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Guest Post: The Paradox of Thrift — Debunked

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Submitted by Gold, Stocks and Forex

The Paradox of Thrift — Debunked

Ever since John Maynard Keynes popularized the Paradox of Thrift, economists, central bankers and politicians have labored under the misapprehension that high levels of savings are bad for the economy and inhibit growth. The Paradox of Thrift simply states: Increased savings means there are less buyers for goods produced, so the nation as a whole will tend to produce less.

  • If an individual saves they increase their wealth;
  • But if an entire nation saves, this causes a shortfall in consumption; and
  • The shortfall in consumption will cause national income to fall.

Keynes was correct in his observation that high level of savings caused a shortfall in national income, but we need to remember that he was writing in the 1930s — in the middle of the Great Depression. His General Theory was published in 1936. What Keynes observed was an anomaly caused by the financial crisis. Falling asset prices threatened the solvency of both individuals and corporations, forcing them to increase their level of savings and — most importantly — use their savings to repay debt.

Not only will national income fall when savings are used to repay debt, but it falls rapidly. The shortfall between saving and new investment (or spending and income) may be small but, like a puncture in a car tire, the result can be disastrous. At each point in the supply chain the leakage is repeated: A receives an income of $1.00 and use 5 cents to repay debt, only spending $0.95. B will receive $0.95 from A, where previously they received $1.00, and will use 5% to repay debt, only spending $0.9025. C will only receive $0.9025 from B but still uses 5% to repay debt, only spending $0.857……… The pattern continues until incomes shrink to the point that parties can no longer afford to repay debt and are forced to consume all of their income. The impact on national income — as evident from the 1930s — can be devastating.

Keynes pointed out that government can break the cycle and make up the shortfall, by spending more than it collects by way of taxes — so that the aggregate level of spending is unchanged. But fiscal stimulus is fraught with dangers, not least of which is the massive public debt hangover faced by the US, Japan and many European economies. I will cover these dangers in more depth in a later post.

Under normal conditions, however, the paradox of thrift does not apply:

  • If an individual saves they will increase their wealth;
  • If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.
  • All that then happens is less consumer goods but more capital goods are produced — spending as a whole does not fall.
  • Production, as a result, will also not fall.

National income is, in fact, likely to rise. New capital investment will boost productivity and accelerate growth.

Consider the simple example of a farmer who saves and buys a tractor. His overall spending is unaffected. He merely consumes less and spends the proceeds on something else — in this case a tractor. The income of the store that supplies him with consumer goods will decrease, but the income of the dealer that sells him the tractor will rise; the net effect on national income is so far zero. But the farmer now produces more food with his new tractor; so his income — and the national income — increases.

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

I will conclude by reminding you that:

  • Savings channeled into new capital investment actually boost growth.
  • Savings are only harmful when used to repay debt or other non-productive purposes.
  • Low interest rates encourage speculation and the formation of bubbles;
  • Bubbles cause financial crises; and
  • Financial crises force consumers to repay debt.

….the never-ending circle of life.


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Mon, 10/24/2011 - 09:11 | 1803929 lolmao500
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German government source says full parliamentary session to vote on EFSF leverage models on Wednesday

Mon, 10/24/2011 - 09:20 | 1803962 SheepDog-One
SheepDog-One's picture

Good I hope they vote and present their plan for the bankrupt bailing the bankrupt, and then we can see its another plan that fixes nothing at all.

Sell the news.

Mon, 10/24/2011 - 09:53 | 1804059 Leopold B. Scotch
Leopold B. Scotch's picture

Through all of this Macro babbling, we need to keep a firm eye on the fact that money in it's current form ain't really wealth.  Stuff is wealth.  Money should be reliable store of wealth, but has not been for a long, long time.

The dollar as a measuring stick for real wealth growth is horribly flawed when the units of said measure have lost any and all discipline required to be reliable, what -- with authorities expanding credit and money supply constantly in good times and bad, only dramatically more so in bad when the bailout's are "needed" to rescue the economy from the prior monetary excess and the damaging mis-allocation of wealth / resources said excess causes.

But to my original point, more units of $$$ applied to a single unit of X, Y, or Z does not give X, Y, or Z any more REAL economic value to an economy.  X has an innate value to Y and Z. 

This whole paradox of thrift and related policies to ward it off, therefore, are mostly flawed in that it all prevents the storing of capital for the creation of more X, Y, and Z, and better yet, improved version of X, Y, and Z that create more efficiencies and more A, B, and C for all the masses.  Instead, capital stores -- the nation's economic seed-corn -- is stolen and redistributed and, generally, put to more highly consumptive or less secure / rational investment purposes.


Mon, 10/24/2011 - 10:16 | 1804136 Bicycle Repairman
Bicycle Repairman's picture

"[as a result of saving] National income is, in fact, likely to rise."

There you go with that "nation" stuff.  If the "nation" only grows @ 2%, but I need 15%, there's a crisis.  It's so much better to force the serfs to consume all their income or to give them nothing for their savings.  Then I can hit my target and all is right in G-d's kingdom.

The real paradox is that the serfs' saving might crowd out my saving.

Mon, 10/24/2011 - 10:26 | 1804165 trav7777
trav7777's picture

Whoever wrote the article is an idiot.  They seem to believe that the banks or Fed or economy can magically pay savers a higher yield than the economy itself can generate.

They don't seem to understand where all that magic interest comes from.  The bank pays you a share of what it can earn.  Banks historically did that by lending.  There are simply no takers at higher rates.  Nobody is demanding credit.  The credit base is deflating, which means that loans outstanding are shrinking, things are being paid off, people are cashing out, nobody is going further into debt.  This is a lack of demand for credit, in the aggregate.  So, to try to get more volume, the system has lowered the price of credit, and prevailing interest rates have fallen.  It's really as simple as that.

The temporary bond bubble is simply because those are the only "sure" way to get any nominal principal back.  And the banking rules make all these savings go into the money markets.   USTs are seen as a safer "sweep" vehicle especially after the buck-break lockup we saw in 08.

Mon, 10/24/2011 - 10:39 | 1804212 eureka
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Yes - plus ad to your analysis that US Empire itself desparately needs credit inflated sector bubbles to generate nominal GDP growth as substitute for real productivity, export and efficiencies growth - all of which are absent.

Hence, crony capitalism, is the name of the game - a play of short term "gain" for the offshoring & outsourcing executive class and the corrupt politican class - both of whom are in service of the few hundred oligarch billionaires who own virtually everything.

If you want freedom - if you want a republic - you must destroy the empire.

Mon, 10/24/2011 - 11:08 | 1804357 Raging Debate
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Right analysis wrong remedy. The empire was like Ghengis Khan's sweeping over the plains conquering everything in its path but no plans to stick around afterward and manage it. That is because the management is toward the official launch of the Chinese reserve currency and domestic growth for them thereafter. It is said a man cannot serve two masters, he will love one and despisethe other.

You don't have to try end the empire, American handed it over to China which is called mandraking and this was a forty year plan. There are risks and uknowns if China would play and they did. But they also did not give full access to their markets if the plan faltered which it is (trade imbalance gap too long causing big dirty patches of creative destruction).

Picture it as expecting gravity and light coming from the sun being cut but unlike the sun, banking is run by imperfect people. So the lag is killing us and Chinese citizens, near literally and soon to be very literally. There are solutions but not without using next generation crop of innovators and thinkers. No worries, us Yanks already built out most of the basic solutions already to gather the information needed to get up and gallop in the West and do it far faster than expected. Careful of attempted murder on the rape victims of the West is needed if we wish limited hostilities vs. glowing heads and eating bugs for a year for ALL

Mon, 10/24/2011 - 11:50 | 1804572 Random_Robert
Random_Robert's picture

"The temporary bond bubble is simply because those are the only "sure" way to get any nominal principal back. "

So Trav, what then is the surest way to ensure that you get some of your REAL principle back....?


Mon, 10/24/2011 - 13:45 | 1805060 dlmaniac
dlmaniac's picture

The surest way is not putting money in the bank to begin with. Interest should not have anything to do with the bank's health. Interest rate is the price of money. If you need money badly then you offer higher rate, if not then a lower one. It's that simple. After that it's up to the savers to decide if the bank is safe enough for the deposit. If not then stay out and let the bank fail so deposit could go to more capable firms to help economy.

Mon, 10/24/2011 - 10:26 | 1804168 CPL
CPL's picture

"might crowd out my saving."


You meant do, not might.

Mon, 10/24/2011 - 10:23 | 1804156 duo
duo's picture

Debt should only be used for investments that increase productivity.  Debt that finances consumption can be nothing but inflationary.

Mon, 10/24/2011 - 10:27 | 1804173 CPL
CPL's picture

debt isn't an investment.


It is a hole throwing compounding interest on that and it becomes a hole that no one returns from.

Mon, 10/24/2011 - 10:49 | 1804262 Raging Debate
Raging Debate's picture

Good commentary thanks for the time. In late 2013 or 2014 the dollar will be .55 and temporarily pegged to China. It is at this time the masses say hey wait a frigging second, you stole have our real wealth over the last few decades.

Here is where the people of America ultimately decide to scrap the US brand for America 2.0 . Too much stick by financeers to pump Chinese domestic consumption on Americans backs after 40 years of it will mean very, very bad things for the entire world.

The Chinese peg will be launched, sizzle and pop. The cultures have the disadvantage of different value-based legal systems, lack of harmonization also means far more carrot needed to build confidence and I only see sticks in the plans.

If some of you in leadership don't humble yourselves the citizens will be beating you over the heads with those sticks or more literally will destroy already fragile supply chains.

Mon, 10/24/2011 - 10:57 | 1804269 Pegasus Muse
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"... money in it's current form ain't really wealth. Stuff is wealth. Money should be reliable store of wealth, but has not been for a long, long time." Which is a good segway for James Turk's latest piece.


The Gold Money Index

By James Turk, Founder & Chairman of GoldMoney October 24 (King World News) – In one important respect, gold is like any other asset. You want to buy it when it is undervalued, and sell it when the opposite is true – when it becomes overvalued. Thus, knowing how to accurately value gold is essential for sound portfolio management.

Because gold is money, its value cannot be measured with the standard techniques used to evaluate investments. Gold is not an investment because it does not produce any cash-flow. It is a sterile asset. Consequently, gold does not create wealth, nor for that matter, does any national currency create wealth. Currency in all its forms – whether fiat or gold – is wealth, held in the form of deferred purchasing power. This store of value function is one of any currency’s most important tasks.

So when the price of gold rises, wealth is just being transferred to people who own gold away from those people holding the national currency being used to report the rising gold price. Wealth is simply being re-shuffled – as I like to say – to its rightful owners, namely, those who choose wisely among the different currencies available in which to hold their liquidity needs. Their wise choice is simply a matter of recognizing which currencies are overvalued and which are undervalued, so they own the latter and avoid the former.

One of the most trusted models that I use to value gold is my Fear Index, about which I have written extensively. Another trustworthy model is my Gold Money Index, which values gold based on its historical role as international money and global numéraire. Here is the formula.

more here:

Jim Rickards also has a new interview/blog piece up on KWN. Good stuff about how the Fed plays mind games with investors.

Mon, 10/24/2011 - 09:14 | 1803934 Shizzmoney
Shizzmoney's picture

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

100% agree.  Where is the INCENTIVE for workers to save?  When corporations (like mine) are starting more-and-more to not match 401Ks (and stiff us on pay/raises that don't keep up with USD inflation rates), or when CDs and savings rates, even at the best of banks and credit unions, don't return a good yield on investment...... where is the consumers' incentive to trust these institutions to do good with their money for their future and their childrens'? 

Never mind the fact that all of the smart people, including the rich, are starting to now to "mattress" their money more and more when they get paid.  People know the bank holidays, the effect of QE3 on our money, the fall of Greece and BOA is coming.  And to be ready, you need cash/gold/silver ON hand, as debit and credit cards go obsolete. 

Mon, 10/24/2011 - 09:20 | 1803952 Harlequin001
Harlequin001's picture

100% agree.  Where is the INCENTIVE for workers to save?  When corporations (like mine) are starting more-and-more to not match 401Ks (and stiff us on pay/raises that don't keep up with USD inflation rates),- you might want to consider the other side of that argument when employers are trying to maintain output without laying workers off. It is a fact that it is immeasurably more difficult trying to create a job than to get one...

Mon, 10/24/2011 - 11:46 | 1804551 DosZap
DosZap's picture


you might want to consider the other side of that argument when employers are trying to maintain output without laying workers off. It is a fact that it is immeasurably more difficult trying to create a job than to get one...

I agree with you , but their is another side to it.(and ESP is true in times like now,I have many friends still working, doing 80hr weeks, as a rule,this is Japanese style work weeks, the kind that stole you health, mental first, and then physical,this did not turn out well.)

This is where the rub came in, employers(we see it now in full color), are trying to and getting the work of one employee,to match that of three.

When this snowball to hell started is when Corporations started treating employees like chattel.The employees, said to hell with you, and instead of giving there all,started just putting out enough to stay on the payroll.

Coprorate profits are good, because they have eliminated stateside workers as far as they can, and gone over seas.(Thank the gov for most of this).

Mon, 10/24/2011 - 12:02 | 1804616 Harlequin001
Harlequin001's picture

I understand your train of thought but I don't fully agree with it. The rot set in when capital became free, or nearly free. Consider this, I as an entrepreneur need to raise capital. I go to savers either directly or through a bank or venture capital fund (same thing) and raise capital from their savings. They want a return on their investment which I can give because I have margin, i.e I can control supply to ensure there is always demand which means my workers are well paid, the quality of life is good. The bank won't finance another similar outfit because it undermines their loan by swamping demand and therefore reducing the profitability of my business.

Under a gold standard I can do this, if I make cars I can sell them locally to a well paid work force because I have margin. Those workers spend money on locally on rents, mortgages etc to people who can also then buy my cars. The community becomes wealthy as a whole.

Under a fiat system the banks or anyone else can now raise unlimited capital to finance a business. being able to offload said debt to a CB for more liquidity  they can now swamp my market and it is here that you are competing with cheap chinese peasants who have no access to capital but are prepared to work for near nothing. Now we have no local wages because the wages are being paid to peasants in China, just a spiral down of quality and then price until no one can afford my goods and the economy is ruined.

It is the fiat system that requires that employers demand 80 hours per week from you, not necessarily greed, though I concede that it may in many instances be both...

Mon, 10/24/2011 - 09:19 | 1803956 Hard1
Hard1's picture

Totally agree with shizzmoney.  Many people are financially illiterate, but while they still get the reward from buying the latest gizmo, the reward they are getting from their savings is evidently zero nominal or less than inflation.That is a negative incentive to save.


In addition, people who do need to save now (tha baby boomers) must be very worried about their shortfall in the new rate environment, so probably ZIRP 4eva is causing that these large and affluent group reduces consumption dramatically in face of the FED's stimulus.  This is beginning to have pernicious unintended effects.

Mon, 10/24/2011 - 09:45 | 1804047 Leopold B. Scotch
Leopold B. Scotch's picture

While the Fed subsidizes borrowers directly at the expense of savers.

Mon, 10/24/2011 - 10:30 | 1804185 trav7777
trav7777's picture

dude, there is NOBODY out there looking to borrow at 6%.  Or 5%.  The economy cannot generate that ROI.

If you want yield, put your money in Brazil or somewhere that IS capable of growing at that rate.  Stupid savers who cannot figure out how to chase yield (with extra risk) and stamp their feet and INSIST the bank just magically pay them 6% for zero risk...fuckem.

Mon, 10/24/2011 - 11:00 | 1804319 Snidley Whipsnae
Snidley Whipsnae's picture

trav777... "If you want yield, put your money in Brazil or somewhere that IS capable of growing at that rate."

I don't see how the BRIC economies will continue to generate high ROI if the Western consumption economies are slowing. Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet.

Of course, there are many risks associated with investing in anything, including the possibility of capital controls, trade barriers, wars, etc, that can catch one out. Chasing cross border investment returns is no sure fire lead pipe cinch of 6% or better returns...except maybe in the very short run.

I believe the entire world is entering a period of credit contraction and that finding any asset that will retain purchasing power is a good investment...and I own no gov treasury issues.

Mon, 10/24/2011 - 11:08 | 1804356 AnAnonymous
AnAnonymous's picture

Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet.


They are very unlikely to reach that stage.

To develop a higher and higher consumption level, they will need to import everything and anything, especially commodities.

Who has the commodities market ticket entry? The US and it is called the USD. And that is a US monopoly. Cant get them without messing with the US in one way or another, directly or indirectly.

Not possible for them to rise their internal consumption level in any drastic manner as it would take to maintain or increase US consumption.

World is kicking the bucket supporting the US. etc

Key word: US world order. Nothing happens anywhere without the ganglord, the US, knowing of it and allowing it.

Mon, 10/24/2011 - 11:22 | 1804420 Snidley Whipsnae
Snidley Whipsnae's picture

"Who has the commodities market ticket entry? The US and it is called the USD. And that is a US monopoly. Cant get them without messing with the US in one way or another, directly or indirectly."

China has developed trade agreements with Brazil, Russia, and others to settle cross border trade in their local currencies. I expect a continuation of this process as the US economy, and eventually the military, weakens. There is nothing to prevent Iraq from voiding contracts with US oil companies and negotiating contracts with other foreign oil companies when the US military exits Iraq. Iraq, as a soverign, simply states that the contracts negotiated with US oil companies were made under duress.

The USD isn't going away immediately but neither did the British Pound.

All purely fiat currencies have ~ 40 yr lifespan. Are you saying 'this time it's different?'...


Mon, 10/24/2011 - 11:37 | 1804501 AnAnonymous
AnAnonymous's picture

BRIC are BRIC. Agreements on consuming each other wont lead them no further than if they consume themselves. Just a different load distribution.

But what? They can only progress by consuming their exterior. No, cant do. US has the key to paradise.

Iraq as a sovereign? The US knows the job in installing puppet governments. Like telling Saudi Arabia could void US contracts, stop using USD etc...

Look at Saudi Arabia, it has become such a lap dog for the US they are compelled to do the US wet work.

Mon, 10/24/2011 - 11:58 | 1804585 Snidley Whipsnae
Snidley Whipsnae's picture

"US has the key to paradise."

You keep believing that...Let me know how it works out.

Empires come and empires go. You should spend some time reading real history and less time watching main stream media. The US is subject to the same list of missteps that brought down all previous empires. I would enumerate them but believe you should read some history and then you will learn for yourself... far more convincing than a short post on ZH.


Mon, 10/24/2011 - 12:01 | 1804611 Random_Robert
Random_Robert's picture

"I don't see how the BRIC economies will continue to generate high ROI if the Western consumption economies are slowing. Granted, in the long term internal consumption in BRIC economies will lessen the need for exports, but they are not there yet"



-Interesting point, and it exposes that fact that there are no "risk free" growth oriented stories out there today...

so, if making a nominal 5-6% is your goal, then you are pretty much stuck with either:

1) chancing it with the BRIC's

2) Chancing it by trading your own portfolio in the FOREX, bond, or equity markets

3) Chancing by assuming that the printers will keep printing, and that real assets will preserve your purchasing power, while generating the required nominal 5-6% along the way...

People fail to see that you can have a nominally inflative monetary enviornment sitting on top of a real debt-deleveraging sentiment, and the end result in real terms will be deflation; and there is not a single nominal price of ANYTHING would be an accurate indicator of what's going on...  In this scenario, he who loses the least purchasing power, wins.


Mon, 10/24/2011 - 14:39 | 1805305 Nick Jihad
Nick Jihad's picture

If you are a boomer, the ZIRP is a powerful incentive to save. Anyone with elderlyrelatives knows that living off the interest from savings is now impossible. I conclude that if I wish to have a dollar to spend when I am old, I will have to save that dollar now, so I have cut back spending dramatically.

Clearly many others in my generation are having this same thought, but  TPTB prefer to pretend that we are all to stupid to draw this obvious conclusion.

Mon, 10/24/2011 - 09:46 | 1804053 Raging Debate
Raging Debate's picture

Shizz. Yes, final devaluation period in 2013 followed by political panic. It isn't set in stone for more printing afterward for hyperinflation. But for bank holiday period this may last six months credit cards may work, we'll see. The rate of business has increased. For back-up supplies I prefer raw commodity imports like sugar to store for barter. PM's are really for preserving purchasing power past a hyperinflation event. It will be taxed when repatriated no doubt to finish recapitalizing the banking system. But that doesn't mean at all I discourage PM's. I mentioned the sugar because most of the folks reading this can't afford gold.

As for myself, I stored my wealth in intellectual property utility as a means to produce income and it can only be stopped if their is no Internet anywhere on earth. There is no risk-free way of preserving wealth just slightly better methods of loss mititagation. Even oligarchs are not safe in near the end of a Fascist cycle.

Mon, 10/24/2011 - 10:58 | 1804312 DosZap
DosZap's picture


Agreed, also where is the incentive to SPEND?

There is NONE.

Gov/Fed moves and job insecurity have people scared spitless to do anything except spend only what they need to,very little flagrant excess spending, by those that have decent jobs,or a job of any value at all.

Mon, 10/24/2011 - 09:14 | 1803938 ivars
ivars's picture

Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...

I think I finally managed to match them! Of course, crash (mimicking recession in q1 2012 in the USA and probaly worldwide) is there for all to be seen:

Now I have a really superb forecasting /history study interest tool . Have a look at exercise behind matching GREAT DEPRESSION and GREAT RECESSION timelines for the first time ( once  I managed to patternalize ( ?) OUT FED's grip on USA stock market prices)  and, as usual, better visibility charts plus explanations here:

And here:

The supplement chart for rereading the history of GREAT DEPRESSION and rethinking the future as time line can be extended as well:

Mon, 10/24/2011 - 09:45 | 1804046 mess nonster
mess nonster's picture

Props Ivars- you've definitely found a correlation of peak to peak and trough to trough.  (Seems to me such a correlation speaks more to the madness of crowds than anything else) The only major difference will be when today's chart plunges all the way to literal Great Depression levels. That will be quite the anomaly!

Mon, 10/24/2011 - 11:34 | 1804465 DosZap
DosZap's picture


Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...

I do not agree, if you were in the US on a typical Sunday morning, the churches are still full of Protestants, that have ethics and practice them, I am one.

Protestants and their ethics is what built this country, our first textbook in this country was the Bible.

In the Depression, people would ask for work, hated handouts and only took them when no choice was to be had.

When I was growing up these same ethics applied, If a man does not work, he does not eat.

Why?,self esteem and ethics,from what?,Protestantism.(and other Christian Religions).

Mon, 10/24/2011 - 11:49 | 1804560 Snidley Whipsnae
Snidley Whipsnae's picture

doszap... please, we have more than enough revisionist historians and propagators of mythology running around spreading disinformation.

Do you really believe that all the homeless holding up 'will work for food' signs at interstections really want to work? Or, do they want a couple of bucks for food/drink?

Were the Salem Witch Hunts caused by the 'first protestants in America' reading their textbook, the bible?

Religion is supported by the State because various religions help keep the sheeple in line.

...and, when no other reason exists for starting a war, the State can always call on differencies of opinion about who's god is the best.

I could go on but you get the gist... This is not a site to discuss religion or your particular religious bias.

Mon, 10/24/2011 - 11:38 | 1804511 AnAnonymous
AnAnonymous's picture

Of course human nature has not changed and protestant ethics existed somewhere sometime- but not in the USA...


No. Human nature is no constant.

What has not changed, the US citizens nature, which is eternal.

Mon, 10/24/2011 - 09:15 | 1803940 LawsofPhysics
LawsofPhysics's picture

Still fighting for the infinite growth and production model on this finite world eh?  Good luck with that.

Mon, 10/24/2011 - 09:24 | 1803974 snowball777
snowball777's picture'll contaminate the experiment and we'll never be able to trust the results.


Mon, 10/24/2011 - 10:10 | 1804118 tarsubil
tarsubil's picture

Hi, I never signed a consent form and I would like to opt out. Thanks!

Mon, 10/24/2011 - 09:15 | 1803941 mayhem_korner
mayhem_korner's picture



Savings are deferred consumption, but fail if the real return is negative.  The spread between the intoxicating projected real return relative to interest rates at the time of investment and the actual return of invested capital based on market valuation, including bubble effectsleads to the insurmountable debt gap.  

Too many go "all in" on the former, not realizing that the predictable overinvestment leads the latter.  And so spawns Bagholder Nation.

Mon, 10/24/2011 - 09:24 | 1803976 LawsofPhysics
LawsofPhysics's picture

Just call it for what it is, a ponzi.

Mon, 10/24/2011 - 09:17 | 1803949 mr_sandman
mr_sandman's picture

"The pattern continues until incomes shrink to the point that parties can no longer afford to repay debt and are forced to consume all of their income."


Yes, but this "pattern" only is due to the fact that the credit expansion was fraudulent in the first place.  No one would claim that Enron was a "pattern" that should be saved because there would be a self-reinforcing spiral making that entity insolvent.

Keynes was wrong even in the context of the Great Depression, because it is impossible to grow real products with capital that consists of IOUs.  It would be like Aesop's fable with the ants and the grasshopper in the winter.  The grasshopper gets to the storehouse and realizes there are lots of IOUs that say "here is some food."  It doesn't matter if there's some mathematical death spiral that results from "deflation" or "deleveraging" when he realizes this, the aggregate quantity of capital (e.g. food) in the storehouse simply does not exist in the physical world and no amount of accounting wizardry can alleviate this.

Mon, 10/24/2011 - 09:26 | 1803980 LawsofPhysics
LawsofPhysics's picture

Bravo!  Now if only eCONomists, economics, and monetary policy actually cared about the real world.  hedge accordingly.

Mon, 10/24/2011 - 10:33 | 1804193 trav7777
trav7777's picture

YES!  Excellent analogy; I am going to use that in the future.

And that is PRECISELY why deflation in the quantity of IOUs in such an edge case does NOT lead to more worthful IOUs.  They are themselves bankrupt as an institution and must be discounted.

Mon, 10/24/2011 - 11:21 | 1804414 Raging Debate
Raging Debate's picture

Yep. Bonholder haircuts galore, country by country. Europe first, America second, China third and least cut. From a citizens stand-point of suffering, eating a huge shit sandwich and getting it over with in 2008 wpupd have been better. For bondholders, it is better to wait. One holds the capital and assets. Gee, what's happening Beave?

Mon, 10/24/2011 - 09:19 | 1803958 i-dog
i-dog's picture

"supplanted by the consume, borrow and speculate profligacy"

I contend that this was caused by the welfare state, not by interest rates. Instead of the old saw of "save for a rainy day", the socialist meme of "vote for us...we'll look after you" introduced a moral hazard.

This is what caused the SKI generations: Spend the Kids Inheritance ... they won't need it!

Fucking socialists fail again...then blame it on capitalism!

Mon, 10/24/2011 - 09:28 | 1803991 Waterfallsparkles
Waterfallsparkles's picture

I will not be spending my Children and Grand Childrens Inheritance.

I worked very hard to build what I have.  I did it so that my Future Generations will have a better life and just maybe will be able to graduate from the Middle Class into the Upper Class.  Money wise.

As it takes Money to make Money.  So, if I have shown them diligent money principals and leave them Money or Assets they will have a chance to use those Assets and Money to grow it into even more Money.

There are 3 was to make Money.

1. Is to Work for Money.

2. Is to have Money Work for you.

3. Is to have People Work for you.

Combine all three and you will be above the Middle Class.

Mon, 10/24/2011 - 10:35 | 1804197 trav7777
trav7777's picture

#2 is no longer viable in the aggregate.

Mon, 10/24/2011 - 11:03 | 1804337 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

#2 was never viable in the aggregate.  Finance is zero sum.  If someone is collecting interest, someone else must be paying it.

Mon, 10/24/2011 - 11:37 | 1804497 Raging Debate
Raging Debate's picture

True Trav but low hanging fruit exists and I'm aggregating smaller investment just fine now (recent 90 day activity). But this is very unsexy and far more tedious than what most investors are used to with index investing. LOG = Low organic growth. If your not already very well connected go out and do some research and grab some low hanging fruit. Lots of established foreigners around now with small pockets of cash and are very itchy to invest. You'll just have to learn a few of their customs to close deals. That is one opportunity. There are some others but I am not going to just sit and gripe about no opportunity.

Someone mentioned Bakken the other day. While we all heard we're all going to die from Peak Oil, thousands of miles of pipeline was being built. Since few ever heard about the opportunities Bakken provides, why don't some of you build or expand a service that finds these kinds of opportunities? Then hire a couple of people part-time ;)

Mon, 10/24/2011 - 16:37 | 1805869 Waterfallsparkles
Waterfallsparkles's picture


#2 does still work if your Money is in Investment Real Estate.  Most Property's will give you at least a 5% sometimes 8% or more return on their value.

Mon, 10/24/2011 - 21:23 | 1806718 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

But not in the agregate.

Sure zero sum games can work for some people.  Some people make their living at the poker table, but that's only possible because other people lose money at the poker table.

If someone is collecting rent, someone else must be paying it.

At the micro level I agree with you, but trav7777 was addressing the macro level not micro, although the post he was replying to was from a micro perspective.  So trav7777 is technically correct, but only technically.

Mon, 10/24/2011 - 09:37 | 1804023 rwe2late
rwe2late's picture

Actually, idog, it’s not the sharing of wealth that is the basic problem, but rather the extreme concentration of it .


The need for a profit-driven economy to continuously expand profits is the problem. And furthermore, in a plutocracy, where those who possess the money determine the “needs” , … well you figure it out.


Here’s a quoted version of the anti-capitalist argument:


… in order to keep an industrial economy functioning, consumption must not only be continuous, it must continually increase.

…But continually increasing consumption is not compatible with frugality. An industrial economy requires people to spend and spend and spend while frugality requires people to save and save and save. The American economy destroyed the Protestant ethic and the religious views upon which it was founded. Conspicuous consumption replaced hard work and thrift.

Saving is (presumable) good for individuals but bad for the economy which requires continuously increasing spending. If an economist had told that to me to my face, I would have told him that that clearly means that there is something fundamentally wrong with the nature of the economy, that it means that the economy does not exist to provide for the needs of people but that people exist only to fulfill the needs of the economy. Although it may not look like it, such an economy enslaves the people it claims to serve. So in effect, industrial capitalism has perpetuated slavery; it has re-enslaved those who were once emancipated.

When consumption replaced thrift in the American psyche, the rest of morality sank into depravity with it. The need to sell requires marketing which is nothing but a liars lair. After all, the entire enterprise is founded on Edward L. Bernays 1928 book, Propaganda. The American culture has been inundated by a tsunami of lies. Marketing has become the culture's predominant activity. No one can isolate her/himself from it. It's carried on by businesses, politicians, and the media. No one can be certain s/he's being told the truth by anyone. No moral code can survive in a culture of dishonesty, and none has!



Mon, 10/24/2011 - 12:49 | 1804824 ElvisDog
ElvisDog's picture

in order to keep an industrial economy functioning, consumption must not only be continuous, it must continually increase

I disagree with that premise. A state you see throughout nature (and it's the state most systems are driven towards) is that of equilibrium. Neither increasing nor decreasing. Where is it written that consumption must increase to maintain a stable industrial economy? It seems like you are starting with a false premise and building your argument from it.

Mon, 10/24/2011 - 15:03 | 1805416 ToddGak
ToddGak's picture long as world population is increasing...even if everyone's per capita consumption remained the same on average, total overall production would need to increase to account for population growth.  I guess this is where the zero population growth arguments come into play.

Mon, 10/24/2011 - 09:20 | 1803964 Waterfallsparkles
Waterfallsparkles's picture

They are right.  As interest rates dropped on savings I used that Money to pay off Debt.  That way any interest I was paying is now Interest I am making on the Money used to pay off the Debt.

Paying off Mortgages and Credit Cards.

What was really funny was that I was paying 9.9% on a Credit Card I had.  They raised my rate to 17.9%.  So, I gathered all of the Money I could and paid it off.  They lost 9.9% on that Credit Card and I gained 9.9% on the Money I used to pay it off.  The amazing thing was that as soon as I paid it off they gave me an offer to reborrow the Money for a 3% one time fee and 0% interest.

Paid off Mortgages.  The Banks or Investors lost the interest income on those loans as well.  This leaves me with more Money in my pocket every month.  That Money is then used to work on the next Mortgage.

0% or .15% interest benifits no one except the Banks.

Mon, 10/24/2011 - 10:11 | 1804122 Waterfallsparkles
Waterfallsparkles's picture

Another point is that the Government cannot Tax me on the interest I saved.  Only on the interest I earn.

Mon, 10/24/2011 - 10:43 | 1804232 DOT
DOT's picture

Just wait...

They tax the unrealized gain in RE don't they?

Mon, 10/24/2011 - 16:30 | 1805836 Waterfallsparkles
Waterfallsparkles's picture

Yes, they tax the unrealized gain in Real Estate thru Property Taxes.  But, if you do not sell there is no gain.

Plus, your Mortgage does not in any way change the Tax on the Gain in your Property value, if and when you sell.  I do not intend to sell.  Just pass it down to my Children.

Mon, 10/24/2011 - 10:29 | 1804180 s2man
s2man's picture

+1, WFS.  The only debt I have remaining is my mortgage, which should be paid off in four years.

I put 10% of my gross into savings.  And when it builds up, I spend it.  My spending is slightly deferred, but besides emergency cash, I spend every FRN I can get my hands on.  I just don't waste it paying interest. 

Long physical assets, short FRNs.

Mon, 10/24/2011 - 09:21 | 1803966 mjk0259
mjk0259's picture

Savings are rarely channeled into new productive capital investments presently unless you count gambling or buying government bonds as productive capital investments.

Mon, 10/24/2011 - 10:07 | 1804030 Bob
Bob's picture

If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.

Yes, what a crock of shit that little unsupported "fact" (leap of faith) is wrt the real world.  Of course, as long as the financial system itself is fraudulently defined as "productive" and its "products" included in GDP, the macro crowd can keep pushing stupid prescriptions that seem perfectly logical. 

Mon, 10/24/2011 - 09:22 | 1803971 SheepDog-One
SheepDog-One's picture

When you really look at it, this is one fucked up world.

Mon, 10/24/2011 - 09:27 | 1803985 gaoptimize
gaoptimize's picture

This is what I was taught.


In thie current situation, it probably will end in a bank run also.

Mon, 10/24/2011 - 09:28 | 1803987 Withdrawn Sanction
Withdrawn Sanction's picture

Every period of significant sustained deflation was preceded by an enormous build up in credit (usually, but not always, to fight a war). The 1870s (aftermath of the Civil War and Reconstruction), the 1930s (WW-I)...every period but one that is. Now. The post-WW II era saw no deflation as the public's ability to thwart excessive money and credit was stymied by the gold-EXCHANGE standard that existed (i.e., one that relied on politicians to police themselves, as does our current system of floating rates). Instead we saw near continuous build up in credit for the past 60+ years. And anytime that process slowed, a recession typically ensued until such time as the inflationary processes resumed.

For the first time in those 60+ years we've witnessed an actual reduction in the totality of debt owed and even though small, its effects have been near-catastrophic. Prof Siegel (U-Penn) was on Bloomberg the other day practically pleading w/the federal government to continue deficit spending. He identified it (correctly) as the only entity still binging on credit. If it stops so does any expansion. It will stop, but that's another story.

Bottom line: Savings does not cause this problem, excessive unchecked credit expansion does. Any "paradox of thrift" is an effect, not a cause.

Mon, 10/24/2011 - 10:23 | 1804157 mess nonster
mess nonster's picture

Of course it makes you wonder if there is some natural debt limit that is reached under a gold standard, and yet can be disguised uder a fiat system with much greater disastrous consequenses.

Or, could it be that the energy never existed in the past to service the debt? That is, the natural "debt cap" has more to do with thermodynamics than it does with any aprticular monetary system. Think about it- how does one earn "times three" to service debt? This energy once came from animals and people mostly- thus a certain thermodynamic cap on total debt exposure based on the energy output limits of productive labor needed to pay back the debt.

Most specifically, this cap existed in agriculture, where food productioon was largely, (and still in the 1930's) accomplished with animal power and biological (today called "organic") fertilizer inputs. It all boils down to thermodynamics. Like the above poster said, you might be able to eat an IOU, but it has very few calories.

Post WWII, however, saw a great expansion in petroleum-powered productive capacity, especially in agriculture. It was this expansion thermodymanically, occurring at a rate much faster than debt accumulation, that allowed the world economy to binge on debt for 60 years.

Peak Oil bitchez... now it's impossible to pay back times three, or even (presently) times noithing. Food shortgaes equal revolution, revolution equals debt cancellation, or, if a government is clever enough to export its revolution as a war of aggression. it equals debt cancellation on the back of someone else. If tomorrow we find another energy source as versatile, cheap, and with such universal application as petroleum, we could go back to our borrow and spend profligacy with no worries.

Thermodynamics...immutable physical laws are a real bitch, man!

Mon, 10/24/2011 - 10:33 | 1804191 s2man
s2man's picture

Entropy, Bitchez

Mon, 10/24/2011 - 10:42 | 1804220 trav7777
trav7777's picture

not energy, power.

Most people don't know that coal extraction from mines was initially by horses.  The EROI on this was *higher* than when these horses were replaced with steam engines.  However, the rate of extraction was lower with horses.  Power is all that matters to our economy, the rate of expenditure of energy, or rate of work.  Human power is high EROI, but low power.

Thermodynamics make it such that as power rises, EROI necessarily falls.

And, also, I told the deflationists in 08 why credit was collapsing and who would step up and borrow.  All the Douchingerites said that they would simply fold their arms and refuse to borrow.  I said if you don't borrow, the gov't will force you to by borrowing on your behalf.

The mechanics of debtmoney are very SIMPLE once you get your mind around them.

Mon, 10/24/2011 - 10:48 | 1804260 DOT
DOT's picture

+ MV2

Mon, 10/24/2011 - 12:56 | 1804858 ElvisDog
ElvisDog's picture

Prof Siegel (U-Penn) was on Bloomberg the other day practically pleading w/the federal government to continue deficit spending

Siegel, Krugman, and the rest of the academic Keynesists hold the belief that there is no limit to the amount of debt that the U.S. government can issue. Another way of stating this premise is that the principal never needs to be paid down, the old debt is continuously rolled over into new debt. Now, if you accept the premise that a virtually infinite amount of debt can be issued, then Siegel is correct in that the government should issue as much debt and deficit spending as is required to maintain "growth". The fact that no state in all of human history has been able to issue an infinite amount of debt doesn't seem to trouble (or even occur) to them.

Mon, 10/24/2011 - 09:29 | 1803994 ArkansasAngie
ArkansasAngie's picture

Savings are easy pickings for the Fed. 

The very idea that the Fed would encourage risky behavior by granny is crimnal

Mon, 10/24/2011 - 10:05 | 1804107 XitSam
XitSam's picture

Not just the Fed.  The Bank of England is forcing savings into the equity market by keeping interest rates low, as an explicit, stated policy.

Mon, 10/24/2011 - 09:48 | 1804032 Mercury
Mercury's picture

The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess.

Yes, funny how we've travelled from pont A to point B like that.  Pretty simple really, we've reversed the exception and the rule.

But there is no paradox of gravity and there is no paradox of deleveraging - just controlled and uncontrolled.

Mon, 10/24/2011 - 09:53 | 1804054 Shizzmoney
Shizzmoney's picture

You might want to consider the other side of that argument (401K, pay) when employers are trying to maintain output without laying workers off. It is a fact that it is immeasurably more difficult trying to create a job than to get one...

OK, I can agree (esp. when it comes to health care), but when CEOs are making 475-to-1 ratio of how much they get paid as supposed to the rest of the proletariat.......that becomes a harder argument.  And yes, they have a right to do that......but I also have a right to point out that is NOT a sustainable model for wealth growth for ALL of the classes of society, and will create us going at each others' throats.  Stress levels are up across ALL workplaces.  If *we* show sacrifice, then the top also must as well.  If they don't, yes, they'll have all this money.....but it won't mean anything to the majority of them when the USD ceases to become the reserve currency, and when some hungry looter is raiding their fridge during "The Great Riots" in the middle of the night.

In addition, people who do need to save now (tha baby boomers) must be very worried about their shortfall in the new rate environment, so probably ZIRP 4eva is causing that these large and affluent group reduces consumption dramatically in face of the FED's stimulus.  This is beginning to have pernicious unintended effects.

The proletariat populace (i.e. most of us) are SLOWLY starting to understand this, but not fully. 

People who work today fall into three categories:

A) The sheep who still blindly invest in 401Ks/IRA and other retirement funds from their employers, who invest blindly into investment banks, who invest blindly into various bonds that may, or may not, have liability attached to sovereign debt (whether it state or corporate).  Before, it was attached to housing, hence why those with AIG and Lehman and Bear Sterns literally lost their shirts.  WHen the other shoes drops, this will spread to other firms, whether they like it or not.  I know of a BPD officer who lost $75K on Lehman ALONE.  This shuns people from investing, which affects capital in banks (which we need to keep printing money that actually has value of testicles behind it).

B) Older workers like my father (Vietname War Vet, BPD for 31 years) who KNOW I won't be able to afford putting him into a nursing home (like his family did for my grand mother) and maybe even lose HIS pension once the second shoe drops, working harder, and longer to try to save up as much as he can to survive once that shoe drops.  I try to educate him on making his money more "tangible" (buying silver, getting off the 401K tit once the Gov't confiscates them, claiming they'll need it to pay for SS), but he's an old Republican who is more focused on blaming Dems/Obama for everything rather than the real culprit - the Fed Reserve cartel.

C) Young workers (35 and under) like I, who thanks to the internet can research and read and open their minds, who "mattress" their money as we know saving for now ain't yeilding squat.  On top of that, college costs will go up, and income goes down, creating a "glass house" effect that will isolate the majority of the populace. 

Younger workers can work harder and be exploited for our productivity (and joint blind faith in the system)= for now, but this model won't last as eventually as we get older we won't be able to afford having a family once we find out how much it REALLY costs, and how the Christian model of "blind faith in love and each other" doesn't help pay the monthly grocery/mortgage bill, nevermind create savings (or will the bank who gave you the loan give two shits).  Never mind the dumb ones are encouraged to spend on consumer goods, most of which lose 80% of their value after two years (so you can't even resell it to get the NEW gagdget, never mind pay off the debt from the old one.

This will create tension from us having our asses against the wall. as unlike our baby boomer predecessors, we really don't give two shits about religion and consquences....I just hope it comes in a non-violent form (money bruning rallies, debt strikes, general strikes) and not like what eventually is happening like in Greece.

Research "Serfdom in the Middle Ages" to see where we are headed.  I am glad my dad could afford a private school where I had a kick-ass Western Civ teacher who told us about how Serfdom (then led by a joint cartel of religious leaders who also controlled banking through monarchies), and not JUST the Black Plague, was the reason the Dark Ages existed.


Mon, 10/24/2011 - 10:01 | 1804098 Bob
Bob's picture

The monstrous capture of the younger generation via student loan debt is a tough nut to crack.  It's no wonder that some are screaming for a student loan jubilee, regardless of how outrageously "unrealistic" it sounds.

I'd like to see folks focusing specifically upon reform of the laws barring discharge in bankruptcy.  This is something specific that speaks clearly to fairness--they are the only group that is enslaved in this obvious manner--and would be a major move forward for those hardest hit. 

Unlike a jubilee, it is a demand that is perfectly congruent with existing law and practice in every other area.  There's nothing "radical" or unrealistic about it. 

Mon, 10/24/2011 - 10:35 | 1804199 mjk0259
mjk0259's picture

A few doctors and lawyers declared bankruptcy immediately after graduating so there is some justification for that - maybe for 3 years after graduation not for life.

Mon, 10/24/2011 - 10:51 | 1804268 Bob
Bob's picture

Sounds fair.  We're on a roll!

Really, this is about pure, unembellished discrimination against the younger generation and simply making the demand for change in bankruptcy laws to make them equal to everyone else in society will make the case itself. 

Preference for students won't sell--hell, everybody's in debt and we all wish we could write it off--but FAIRNESS and equality before the law will.

Mon, 10/24/2011 - 13:27 | 1804973 Captain Kink
Captain Kink's picture

If a student borrows the 50-100k to get a degree in Art History or Classical Languages or Anthropology or.... they deserve the insolvancy that they end up with... The problem is that we allow our kids to go off to college to "study" what they think they like and enjoy as opposed to advising them that they had better be employable when they get out of school.  I know many grads in engineering and math and even finance and accounting that are not having trouble getting jobs and paying back the debt they assumed in return for acquiring skills that are productive and useful. 

Mon, 10/24/2011 - 13:48 | 1805048 Bob
Bob's picture

That may be true, although abuses by worthless for-profit schools are taking a toll regardless of major, not to mention foreigners on work visas and outsourcing that clearly are reducing employment opportunities in nearly every field. 

That said, what's the argument for picking this single class of borrower as the group literally enslaved by debt regardless of individual differences?  Where's the appropriate incentive for lenders to exercise discretion . . . something that might well remedy the problem you cite, in addition to the restoration of fundamental equality that eligibility for discharge in bankruptcy would provide.

Mon, 10/24/2011 - 11:07 | 1804353 DOT
DOT's picture

Pay Back is a Bitch.

The Federal Government controls the Student Loan "market".

Repayment could both serve the graduate by having allowed the opportunity, and the public good.

Capping not just the time period that collection may occur but also the time period that interest accrues could provide some relief with-out comprimising the demand for repayment. 

Another possibility could be making all student loans interest free (public good in Education) and letting the IRS collect up to 15% of earnings up to the amount of the loan over the first 10 years.  No job means no repayment if you want to be a hippie for 10 years.


The Hippies will be with us always.  ;)

Mon, 10/24/2011 - 12:19 | 1804692 DosZap
DosZap's picture


Great post execpt here is a major FAIL in your Gens issues.

 we really don't give two shits about religion and consquences

Without an anchor in your life (Belief), you will always be like a dingy that got losse from the pier.

No goal, just aimless futility.

Mon, 10/24/2011 - 10:01 | 1804088 A_MacLaren
A_MacLaren's picture

You write about the Paradox of Thrift in normal times.  "Savings are only harmful when used to repay debt or other non-productive purposes."  But these times are far from normal.  Public and private debt remain at staggeringly high levels compared to GDP & Household Income.  There is an excess of supply of productive capacity in both labor (high unemployment) and infrastructure (empty store-fronts, idle factories and see-thru office space).

Perhaps you didn't obsserve Ray Dalio's comments:

So that there`s a private sector debt issue at the same time as the public sector debt. They`re both. So if you resolve the budget deficit, you do not resolve the private sector debt issue. Both of those things mean we`re both overly indebted. We cannot -- the amount that we owe and have promised in its various forms can`t be paid.


We can`t solve the problem easily because we still have too much debt. But we can move forward in being able to make the best of it. We can spread it out, we can keep orderly we have a situation now in which we have a very severe situation, not only because we have a deleveraging going on, but we have a situation in which monetary policy cannot work the way it worked in the past, that fiscal policy will not be stimulative.

Perhaps your solution is to increase leverage even more?  Don't delever, borrow and spend more? 

Mon, 10/24/2011 - 12:14 | 1804676 Raging Debate
Raging Debate's picture

Exactly A Mclearan. See my comment a few up about unsexy, organic investment. You still lever up it just means five year business plans and stop changing the rules of the game like government is doing now. It is not just a lack of skills in labor that is the problem, it is also indirect tax policy that encouraged employees to sue for anything while the State was really just after its fine/tax.

As revenues have collapsed, government at all levels does more of this but with the flimsiest of excuse as the laws make every person a criminal, but when taxing you tax the bell curve or you tax whatever class you can. That becomes the middle class in these times. Why? Because tge truly rich escape taxation and the poor have little to tax. I didn't say I liked it or it is fair. A friend of my teaches piano lessons and just got whacked with $4k bill. Never seen the application of this tax law applied in this way. It didn't surprise me and for her, the choices are work harder to pay taxes (including inflation) or become like one of those supposed dirty hippies at OWS.

Mon, 10/24/2011 - 09:57 | 1804090 hyperbole2000
hyperbole2000's picture

Keynes based tax policy taxes work and savings and not consumption unlike our grandparents tax policy which taxed consumption. If only consumption is taxed and income (work) and savings are left alone then the rich whose money works for them benefit and the poor who work for money benefit. Overtime the savings of the poor though hard work would move them upwards economically. This would be an improvement over current tax policies where perpetual disincentives via taxes on work and savings eventually cause everyone to be broke and unemployed. As the article states a savings based economy will lead to increases in productivity and efficency which in turn lead to resource conservation and long term sustsainability and economic stability. Even the Greens will be happy. Sustainable social and political stability will also be realized. From a philosophical perspective life, whose definition was required by Dr. James Lovelock in his task to spec. the instrumentation platform for the first Mars lander, was defined to be that which saves energy. Man as the sentinent being at the top of tree of life would be practising a primevial quest to perpetuate life and growth through a pro-savings tax policy. Even the public services should be allowed to build large reserves, no harping about over taxation during the boom times as the reserves, during the inevitable busts following the booms, could be used by the Public Sector to build up infrastructure at the very low costs offered by the hungry private sector construction industry. Such a system would eventuall be comprimised by regulatory capture abd be subject to boom bust cycling; however, if the mantra of "Tax consumption not work or savings" can be enshrined constitutionally and not abandoned the deviation away from the average during the inevitable economic swings can be minimized.

Mon, 10/24/2011 - 10:55 | 1804298 AnAnonymous
AnAnonymous's picture

Overtime the savings of the poor though hard work would move them upwards economically.


Made me laugh.

How? Please explain.

What is hard work?

Work, production etc... are consumption of the environment. Working hard is consuming hard.

Funny how US citizens love their fabled past. Most of their wealth has been accumulated through transfer of wealth/theft. Cant admit that.

So they refuse basic facts on work.

Another iterance of the US not being the solution, the US being the problem.

Mon, 10/24/2011 - 11:19 | 1804350 DosZap
DosZap's picture


Second most idiotic( no clue about 90% of Americans) post from you.

Funny how US citizens love their fabled past. Most of their wealth has been accumulated through transfer of wealth/theft. Cant admit that.

No, for the vast majrity it came from 30-40yrs of sitting in traffic, and spending hours minimum in  cars, to get to jobs that we most did the work of two for one wage,it's called busting your ass.You ever heard of it? it's called WORK.

No one from Da Gub, has ever given me a dime.My full taxes combined run close to 50%,what else do you want/expect from us?

First born?

Mon, 10/24/2011 - 11:20 | 1804409 AnAnonymous
AnAnonymous's picture

You got me here.

Stuff to say on self indiction and US citizens. Usually, for US citizenism causes, US citizens refuse to self indict.

But here, we've got a winner. A US citizen who forgot himself. Or maybe not, after all.

If indeed my post is idiotic, yours is even more idiotic. Work is consumption of the environment. That is what is work.

Work, production... All that is consumption of the environment. If indeed work could exist out of any material referential as US citizens like to propagate, the current situation would be otherwise.

When one steals the environment of another, one also steals the capacity of that piece of environment to support work. Hence the big issue met by all expansionists. As they steal, they also increase the potential for work and hit a hard line when they can no longer expand.

Rings a bell?

Now, the comment is idiotic but it might not be self indiction.

US citizens are duplicitous. Denial is their sport and they would prefer to throw a dumb like comment in the pond to divert from the core point.

Which was done. Spouting out idiotic comments does not reveal stupidity. The comment is stupid but the person might not be, just sidetracking etc...

The US citizen nature is eternal.

Mon, 10/24/2011 - 11:35 | 1804489 DOT
DOT's picture

Take a big rock...a big block of marble. It is rough and crude; inside it is a beautiful statue.

It will take great imagination and Hard Work to bring it out.

You are so absolutely wrong even the rocks are laughing at you. (props to Victor Hugo)

Mon, 10/24/2011 - 11:41 | 1804532 AnAnonymous
AnAnonymous's picture

And what? Has it not consumed one big block of marble, that wont never be in its original shape?

US citizens'arrogance has grown to such level now that even through their direct examples, they admit what they deny.

Mon, 10/24/2011 - 12:03 | 1804620 DOT
DOT's picture

Are you proposing that the rock has a higher purpose than the lovers of beauty ?

What you are missing is that there has been a transformation.

The rock still exists! Even the debris from sculpting still exists!

Through the imagination of man beauty is revealed.


Do you hate  beauty?

Mon, 10/24/2011 - 11:36 | 1804490 hyperbole2000
hyperbole2000's picture

If we don't consume we die. It's called eating, building shelter, and keeping warm. Ironically, I agree with you in that it is an inevitable depletion of resources. Therefore we must maximize productivity and efficiency to slow down the rate of resource depletion. And guess what: it will increase our standard of living which reduces the poulation growth rate because we don't, have to worry about our childern dying prematurely. And that is the real threat: Our population growing beyond the planet's resources to support it sustainably. Only capitism that rewards work and savings will give us a reduction in the resource depletion rate and added time we need to have a chance to find a sustainable future pathway. Burrow, spend, and consume under government controlled inflation management wizardry is a fast track to hell with no hope.

Mon, 10/24/2011 - 11:45 | 1804546 AnAnonymous
AnAnonymous's picture

If we don't consume we die. It's called eating, building shelter, and keeping warm.


Waooo, because work in US citizens societies is mostly oriented toward eating, building shelter and keeping warm?

Looks like primitive societies...

If capitalism rewarding conservation? Really? No. Capitalism rewards expansion.

The bent was taken in 1776 with the inception of the US and that massive, big blob country continent which was to force imbalances over imbalances on the rest of the world.

Mon, 10/24/2011 - 12:08 | 1804649 DOT
DOT's picture

Population growth requires expansion, shit head.

US Citizen farmers (get my lingo?) feed Billions.

Should they stop ?  You are a clueless troll.

Mon, 10/24/2011 - 11:15 | 1804384 DOT
DOT's picture

Hard work will work if first you think.

You are an ass. Thinking first also works when posting.


Viva la Raza!

Mon, 10/24/2011 - 11:18 | 1804396 hyperbole2000
hyperbole2000's picture

Hard work means more work. Currently working more puts you into a higher tax bracket and discentivizes the worker from doing more work. This places a ceiling on the productivity/efficiency of the worker. Magnify that one worker by millions of workers and you realize there is a lot of firepower in the system. Don't use the "the chicken or egg first" BS. That is the point of the argument. Using the premise of your argument as teh conclusion is circular and fallicious. If I work 7-10s and have $3000 in my pocket I could spend it now and pay a 9% sales tax or I could save and grow it a little and buy what I wanted later when productivity has lowered the price 9%. Result:I got mu man-toy and saved a little money to boot. Compared to the curent godforsaken system based on borrow and spend with inflation cooked in to make you spend before the price skyrockets. A model designed to create wastefullness and resource depletion. The same modus operandi as a cancer cell.

Mon, 10/24/2011 - 11:26 | 1804443 AnAnonymous
AnAnonymous's picture

What chicken and egg?

So the US has forced the world in a game of consumption.

What guarantees you that there will be still goods when you want to consume thanks to your savings, especially money savings?

Current situation is like a mall. But the mall is less and less restocked to converge toward no restock at all.

What is best? US citizens have to improve on their propaganda.

Everyone sees that right now consumption is the best. Debt is fantastic as you can consume now through a promise to pay back later.

All people who stay their hand when reaching to their credit card are in for the shocking discovery that the day they want to consume, the stalls are empty.

Black Friday exists and they have given examples that even the negroes have gotten it.

By US standards, it should mean an urgent means to better propaganda. Because when you can not bamboozle the guy you label as the dumbest in the classroom, it means you are even dumber than him. Or something like that.

Mon, 10/24/2011 - 11:39 | 1804513 DOT
DOT's picture

"... even the negroes..."


What a total ass you are!   Or something like that.

Mon, 10/24/2011 - 11:42 | 1804536 hyperbole2000
hyperbole2000's picture

Ace serve, point, game, match!!!!!!!!!

Mon, 10/24/2011 - 11:46 | 1804553 AnAnonymous
AnAnonymous's picture

For what?

For telling that the negroes saw through the US consumption game?

Mon, 10/24/2011 - 11:40 | 1804523 hyperbole2000
hyperbole2000's picture

Oh I forgot, Only the US eats, needs shelter, and needs to keep warm via consumption. The rest of the planet lives of magic fairy dust.

Mon, 10/24/2011 - 11:51 | 1804581 AnAnonymous
AnAnonymous's picture

Oh I forgot, Only the US eats, needs shelter, and needs to keep warm via consumption. The rest of the planet lives of magic fairy dust.

Made me laugh.

Typical US citizenism.

So now the pride of the free world, the leader of the US world order, has its citizens consume not more than Somalians?

Please consider that consumption by US citizens encompasses a bit more than covering needs for food, a basic shelter and a warm place to sleep in.

Mon, 10/24/2011 - 12:34 | 1804753 Raging Debate
Raging Debate's picture

An Anon's purpose of wasting time is to actually waste yours. An Anon, I'll will take this up with your real employers so you add value. But your never really going to talk to me again directly in dialogue because while I respect employers, I do not respect employees that can't even bother thinking creatively, even when given a shitty task.

Mon, 10/24/2011 - 09:59 | 1804095 SqueekyFromm
SqueekyFromm's picture

Sooo, saving money does not decrease consumption as long as you spend the money you saved.

Why am I thinking we still have a paradox???

Squeeky Fromm, Girl Reporter

Mon, 10/24/2011 - 10:07 | 1804113 pemdas
pemdas's picture

Even if YOU save the money, some one else will spend/invest it, wither the bank you put it in or the government of the bond you buy.

Mon, 10/24/2011 - 10:55 | 1804302 AnAnonymous
AnAnonymous's picture

It is always the other guy with US citizens.

Mon, 10/24/2011 - 11:10 | 1804361 SqueekyFromm
SqueekyFromm's picture

Maybe that is the paradox again. You decide to save money rather than go to the restaurant. So do a lot of other people, The restaurant closes. The government spends the money you saved to pay unemployment benefits and food stamps to the restaurant workers. Isn't that proof of the paradox??? How people not spending, means the government has to spend more???

Squeeky Fromm, Girl Reporter

Mon, 10/24/2011 - 10:11 | 1804123 SDS Trader
SDS Trader's picture

This article seems subject to confusion since in the classical sense, thrift = saving = placing that money in a demand deposit account, under one's mattress, or burying it in coffee cans under the moonlight in one's backyard, rather than buying shares in General Electric or Apple Computer over time.

Keynes (who I am not a fan of) may have been writing at turbulent times, but demand deposits then were not materially different than they are now, with the possible exception of the vanishing of Postal Savings accounts.

I agree about the wanton demand for cheap money, but I think the sins of our banking fathers go back further than 3 generations.  Heck, the bi-metalism movements of the late 19th. century prove that - just read "The Wizard of Oz" and check out those silver, not ruby, slippers Dorothy wore in the book.  And let's not forget "The Crime of (18)73"  or "The Cross of Gold" speech either.

As Hal Holbrook's character Lou Mannheim said in "Wall Street" - "Jesus you can't make a buck in this market, the country's goin' to hell faster than when that son of a bitch Roosevelt was in charge. Too much cheap money sloshing around the world. The worst mistake we ever made was letting Nixon get off the gold standard."

Nice read.


Mon, 10/24/2011 - 10:14 | 1804131 DOT
DOT's picture

 A $million project is funded by a like amount of taxes at the federal level.The amount of $300K is saved for the Inspector General's oversight and administrative costs.

$700K is received by the State government, which sets up a payment mechanism for the project. $200K is retained by the State to pay for adiministrative costs.

The local government hires a consultant to implement the program according to the rules from the State and Federal Governments. The Consultant's study cost $100K. A program director is hired to run the program; another $150K.  $250K is spent securing facilities for the Program.


The Program is cancelled due to a "lack of funding".      Lack of spending is not the problem in the Public Sector. 


In the Private sector savings can be purposed to provide a capitol base for  opportunistic spending or  collateral.

If you have "saved" some gold the FRNs used to purchase it are kept in circulation. If you lever up, with a Mortgage for example, the activity leads to an increase of economic activity (growth models).


If no one is Buying what YOU are Selling consider that what you are selling, how you are selling, and when you are selling, is simply not wanted or needed right now. 

Now paying off that Mortgage, paying debt service, taxes on the assets and income that you have... That's going to have a negative impact on economic expansion.  Obligations in the Private sector to aquire goods or services now, with a pledge against the future, spends tomorrows potential wealth, and diminishes future opportunities.

Spending has never been a problem.

Not getting what you have already spent money to aquire (honest government) is a real drag.

Mon, 10/24/2011 - 10:15 | 1804135 paul20854
paul20854's picture


Was Keynes right about anything?


Mon, 10/24/2011 - 10:59 | 1804315 Bob
Bob's picture

Apparently not.  It would almost seem that only a couple impressionistic paragraphs are necessary to refute another of his mainstays.  Life is easy on the internet!

Mon, 10/24/2011 - 10:16 | 1804137 mr1963
mr1963's picture

Liked the article, would have been good to correlate to --say GM -- who, with large cash reserves and no earnings, turned to a flawed mortgage market to try to get a return, and well, kind of went bankrupt (although really didn't need to, another argument for another day). Point being, corporations as well as private citizens were forced into riskier alternatives with disasterous consequences.

Mon, 10/24/2011 - 10:17 | 1804138 Cranios
Cranios's picture

This is one of the best articles ever posted on ZH - and also one of the shortest, reminding me that brevity is the soul of wit.

Mon, 10/24/2011 - 10:17 | 1804139 Restcase
Restcase's picture

I'm going to save or spend as it suits me regardless of its effect on "the economy" or society. It's kind of disturbing that some social engineer has tied my saving or spending habits into the greater good.

Mon, 10/24/2011 - 10:17 | 1804142 High Plains Drifter
High Plains Drifter's picture

in sync with this blog posting, let us look back to 1987 and louis rukeyser. on the one hand we have john m templeton, wasp , scrimp and save........on the other we have squid proponent , steven einhorn , representing the new wave (at that time) of leverage up and get risky, type guys who, in the final estimation , made wall street what it is today, nothing more than a casino......and a big rip off. so the baby boomer has a dilemma. what to do. what to do. my suggestion to them is simple. get your money out of this system and get into tangible assets that you can control.

Mon, 10/24/2011 - 10:45 | 1804245 mess nonster
mess nonster's picture

What to do, what to do... inflation encourages borrowing, spending and speculation. Now in my mid forties, i have heard about the folly of putting money in a savings account since I was old enough to understand such concepts. Sixty years of an inflationary economy, and of course saving will become an anachronism, as soicially quaint as spittons and rumble seats.

I wouold say that most of us, including, or especially, people like Steven Einhorn, are reactionary. He isn't the cause, just the magnifier, of how inflation operates. A guy like him, raised in an environment of situational ethics, sexual excess, and general moral fogginess, isn't going to buck the system, he's just going to go with the flow, on the leading edge of the flood. I mean, this isn't a guy who spent a lot of time in Sunday School. Does he, or Michael Milken, or any of the other kings of the eighties, have a sense of Moral Conviction? Do they hedge themselves up with self-imposed Conscientious Liimits to their behavior? Fuck no! And neither do any of the other squids presently sucking the life blood out of the economy. Correctly, they will tell you, they are just doing what comes naturally, and what the economic trend of the times tells them to do.

There are two kinds of inflation/deflation models. There is the bellows model. A bellows inflates, and then it deflates, cyclically and predictably. Then there is the party-balloon model. It inflates until the ability of the latex to withstand the increasing prssure in the balloon is exceeded, and the balloon bursts catastrophically. Peak Oil is the limit to the balloon's expandability. The balloon has already burst, but the huffing and puffing continues for a few brief moments.

Deflation favors cash-in-hand. Put some under a mattress near you NOW! 

Mon, 10/24/2011 - 10:50 | 1804266 Downtoolong
Downtoolong's picture

I believe an investment product should exist that simply guarantees savers preservation of the purchasing power of their money after adjusting for inflation and taxes. It could be something like TIPS, but, with a zero coupon and no tax on the imputed CPI adjustment component (which is nothing but a tax on assets held anyway, because, it is all pseudo income). I bet if such a product did exist many investors would be all over it, because (sadly), it's actually a hard combination of risk and reward to beat these days.

And how hard could it be for all the industry and government geniuses who claim to be able to sort out the intricacies of world finance and economics, and who have already demonstrated a willingness to use their massive power to orchestrate massive market interventions and manipulations via fiscal and monetary policy and backstop guarantees to come up with a simple product like this for the little guy? Not too difficult I would think. Therefore, by “should exist”, I’m implying that a financial industry which doesn’t provide such a basic foundation product as an option for investor portfolios is itself under-performing at a substandard level.

Mon, 10/24/2011 - 11:12 | 1804370 mess nonster
mess nonster's picture

The "guarantee" of such savings' purchasing power means someone would have to addd to your savings account in an inflationary economy in order to keep its purchasing power constant.

Wall Street is designed to STEAL your money. They are not disposed to such a idea...

But wait! if the government, which is also designed to steal your money, were to be the depositor into your savings account, they could do so by borrowing the moey from Wall Street, and then stealing even more of your taxes to pay for putting just some of that money back into your savings account, while increasing your taxes to pay for it.


Hey little guy, you're in the barrel. If you can't soar with the eagles, then crawl with the reptiles. It's the mid-sized herbivores that are hunted and killed to be eaten.

Mon, 10/24/2011 - 10:51 | 1804274 AnAnonymous
AnAnonymous's picture

Saving or not saving means nothing in this US driven world.

Reading the comments section, clearly, US citizens who have risen up through theft and own most of things thanks to theft,are now obsessed by making sure other people might follow the same path as them, because, unavoidably, it would mean massive theft from US citizens.

Once a thief...

Mon, 10/24/2011 - 11:22 | 1804418 DOT
DOT's picture

OK, you have made the accusation, now make your case.

So far you have only made the case here at ZH, that you are an ass !

Mon, 10/24/2011 - 11:30 | 1804460 AnAnonymous
AnAnonymous's picture

The case is being made by US citizens'actions.

It is like being a witness to a burglary. Or when a burglary is broadcast on every TV networks, radio networks and the rest.

Useless to make a case. Useless to accuse. You simply report.

Mon, 10/24/2011 - 11:54 | 1804590 DOT
DOT's picture

Citizenship is not a requirement for being a human.

Human Action shaped by thought and reason seeks to improve the Human Condition.

Sleep in the gutter,  fool, then report. Observe that the gutter is not as forthcomming of benefits as Hard Work.


Mon, 10/24/2011 - 10:53 | 1804290 DosZap
DosZap's picture

 Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

Also, it's a far cry from MOST here's Parents generation.

Mon, 10/24/2011 - 10:54 | 1804294 TO
TO's picture

This is very interesting if you follow the logic further.  If I don't have debt and save then the bankers don't asset strip me and I can complete with my capital investments.  Further, if I fall into their ploy and take on too much debt, I can never save enough to have capital to compete against TPTB.  What a wonderful, self-reinforcing system feeding the bankers and the super-rich.  Debt, it's what's for dinner.

Mon, 10/24/2011 - 11:01 | 1804329 AnAnonymous
AnAnonymous's picture

Made me laugh.

Incredible US citizens. Everyone is up in their US citizens'shit but US citizens still want the others not to tell that their shit smells.

The US has imposed on the rest of the world a consumption game. It is all about consuming as fast as possible the Earth.

Debt is a fabulous tool to perform well in that game.

Even in the best scenario, savers are losers in a consumer game as they will be left with less and less to consume.

That is the best scenario because others feature US citizens raiding the saved stuff when they are low on consumption access.

Like Lybia, with the mad dog Gaddafi conserving oil, and preventing US citizens from consuming it at full potential.

Want to finish like Gaddafi? Save in real terms. Conserve. US citizens are going to end knocking at your door because they are expansionists. And expansionists need room to expand. And conservation provides expansionists with room to expand.

Mon, 10/24/2011 - 11:47 | 1804557 DOT
DOT's picture

Junk for you asshat !


Make your case, how about a cogent argument ? 


Europe is the main consumer of Libyan oil.   

Mon, 10/24/2011 - 17:36 | 1806073 DosZap
DosZap's picture

AnAnonymous ,

YOU should be damn glad we are not Colonialists,we would own the world with rare exceptions.

But, we would rather screw ourselves,than actually break even on a deal for the American public at least.

Profits made with our taxes, NEVER come back to us.

So stick that in your pipe and suck on it .

Mon, 10/24/2011 - 11:00 | 1804323 Catullus
Catullus's picture

Kind of getting there.

There seems to be this meme out there that paying off your debts is somehow not productive. Which is to say, returning the capital that someone else loaned you is not productive for new capital development. That's not per se correct.

The issue is when the debt issued to the debtor was not from capital savings, but rather an accounting ledger gimmick supported by Fed (counterfeiter) manipulation. The reality is that BECAUSE the fed mimicked real savings with their money printing, the debtors as a whole will never be able to pay off what they borrowed. The seeds of the collapse are built in to the boom.

The Paradox of Savings is a 300 year old canard of terrible logic that simply has no concept of a pure theory of capital. Those who use it, don't know what capital is and can hardly tell you how it is deployed. An interest rate might as well the price of candy bars.

Mon, 10/24/2011 - 11:06 | 1804348 dumby
dumby's picture

All this talk of "income", "savings", etc is really beside the point. The issue is not that complex.

Any time a person chooses to do one thing (such as save), instead of another (spend), that is evidence of preference (marginal utility of saving is increasing or they wouldn't choose this).

Obviously the individual is choosing what is best for himself, and is better off saving than spending.

What is 'society' but a collection of individuals? Therefore if, as a group, people prefer saving to spending, the group is better off as a result.

I know F.A. Hayek and others can debunk Keynes with many fancy words, but it only really requires basic common sense and to observe, furthermore, that pumping water from one end of a swimming pool to the other does not raise the level of the water: it only produces heat and wastes energy.

Mon, 10/24/2011 - 11:17 | 1804394 technovelist
technovelist's picture

The so-called "paradox of thrift" is utter and complete horseshit in ANY economy, "normal" or otherwise, as anyone familiar with Austrian economic analysis could tell you. The boom that precedes a bust is the problem, whereas the bust is the cure, and no amount of intervention can prevent a bust after a boom; the only thing intervention can do is to make matters much worse by delaying the correction and making it much more painful.

Mon, 10/24/2011 - 11:18 | 1804397 Odin
Odin's picture

Awesome article. Sounds a lot like what Peter Schiff has been saying for years. End the Fed!

Mon, 10/24/2011 - 12:20 | 1804696 CTG_Sweden
CTG_Sweden's picture

I think the reason why politicians generally have discouraged saving and encouraged spending is that more spending increases GDP and decreases unemployment in the short term. Encouraged spending makes it easier to be re-elected. It is also more likey that you get re-elected if you increase the public debt (by tax reductions or more public spending) and thereby increase GDP and decrease unemployment in the short term.

I think that the best solution to the problem would be if people who don´t want to be fooled created their own countries. Another solution could be (combined with the solution mentioned above) more idealistic politicians who have a genuine affection for their country and their electorate. The current situation where you have an electorate which does not understand basic economics and politicians and big media (which to a very large extent decide the outcome of the elections) who do not have a genuine affection for their country and electorate very easily results in budget deficits and other economic problems. I know that some people within the EU think that the solution to the problem is some kind of "managed democracy" that would resemble count Richard von Coudenhove-Kalergi´s ideas of European élite rule. But I think that the solution should be more democracy rather than less democracy, at least for those who don´t want to be a part of the élite rule system.


Mon, 10/24/2011 - 12:38 | 1804771 PulauHantu29
PulauHantu29's picture

Good summary. the best sentence:

<<The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess.>>

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