The odds of a financial crisis are almost inevitable if a person was to come out of denial about the gross mismanagement that has been going on in the OECD world in recent decades.
Democratically elected Governments have been completely blind sighted by the short term view and have assumed almost arrogantly that “this time it is different” or "the free market will save the day". They have allowed all manner of borrowing to get out of hand and forgotten the golden rule: Always have some money set aside in case of a rainy day. Now that the rainy day has come, where is all this money going to come from? The answers are all pretty much the same…
Either borrow more (no longer a realistic option for many), print more money (never overly sensible) or the more likely option of slashing budgets. Slashing budgets is hardly going to do wonders for the morale of the workers. Of course a government can default on its debt obligations...
Unfortunately slashing budgets in the 21st century is not the same thing as slashing budgets in the 20th century. Workers may have revolted in the 20th century at such ideas, but by and large societies back then were much more respectful of authority and just went along with what had to be done. This subservient mentality is fast disappearing with the onset of the baby boomers nearing retirement whose mentality is more akin to entitlement than sacrifice. The young of today have only known the good times. Faced with the prospect of decades of hardship they are likely to revolt big time as such prospects. Perhaps this is the one point that many of those in authority have somewhat overlooked. A financial crisis is one thing. A complete collapse of the underlying structure of society is another thing altogether.
The solution is simple in many ways. Avoid a financial crisis by acknowledging up front that the previous few decades have been a huge experiment with filial currencies. History has shown us the benefits of the boom times, but alas the bust times can be highly destructive. Oh well. Lets all sigh a big relief that nothing about money should be taken too seriously since it is only created out of thin air in the first place.
Why not just wipe the debt slate clean by every government defaulting on its debt en mass? After all, we are all pretty much in the same boat in the OECD. I am sure countries like China would understand and forgive our mistaken "capitalist" experiment that only requires some minor tweaking.
Sunday, January 30, 2011
Saturday, January 29, 2011
The major flaw of the capitalist system and how to prevent the next financial crisis.
It is only a matter of time before the proverbial hits the fan. The capitalist system as we know it is fatally flawed and the flaws are starting to create havoc with increasing regularity. The major flaw of the capitalist system goes something like this. It is dependant on growth…
While growth remains in the economy, the financial system which is based on credit or debt continues along swimmingly. Along the way it allows workers to take out loans at varying rates of interest to purchase all manner of items including homes and cars. More importantly it allows businesses and governments to invest in long term projects for the benefit of all.
However beware if something occurs to disrupt this relentless growth. (eg a financial crisis such as sub prime or rising oil prices) Then a correction of some magnitude is inevitable. In the worst case scenario workers and businesses start to default on their loans and risk adverse banks start to slow down their lending or invest in lower risk government bonds. In the extreme case governments need to bail out failing banks and take on additional debt. It then becomes a matter of time to allow the economy to remove the excesses from the system and once again return to historical growth levels. This is normally achieved by the government /s impacted learning again the need to balance their budgets through austerity measures or enacting temporary fiscal stimulus packages until the economy improves. There is nothing new in this and to some degree it can be anticipated through the cyclic nature of economic cycles. (ie a boom is inevitably followed by a bust)
Unfortunately this last boom cycle has resulted in unbelievable levels of debt for OECD countries that have long known the fruits of credit but have chosen to disregard the risks.
Now the only saviour for all these debt ridden governments is to hope and pray that the global economy returns to historical growth levels in a timely manner before all hell breaks loose. In the meantime they are faced with rather bleak choices. Ironically the only way to save their economies from deteriorating further is to take on more debt to pay for mounting budget deficits. The larger economies are resorting to the more risky last resort of quantitative easing and where possible, expensive stimulus packages that are not guaranteed to succeed.
Either way the clock is ticking. Budget deficits are now completely out the question on an ongoing basis and any further quantitative easing runs the risk of a rapidly deteriorating currency.
Restoring government budgets to surplus is no longer an optional luxury. It has become a necessity and a necessity that is measured in years and not decades. Along the way, everyone’s standard of living in the OECD is slowly but surely falling. Taxes are on the way up and if taxes are not going up then you can be certain that austerity measures are not too far away.
Moving forward…
The dreaded truth about this elaborate and evolved capitalist system centred on “money” is that the raw substance that makes this financial system so successful is created from thin air. It is nothing more than an elaborate and well thought out confidence trick that is designed to create the right incentives for men to work to advance societies over time. It has proved to be the fairest way to share wealth in the modern world after taking into account the inherent nature of man’s flaws and the varying percentage of men who are dishonest and or lazy. It certainly has worked to advance societies and increase the standard of living of man generally in the 20th century. (albeit to varying degrees depending on where in the world you live)
Unfortunately this elaborate and well thought out system is now out of date with modern day global realities in the 21st century. Why it has worked well in the past was largely because the world had been divided into two. While the second half’s development was much lower, access to global resources such as oil was effectively unlimited. Now that the second half of the world is catching up, serious problems loom because supply for resources can no longer keep up with demand.
2008 was a window on how this situation creates financial chaos leading to a lack of confidence generally, but especially in our current financial system. Should this scenario occur again there is a substantial risk that filial currencies would collapse one after another. Then the financial future is much less certain although one thing can be almost guaranteed. Disorder and major disruptions. The standards of living for billions of people will fall. The potential for mankind to advance societies to the next level will take a back seat to resource wars and anarchy.
It is in all our best interests to ensure that this eventuality does not occur. The change that I am proposing is hardly likely to come easily. It involves adding an additional layer of government that ultimately has full control of the world’s finances. In some ways we already have this layer of government however the United Nations hardly funds itself at the moment. Therefore the first step is to allow the United Nations to create its own Federal Bank and take control of the worlds finances.
Once this occurs the UN will vastly increases its authority over what occurs on this planet. The UN will work in consultation with all world governments to immediately tackle the world’s most pressing issues such as poverty that occurs due to issues around inequality. Other pressing issues include taking immediate steps to plan for climate change and to work on an equitable way to share the planets limited resources in a manner that is fair and sustainable for future generations. The end game is simple: change the way the planet is governed so that the interests of all the species on the planet are the first priority and not the interests of any one country or a few powerful elite.
In reality convincing the average man of the necessity for this decision is hardly likely to be straightforward. For a start who exactly represents the UN? In an instant a political football is let loose that can only be solved by something called consensus. Every country needs to agree to submit to a new authority whose decisions they may or may not agree with. Then there are a myriad of issues over what exactly qualifies as human right abuses.
While growth remains in the economy, the financial system which is based on credit or debt continues along swimmingly. Along the way it allows workers to take out loans at varying rates of interest to purchase all manner of items including homes and cars. More importantly it allows businesses and governments to invest in long term projects for the benefit of all.
However beware if something occurs to disrupt this relentless growth. (eg a financial crisis such as sub prime or rising oil prices) Then a correction of some magnitude is inevitable. In the worst case scenario workers and businesses start to default on their loans and risk adverse banks start to slow down their lending or invest in lower risk government bonds. In the extreme case governments need to bail out failing banks and take on additional debt. It then becomes a matter of time to allow the economy to remove the excesses from the system and once again return to historical growth levels. This is normally achieved by the government /s impacted learning again the need to balance their budgets through austerity measures or enacting temporary fiscal stimulus packages until the economy improves. There is nothing new in this and to some degree it can be anticipated through the cyclic nature of economic cycles. (ie a boom is inevitably followed by a bust)
Unfortunately this last boom cycle has resulted in unbelievable levels of debt for OECD countries that have long known the fruits of credit but have chosen to disregard the risks.
Now the only saviour for all these debt ridden governments is to hope and pray that the global economy returns to historical growth levels in a timely manner before all hell breaks loose. In the meantime they are faced with rather bleak choices. Ironically the only way to save their economies from deteriorating further is to take on more debt to pay for mounting budget deficits. The larger economies are resorting to the more risky last resort of quantitative easing and where possible, expensive stimulus packages that are not guaranteed to succeed.
Either way the clock is ticking. Budget deficits are now completely out the question on an ongoing basis and any further quantitative easing runs the risk of a rapidly deteriorating currency.
Restoring government budgets to surplus is no longer an optional luxury. It has become a necessity and a necessity that is measured in years and not decades. Along the way, everyone’s standard of living in the OECD is slowly but surely falling. Taxes are on the way up and if taxes are not going up then you can be certain that austerity measures are not too far away.
Moving forward…
The dreaded truth about this elaborate and evolved capitalist system centred on “money” is that the raw substance that makes this financial system so successful is created from thin air. It is nothing more than an elaborate and well thought out confidence trick that is designed to create the right incentives for men to work to advance societies over time. It has proved to be the fairest way to share wealth in the modern world after taking into account the inherent nature of man’s flaws and the varying percentage of men who are dishonest and or lazy. It certainly has worked to advance societies and increase the standard of living of man generally in the 20th century. (albeit to varying degrees depending on where in the world you live)
Unfortunately this elaborate and well thought out system is now out of date with modern day global realities in the 21st century. Why it has worked well in the past was largely because the world had been divided into two. While the second half’s development was much lower, access to global resources such as oil was effectively unlimited. Now that the second half of the world is catching up, serious problems loom because supply for resources can no longer keep up with demand.
2008 was a window on how this situation creates financial chaos leading to a lack of confidence generally, but especially in our current financial system. Should this scenario occur again there is a substantial risk that filial currencies would collapse one after another. Then the financial future is much less certain although one thing can be almost guaranteed. Disorder and major disruptions. The standards of living for billions of people will fall. The potential for mankind to advance societies to the next level will take a back seat to resource wars and anarchy.
It is in all our best interests to ensure that this eventuality does not occur. The change that I am proposing is hardly likely to come easily. It involves adding an additional layer of government that ultimately has full control of the world’s finances. In some ways we already have this layer of government however the United Nations hardly funds itself at the moment. Therefore the first step is to allow the United Nations to create its own Federal Bank and take control of the worlds finances.
Once this occurs the UN will vastly increases its authority over what occurs on this planet. The UN will work in consultation with all world governments to immediately tackle the world’s most pressing issues such as poverty that occurs due to issues around inequality. Other pressing issues include taking immediate steps to plan for climate change and to work on an equitable way to share the planets limited resources in a manner that is fair and sustainable for future generations. The end game is simple: change the way the planet is governed so that the interests of all the species on the planet are the first priority and not the interests of any one country or a few powerful elite.
In reality convincing the average man of the necessity for this decision is hardly likely to be straightforward. For a start who exactly represents the UN? In an instant a political football is let loose that can only be solved by something called consensus. Every country needs to agree to submit to a new authority whose decisions they may or may not agree with. Then there are a myriad of issues over what exactly qualifies as human right abuses.
Saturday, January 15, 2011
Credit Revolution
Credit Revolution
The ongoing success of the capitalist system is dependent on the ongoing credibility of the trading commodity on which the capitalist system is based. Today that trading commodity is undoubtedly access to credit. Yet credit comes at a cost and this cost is called interest. Interest for its part is a double edged sword. Although interest is an efficient market mechanism to take into account risk, the downside is that interest by necessity must add to the global money supply since a borrower must pay back a sum in addition to the principle.
This means that whenever interest rates are above zero, the money supply must be continuously increased so that interest payments can be logically made. (otherwise the entire capitalist system would collapse) How is this possible in a closed system?
The logical answer is that this extra money supply is created out of thin air akin to a conjurers trick. Once you understand this grand illusion a person can quickly come to some rather startling conclusions. Why not simply take advantage of this grand illusion to create even more credit. Then use this extra credit to tackle the worlds most pressing problems like poverty and climate change.
The ongoing success of the capitalist system is dependent on the ongoing credibility of the trading commodity on which the capitalist system is based. Today that trading commodity is undoubtedly access to credit. Yet credit comes at a cost and this cost is called interest. Interest for its part is a double edged sword. Although interest is an efficient market mechanism to take into account risk, the downside is that interest by necessity must add to the global money supply since a borrower must pay back a sum in addition to the principle.
This means that whenever interest rates are above zero, the money supply must be continuously increased so that interest payments can be logically made. (otherwise the entire capitalist system would collapse) How is this possible in a closed system?
The logical answer is that this extra money supply is created out of thin air akin to a conjurers trick. Once you understand this grand illusion a person can quickly come to some rather startling conclusions. Why not simply take advantage of this grand illusion to create even more credit. Then use this extra credit to tackle the worlds most pressing problems like poverty and climate change.
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