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"One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost"

Tyler Durden's picture


The following extract from Charles Gave's (of GaveKal ) latest letter to clients is a must read for all, especially for the central planning members of the FOMC. The punchline is this statement which is so simple and obvious, it is no wonder virtually noone in control has figured it out yet: "One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost."

From GaveKal Research: Obsessed by Negative Real Rates

Deflation and crisis

Consumption bubbles fuelled by negative real rates always contain the seeds of their own destruction. Debt levels get too high and force household deleveraging; meanwhile the currency falls, which improves competitiveness in the global marketplace. The combined effect is a narrowing of the current account deficit. When the world’s reservecurrency nation experiences such a narrowing, the supply of dollars outside of the US falls, and inevitably catches some countries out.

The best way to look at global dollar supply is to remove China and oil from the US current account balance; this is because of the incredible competitiveness of China, and the scarcity-value of oil producers. Excluding oil and China, the annualized US current account has moved from a deficit of 3% of GDP in 2003 to a recent surplus of 1% of GDP.

This improvement in the current account position has taken place despite the fact that most of the world is growing well below its potential. In effect, the US economy has exercised an immense deflationary pressure on the margins of companies outside of the US, and in so doing has managed to “recover” roughly 4 % of its GDP.

This turnaround underlines just how low the value of the US dollar fell after years of dilutive monetary policy. Moreover, the pressure of a cheap dollar has been compounded by mercantilist China’s de facto peg to the US dollar. No wonder so many current account crises are percolating around the world—countries from Egypt to Italy to India have had to deal simultaneously with a hypercompetitive dollar, an undervalued renminbi and higher oil prices:

While the oil producers and China may still be sitting on a ton of US dollars—which they are recycling into USTs and thus keeping US government borrowing costs at bargain-basement levels—the dollar supply elsewhere in the world has fallen sharply. The countries which have no access to the US currency have to start using their foreign exchange reserves to meet their payments (very often to oil producers and China), thus amplifying the problem. When a country is forced to sell reserves, then it has to follow restrictive monetary and budget policies to depress domestic demand and recreate a current account surplus. 

The cost of capital rises sharply for the private sector. India today offers a prime example of a country stuck in this corner.

In the chart below , I am showing the 12-month variations of foreign central bank reserves deposited at Fed—this is excluding China (I would also exclude the oil producers, but could not find a way of estimating their forex reserves). Past periods of rundowns in global forex reserves always have been associated with crises.

When the US current account deficit starts closing, the dwindling supply of dollars eventually leads to a panicked rush for dollars. Non-US companies that binged on dollars when the money was cheap and the dollar was forever going down, now find themselves caught out. Every entity with a negative cash flow in dollars scrambles for dollars — even through selling local assets and converting the proceeds — depressing risk assets everywhere.

The US dollar and USTs outperform everything, including industrial metals (see chart overleaf). And of course equities are not spared (see chart overleaf).

Needless to say, if one has to be invested in equities in these periods, stay in the US stock market (as US companies will not have such troubles) and avoid non-US equities except when they become extraordinarily cheap versus the US market (e.g., a ratio below 1.2x).

I could go on and on with other examples, but let’s just get to the point: one cannot operate a capitalist system if the state can borrow at a negative cost. Years of irresponsibly loose monetary policy in the US has led to cheap funding for the US (and other) governments, but difficult credit conditions for the  private sector all around the world. As I underlined in How The World Works, negative real rates leads to misallocation of capital which ends in asset deflation, while simultaneously limiting the capacity for recovery by driving out the private sector.

The Fed has been managed by a bunch of Keynesians who care nothing about the role of the dollar as a reserve currency and who probably believed they were managing the central bank of Belorussia or Zimbabwe!

So what’s an investor to do?

Now at this point, the reader may feel I am about to suggest buying a ranch in Oklahoma, a few guns and some nuggets of gold. This is not my recommendation—at least not yet. In fact, for more than a year now, we have been recommending assets with a positive cash flow in US dollars.
We see no reason to change the portfolio yet. Indeed, because the US bond market has absorbed so much of the world’s “panic liquidity,” a
number of US assets are still reasonably priced (corporate bonds) or even cheap (e.g., platform companies, or good quality residential real estate).

The big question is whether there is scope for more sane central banking, and an improvement in liquidity conditions. In some ways I feel hope:

• Oil prices have come down a lot, and the US dollar is rising (despite the Fed’s frenetic distribution of swaps).

• China is internationalizing the RMB and increasingly widening its capital account, to provide another source of liquidity.

• If non-US assets become cheap enough, then more risk capital will start flowing in that direction (a break-down of the euro would be very useful here in so far as it would instantly create a lot of very cheap assets in Italy, Spain, France, etc.)

In an ideal world, central banks would stop manipulating prices and would return to the Wicksellian rule which worked so well from 1983 to 2002—i.e., they would decide to put short rates gradually back at a level consistent with the growth in the local private sector GDP. I know full well that allowing short rates to go up at this time flies against the current Keynesian orthodoxy at the Fed. A few Fed officials have already acknowledged that with the Fed balance sheet as enormously large as it, future QE action will simply have much less bang for the buck. Unfortunately, with Wednesday’s FOMC announcement on additional funds for Operation Twist, it is clear that any voice of reason in that organisation will be drowned out the by Keynesians on board.

I can only take solace from the fact that political winds also do not seem to be blowing in the Fed’s direction. We may have to wait for November—to see if the voters fire the Fed. Such an outcome would be very bullish for global risk assets.


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Sat, 06/23/2012 - 12:31 | 2553790 Frastric
Frastric's picture

This is why I love ZeroHedge, there are articles -- not necessarily accurate all the time -- that help this layman come closer to understanding what's happening.

Sat, 06/23/2012 - 13:17 | 2553901 AldousHuxley
AldousHuxley's picture

so if the above claims are true, then ask yourselves what is American operating? surely not the impossible capitalism....


State of America are operating a scam at this point. How can you have capitalism when your banks are incolvent?


capitalist experiment failed. just like communism, extreme dogma and inflexibility to change upon realities of nature, led to extreme greed, and extreme failures, and now extreme coverups. World rewards balance. man and women, ying and yang, capital and labor....all man island ends in no descendents, all capitalism and no labor ends in destitude.


Sat, 06/23/2012 - 13:51 | 2553995 Nels
Nels's picture

The capitalist experiment ended in around 1913.  It didn't fail, it was killed.

It's the democracy experiment that is in trouble.  We can't seem to elect anybody who is not on the "Save the Banks, Screw the Rest' bandwagon.

Sat, 06/23/2012 - 14:14 | 2554051 Waffen
Waffen's picture

And then 4 short years later 117k Americans died so Jews could have their Palestine

balfour declaration Quid pro quo to baron rothschild for Jews getting the USA into ww1

Benjamin h freidman

Sat, 06/23/2012 - 14:17 | 2554056 CH1
CH1's picture

It's the democracy experiment that is in trouble.

It was NOT a democracy experiment. Originally (like 1776-1792 and 1800-1830 or so) it was a republican experiment. Since then it has been varying degrees of fascism. And yes, 1913 is when it was seriously institutionalized.

This fascist experiment is sold to some people via socialism (i.e., free crap) and to others, more recently, with a supposed holy word, "democracy."


Sat, 06/23/2012 - 14:49 | 2554195 AldousHuxley
AldousHuxley's picture

democracy is not in trouble.


bigger problem is nation is founded on republic ideals with distrust of the masses. it is setup for ruling elites.


it is like going to police to report a crime, and learning that police are the ones who perpetulators.


HOPEless.....just start robbing the top 0.1% . that's probably why bankers are the way they are. they see that even richer elites are all corrupt, so they become cynical of the world and says " fuck it, I'm going to become a millionare by robbing from billionare drug lords, arab kings, chinese slave owners"


what is the level of confidence in America being a meritocracy in the mind of banker handling Paris Hilton's wealth?

well now you all are learning this too.

Sat, 06/23/2012 - 18:46 | 2554704 RockyRacoon
RockyRacoon's picture

Damn them perpetulators.

Sat, 06/23/2012 - 19:56 | 2554797 GernB
GernB's picture

The US is not capitalist. 24% of GDP is consumed in taxes. The tax code that consumes that 24% is designed to distort normal free market pressures. Then the government spends that 24% in ways that further subverting free markets. Its simply bogus on the face of it to call what we have in the US capitalist. We can agree its failing nd corrupy, but the markets that are the worst off are those where government has distorted markets the most health care, housing, banking, education, and transportation.

Sat, 06/23/2012 - 22:08 | 2555000 mjk0259
mjk0259's picture

France is 57%. Their health care is better than US and cheaper. Transportation is better too. Their banks are maybe not worse than US despite being nationalized periodically. Just about every country has better education and it's government operated the same as US up to high school and usually college as well.


Sun, 06/24/2012 - 02:10 | 2555224 GernB
GernB's picture

Better according to organizations that use statistcs to get the gullible to believe thingsvthat are contrary to the facts. Even were that the case all it would prove is smaller governments can control things better. It does not prove we should all surrender our right to control the healcare choices availabke to us through our buying power in a free market so people like you can engineer a utopia we will all like or else.

Sun, 06/24/2012 - 15:13 | 2556205 AldousHuxley
AldousHuxley's picture

in a free market only the rich can afford healthcare because it is so god damn expensive.

looks like you dont' realize what a poor shit you are and how much help you are getting from your government:


  1. state is what pays for education system for YEARS to figure out who's smart enough to even receive training
  2. tax free (revenue loss) status to medical schools
  3. free training at the cost of residency salaries ($40-55k/year per doctor) as subsidy to hospitals
  4. hospitals run as tax free (revenue loss) organizations
  5. hospitals can simply write off any unpaid bills (subsidy in accounting)
  6. your healtchare expenses are tax deductible for your employer (revenue loss)
  7. your personal healthcare expenses are income tax deductible
  8. many hospital's buildings are built using tax dollars

Ask yourself, what kind of industry has so much tax benefits? Does your government give $10,000 gift certificate to every citizen so they can purchase stuff your company makes and then give $40,000 year training for every employee you hire?


less or more control doesn't equal to less or more quality or price.

you want to lower price, create more doctors with slightly less quality.


Sun, 06/24/2012 - 15:14 | 2556207 AldousHuxley
AldousHuxley's picture

in a free market only the rich can afford healthcare because it is so god damn expensive.

looks like you dont' realize what a poor shit you are and how much help you are getting from your government:


  1. state is what pays for education system for YEARS to figure out who's smart enough to even receive training
  2. tax free (revenue loss) status to medical schools
  3. free training at the cost of residency salaries ($40-55k/year per doctor) as subsidy to hospitals
  4. hospitals run as tax free (revenue loss) organizations
  5. hospitals can simply write off any unpaid bills (subsidy in accounting)
  6. your healtchare expenses are tax deductible for your employer (revenue loss)
  7. your personal healthcare expenses are income tax deductible
  8. many hospital's buildings are built using tax dollars

Ask yourself, what kind of industry has so much tax benefits? Does your government give $10,000 gift certificate to every citizen so they can purchase stuff your company makes and then give $40,000 year training for every employee you hire?


less or more control doesn't equal to less or more quality or price.

you want to lower price, create more doctors with slightly less quality.


Sun, 06/24/2012 - 10:16 | 2555502 LG_Knight
LG_Knight's picture

So why are you still here?

Sun, 06/24/2012 - 05:00 | 2555286 IBelieveInMagic
IBelieveInMagic's picture

Now it is all about defending the reserve currency status -- let's face it, the free stuff has been powerful addictive drug.

Sat, 06/23/2012 - 13:19 | 2553903 narnia
narnia's picture

The government spending $3 trillion annually to buy bombs that don't keep us safe, a public education system that is worth a fraction of its cost, a bunch of roads and utilities subsidizing suburbia, and to fight the failed war on drugs is a massive misallication of capital. There's nothing in the government's borrowing rate or the international flow of funds that makes these economic morons run counterproductive deficits.

Sat, 06/23/2012 - 13:31 | 2553944 Waffen
Waffen's picture

This article sucks. Look if you have not already bought some property and are actively trying to disconnect from the just in time system by being more self sufficient you are a risking an early death.

Get your shit in order first, then if you stil have so much etc cash that you want to invest it in equities (ugh) then I suppose you can do it, but you are just picking up pennies in front of a steam roller.

What do you think at the last minute you're gonna move to the country and suddenly grow a huge garden and raise animals, when you have probably never once picked up a hoe or milked a goat? You think you are just going to know how to grow in (insert state/region here) when you have never even lived their before?

Bad advice.

Sat, 06/23/2012 - 18:14 | 2554656 Whatta
Whatta's picture

Good advice.

Good investors know to be hedged. So, why not be hedged in life as well (like I am) by having property, source of water, food, etc.

At worst you have a cool place to live at, or hang out on the weekends. If TSHTF then you are mcuh ahead of the masses.

And good property is a good store of value...still.

Sun, 06/24/2012 - 05:11 | 2555287 IBelieveInMagic
IBelieveInMagic's picture

You are imagining a gentle and orderly decline where the one's who are unprepared will quietly go away. On the contrary, when things fall apart, it will result in kinetic escalation and then everyone chances are about even. So, why bother.

I have come to the conclusion, the fiat system for all it's defects, has enabled growth to support growing populations (probably by pulling forward future demand) -- of course the guys running the system have taken unfair advantage of their closeness to the controls but all said, it has facilitated easy and fast economic transactions that has resulted in employment for the growing masses. I know this is heresy to many on this forum but it had to be said and no, I am not employed in the financial industry.

Sun, 06/24/2012 - 10:52 | 2555606 Seer
Seer's picture

Throughout history the overwhelming majority of widespread collapse has seen people die "on the road."  You can see this thing happening today, with large populations of "displaced" people.

Yes, and history also shows there are handfuls of aggressive people looking to pillage.  Such people, however, are low in numbers: when you create lots of flames it tends to draw more attention (and skew the perception).

"and then everyone chances are about even."

"Chance" is gretaly affected by preparation.  You can rationalize all you want about your choice to not prepare, but doing so doesn't alter these realities.

"I have come to the conclusion, the fiat system for all it's defects, has enabled growth to support growing populations (probably by pulling forward future demand)"

Growth is the strategy of bacteria and cancer cells.  You need only do a SIMPLE study as to where this leads.  Keep in mind that humans survive at the whims of bacteria: if not for all the bacteria in your gut to break down your food, which in turn heats your body, you WOULDN'T exist!  In a way you can say that we ARE bacteria.  These facts inform us that we are not apart/different from bacteria, that the same basic laws apply to humans.  GROWTH in a finite environment is LIMITED!

"probably by pulling forward future demand"

When you wrote this did you even consider what this means, what the ramifications are?  It pretty much wipes out the notion of growth being good.

Back to the "even chance" part... I lose fowl to aerial predators.  What I have come to realize is that this happens is that those that turn into raptor lunch are either weak or are not paying attention to their environment.  The "weak" ones are MY fault: I have failed to correct this either through a failing in culling or a failing in proper animal husbandry.  Your argument would clash with this reality, it would have "strong" animals being as "weak" and as unaware as the "weak" and unaware ones.

Next time there's a big thunderstorm go out into a big field and hold up a long metal rod, while barefoot.  Given your logic you are no more likely to be hit by lightening than a neighbor who is below ground and wearing a rubber suit.

If you believe that there is no purpose in planning then that's YOUR belief.  But do NOT mistake the word "belief" for the word "fact."

Sat, 06/23/2012 - 17:13 | 2554524 They Tried to S...
They Tried to Steal My Gold's picture

negative inflation.......hmmm

Sat, 06/23/2012 - 17:14 | 2554528 They Tried to S...
They Tried to Steal My Gold's picture

Yes.....we all should to get laid more often.

Sat, 06/23/2012 - 18:40 | 2554691 PhilB
PhilB's picture

You are right...that the articles are sometimes not correct. This guys analysis isnt worth the pixels im reading it on. What a bunch of crap stats and assumptions. Anyone with half an econ degree can see the gaping holes in this article.

Sat, 06/23/2012 - 20:03 | 2554805 GernB
GernB's picture

How about one example. I tend to dismiss claims of inaccuracy if not backed up by at least something that illustrates why its wrong.

Sat, 06/23/2012 - 20:47 | 2554864 PhilB
PhilB's picture

Just one example? The whole piece is a bunch of gibberish. The fact that you dont see it so clearly just tells me that indeed you dont understand economics or markets very well. If my assumptions on you is correct, you just saved me doing your homework in critiquing a piece of crap article that is so fallacious that it doesnt merit any serious consideration or refutation.

Sat, 06/23/2012 - 22:11 | 2555004 mjk0259
mjk0259's picture

Well, what's the sense of analyzing US trade without China and oil? Those are the two biggest imports. What the hell is the US increasing exports of with this cheaper dollar? We barely export any manufactured products.

Sat, 06/23/2012 - 22:49 | 2555055 All Risk No Reward
All Risk No Reward's picture

Folks, Keynesians don't run anything anymore than a Randsian ran the Fed under Greenspan.

Pay close attention - the detail is in the detail, not the slick narrative or the thin veneer.

The people running the show are bankster crooks who have criminally blown the world's largest credit bubble (having leveraged to the hilt with full foreknowledge of the bubble and profited immensely) and they use a b*stardized version of what they sell as Keynesianism to the masses who don't really know better.

When the banks got in trouble, did Alan Greenspan wip out Ayn Rand, his alleged hero, and tell the banksters to bury their dead banks as Ayn would have had them do?

H* no, Rand when in the trash "cand" faster than you can spit and the debt money spiggots were turned on as society is saturated with debt (and ultimately bankruptcy - bankster corporate fronts are TBTF&J, not nations) and the criminal insider banksters loaded up on Federal Reserve debt receipts that we now get to pay back to their Federal Reserve front corporation!

IOW, Ayn Rand was nothing more than cover for Greenspan to allow the banks to do whatever they want until her theories were no longer useful to the bankster profits...  then she was kicked to the curb.

The EXACT SAME is true with Keynesianism.  It is cover to allow the banksters to loot the Treasury dry and saturate society with debt...  BUT IT WILL NEVER BE USED TO JUSTIFY BAILING OUT SOCIETY, JUST CRIMINAL BANKSTERS.

Bankruptcy and receivorship (societal asset stripping) awaits society.

And yes, hyperinflation is the end game, but not until these crooks have traded in their debt receipts for the Earth's real, tangible, physical wealth.

That 3.66% mrotgage is an "I dare you to take this mortgage, we're gonna bust you and take the home from you later" loan, not a "Oh my, we'll hyperinflated next year" loan.

Remember, the banksters control the money supply AND make those loans.  They can't hide their true intent IF YOU KNOW WHAT TO LOOK FOR!

I just told ya.

PS - that doesn't make gold bad, I plan on buying some in the Great Deleveraging so long as I have "the necessities of life" fully covered first.






Sun, 06/24/2012 - 05:41 | 2555291 IBelieveInMagic
IBelieveInMagic's picture

From what I hear, the average time for forclosures is 5+ years in most places. This cost free living does not sound like a very onerous deal for home owners. Damn, I regret paying off my mortgage.

Sat, 06/23/2012 - 12:44 | 2553812 toady
toady's picture

I tried to start my own bank to get those negative rates, but they told me I needed to know a guy who knew a guy, and blah blah blah, and unless I knew the secret handshake they wouldn't tell me the password to their good ol' boys club.

Sat, 06/23/2012 - 13:58 | 2554015 Savyindallas
Savyindallas's picture

Like Skull N'Bones? where you have to be sodmoized by all the other guys and do it to a few animals before you learn the secret nahdshake?

Sat, 06/23/2012 - 14:29 | 2554115 toady
toady's picture

That must be it.

Sat, 06/23/2012 - 16:45 | 2554467 Pure Evil
Pure Evil's picture

What's it, the secret handshake or the sodomizing?

Now, if only Jerry Sandusky knew about the secret handshake.

Sat, 06/23/2012 - 19:41 | 2554782 DaveyJones
DaveyJones's picture

...and now he's going to place where neither the handshakes nor the sodomizing are secret. Poetic really

Sat, 06/23/2012 - 16:38 | 2554455 Papasmurf
Papasmurf's picture

If you belonged, this wouldn't be a concern.

Sat, 06/23/2012 - 17:46 | 2554611 New_Meat
New_Meat's picture

and it would'nt be here

Sat, 06/23/2012 - 12:48 | 2553817 carbonmutant
carbonmutant's picture

"One Cannot Operate A Capitalist System If The State Can Borrow At A Negative Cost."


Sat, 06/23/2012 - 13:47 | 2553983 YHC-FTSE
YHC-FTSE's picture


Then try, "A debt cannot pay for itself". 


In an extremely stupid world it does. And we're living in one, because the illusory promise of safety in government paper has the whole world beguiled, when in fact taking the blindfold off reveals that it is toilet paper signed by criminals. Low grade toilet paper at that. Debt is not capital. Debt is not wealth. When capital is the false promise of payment, the system cannot operate. Didn't we learn anything from subprimes? I put it to you that the USD (Or any fiat) in all its guises is one giant subprime "asset", backed by nothing but fear, hope, and the false promise of productivity by future generations yet unborn. Would you want that in your pocket?

Sat, 06/23/2012 - 19:43 | 2554786 DaveyJones
DaveyJones's picture

always enjoy your posts

Sun, 06/24/2012 - 04:51 | 2555282 Havana White
Havana White's picture

It did kick rump, that one.

Sun, 06/24/2012 - 06:46 | 2555334 YHC-FTSE
YHC-FTSE's picture

Thanks mate. 

Sat, 06/23/2012 - 12:49 | 2553820 ebworthen
ebworthen's picture

One cannot have liberty and sound money with a central bank controlling the currency.

Sat, 06/23/2012 - 14:18 | 2554073 CH1
CH1's picture

Much better. :)

Sat, 06/23/2012 - 12:57 | 2553826 derek_vineyard
derek_vineyard's picture

our policies and laws are so fucked up it will take a dictatorship or revolution to change things

a group of lawmakers cannot fix this mess  (it all starts with bringing jobs home, americans accepting that work and the ruling income class being eliminated)

america can't have 313 million zuckenfuckers

Sat, 06/23/2012 - 12:57 | 2553842 financial apoca...
financial apocalyptic contagion's picture

the jobs will flow where labor is cheapest, which wont happen in the US anytime soon

subsidies are a stupid idea, so what we are left with is to make shit that no1 else can make.

which is hard to do nowdays coz within a few months India and china will clone it faster and cheaper, which has become a cyclical process in this economy.




Sat, 06/23/2012 - 13:03 | 2553850 John Law Lives
John Law Lives's picture

"the jobs will flow where labor is cheapest, which wont happen in the US anytime soon"

Correct.  Jobs flowed out of the US and into countries like China and India for several reasons including (a) relatively inexpensive labor and (b) gaining a foothold in those emerging markets.  No politician in the US was ever going to effectively stand in the way of that process.  No chance.

Sat, 06/23/2012 - 13:39 | 2553971 ebworthen
ebworthen's picture

You forgot:

(c) avoiding environmental laws so you could pollute someone else's back yard

(d) avoiding paying a living wage and health care insurance to domestic workers

(e) maximizing CEO and upper-level management salaries

(f) taking advantage of slave labor and the downtrodden while supporting oppressive governmental and societal regimes

(g) offshoring of profits to avoid taxation

(h) gutting domestic insfrastructure and manufacturing facilities to ensure the above

Sat, 06/23/2012 - 14:23 | 2554091 CH1
CH1's picture

You forgot:

Ditch the system and move on without it.

Sat, 06/23/2012 - 19:42 | 2554785 Stuck on Zero
Stuck on Zero's picture

Good points ebworthen.  And something else.  The factories followed the capital.  U.S. bankers exported all the capital to build those factories.


Sat, 06/23/2012 - 19:49 | 2554793 DaveyJones
DaveyJones's picture

The Jungle in The Heart of Darkness 


Sat, 06/23/2012 - 17:56 | 2554624 New_Meat
New_Meat's picture

f a:

"the jobs will flow where labor is cheapest, which wont happen in the US anytime soon..."

Actually, when total cost of product ownership is concerned, the tide is close to its peak.  Why?  Economics from the MBAz have not panned out, there are still lower cost venues to do the manufacturing of low-cost goods, and the data continue to flow in.  Cost cutting is reaching back into computer execution of low-skilled tasks on overseas locations.

So, I do agree with you, the "labor" is becoming cheaper by the silicon v. carbon components of the supply chain.

You recommend to "relocate".  To India?  China?

Please give us your travel-log as you self-execute your own recommendation!

Inquiring minds wish to know about your experiences (from well-afar!) as you eventuate.

Don't cha' know.

- Ned

Sun, 06/24/2012 - 11:10 | 2555660 Seer
Seer's picture

"what we are left with is to make shit that no1 else can make."

And then you encounter the little problem of such products being affordable.  Remember: 2/3 of the world's population lives on $3/day or less, and this number is NOT improving (debt pileup and over-saturation).

Kind of hard to build a new boat while you're busy bailing the one that you're in.  In a contractionary environment your debts weigh extra heavy.  Yeah, being contrary sets you apart from competition, "innovation" and "expansion" might sound good during contraction, but it's based on expectations of some sort of "recovery," and at this point it should be clear that That ain't on anyone's radar (other than TPTB's cheer-leading squad).

We have before us a MAJOR paradigm shift.

Sat, 06/23/2012 - 14:21 | 2554085 CH1
CH1's picture

our policies and laws are so fucked up it will take a dictatorship or revolution to change things

Friend, stop relying on others to do it for you.

Start doing new and better things... your way. NOW.

Sun, 06/24/2012 - 10:44 | 2555576 Diet Coke and F...
Diet Coke and Floozies's picture

Agreed. Be the change you want to see in the world.

Sat, 06/23/2012 - 12:58 | 2553843 reader2010
reader2010's picture

This whole farce has always been fascistic since the New Deal. 

Sat, 06/23/2012 - 13:05 | 2553857 slewie the pi-rat
slewie the pi-rat's picture

the man is unable to make a case for what the real  inflation/deflation rate actually is

therefore he can't show that the US is borrowing at a lower rate (which it may not be, btw);  how convenient! 

the idea that people might be willing here to accept nicely <2% on the 10yr MAY indicate deflation or a less inflationary trend

"excluding oil and china" is a new treat, even for slewie!

and of course, politically, we could have a LOT moRISKON if we just shot prez0 and the benzelbub b/c THEY AREN'T DOING WHAT THE PIG-MEN WANT!!!

mittens is the answer!  listen to the pig-man propaganda and vote for mittens!

or because he's white, rich, and the front man for a wealth transfer of galactic proportions which does not include too many other than the pig-men and their servants, slaves, and soldiers

and remember!  mittens is "against socialism"!  if you can just remember that one thing, mittens can do it!  so, it's up to you!

Sat, 06/23/2012 - 13:38 | 2553965 derek_vineyard
derek_vineyard's picture

there is no lesser of 2 evils in this election............but voting all democrat at least slows the finger pointing and allows maybe something to happen....a blow up might be the outcome, but a blow up is better than can kicking

Sat, 06/23/2012 - 15:03 | 2554214 slewie the pi-rat
slewie the pi-rat's picture

if neither of these two soon-to-convene parties wins control of everything we hava better chance at less insanity, imo

i'm just happily surprised we even have a country much less an economy and a currency at this point

the status quo is designed for can-kicking and is all around us.  dammit

and now:  goldilocksCrisisTM ~ the perfect storm for the summer of 2012 ~   [paint-by-computer/number]

Sat, 06/23/2012 - 13:14 | 2553893 New American Re...
New American Revolution's picture

ONE CANNOT RUN A CAPITALIST SYSTEM,  IN A TYRANNICAL STATE.... It is impossible.,... and coming soon to a computer near you,, the newest Super Pac.   Be there and act square.

Sat, 06/23/2012 - 13:20 | 2553904 icanhasbailout
icanhasbailout's picture

Which Goldman-sponsored candidate would be best at ending the Fed?

Sat, 06/23/2012 - 13:34 | 2553946 Sudden Debt
Sudden Debt's picture

I was talking with a friend of mine who works for a bank this week. I was also talking about negative interest rates here in europe and the cash injections.
His answer?
"yeah but that's not real money"....
Not real money? I said?
How many types of euros are there?
I always thougt there was only one type of euro's!
And as he explained it, you had E Euro's and F Euro's and the F euro's never make it into the real economy.
And once you start digging into that, you'll see that the same exists for the dollar. Weird stuff. The more I hear the less I understand about all this stuff.

Sat, 06/23/2012 - 13:39 | 2553969 derek_vineyard
derek_vineyard's picture

don't listen to that bull shit

Sat, 06/23/2012 - 13:51 | 2553993 oldmanagain
oldmanagain's picture

Inadvertly, Zerohedge exposes the Austrian fantasies like no other site.

One cannot defeat the notion of gravity by trashing Newton.  After paragraphs of vitrol, the magic boogie man is summed up as Keynes.   The Austrian idea is a big tent for those who do not see, want to see, the simple concept that wealth does have to be redistributed and that it will be thus.

The master/slave model is sold as truth, a given by God and Nature. But it is as simple as a small child who dislikes anyone else plalying with their toys.  The Gold and Silver solutions by the anal retentive school are personally, singularly successful, but lack the scope or rewards that really drive our existence as societies and being part of it.

Keynes, ie science, has served an over populated world and is the best hope, because it is real. Tax cuts do not pay for themselves.  Society needs funding for those whose efforts serve society, like fire fighters, police, teachers, soldiers.

The Austrian future is a cave with some gold buried that will one day be taken away, most likely, the last thing experienced. Progress, substence, etc. are put in a box of natural law, a prediction of inevitability that has no validity whatever except desire to be not personally responsible.

The Austrians cheered and lobbied for the death of the American auto industry. Not because our cars pollute, etc. but for ideology misplaced.  Some how the misfortune of others makes them feel vindicated and more secure, in a their topsy world.  They endorse every dead end they can think of.  That the sum total of being rationally apecrap will in totality prove beneficial to them individually.  They can become extinct which in Austrian logic is a winner.  Their dream is that no one will find the gold they buried when the thieves arrive.

Sat, 06/23/2012 - 14:24 | 2554089 TWSceptic
TWSceptic's picture

You talk about 'Austrian fantasies', but you are completely clueless about what Austrian economic school entails. You just proved that very clearly in your post. A few childisch ad hominem attacks, that's the best you can do? No wonder people laugh at Keynesians.

Sat, 06/23/2012 - 19:15 | 2554747 SeattleBruce
SeattleBruce's picture

"Keynes, ie science, has served an over populated world and is the best hope, because it is real. Tax cuts do not pay for themselves.  Society needs funding for those whose efforts serve society, like fire fighters, police, teachers, soldiers."

Where to begin?  'Keynes, ie science' is one of the most laughable comments I've seen in a long while, when considering the general nature of economic theory.  Economics is no more than theories based on models based on hunches imitating reality - including your precious John Maynard Keynes.  Just because a prevailing theory is held by the elitist, selfish, ruling elites, to maintain their specious grip on power you think that represents reality?

Austrian school advocates don't cheer for the world's demise - quite the contrary.  We are all about observing reality, and giving the appropriate tools to as many common people as possible to survive the inevitable, self centered implosion that Keynesians and all kinds of political and crony corporate elitists DO to destroy and ruin the world's economies for their own selfish gains.

You need a reality check!

Sat, 06/23/2012 - 20:51 | 2554870 Lore
Lore's picture

It was written in a book. It must be true.

Sun, 06/24/2012 - 11:40 | 2555736 Seer
Seer's picture

Not defending Keynesian economics, but it's NOT Keynesian economics that is killing "the economy."

The economy is killing the economy.

"Economies" have always been about enabling growth.  We need to start the very notion/premise of "growth as the aim."  By skipping this premise all subsequent actions are little more than feeling the heat of the forest fire and pissing on a tree, not seeing/understanding that there's a forest fire raging.

Sat, 06/23/2012 - 15:06 | 2554258 tony bonn
tony bonn's picture

"which they are recycling into USTs and thus keeping US government borrowing costs at bargain-basement levels..."

you are a goddamned liar.....i know you fascist assholes love the strategy of going around your elbow to get to your asshole and presenting it as economic rocket science to the great american boob but i am not buying it.....

china is NOT buying ust - in fact no one outside of the fed is doing so....and the only reason why fed banks buy them is for ir swaps.....fuck you and your disinformation crap.....

Sat, 06/23/2012 - 15:09 | 2554266 Snakeeyes
Snakeeyes's picture

The article makes sense. It is the same reason why Fannie Mae and Freddie Mac have driven out the private sector. Not negative real rates, but unfair competition.

As an Austrian economist myself, I agree with TWSceptic. You are characterizing Austrian economist as if you were reading somethning at Huffington Post.

Sun, 06/24/2012 - 12:07 | 2555804 Seer
Seer's picture

I don't recall people screaming "unfair competition" when the bubble was forming.

Again, not in defense of the indefensible, but Fannie Mae and Freddie Mac did NOT CAUSE this mess.

"As an Austrian economist myself"  FINALLY, an actual Austrian economist that I can pose my question to!  Does Austrian economics promote growth?  (If it does, then how can the outcome be any different than what we have?)

Just a quick search brings up this from the Austrian Economics Center's Mission Statement:

The AEC wants to improve the public understanding of key economic questions in order to promote a free and prosperous society. Being a member of the European Coalition for Economic Growth (ECEG), it closely cooperates with similar institutions and organizes international conferences, e.g. the Free Market Road Show®. The Austrian Economics Center is politically independent.

I was happy to see that "growth" wasn't in their lead paragraph.  NOTE: I was looking for this in the Chamber of Commerce's mission statement, but they don't even have a mission statement on their web site! (I did learn that they were formed one year before the Federal Reserve Act was passed). 

Sat, 06/23/2012 - 16:07 | 2554352 shovelhead
shovelhead's picture

I actually get pretty good value for my LOCAL taxes that pay for fire, police, teachers, water, sewers, roads  etc. that I can keep my eye on.

Federal Taxes?  A gaping void of nothing (for me, anyway), except a runamok world-wide interventionist military, TSA gropers and a Capitol of wastrels squandering my hard earned bread buying votes and contributions for re-election.

Shrink Washington and grow your neighborhood. Your neighbor watching your back or Obama?

Get It?  Most Austrians do. Keynesians never will. Collectivists to a man, every one.

You want to live your re-distribution fantasies? Fine by me... Give Obama another 2-3 K in taxes over what you pay.

Somehow, I don't see that happening. Voluntary does not translate in collectiv-ese.

LOL @ Huff po...Ouch! That had to hurt. Doesn't know shit about von Mises but knows all about Lady Gaga.



Sun, 06/24/2012 - 12:11 | 2555814 Seer
Seer's picture

"Shrink Washington and grow your neighborhood."

What do you mean by "grow?"

And when you say "Shrink Washington," to what level?

Anyone proposing "solutions" should provide details, otherwise it's nothing more than an empty abstract.

Sat, 06/23/2012 - 16:44 | 2554465 nicxios
nicxios's picture

In effect, the US economy has exercised an immense deflationary pressure on the margins of companies outside of the US, and in so doing has managed to “recover” roughly 4 % of its GDP.

Can someone explain this part to me?

Sat, 06/23/2012 - 17:20 | 2554546 OneTinSoldier66
OneTinSoldier66's picture

By lying is all I can think of.


If the Governent spends more borrowed money, money injections called stimulus and/or used to grow Government(more government jobs), then they include that as a rise in GDP. Even though the Government cannot create wealth, it only consumes it.

Sun, 06/24/2012 - 12:37 | 2555866 Seer
Seer's picture

"Even though the Government cannot create wealth, it only consumes it."

Well, banks cannot create wealth either... Actually, NOTHING can.  When we say "create wealth" what we're really saying is that we're creating an illusion of superiority (having a superior position to others), and that it really is only achieved through the extraction of physical resources (which, are limited).  NOTE: in the case of storing up food it's less of an illusion, it buys your future.

If you read what most service entities' statements of purpose is you find that it's about FACILITATING "BETTERMENT" (nearly always expressed as "growth").  Government claims a key role as a facilitator of business: read Smedley Butler's War is a Racket (or John Perkins' Confessions of an Economic Hit man).  If you doubt govt's effectiveness here you only need to measure up total capitalization to see that US businesses are far more "successful" in this measure.

The future was long ago stolen.  I could run around blaming all kinds of things (other than the root problem of expressing the goal as being one of "growth"), but that does nothing to help me prepare for a totally different future than what Madison Ave has painted for us.  In a way I could say that govt is buying folks time by holding off the jackals (i.e. the likes of Jamie Dimon)*.

* We were always going to crash (given that we were always about "growth").  While the final plunge might be deeper thanks to govt intervention I believe that it'll be a bit slower.  So, on one hand we could have had a quick plunge off a 50' cliff, leaving us with broken legs, broken back and a broken neck.  On the other (govt intervention), we're tumbling down a crevasse that we can never climb back out of.  Optimism for the first case would be that we could climb up out of a 50' hole in such a mangled (nearly paralyzed) condition; and optimism in the later case would be that we have time to jump out of the tumbling train (subjecting ourselves to possible injuries that might differ little from that of the first scenario).  As Woody Allen put it:

"We stand today at a crossroads: One path leads to despair and utter hopelessness. The other leads to total extinction. Let us hope we have the wisdom to make the right choice."

I have no idea which path humanity is really on, whether I will be swept up in it or not.  BUT, I do know that the only rational approach is to operate on the basis of sustainability (and anything that promotes "growth" is NOT it).

Sat, 06/23/2012 - 22:18 | 2555015 SeattleBruce
SeattleBruce's picture

Pertains to the first chart - the value of the dollar, and dollar scarcity increased in non-oil producing countries, and not including China since about 2007, making it 'hypercompetitive' there and resulting in a recovery of the US current account in that sector from -3% of US GDP to +1% - or a 4% recovery.

Sat, 06/23/2012 - 16:58 | 2554492 Colonial Intent
Colonial Intent's picture

American politics has always been dominated by wealth, but only rarely have wealthy people from a single industry dominated politics as much as those from the financial industry dominate both parties today.

Sun, 06/24/2012 - 12:43 | 2555878 Seer
Seer's picture

I believe that the domination has been around for quite a while, that we're now only seeing the intensity of it because our eyes are more open today (Internet etc.).  There's also a lot more visibility as the behemoths are fighting between themselves, fighting for dwindling scraps (which also pulls in govt more and more).

Give me control of a nation's money and I care not who makes the laws.

- Mayer Amschel Rothschild (23 February 1744 – 19 September 1812)

Sat, 06/23/2012 - 17:02 | 2554502 spekulatn
spekulatn's picture

Well done ZH. 

Sat, 06/23/2012 - 17:08 | 2554515 OneTinSoldier66
OneTinSoldier66's picture

There is no mention of how the US Government has spent beyond it means for decades and decades and how it either expects to continue to do so, or do something about paying back the National Debt.


By the way Mr. Gave, the Federal Reserve System is neither Federal nor does it have any Reserves.



Sat, 06/23/2012 - 17:10 | 2554516 Stimulati
Stimulati's picture

The fed is being run by monetarists not Keynesians. It's a shame brad Pitt doesn't know the difference.

Sat, 06/23/2012 - 22:42 | 2555043 SeattleBruce
SeattleBruce's picture

"The fed is being run by monetarists not Keynesians. It's a shame brad Pitt doesn't know the difference."

That may be strictly and narrowly true of the fed, but Keynesians are rife throughout the government and crony capitalism, and those fed monetarists are very cozy with those Keynesians.  At that point - what's the difference?

Sun, 06/24/2012 - 01:29 | 2555202 Stimulati
Stimulati's picture

Keynesians haven't been in government for 40 years.  Wreckless deficit spenders like Reagan and Bush who grow deficits during strong growth periods are not Keynesian.

Sun, 06/24/2012 - 02:02 | 2555218 MoneyMagician
MoneyMagician's picture

George W. Bush was a Keynesian dummy. Look up Gregory Mankiw that was one of Bush's economic advisors on his Council of Economic Advisors. He is a hardcore Keynesian. He was a economic advisor to Romney's political campaign. The government is ruled by Keynesians. George W. Bush always made the argument, still does, that tax cuts puts money into pockets of consumers to spend. He also gave money directly in the mail to ordinary people so they can spend it in 2001, and in last term as president. He was a Keynesian, through, & through. Keynesianism is mainstream economics. Government favors it, because it justifies government activism. Seriously know what you are talking about. You only making yourself look dumb by being woefully uninformed, and saying other people don't know nothing.

Sun, 06/24/2012 - 09:52 | 2555447 Stimulati
Stimulati's picture

I don't care who Bush's advisor was, it was his policies that matter.  Bush's economics were supply side corporate cronyism.  Trickle down, if you will.  Cutting taxes and deficit spending during periods of strong economic growth is not Keynesian.  It's just irresponsible voodoo economics.  I understand that it makes Keynes look bad to pin GWB on him but wishing it doesn't make it so.

Sun, 06/24/2012 - 11:05 | 2555648 MoneyMagician
MoneyMagician's picture

You a damn moron. How was Bush a supply sider when he stimulated only demand idiot. Manufacturing decreased under Bush, import grew, and consumption was at historical highs, because of record consumer spending, and inflated housing assets. You don't even know what a supply sider is, let me explain, a supply sider is a person who advocates that stimulations of production, and believes that increased supply is better because it reduces inflation (higher prices), but also creates jobs in the process. China is a prime example of supply side economy. Bush economy was far from a supply side economy. You sound as dumb as a cluelesss progressive. Keynesians are demand siders, they believe consumer spending drives the economy.

Sun, 06/24/2012 - 16:43 | 2556352 Stimulati
Stimulati's picture

You have issues with cause and effect. Bush cut taxes on the rich, reduced regulation, and didn't worry about deficits. Supply side economics. That supply side failed so epically isn't a surpris to any Keynesian. Can you find a keynesian that thinks we've been following their policies?

Sun, 06/24/2012 - 13:00 | 2555919 Seer
Seer's picture

Do you have documented proof of any of this?

Reagan and Bush (both) DID crank up govt spending.  To me any govt spending IS an injection that could be labeled Keynesian.

But... when you say "growth," what do you mean?

It IS my understanding that, as you note, Keynes only advocated deficit spending when economic conditions were weak.  As all of this is really chalk-board stuff, none of it can work in theory form in the real world, not Keynesian economics, not Austrian economics: can't stay pure that is (since it is guaranteed that distortions WILL exist then ANY failings will be blamed on anything other than the fact that ideologies can't exist in pure form in the REAL/PHYSICAL world).  Belief that human-manufactured theory can work in total outside of a lab/academia is the mindset of ideologues.

Sun, 06/24/2012 - 16:38 | 2556349 Stimulati
Stimulati's picture

It's not chalkboard stuff. Look what Clinton did to the deficits. And Al Gore ran on the "lockbox" aka running surpluses during good years.

Sun, 06/24/2012 - 00:19 | 2555152 MoneyMagician
MoneyMagician's picture

Monetarist are basically Keynesians without fiscal stimulus. They believe in monetary stimulus. To try to point the difference within the Federal Reserve is like trying to compare red apples, and green apples. It's still an apple. Milton Friedman inititally followed Keynes both on fiscal and monetary policy, but he then changed his mind on fiscal theory, and called himself a libertarian. Neither schools don't have a theory to explain the phenomenon of interest rates, other than inflation (rising prices) should be the contraint. Austrians have a actual theory of the purpose of interest rates.

Sun, 06/24/2012 - 01:33 | 2555205 Stimulati
Stimulati's picture

No, Keynes said monetary policy wouldn't work at the zero lower bound.  Keynes and Friedman's monetarism are not the same on monetary or fiscal policy.  You folks just don't know your stuff.

Sun, 06/24/2012 - 01:56 | 2555216 MoneyMagician
MoneyMagician's picture

Keynesians advocate lower interest rates, because it makes money cheaper, & easier to get. However, Keynes argued that may not be enough to get consumers spending, so he advocated fiscal stimulus. Friedman was skeptical of government spending that provides growth. Friedman won the nobel prize by saying that Federal Reserve created the depression by not inflating. Same view that Bernanke has. Friedman was a diet Keynesian. He even said "we are all Keynesians". Monetarism is a direct anti-thesis on Keynesian, and is based on the anti-thesis of Keynesianism purely & only on the fiscal policy. You don't know what you are talking about.

Sun, 06/24/2012 - 09:59 | 2555459 Stimulati
Stimulati's picture

The full quote is "In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian."  What Friedman said he meant by that is that all economists have adopted the jargon of Keynes but that his policies have been refuted. 

Yes Friedman and Bernanke have the same views.  That's my point. 

Keynes said at the zero lower bound (where we are today) monetary policy would not be effective and the situation required fiscal stimulus.  Friedman said monetary policy would be effective at the zero lower bound and blamed the Fed for the depression.  So obviously these are pretty critical disagreements.  Bernanke is following Friedman to a "T" and it is obviously failing.  This is not Keynesian.

Sat, 06/23/2012 - 18:12 | 2554652 Fix It Again Timmy
Fix It Again Timmy's picture

The US Govt is a failed business plan that continues to exist solely because it can rob me of my gainfully earned money through TAXES.  Think of govt as Web Van still existing and running on YOUR money...

Sun, 06/24/2012 - 13:13 | 2555941 Seer
Seer's picture

Replace "US Govt" with "<insert name> church."  If you never contribute to the church I suspect that you'd not be well received either.

The difference is that with one you have [by birth or other] entered into a contract with.  With the other, "church," you have an option.  Either, however, presents the threat of ostracization.

Not everything is a "business."  Humans are social creatures.

The "failure" only exists because there is not an infinite capacity for growth: everything is fine until the growth party stops.  Feel free to demonstrate YOUR business plan: if it can operate NOT based on growth then you rock!

Sat, 06/23/2012 - 21:01 | 2554892 proLiberty
proLiberty's picture


Excuse me if I am missed something, but when the author states "one cannot operate a capitalist system if the state can borrow at a negative cost", he fails to state exactly why this is true.  

While I cannot guess at how the author will elaborate on this point, I can tell you that one reason why his assertion is true:  When the State can fund its operations without having to raise taxes, it can act however it wants and that is always to show what a Beast it really is.  It will likely wage war, starting with external enemies but also eventally including internal enemies.  Unless such Leviathan States are reigned in by political means, such States will end in bloodshed and destruction.


Sun, 06/24/2012 - 13:23 | 2555967 Seer
Seer's picture

"Unless such Leviathan States are reigned in by political means, such States will end in bloodshed and destruction."

The goal of governments/States IS GROWTH.  If there insufficient resources (a point that will always be encountered) the government/State has no choice other than to seeks war and OR implement "austerity."

"political means" is how states become leviathans.  TPTB aren't going to correct themselves, in which case desiring correction by "political means" translates to "austerity for the poor and more protection for the rich."

I'd have  to say that if one is really FOR liberty then one canNOT accept ANY State.  States are given powers ABOVE liberty: when the State has the license to kill it will do so when it likes (and unless you're one of the chosen guardians of the State [TPTB] you're a candidate for their hit list).

The raging wild fire extinguishes itself by consuming its fuel.  That will be the case for "Leviathan States" (and will be the case for ANY concentration of power, even our Sun!).  Attempts to put out the fire are going to get oneself burned...

Sat, 06/23/2012 - 22:47 | 2555051 SeattleBruce
SeattleBruce's picture

"When the State can fund its operations without having to raise taxes, it can act however it wants"

This may have been true for the past 40 years, but the debt funded illusion and central planning delusion is falling of its own weight.  So if by 'operate' a capitalist system, the author means, sustain a capitalist system across time, the reality of current events proves the truth of this statement.

Sun, 06/24/2012 - 12:42 | 2555876 HAhyperion
HAhyperion's picture


1) State the obvious but 2) prescribe an obfuscation remedy - a Pan EU banking union when the EU is a mess  Again, the goal - stripping individual sovereignty, consolidated wealth pockets ripe for global finance picking, extraction Onwards and upwards the globalization of poverty 



Sun, 06/24/2012 - 13:36 | 2556001 Seer
Seer's picture

I doubt that the aim is that of globalizing poverty.  Sure, I suspect that some in TPTB's ring salivate over people suffering, but I don't think that on the whole these folks could see this as a smart objective for retaining their power.

Poverty happens as the result of scarcity.  Water cannot be turned into wine, not by the State, not by "business."  If there are shortages of essential resources then there is only one of two "solutions" or outcomes:

1) Reduce demand (essential resources would dictate that this reduction would, eventually, mean a reduction in population);

2) "Discover" resoruces in another's realm (usually takes on the form of war).

NOTE: When I say "essential" think of the periodical elements- you cannot create these, they are fundamentals.

Sun, 06/24/2012 - 13:03 | 2555924 Grand Supercycle
Grand Supercycle's picture

Monthly USDX indicators continue to warn of significant long term US dollar upside.

The SPX big picture remains very bearish and unfortunately this won’t change.

Market intevention only postpones the major crash, it can not prevent it. The deferment also ensures the inevitable crash will be even worse.

Sun, 06/24/2012 - 13:18 | 2555949 HAhyperion
HAhyperion's picture


Maybe we all should be reviewing Kindleberger .  His lessons of panic in financial markets (vs Friedman), markets can get it WRONG for a very very long time: self reinforcing boom and bust cycles; the second lesson, the power of contagion (1931 small Vienna spread to Berlin, then London and New York - and the key point being besides financial ties there is the psychological element) , the third, the importance of hegemony.  There must be a benevolent (hopefully) single global power for stabillity.  The vacuum in the Great Depression (transition of UK to US, US not wanting to accept baton) same today global leadership vacuum, small country/entity (Greece/Lehman) contagion, blame. etc

Ultimately, Kindleberger had enough sense to move beyond the mathematical models and probabilities, to realize that economics is a social science indeed (there's a psychology at the micro - individual, the mid point, the institution, and the macro, collectively exchanges and markets) of a million billion actors (hard to estimate/predict) and that politics, the stable "good faith" hemegon, is crucial to keep IT ALL contained from going off rails at times of crisis.  

The lack of global leadership, or if leaders, they certainly are not acting in good faith (for instance 2008 or current EU crisis we would have seen a 21st century Marshall Plan) is indeed what is the real underlying problem -  no "good faith" - no surprise the world's peoples have lost faith. 


Sun, 06/24/2012 - 13:45 | 2556022 Seer
Seer's picture

It's a discussion of the train-tracks and not the PATH of the train!

The destination is guaranteed, it is dictated by the realities/consequences of having the central theme (economic engines ALL) based on growth.

The Marshall Plan was no more than one big redistribution of power and wealth.  It was a change in the tracks (or speed of movement) but not a change in the fundamental PATH.

Question the premise!

Sun, 06/24/2012 - 13:33 | 2555993 HAhyperion
HAhyperion's picture

Ultimately, "there is no free lunch" - so I am not so sure about a GDP pick up or borrowing at negative rates - there is always a cost, whether hidden or not.  The opportunity costs of any real investment are staggering - not too mention inflationary risk and depression downside.  

Pay now or pay later but pay nonetheless.

Sun, 06/24/2012 - 13:55 | 2556046 Seer
Seer's picture

Exactly!  And, it's the same regards which "economic THEORY" (if based on growth) is the driving model.

When we talk about the future we need to be honest with ourselves.  When proposing any tack we must ask ourselves whether it will buy us MORE time.  Pushing the growth meme is NOT one of promoting the future, and anyone who combines the two together in spouting off some "solution" should be confronted straight up on this and not let off the hook until he/she/they can back up their assertion/premise.

We are faced with one of two choices:

1) SPEED UP trying to escape the planet (before we completely trash it), which is something that we've not proven to be very efficient/good at attempting;

2) SLOW DOWN and learn again how humans managed to for thousands of years, albeit in much smaller numbers (and ALWAYS in a steadily growing direction, which WON'T be possible going forward).

Since I seem to have misplaced the keys to the rocket ship I've put myself in the position of having to resort to the second choice.

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