast such things, there has most definitely been a shortfall in the volume of US national income. However, even allowing for the impact of the financial crisis, there has been no significant shortfall in the value of national income. In other words, while output has been consistently lower than expected, inflation has been consistently higher than expected.

‘Forecasting Recessions under the Gramm-­Rudman-­Hollings Law’, NBER Working Paper No. 2066, Nov. 1986 278 4099.indd 278 29/03/13 2:23 PM INDEX Africa 19 ageing populations 78, 88, 250 age-related expenditure 48 generational divide 171–4, 241, 243–5 Germany 136 Japan 23, 25 AIG 30 Akerlof, George 123–4 American War of Independence 154 ancien régime and the French Revolution 151–7 Angola 19, 82 Anwar Ibrahim 200 Arab Spring 160 Argentina 13–19, 24–6, 39, 42, 161 Arizona Support Our Law Enforcement and Safe Neighbourhoods Act (SB 1070) 192 Armstrong, Neil 9–10, 35 Arrow, Kenneth J. 132–3 Asian crisis 192–6 recovery from 204–5, 206, 208–9 asset prices 62–3 asset-backed securities 73 Audit Commission 173–4 austerity 67–8, 111, 205, 226, 242 and political extremism 227 Statute of Labourers 211 versus stimulus 4 wartime 114, 143 see also Snowden’s budget Australia 15, 16, 117, 187 Austria 225 baby boomers 1, 7, 243 bailouts 61–2, 241 Balls, Ed 101 Bank Negara 199 Bank of England 33, 61, 90–2 economic growth forecasts 74 interest rates 71, 102 and Libor 126 Bank of Japan 21 banking free 255, 257 and protectionism 215 union (eurozone) 256 banks 125–31, 252–7 bankers’ rewards 48–9 failure 30–1, 255 liquidity buffers 84, 90 mortgage loan-to-value ratios 51–2 regulatory uncertainty 251–2 and savers 136 see also central banks Barclays Bank plc 126, 127–8 279 4099.indd 279 29/03/13 2:23 PM When the Money Runs Out Basel III regulations 83 Bean, Charlie 63–5, 75 Bear Stearns 30 Belgium 184 Ben Ali, Zine al-Abidine 160 Benedetti, Count 182 benefits 47, 203–4 see also social spending Bernanke, Ben 4, 21–2 Beveridge, William 44–5 bimetallism 184–5 Bismarck, Otto von 182 Black Death 209–10, 213 blame culture 108, 161, 189, 200–1, 226–7 Blenheim Palace 222–3 bonds 73, 77, 80, 86, 221 borrowers 97, 133–4, 137 borrowing, government borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues Botswana 19 Brazil 19, 89, 163 Britain see UK (United Kingdom) British Empire 14, 15, 16 Bryan, William Jennings 187 budget deficits 58, 69, 79, 110, 117 France 54 Germany 54 Spain 54 UK 52, 54, 66–7 US 53–4, 66–7, 118 Buenos Aires 15 Business Week 29–30 Buxton, Thomas Fowell 128 California 173 Calonne, Charles-Alexandre de 154–5 Canada 15, 16 capital adequacy ratios 256 controls 16, 199–200, 201, 234 flight and the euro 191 foreign 198, 202 immobile 250–2 markets 31, 133 and the rise of living standards 180 Carr, Jimmy 148 Case-Shiller house price index 63 Catalonia 153 Central African Republic 163 central banks and bailouts 241 expansion of remit 86 and government debt 80–1 and illusory wealth 64–5 interest rates 71 and a new monetary framework 245–6 nominal GDP targeting 247–50 and politics 78, 89–90, 91–5 and redistribution 121 see also quantitative easing (QE) Chicago 15 China and commodity prices 77 financial systems 135 and globalization 167 income inequality 160, 163 living standards 27 per capita incomes 251 and regional tensions 228 renminbi currency 177 silver standard 183, 185 trading partners 82 and the US 12, 139 Chinese Exclusion Act 188–9 Chrysi Avgi 227 Churchill, Winston 103 circuit breakers 242, 256 Coinage Act 184–5 Committee on National Expenditure 98–9 commodity prices 77, 109, 116–17 conduits 129–30 Connecticut 163 consumer credit 11–12, 52, 135 contingent redistribution 236 credit consumer 11–12, 52, 135 derivation of word 125 expansion 56–7 and the property boom 61 and protectionism 215 queues 80–1, 83–4, 85–9, 217 Creditanstalt 225 creditors creditor nations 224–5, 232 and debtors 139–43, 174–7, 188, 191, 232–4 280 4099.indd 280 29/03/13 2:23 PM Index foreign 193, 221, 223 home grown 138 Japan 22 cross-subsidization, of banking services 256–7 currencies 177, 221 ‘currency wars’ 82, 190 see also eurozone; renminbi; ringgit; sterling Darling, Alistair 92–3 debt and asset prices 63 and central banks 241–2 eurozone crisis 145, 235–9 excessive 67, 213–14 France 154 household 12, 63–4, 85 and inflation 220 Japan 23 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 repaying 34 debt deflation 115 debtors and creditors 139–43, 174–7, 188, 191, 232–4 eurozone 224–5 home grown 138 deficient demand 57, 59 deficit expansion 119 deficit reduction 242 deficits 58, 69, 79, 110, 117 France 54 Germany 54 Korea 202 pension funds 75, 172 Spain 54 and surpluses 134–7, 232–4 UK 52, 54, 66–7 US 53–4, 66–7, 118 deflation 21–2, 185 democratic deficit 143, 221 Deng Xiaoping 12, 160 Denmark 158 the Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Dexia 30 Diamond, Bob 126 Dickens, Charles 43 disaster-avoidance 7 District of Columbia 163 dollar standard 190 dotcom bubble 169 Draghi, Mario 94 economics profession 3–4, 5–6, 258–9 Edelman Trust Barometer 148 education 12 financial 257–9 literacy 15 training 254 Edward III 211 Egana, Amaia 153 emerging nations 28, 116 employment 115–16 see also labour; unemployment enfranchisement 222, 242–4 the Enlightenment 6, 11, 154 entitlement culture 45, 48, 137, 143, 209, 218 absent from Asia 204, 209 need to reduce 178, 205 equities 79, 172 ethics 254 Ethiopia 19 European Central Bank (ECB) 92, 93–5, 119–20, 144–5, 146 eurozone banking union 256 crisis 224–6, 235–9 and the European Central Bank 93–5 northern creditors and southern debtors 67, 139, 145, 157, 191, 232–3 and trust 145–6 and the UK 111, 214 variations in borrowing costs 215–16 exchange rates 81–2, 111–12, 175, 239–42 executive pay 48 exports 11, 112 extremism, political 226–9 Fannie Mae 190 Federal Reserve 74, 92, 105, 241 and the Great Depression 59, 106–7 Ferguson, Niall 26 Ferguson, Roger 194 feudalism 213 financial services 168–70 innovations 11–12, 38, 133–4 Financial Services Authority (FSA) 171 Finland 158 First World War 103, 114 ‘fiscal club’ concept 237–9 fiscal policy 58, 66–7, 69–70, 77–8, 246–7 fiscal trap 79–81 281 4099.indd 281 29/03/13 2:23 PM When the Money Runs Out fiscal unions 236–7 Fisher, Irving 108, 115 football 165 forecasting 52–3, 63, 71–2, 74, 108 Fortis 30 France age-related expenditure 48 ancien régime and the Revolution 151–7 and Austria 225–6 benefits 204 budget deficit 54 exports 82 Latin monetary union 184 per capita incomes 101, 105 and political extremism 192 and public spending 49 Franco-Prussian War 182 Frank, Barney 65 fraudulent acts 35–6 Freame, John 127–8 Freddie Mac 190 free banking 255, 257 French Revolution, and the ancien régime 151–7 Freud, Sigmund 51 Friedman, Milton 59, 60, 86, 106, 188 Fuld, Dick 253 GDP forecasts 48, 52–4 targeting 247–50 General Strike 104 generational divide 171–4, 241, 243–5 see also ageing populations Germany ageing population 48, 136, 171 benefits 204 budget deficit 54 and the eurozone crisis 34, 191, 225, 232–3, 235 exports 82 Franco-Prussian War reparations 184, 186 government borrowing 71, 144 interest rates 146 late 19th-century economy 186, 189–90 living standards 13–14 national income 32 per capita incomes 101, 105 and the Protestant work ethic 26 and public spending 50 surplus 135–7 Treaty of Versailles 103 unification 182–3 Weimar Republic 55–6, 89 GfK/NOP Inflation Attitudes Survey 92 globalization 166–7, 169, 214–16, 224–6, 250–1 Gold Standard 186 and Germany 184 and the UK 57, 98–9, 102, 103, 105 and the US 107, 109, 187–8 gold standards 183–4, 185 Golden Dawn Party 227 Goodwin, Fred 253 Gordon, Robert J. 4 government bonds 73, 77, 80, 86, 221 government borrowing borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues government debt and central banks 241–2 eurozone crisis 145 excessive 67, 213–14 France 154 and inflation 220 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 governments and central bank bailouts 241 and credit queues 83–92 mistrust 140, 147–8, 217–18 social spending 45–7 spending 58, 109, 119, 142, 203 spending increases 49–50, 66 Gramm-Rudman-Hollings Act 242 Great Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Great Railroad Strike 187 Greece 82, 134, 140–1, 144–6, 234 and the euro 191 and political extremism 192, 227 Greenback Party 187 Greenspan, Alan 61–2 growth forecasting 74 global 28 start of the 21st century 169–70 targeting 247–50 282 4099.indd 282 29/03/13 2:23 PM Index Hamada Marine Bridge 23 Hayek, Friedrich 56, 207 HBOS 30 health spending 45–6 Helmsley, Leona 148 high-quality liquid assets (HQLA) 83–4 home bias 215–16, 251–2 Hong Kong 163, 204 Hoover administration 118 housing markets 30–1, 61, 63–5, 115–16, 130 foreign buyers 177, 223 see also mortgage-backed securities; subprime HSBC 126, 254 Hundred Years War 209–10 Hungary 89 hyperinflation 78, 89 Iceland 32 Illinois 173, 174 illusions and asset prices 62–3 illusory prosperity 49–51, 56–7, 64–5, 68 and investment philosophy 137–8 public sector 52–3 IMF 200, 202 import tariffs 16 income inequalities 25, 34, 48, 158–70 income, national 32, 49–50, 141–2, 247 Germany 33 Japan 32 UK 110–11, 112 US 117–18 incomes, per capita 27, 49, 159–60, 163 Argentina 14 China 251 France 101, 105 Germany 14, 101, 105 India 27, 251 Indonesia 197 Japan 21 Korea 202 Malaysia 198 UK 1, 44, 101, 105 US 14, 101 India 27, 183, 185, 251 Indonesia 193, 195, 196–7 industrial relations 103–4 Industrial Revolution 38 IndyMac 30 inflation and ageing populations 250 Argentina 18 and commodity prices 116–17 deflation 21–2, 185 excessive 77–8, 89 housing market 64 and the New Deal 109 and stagnation 219–20 targeting 59–61, 87–8, 246, 247 UK 114 US 115 infrastructure projects 236 innovations, financial 11–12, 38, 133–4 interest rates and asset prices 63 credit queue jumping 83–92, 217 expected future 87–8 falls 32, 69, 137, 146–7 inflation versus GDP targeting 248–9 Libor 126 and monetary and fiscal policies 245–6 persistently low 72, 75, 76, 89–91, 239 and stimulus 58 subsidizing 190 UK 61, 71, 102 US 57, 61, 105, 135, 193 intergenerational divide 171–4, 241, 243–5 see also ageing populations International Monetary Fund (IMF) 144–5, 200, 201, 202 international/domestic conflict 232–5 investment demand for financial services 168 and income inequality 162–3 international 134, 136, 176–7, 193, 232 private investors 144–5 Ireland 49, 134 Israeli–Palestinian conflict 122–3 Italy 49–50, 82, 146, 184, 191 ageing populations 171 Japan 20–6 ageing populations 171 attempted reforms 42 debt repayment 135 exports 11 government borrowing 144 government debt 52 liquidity trap 72 living standards 14 national income 32–3 and quantitative easing (QE) 85 stockpile of assets 240 and trust 161 unreliable estimates 113 283 4099.indd 283 29/03/13 2:23 PM When the Money Runs Out Jay Cooke and Company 186 Jerusalem trip 122–3 Jews, attitudes towards 189, 200–1, 213 jobs 115–16 see also labour; unemployment Kahneman, D. 41 Kalecki, Michael 59 Das Kapital(Marx) 179 Keynes, John Maynard 38, 57–9, 72, 86, 108 ‘Economic Possibilities for our Grandchildren’ 259–60 Essays in Persuasion 100 The General Theory of Employment, Interest and Money 58–9, 89 on the Gold Standard 104 How to Pay for the War 114 Keynes Plan 233 Keynesian policies 60 on the Snowden budget 99 King, Mervyn 73, 90–1, 92–3, 180 Knetsch, J.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, Albert Einstein, asset-backed security, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Plutocrats, plutocrats, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, Winter of Discontent, working poor, Yom Kippur War

But the higher the rate of interest, the more these gains are siphoned off by lenders, reducing the benefits to the economy.46 ‘Consumptive loans’, including mortgages and credit cards, allow consumers to bring forward purchases, and so may boost growth for a while, though in the long run their consumption is reduced by the burden of paying off the interest. Whatever the benefits of credit, interest charges add deadweight costs, diminishing those benefits. This depression of consumption and investment by the payment of interest is sometimes called ‘debt deflation’. Lenders generally demand higher rates of interest from those who are more at risk of defaulting. In the US, the poor pay 50–60% more in interest on auto loans than the better-off. From the point of view of the lender, this may be rationalised as a form of insurance against risk, but it has the ironic effect of making those in a weaker position for getting credit even more likely to default.

Although neoliberal politicians now like to blame the debt mountain on profligate consumer and government borrowing, so as to provide an excuse for cutting public spending, the financial sector itself was the main debt growth sector, as a result of loans between different financial organisations.47 You might think that creating ever greater volumes of credit money would cause inflation. It did, only not in the prices of consumer goods but in asset values, especially property values – the kind of inflation neoliberals love. It increases the wealth of asset holders relative to the asset-poor, who experience wage stagnation and debt deflation.48 As long as the bubbles are growing, banks lend out more and get still more interest. In John Merryman’s words: What the people in charge came to understand is that lots of money can be created, without causing general inflation, if it can be largely kept out of the regular economy. While a lot is loaned back into the economy, much is cycled within the banking system. All that ‘liquidity,’ as derivatives, securities, off balance sheet vehicles, etc, is mostly just chips in the casino.

., Haslam, C. and Williams, K. (2001) ‘Accumulation under conditions of inequality’, Review of International Political Economy, 8(1), pp 66–95. 43 Shutt (2009), pp 128–9. 44 See Chapter Eighteen. 45 Lysandrou, P. (2011) ‘Global inequality as one of the root causes of the financial crisis: a suggested explanation’, Economy and Society, 40(3), pp 323–44. 46 At the time of writing, European Union citizens’ bank deposits were protected up to €100,000 (£85,000) in any one banking group. 47 Turner, A. (2009) The Turner Review: A regulatory response to the global banking crisis, London: Financial Services Authority, p 18. 48 For a definition of debt deflation, see Chapter Four. On how Wall Street engineered asset inflation at the end of the 20th century and enhanced the unearned income of the top 1% in the US who were bondholders, see Canterbery, E.R. (2000) Wall Street capitalism; The theory of the bondholding class, Singapore: World Scientific Publishing Company. 49 Merryman, J. (2012) Occupying money, 17 May, http://source.yeeyan.org/view/430335_f43/Occupying%20Money.%20-%20welcome%20to%20exterminating%20angel%20press.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

Similarly, the notion of relying on “real savings” rather than “artificial credit” would require the abolition of fractional reserve banking—where the bank lends out multiples of its reserves—and therefore an end to, for example, securitization, car loans, education loans, mortgages, and so on. It’s hard to see this as either welfare improving or politically sustainable in any meaningful sense. Third, you don’t have to be a Keynesian to acknowledge that economies do not necessarily self-heal. One of America’s Great Depression–era monetary economists, Irving Fisher, analyzed how, much to his dismay, depressions do not in fact “right themselves” owing to a phenomenon called debt deflation.55 Simply put, as the economy deflates, debts increase as incomes shrink, making it harder to pay off debt the more the economy craters. This, in turn, causes consumption to shrink, which in the aggregate pulls the economy down further and makes the debt to be paid back all the greater. Fourth, just as it does not follow that governments should always intervene to stave off market adjustments, as the “Greenspan put” and Ireland’s bank rescue showed only too well, to argue that there should never be intervention presumes knowledge of the system—it will return to full employment if left alone—that Austrians themselves say is impossible to attain.

The Austrian Economists website, http://austrianeconomists.typepad.com/weblog/2008/05/is-austrian-eco.html. 52. See many of the pro-Austrian sentiments on the hedge-fund news site www.zerohedge.com. 53. John Maynard Keynes, The General Theory of Employmemt, Interest and Money (New York: Harcourt Brace, 1963), 3. 54. United States Bureau of Labor Statistics, News Release, “Union Members Summary,” January 27, 2012, http://www.bls.gov/news.release/union2.nr0.htm. 55. Irving Fisher, “The Debt Deflation Theory of Great Depressions,” Econometrica, 1, 4 (1933): 337–357. 56. John Quiggin “Austrian Economics: A Response to Boettke” posted on Johnquiggin.com, March 18, 2009, http://johnquiggin.com/2009/03/18/austrian-economics-a-response-to-boettke/. 57. Good luck with that. Somalia is a shining example of such zero-state political economies. 58. For a more detailed account see Blyth, Great Transformations, chaps. 5 and 6. 59.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global supply chain, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, Lao Tzu, liquidity trap, lump of labour, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, oil shale / tar sands, Own Your Own Home, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

A debt pyramid cannot grow forever, because eventually, after all the debtors’ assets are gone, and all their disposable income devoted to debt payments, creditors have no choice but to lend debtors the money to make their payments. Soon the outstanding balance is so high that they have to borrow money even to pay interest, which means that money is no longer flowing, and can no longer flow, from debtor to creditor. This is the final stage, usually short, though prolonged in our day by Wall Street’s financial “wizardry.” The loans and any derivatives built on them begin to lose their value, and debt deflation ensues. Essentially, the proximate financial crisis and the deeper growth crisis of civilization are connected in two ways. Interest-based debt-money compels economic growth, and a debt crisis is a symptom that shows up whenever growth slows. The present crisis is the final stage of what began in the 1930s. Successive solutions to the fundamental problem of keeping pace with money that expands with the rate of interest have been applied, and exhausted.

If it did, then the story under which the Middle East ships us its oil, Japan its electronics, India its textiles, and China its plastic would come to an end. Unfortunately, or rather fortunately, that story cannot be saved forever. The fundamental reason is that it depends on the maintenance of exponentially growing debt in a finite world. When money evaporates as it is doing in the current cycle of debt deflation, little changes right away in the physical world. Stacks of currency do not go up in flames; factories do not blow up; engines do not grind to a halt; oil wells do not run dry; people’s economic skills do not disappear. All of the materials and skills that are exchanged in human economy, upon which we rely for food, shelter, transportation, entertainment, and so on, still exist as before. What has disappeared is our capacity to coordinate our activities and focus our common efforts.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

accounting loophole / creative accounting, Airbnb, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, winner-take-all economy, Wolfgang Streeck

Although interest rates are at a record low, investment and growth refuse to respond, giving rise to discussions among policymakers about lowering interest rates further, to below zero. While in the 1970s inflation was public enemy number one, now desperate efforts are being made throughout the OECD world to raise it to at least 2 per cent, hitherto without success. By comparison with the 1970s, when it was the coincidence of inflation and unemployment that left economists clueless, now it is very cheap money coexisting with deflationary pressures, raising the spectre of ‘debt deflation’ and of a collapse of a pyramid of accumulated debt by far exceeding in size that of 2008. How much of a mystery the present phase of the long crisis of contemporary capitalism presents to its would-be management24 is nowhere more visible than in the practice of ‘quantitative easing’, adopted, under different names, by the leading central banks of the capitalist world. Since 2008, central banks have been buying up financial assets of diverse kinds, handing out new cash, produced out of thin air, to private financial firms.

This regime, fashioned after the German model, soon proved unable to enforce fiscal discipline even on Germany. It also failed to prevent the post-2008 Eurocrisis, when public and private debtors in a number of EMU member countries suddenly appeared over-indebted and lost the confidence of their creditors, especially as their national economies became locked into stagnation, with a possibility of debt deflation. As a consequence, risk premiums on public debt in several EMU member countries began to rise; in countries like Italy, Greece, Spain and Ireland they reached an unmanageable level. As indicated, there are no general economic limits to public debt, which requires strictly individualized, case-by-case risk assessment on the part of creditors. Under EMU, financial markets had freely lent to weaker member countries at historically low interest rates, apparently on the assumption that, regardless of the treaty, their debt would somehow be mutualized should they become insolvent.

Investment: A History by Norton Reamer, Jesse Downing

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Born in 1867 in New York, Irving Fisher was a prolific American economist who made contributions to indexing theory as it pertains to measuring quantities like inflation (James Tobin called him the “greatest expert of all time” in this topic), produced work distinguishing between real interest rates and nominal interest rates, and improved the quantity theory of money.4 He also proposed debt deflation as the mechanism that wreaked havoc on the economy in the Great Depression. While John Maynard Keynes’s economic formulations became largely favored over Fisher’s in their own time, interest in debt deflation reemerged in the wake of the global financial crisis of 2007–2009. Given these achievements, it is not entirely surprising that Milton Friedman would call Fisher the “greatest economist the United States has ever produced.”5 Fisher’s primary contribution to investment theory was the development of a metric to assess which income stream represents the optimal investment: “rate of return over cost,” a concept related to what is today referred to as net present value (NPV).


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labor-force participation, Malacca Straits, Mark Zuckerberg, market bubble, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Peter Thiel, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

Chapter 7: The Price of Onions 1 Helge Berger and Mark Spoerer, “Economic Crises and the European Revolutions of 1848,” Journal of Economic History 61, no. 2 (June 2001): 293–326. 2 Martin Paldam, “Inflation and Political Instability in Eight Latin American Countries,” Public Choice 52, no. 2 (1987): 143–68. 3 Marc Bellemare, “Rising Food Prices, Food Price Volatility, and Social Unrest,” American Journal of Agricultural Economics, June 26, 2014. 4 “World Bank Tackles Food Emergency,” BBC News, April 14, 2008. 5 Neil Irwin, “Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel,” New York Times, December 19, 2014. 6 Jim Reid, Nick Burns, and Seb Barker, “Long-Term Asset Return Study: Bonds: The Final Bubble Frontier?,” Deutsche Bank Markets Research Report, September 10, 2014. 7 Irving Fisher, “The Debt Deflation Theory of Great Depression,” St. Louis Federal Reserve, n.d. 8 David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of History (New York: Oxford University Press, 1996). 9 Claudioo Bordio, Magdalena Erdem, and Andrew Filardo, “The Costs of Deflations: A Historical Perspective,” Bank of International Settlements, 2015. 10 “Toward Operationalizing Macroprudential Policies: When to Act?”

“Who’s Afraid of a Little Deflation?” Wall Street Journal, November 17, 2014. Druckenmiller, Stanley, and Kevin Ward. “The Asset-Rich, Income-Poor Economy.” Wall Street Journal, June 19, 2014. “Falling Prices Are Good for Workers.” Lombard Street Research, January 23, 2015. Fischer, David Hackett. The Great Wave: Price Revolutions and the Rhythm of History. New York: Oxford University Press, 1996. Fisher, Irving. “The Debt Deflation Theory of Great Depression.” St. Louis Federal Reserve, n.d. Gavae, Charles. “Back to MV=PQ.” GK Research, January 9, 2014. Hatiuz, Jan. “Revisiting the Risk of Another Bus.” Goldman Sachs Global Investment Research, November 3, 2014. Irwin, Neil. “Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel.” New York Times, December 19, 2014. Kay, John. “History Is the Antidote to Fear of Falling Prices.”


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

George Cooper, The Origin of Financial Crises: Cen- tral Banks, Credit Bubbles and the Efficient Market Failure (2008). Bradv Dennis and Robert O'Harrow Jr., "A Crack in the System," Washington Post, Dec. 29-31, 2008. Chris Farrell, Deflation: What Happens When Prices Fall (2004). Niall Ferguson, The Ascent of Money: A Financial History of the World (2008). Stanlev Fischer and Rudiger Dornbusch, Introduc- tion to Macroeconomics (1983). Irving Fisher, "The Debt-Deflation Theory of Great Depressions," 1 Econometrica 337 (1933). W. Scott Frame and Lawrence J. White, "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?" Journal of Economic Perspectives (Spring 2005): 159. Peter M. Garber, "Famous First Bubbles," Journal of Economic Perspectives (Spring 1990): 35- James D. Gwartney et al., Macroeconomics: Private and Public Choice, pt. 3 (12th ed., 2008).

Unhappy Union by The Economist, La Guardia, Anton, Peet, John

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

bank run, banking crisis, Berlin Wall, Bretton Woods, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, Flash crash, illegal immigration, labour market flexibility, labour mobility, market fundamentalism, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

In September 2013, Wolfgang Schäuble, the German finance minister, boasted that the slow return to growth in the euro zone, and the rebalancing of current accounts in deficit countries, was proof that the much-criticised medicine was working:1 Systems adapt, downturns bottom out, trends turn. In other words, what is broken can be repaired. Europe today is the proof. Yet this is to miss the point. The euro’s is a story of survival, not of success. Although it is limping back to growth, its weaker members have sunk deeper into debt. Mass unemployment and debt deflation in Greece are hardly evidence of successful adjustment. The question is not whether economies eventually bottom out, but whether politicians limit or worsen the damage. One answer is to compare the euro zone’s performance with that of the United States (see Figure 12.1). European leaders like to blame the United States for their crisis, and to boast that aggregate public debts and budget deficits are healthier than those of the United States.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

We do not have much data on deflationary environments but what we have looks scary (the U.S. in the 1930s, Japan more recently). Deflation tends to hurt most asset classes, so it is difficult to hedge against. Nominal government bonds are the most obvious hedges—but even they may be less than fully effective if a deflationary recession raises market concerns about sovereign creditworthiness. Unfortunately, the current environment resembles classic debt deflation (which is preceded by excessive debt accumulation and characterized by de-leveraging) more than it does the benign deflation experience of the late 19th century, when stock prices, real output, and incomes all rose tremendously. In the latter case, deflation was caused by technological improvement (increased productivity) during a period when money supply growth was severely constrained by use of the gold standard.

Improved central bank credibility was one major reason for anchoring long-term inflation expectations. We simply do not know what it takes to unmoor those expectations, what it takes to get the genie back in the bottle if this happens, and if the Fed has the stomach for it. Bond vigilantes worry about the Fed’s priorities and its independence. Even if the unmooring of inflation expectations to the upside is scary, the impact of global deflation, if it occurs, is even worse. Debt deflation and hyperinflation are the worst destroyers of wealth. Most policymakers now fear the former more than the latter, which makes inflation (though not hyperinflation) the more likely medium-term outcome. Sovereign creditworthiness may be reassessed Consistent with both themes discussed above, re-rating of perceived creditworthiness may take place. Given the rising fiscal challenges in G7 markets, we could see G7 government bond yields rise above those of top-rated emerging nations and top-rated corporations.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

His speeches, however, were tightly reasoned, influential, and closely read, both inside and outside the Fed. Among Bernanke’s most visible roles was promoting, explaining, and defending Greenspan’s strategy of keeping interest rates very low. This was, in part, a deliberate campaign to reduce the risk of deflation — a generalized decline in prices, which can lead to a debilitating disease that makes it ever harder for borrowers to pay back debts. Deflation was a major feature of the Great Depression, and most economists thought it had been eradicated until it reappeared in Japan in the 1990s. As U.S. inflation rates fell in early 2002, the Fed saw deflation as a possibility for which it had to prepare. So in November 2002, to a group of economists in Washington, Bernanke delivered a talk titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, autonomous vehicles, banking crisis, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, computer age, debt deflation, deskilling, diversified portfolio, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Fractional reserve banking, Freestyle chess, full employment, Goldman Sachs: Vampire Squid, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Maynard Keynes: technological unemployment, John von Neumann, Khan Academy, knowledge worker, labor-force participation, labour mobility, liquidity trap, low skilled workers, low-wage service sector, Lyft, manufacturing employment, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, performance metric, Peter Thiel, Plutocrats, plutocrats, post scarcity, precision agriculture, price mechanism, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Richard Feynman, Rodney Brooks, secular stagnation, self-driving car, Silicon Valley, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, Thomas L Friedman, too big to fail, Tyler Cowen: Great Stagnation, union organizing, Vernor Vinge, very high income, Watson beat the top human players on Jeopardy!, women in the workforce

See Consumer Price Index (CPI) Craigslist, 95 Creative Machines Lab (Cornell University), 108 creativity, machines demonstrating, 108–113 credential inflation, 252 credentials, higher education, 142 Crichton, Michael, 244 crowd sourcing, 95 “The Cult of Kurzweil” (Geraci), 235 curiosity, machines demonstrating, 108–113 cyber attack, cloud robotics and, 22–23 Cyberdyne, 157 cybernation, 30 “cyborg,” 106 Cycle Computing, 104–105 Cynamon, Barry, 199, 200, 214 Dana-Farber Cancer Institute, 149 “Darci” software, 112–113 DARPA. See Defense Advanced Research Projects Agency (DARPA) debt deflation and, 217 financial crisis and, 218–219 income inequality and consumer spending, 214 ratio to income, 199–200 Deep Blue computer, xiv, 97–98, 122 deep learning, 92–93, 121, 231 Defense Advanced Research Projects Agency (DARPA), 80, 181–183 deflation, 216–217 Delta Electronics, Inc., 10 Delta Cost Project, 140 demand, 196–197 in China, 223–227 productivity and, 207–208 Democrats, income distribution preferred by, 47n design philosophy, 254–255 developing countries, 10–12, 25, 78–79 diagnostic tool, repurposing Watson as, 102–103 digital computer, effect of, 33–34 digital divide, 78 digital economy, long-tail opportunities in, 76–78 DiNardo, Courtney, 148 disruptive technology, xviii, 66 division of labour, 73 Dow News Service, 113–114 Drexler, K.


pages: 318 words: 85,824

A Brief History of Neoliberalism by David Harvey

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, Asian financial crisis, Berlin Wall, Bretton Woods, business climate, capital controls, centre right, collective bargaining, crony capitalism, debt deflation, declining real wages, deglobalization, deindustrialization, Deng Xiaoping, Fall of the Berlin Wall, financial deregulation, financial intermediation, financial repression, full employment, George Gilder, Gini coefficient, global reserve currency, illegal immigration, income inequality, informal economy, labour market flexibility, land tenure, late capitalism, Long Term Capital Management, low-wage service sector, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, Mont Pelerin Society, mortgage tax deduction, neoliberal agenda, new economy, phenotype, Ponzi scheme, price mechanism, race to the bottom, rent-seeking, reserve currency, Ronald Reagan, Silicon Valley, special economic zone, structural adjustment programs, the built environment, The Chicago School, transaction costs, union organizing, urban renewal, urban sprawl, Washington Consensus, Winter of Discontent

-B. 220 democracy demand for 110 excess of 184 as luxury 66 meaning of 206 Democrats (US) 49, 51 consent, construction of 51, 53–4, 62–3 uneven development 92, 93, 103, 110 see also Clinton; Roosevelt Deng Xiaoping 1–2, 120–5 passim, 135–6, 168 deregulation 3, 22, 26, 65, 67, 114, 161 derivative rights 182 Derthick, M. 219 devaluation 103, 105, 135 developing countries 71–4 see also Africa; Asia; debt; inequalities; Latin America; uneven development Dicken, P. 91, 102, 109, 131, 216, 219 dignity, human 5 see also freedom dirigisme 10 disposable commodity, labour as 70, 153, 157, 164, 167–71 dispossession see accumulation dissident movements 5 see also student movements Dongguan 132, 147, 149 Duhalde, E. 105–6 Duménil, G. 207, 213, 219–20 freedom concept 16–17, 18, 24, 26, 30, 33, 209 freedom’s prospect 191, 222 Eagleton, T. 198 earnings see income/wages East Asia 2 and China 122, 141 consent, construction of 59 freedom concept 10, 11, 23, 35 freedom’s prospect 190, 193–4, 197, 199, 206 neoliberal state 66, 72, 85 neoliberalism on trial 154, 156, 169 uneven development 87–94 passim, 96, 97, 106–12, 115, 116, 118 see also China; Hong Kong; Japan; South East Asia; South Korea; Taiwan East and Central Europe 5, 17, 71 neoliberalism on trial 154, 170 uneven development 94, 95, 117 ecosystems see commons Ecuador 95 Edsall, T. 48, 49, 51, 54–5, 211 Edwards, M. 220 egalitarianism 203–4 Eley, G. 208 elites and restoration of power China 123, 145 consent, construction of 39, 42–5, 51, 52 freedom concept 15–19, 23, 26, 29–30, 31–8 freedom’s prospect 197, 203–4 neoliberal state 66, 69, 84 neoliberalism on trial 152, 153, 156 uneven development 90–3, 96–9, 103–6, 108, 112, 114, 117, 119 see also financial system ‘embedded liberalism’ 11–12 employment see labour Enron 32, 77, 162 entrepreneurialism 23, 31 environment see commons equality 120 see also inequalities ERM 98 ethnicity 85 Europe 109, 157 European Union 79, 89, 91–2, 93, 114–15 freedom concept 11–15, 17, 19, 24, 27–8 freedom’s prospect 193–4, 200, 206 uneven development 89, 91–2, 93, 114 see also Britain; East and Central Europe; France; Germany; Italy; Sweden Evans, P. 212 excess capacity 194 exchange as ethic 3, 13 exchange rates 10, 12, 123–4, 141 exploitation of natural resources 8–9, 159, 164, 174–5 export-led growth 107 China 128, 130, 135–7 see also East Asia; FDI; market economy; South East Asia failure of neoliberalism 154–6 see also neoliberalism on trial Falklands/Malvinas war 79, 86 Falwell, J. 49 Farah, J. 219 FDI (foreign direct investment) 6, 7, 23, 28–30 China 21, 123, 125, 126, 129, 133–4, 141, 147 decline 190, 191 uneven development 90–4 passim, 98, 100, 101, 103, 105, 109, 117–18 see also debt; financial system Federal Reserve (US) see Volcker financial system and power 40, 62 China and state-owned banks 123, 125, 126, 129, 133–4, 141, 147 crises 12, 44–8, 68, 189, 193–4 uneven development 94–7, 104–5 see also debt; deflation; inflation decline 190 financialization 161–2 neoliberal state 71–5, 78, 80 neoliberalism on trial 157, 158, 161–2 uneven development 88–93, 94–9, 104–5, 108, 114, 119 see also corporations; currency; elites; FDI; IMF; income; Treasury; World Bank Fisher, W. 222 Fishman, T. 216 ‘flexible accumulation’ 75–6 flexible labour 100, 112 force see coercion/force Ford, G. 46 foreign direct investment see FDI Forero, J. 214, 217 Fortune 500 17, 44 four modernizations (China) 120 Fourcade-Gourinchas, M. 208, 211 Fox, V. 98 France 41, 157, 200 freedom concept 5, 11, 13, 15, 17, 19, 24, 27 neoliberal state 66, 84, 85 uneven development 91, 115, 117 Frank, T. 172, 210, 211, 213 free trade/market see market economy freedom, concept of 5–38, 207–9 as catchword 39, 41–2 class power 31–6 definitions 36–7 divergent concepts 183–4 four cardinal 183, 206 neoliberal theory, rise of 19–31 neoliberal turn, reasons for 9–19 freedom’s prospect 36–8, 186–206, 221–2 end to neoliberalism, possible 188–98 neoliberalism, alternatives to 198–206 Freeman, J. 46 French, H. 216 Friedman, M. 8, 20, 22, 44 future see freedom’s prospect G7/G8 countries 33, 66, 94 ‘Gang of Four’ see Hong Kong; Singapore; South Korea; Taiwan GATT 100 General Motors 130, 134, 135, 157 Geneva Conventions 6, 198 George, S. 207, 222 Germany 66, 87, 91, 157 West 24, 41, 88–9, 90 Gilder, G. 54 Gill, L. 220, 222 Gills, B. 221 Gindin, S. 28, 208, 219 Giuliani, R. 48, 100 global warming 172, 173, 174 globalization 70, 80, 159, 163 see also market economy; WTO Glynn, A. 208 Goldwater, B. 2 Gowan, P. 209, 213 Gramsci, A. 39, 78 Gray, J. 152–3 Guangdong 121, 128, 135, 136, 137 Haggard, S. 211 Hainan Island 131 Hale, D. and L. 215, 216 Hall, P. 211 Hall, S. 211 Harris, P. 220 Harrison, J. 208 Hart-Landsberg, M. 215, 217 Harvey, D. 211, 212, 213, 219, 221, 222 freedom concept 14, 207, 209 Hayek, F. von 20, 21, 22, 37, 40, 57 Hayter, T. 211 health, poor 154 Healy, D. 212 hedging 97–8 hegemony see power Held, D. 222 Henderson, J. 72, 213 Henwood, D. 209 Hofstadter, R. 82–3 Holloway, J. 219 Hong Kong 2, 89, 96, 157 and China 121, 123, 128, 130, 132, 136, 138, 141, 147 Hout, T. 216 Huang, Y. 124, 215 Huawei 134–5 Hulme, D. 220 human rights see rights hyper-inflation 193 Hyundai 107, 111 IBM 13, 146 ideologies see neoliberalism; values illiteracy 156 IMF (International Monetary Fund) 3 China 122, 141 consent, construction of 40, 54, 58 freedom concept 8, 10, 12, 24, 30 freedom’s prospect 185, 189, 201, 205 neoliberal state 69, 72, 73, 75 neoliberalism on trial 152, 154, 162–3, 175, 182 uneven development 92–9 passim, 103, 105–6, 111, 116–18 imperialism see neocolonialism imports 139–40 cheap 101 substitution 8, 98 income/wages China 126–7, 136, 138, 143–4, 148 falling 18 individual 176–7 inequalities 15–19, 88, 92, 100 neoliberalism on trial 154, 156 policies 12 and productivity 25 uneven development 88, 92, 100, 114 India 9, 134 freedom’s prospect 186, 194, 202, 206 neoliberal state 76, 85 neoliberalism on trial 154, 156, 174 individualism 23, 42, 57 neoliberal state 65–6, 79–8, 82, 85–6 see also freedom Indonesia 199 and China 138, 139 freedom concept 31–2, 34 neoliberal state 76, 85 neoliberalism on trial 153, 163, 167, 168, 175, 178 uneven development 89, 91, 96–7, 108–9, 117, 118 inequalities China 142–51 income 15–19, 88, 92, 100 increased 89–90, 118 see also class; developing countries; power; uneven development inflation 1, 135 consent, construction of 51, 59 control as only success 156 freedom concept 12, 14, 22, 23–5 freedom’s prospect 189, 193 stagflation 12, 22, 23, 24–5, 57 uneven development 88, 93, 100 informal economy 103 information technology 3–4, 34, 157, 159 innovation see technology, new Institute of Economic Affairs (UK) 22, 57 institutions 40, 64, 75 see also IMF; World Bank; WTO intellectual property rights 64, 68, 160 interest rates 23–4, 51, 59, 99, 162 international agreements 6, 92, 198 see also IMF; WTO intervention 20–1, 79 lack of 69 see also pre-emptive action investment see FDI Iran 28, 85, 139, 206 Iraq 179–80, 181, 204 reconstruction 184 War 6–7, 9, 35, 39, 153, 160, 184, 197 Isaacs, W. 193 Islam 83, 186 see also Middle East Israel 12 Italy 66, 96 freedom concept 11, 12, 13, 15 Japan 2, 59, 156 and China 123, 134, 136, 138–40, 142 freedom concept 10, 11, 23 freedom’s prospect 190, 193 neoliberal state 66, 85 uneven development 87–94 passim, 107 Jensen, D. 186 Jessop, B. 211 Jevons, W.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, distributed ledger, Edward Snowden, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

Targeting temporarily elevated inflation might well have been a powerful tool in the aftermath of the financial crisis. Had it been done forcefully and early on, and especially coincident with the large initial fiscal impulse, a higher inflation target might have helped sustain enough momentum to avoid the liquidity trap that ultimately ensnared so many countries. Higher inflation would have helped both to stimulate demand through lower real interest rates and to mitigate adverse debt deflation dynamics. And it was not necessary to do this on a permanent basis: the key was responding quickly to the crisis.11 True, a large branch of the zero bound literature is predicated on the view that the inability to promise higher inflation, even when essential, is inherently an intractable credibility problem. That seems far too strong; it echoes the view from the 1980s that central banks could never convince people that they wouldn’t inflate.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, conceptual framework, corporate governance, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

You may believe—as I do—that the greatest short-term risk facing the United States is deflation, as a slack in goods and labor markets implies seriously strong deflationary forces. But Chris correctly points out that large and monetized fiscal deficits eventually may cause, in the medium term, a rise in expected and actual inflation as they did after the Civil War and World War II. Indeed, the temptation to use a moderate and unexpected inflation tax to wipe out the real value of public debt and avoid the debt deflation of the private sector is powerful, and history may repeat itself—even if the short-term maturity of U.S. liabilities, the risk of a crash of the U.S. dollar and associated runaway rising inflation, and the related risk that the United States’ foreign creditors may pull the plug on the financing of the U.S. deficit may constrain these inflationary biases. Similarly, Chris stresses the role of poor fiscal and monetary policies and botched regulatory policies in triggering recent and not so recent financial crises.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

Nobody can be certain what a sustainable and steady state ratio of private debt to GDP is. The answer will depend on the asset prices against which debt is collateralised, the rate of interest, and the spread, growth and sustainability of economic activity in each individual country. What can be said is that when Japan’s aggregate private debt to GDP ratio rose above 300 per cent it triggered a prolonged period of deleveraging and debt deflation that lasted more than fifteen years. So 300 per cent probably represents a ceiling. In Britain the same is likely to be true, and particularly indebted sectors – both commercial real estate and residential property – will have to see a fall in borrowing. Equally problematic is determining a sustainable level of public debt, which is certain to rise to maintain economic activity in almost every country as private debt starts to fall.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

Interest rates on new business loans in southern Europe have scarcely fallen, while the supply of credit has collapsed.314 “Everyone is saying that the crisis is over,” says Jorge Fernández-Cid, the founder of a small Spanish advertising agency. “But this has not arrived at the level of businesses. The problem with this crisis is that there is no money.”315 Looming deflation – a sustained period of falling prices – could exacerbate all these problems. Falling prices would cause people to postpone spending because they expect things to be cheaper in future, entrenching stagnation. Worse, whereas inflation erodes the value of debt, deflation would increase the eurozone’s already huge debt burden. Falling prices would also increase real interest rates: since nominal interest rates are already near zero and can scarcely fall below, deflation raises the real cost of borrowing, crimping investment. Even very low inflation – the eurozone’s was a mere 0.8 per cent in the year to February 2014 – is a drag. The chances of getting stuck in a deflationary debt trap are rising.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

Struggling to meet their financial commitments, some shaky borrowers are forced to sell off whatever assets they can liquidate. “This,” Minsky noted drily, “is likely to lead to a collapse of asset values,” which, in turn, can lead to “a spiral of declining investment, declining profits, and declining asset prices.” Unless the financial authorities intervene, lending public money freely to whoever needs it, the ultimate result could well be “a traumatic debt deflation and deep depression.” In what was perhaps a poke at the efficient market hypothesis, Minsky described his thesis that capitalist economies inevitably progress from conservative finance to reckless speculation as the “financial instability hypothesis.” Minsky described it as an interpretation of Keynes’s General Theory, and he also credited the Austrian economist Joseph Schumpeter for influencing his views.


pages: 401 words: 112,784

Hard Times: The Divisive Toll of the Economic Slump by Tom Clark, Anthony Heath

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Affordable Care Act / Obamacare, British Empire, Carmen Reinhart, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, Etonian, eurozone crisis, falling living standards, full employment, Gini coefficient, hiring and firing, income inequality, interest rate swap, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, low skilled workers, mortgage debt, new economy, Northern Rock, obamacare, oil shock, Plutocrats, plutocrats, price stability, quantitative easing, Ronald Reagan, science of happiness, statistical model, The Wealth of Nations by Adam Smith, unconventional monetary instruments, War on Poverty, We are the 99%, women in the workforce, working poor

But, make no mistake, frailer communities and worse mental health will cost the public purse in the end. Because deep recessions do such damage, it is important to be grateful for one great mercy: the prevailing policy of easy money in both Britain and America. Record low interest rates and liberal use of the printing presses represent one crucial break with the early 1930s, and have allowed both countries to avoid the trap of debt deflation and the wholesale destruction of jobs that has historically come with it. We have not dwelt on this point because the reflationists have mostly carried the day; it is, however, important to register, since undue panic about inflation, or pressure from savers fed up with low returns, could yet force a premature policy shift. The continuing misery of the eurozone illustrates (among other things) the dangers of even a slightly more restrictive monetary policy for jobs.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buy low sell high, capital asset pricing model, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, new economy, New Journalism, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond

Plans were also made to establish the new journal, to be called Econometrica. That journal is now nearly sixty years old and commands wide respect among economists, statisticians, and mathematicians. The first issue of Econometrica, which appeared in January 1933, contained an introductory article by the famous Harvard economist and the first president of the Econometric Society, Joseph Schumpeter, as well as a timely paper by Irving Fisher titled “The Debt-Deflation Theory of Great Depressions.” The first fruit of Cowles’s own research into market forecasting, an article titled “Can Stock Market Forecasters Forecast?,” appeared in the July 1933 issue. A three-word abstract of the article concluded: “It is doubtful.” Cowles analyzed the track records of four sets of forecasters: sixteen leading financial services that furnished their subscribers with selected lists of common stocks; the purchases and sales of stocks made by twenty leading fire insurance companies; a test of the Dow Theory gleaned from Hamilton’s editorials in The Wall Street Journal; and the twenty-four publications that had set Cowles off on his quest, including sixteen professional financial services, four financial weeklies, one bank letter, and one investment-house letter.


pages: 331 words: 60,536

The Sovereign Individual: How to Survive and Thrive During the Collapse of the Welfare State by James Dale Davidson, Rees Mogg

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, agricultural Revolution, bank run, barriers to entry, Berlin Wall, borderless world, British Empire, California gold rush, clean water, colonial rule, Columbine, compound rate of return, Danny Hillis, debt deflation, ending welfare as we know it, epigenetics, Fall of the Berlin Wall, falling living standards, feminist movement, financial independence, Francis Fukuyama: the end of history, full employment, George Gilder, Hernando de Soto, illegal immigration, income inequality, informal economy, information retrieval, Isaac Newton, Kevin Kelly, market clearing, Martin Wolf, Menlo Park, money: store of value / unit of account / medium of exchange, new economy, New Urbanism, offshore financial centre, Parkinson's law, pattern recognition, phenotype, price mechanism, profit maximization, rent-seeking, reserve currency, road to serfdom, Ronald Coase, school vouchers, seigniorage, Silicon Valley, spice trade, statistical model, telepresence, The Nature of the Firm, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, trade route, transaction costs, Turing machine, union organizing, very high income

In the transformation of the year two thousand, the rising star will be the Sovereign Individual. As the nation-state system breaks down, risk-averse persons who formerly would have sought employment with government may find an alternative in affiliating as retainers to the very rich. You should expect a slowdown or decline in per capita consumption in countries such as the United States, which have been the leading consumers of the world's products in the late stages of industrialism. Debt deflation may accompany the transition to the new millennium. The death of politics will mean the end of central bank regulation and manipulation of money. Cybermoney will become the new money of the Information Age, replacing the paper money of Industrialism. This means not only a change in the fortunes of banknote printers, it implies the death of inflation as an effective means by which nation-states can commandeer resources.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

Alan Greenspan (2007) The Age of Turbulence: Adventures in a New World, Allen Lane, London: 360, 361. 5. Ben Bernanke “The economic outlook” (5 May 2005), Testimony to the Joint Economic Committee, US Congress. 6. “Savings versus liquidity” (11 August 2005) The Economist. 7. Robin Harding “Bernanke says foreign investors fuelled crisis” (18 February 2011) Financial Times. 8. Fisher, Irving “The debt-deflation theory of great depressions” (1933) Econometrica: 337–57. 9. William White “Is price stability enough?” (April 2006) Bank of International Settlements. 10. Gillian Tett of the Financial Times coined the phrase; see Gillian Tett “Should Atlas still shrug?” (15 January 2007) Financial Times. 11. The phrase “new liquidity factory” was coined by Mohamed El-Erian. 12. Total outstanding volumes of derivative contracts are greater, around $600 trillion (see Chapter 14).


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

In the rush to judgment, anyone who said or wrote anything about some kind of bubble or imbalance or financial instability sometime in the 2000s suddenly sought to be credited as rivaling the Oracle at Delphi, engaging in the most exquisite augury. Some Nobel winners in particular pushed this ploy well beyond the breaking point, eliding prediction proper, and instead suggesting that anyone who had ever produced a mathematical model mentioning bank runs or financial fraud or irrational expectations or debt deflation or (fill in the blank) was proof positive that the economics profession had not been caught unawares.23 It helped if the interlocutor stopped paying attention to what had been taught in the macroeconomics classes across the most highly ranked economics departments. It got so bad after a while that any mention of market failure or departure from equilibrium was supposed to function as a “get out of jail free” card in 2009.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Amazon: amazon.comamazon.co.ukamazon.deamazon.fr

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money: store of value / unit of account / medium of exchange, moral hazard, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

Shares in American corporations promised not only a dividend cash flow but also a stake in tangible corporate assets whose monetary value would automatically rise when the government printed money. Like Keynes, Fisher was a progressive who believed that economists could help solve the world’s problems. He introduced mathematical methods of economics to America and is famous for his macroeconomic theories about the quantity theory of money and debt-deflation market cycles. Fisher’s contribution to financial economics was particularly important. He took the mathematics of present value (first formalized by Fibonacci!) and applied it to investment decisions. In Fisher’s analysis, corporate managers acting in the best interests of shareholders should choose projects with the highest positive net present value that takes into account not only the time value of money but also the risk of the project.