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Financial crisis ! whats your opinion and why :)

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    (Original post by py0alb)
    No thats the liquidity demand function. The money supply is different. Banks can't control the money supply, only the central bank or government can do that.
    What do you mean by the money supply? The monetary base?

    If you do mean that, then the central ultimately has control to issue the monetary base. However if there is sufficient demand for debt, the monetary base for such debt will be created automatically because the central bank does not target the monetary base but the funds rate.

    Here's a revision question for ya: What happens if the money supply (M1/P) is increased but liquidity demand remains constant?
    Nothing?
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    (Original post by Classical Liberal)
    What do you mean by the money supply? The monetary base?

    If you do mean that, then the central ultimately has control to issue the monetary base. However if there is sufficient demand for debt, the monetary base for such debt will be created automatically because the central bank does not target the monetary base but the funds rate.


    Nothing?
    I mean M1. M0 is generally referred to as the monetary base (ie total liquid government credit) and M1 as the money supply (total liquid credit). M2, M3 and M4 are wide money which start to count more and more illiquid assets.

    Liquidity preference is controlled by GDP, interest rates and public expectations (both rational and irrational).

    For the liquid asset market to be in equilibrium, L must equal M1/P. Otherwise interest rates will automatically shift until the market clears.

    Why do you say "demand for debt"? Do you mean liquidity preference? Why not just say so?

    Obviously, the only issue arises when interest rates hit at the zero bound and monetary policy becomes impotent to stimulate investment. This is the point at which fiscal policy normally steps in with a stimulus package designed to boost GDP by encouraging consumption instead, and get the interest rate off the floor.

    The price for this? Typically a temporary period of superoptimal inflation pushes real wages down as we have just experienced in the UK. As long as it remains in control its normally a price worth paying.
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    (Original post by py0alb)
    Liquidity preference is controlled by GDP, interest rates and public expectations (both rational and irrational).
    Interest rates in a free market are determined by time preference. That is, if you are very scared about the future you want to have money on hand (somewhat like a liquidity preference), however if you are confident about the future and want to delay your consumption you will save money.

    This looks like a deep schism where I see time preference driving the market for money whilst you see liquidity preference.

    For the liquid asset market to be in equilibrium, L must equal M1/P. Otherwise interest rates will automatically shift until the market clears.
    What is L and what is M1/P?

    Why do you say "demand for debt"? Do you mean liquidity preference? Why not just say so?
    It means precisely what it says on the tin. People want to go into debt. They want to bring their consumption or investment into the present rather than earning income over time and then spending that income in the future. It is time preference rather than liquidity preference.
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    (Original post by Classical Liberal)
    Interest rates in a free market are determined by time preference. That is, if you are very scared about the future you want to have money on hand (somewhat like a liquidity preference), however if you are confident about the future and want to delay your consumption you will save money.

    This looks like a deep schism where I see time preference driving the market for money whilst you see liquidity preference.

    What is L and what is M1/P?

    It means precisely what it says on the tin. People want to go into debt. They want to bring their consumption or investment into the present rather than earning income over time and then spending that income in the future. It is time preference rather than liquidity preference.
    The schism is illusionary. What you call time preference was simply what I referred to as public expectations. It is one of the three variables that controls liquidity preference, but it is the least powerful of the three. Don't overestimate its effect in comparison to the more direct and immediate effects of real interest rate and GDP.

    L is liquidity preference and M1/P is money supply/prices.
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    (Original post by py0alb)
    The schism is illusionary. What you call time preference was simply what I referred to as public expectations. It is one of the three variables that controls liquidity preference, but it is the least powerful of the three. Don't overestimate its effect in comparison to the more direct and immediate effects of real interest rate and GDP.
    People do not care about GDP. Just because the economy expands generally does not mean individuals think to themselves, **** I need more cash.
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    (Original post by Classical Liberal)
    People do not care about GDP. Just because the economy expands generally does not mean individuals think to themselves, **** I need more cash.
    You're thinking microeconomics, we're talking macroeconomics. We're talking about the liquidity preference of the entire nation. Obviously that will be directly related to GDP.

    If you want to think of it in micro-terms (which isn't always wise because micro and macro concepts don't automatically correspond), an individual's person's liquidity preference (ie the amount of money he keeps in his pocket or his instant access account) depends on a) how much he earns, b) how much interest it costs him to borrow money/not to save the money, and c) his expectations of whether its a good idea to spend the money now or keep some back for the future.
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    (Original post by py0alb)
    You're thinking microeconomics, we're talking macroeconomics. We're talking about the liquidity preference of the entire nation. Obviously that will be directly related to GDP.
    Just because the economy has grown does not mean there will be more liquid assets by definition?
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    (Original post by Classical Liberal)
    Just because the economy has grown does not mean there will be more liquid assets by definition?
    No not necessarily. GDP is a measure of how many goods and services we produce in a year. There is no reason why we should wish to keep all of what we earn in the form of liquid assets. We might choose to stick the whole lot in an ISA.

    There are two different interacting media: goods and services (the real economy) and liquid assets (the monetary economy). The amount of each provided is defined by aggregate supply and demand, but in an interacting manner.

    There is a self-stabilising relationship between the G+S market and the liquid assets market: If GDP goes up, then our national liquidity preference goes up. If our liquidity preference goes up, then interest rates go up. If interest rates go up, then investment falls. If investment falls, then GDP falls back down. So we have a stable equilibrium.

    Basically:

    If people want more cash and less stuff: they buy less and the real economy shrinks.
    If people want less cash and more stuff: they buy more and the real economy grows.
    If people want more cash and more stuff: they borrow more so interest rates go up.
    If people want less cash and less stuff, they save more so interest rates go down.


    There are also other factors that can have either a stabilising or destabilising effect that I won't go into now, such as money supply, MPC, inflation, unemployment, exchange rates etc.
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    This has been a good revision session for my upcoming exams!
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    (Original post by py0alb)
    This has been a good revision session for my upcoming exams!
    That is not what is supposed to happen on TSR.
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    (Original post by Classical Liberal)
    Careful here, many of these firms that go abroad and use third world labour are actually helping the workers. The workers are being allowed to use more capital. Which makes them more productive. Which means they get higher wages.

    As long as the workers in these nations are able to freely choose their form of employment, MNCs do a lot of good.

    If the MNCs were to leave these nations the workers would not gain. Suddenly they would be out of a job and have to take a lower quality form of employment, by their judgement, instead. They might be forced back into a subsistence farming existence.

    Honestly this is the most regurgitated answer ever. I've heard it about 1000 times. It is simply not true. Capitalist imperialism has always been justified in the west through the same rationalizations of 'progress'. "It's better for them. Otherwise they'd still be farmers! God forbid!"

    These 3rd world countries were once self-sufficient, stable, and filled with generally happy people. Capitalist imperialism has disrupted that existence. How is being a peasant worse than being a 12 year old factory worker? How is being a farmer worse than working 16-hours a day and developing RSI in a Nike factory? Let's not kid ourselves, these people are slaves, and their slave-labour is what allows us to maintain our living standards.

    Now - you are able to ignore this cognitive dissonance by rationalizing it to yourself that it is all temporary. These people lead crap lives, but it's ok, they are making 'progress', and are 'progressing' from their 'antiquated backward' lives into the great happiness that is western capitalism.


    For example I remember a story a clothes brand from a celebrity that it turned out used child labour in the third world. There was a popular hippy revolt in America, because they thought child labour was abhorrent, and the clothes brand was shut down. This meant the factory with the child labour in it was closed down.

    Now many of the child labourers were young girls. And guess what happened after they lost their jobs? Many of them turned to prostitution. An absolute tragedy caused by do gooders who do harm. It is well intended people who do the most harm.
    This is true. It happens all the time. It happens because of the system in place. Most 3rd world countries compete with each other, they actually petition big corporations by promising lower wages, higher productivity, less cost. So when one company is forced to shut down its slave factory, it moves elsewhere to a competing company and the people from the old company are screwed.

    In your twisted worldview, this is all progress! Soon they'll be enjoying the fruits of great new life-styles, because they will have progressed to a service and information-based economy, and the miserable industrial slave-labour will have been moved to another developing country! Ah the beauty of it!

    This entire life-view ignores how capitalism developed in Europe. The west developed because millions of immigrants left to the US/Canada/Australia/ etc.

    Imagine if no one from Ireland had left during the potato famines, or from England during the industrial revolution. What would England look like now? You're kidding yourself if you think English people would have even remotely the same living conditions as they do now.

    Long story short - The exodus of miserable people kept the labour market lower than it should have been, the influx of riches from the colonies kept a fat stream of resources and stolen wealth flowing into the economy, and the military capability allowed more economies to be invaded and occupied.

    Obviously, capitalism cannot develop in the 3rd world now in the way it did in the west. You've adopted it as some sort of religion, which is why you support things like no regulations. No regulations! Hah! Have you forgotten how many riots it took Europeans to get their governments to introduce the 10-hour workday, and then the 9-hour workday? People gave up their lives for regulation like that. The only reason you harbour these views is because you live in a protected cozy environment in the west, and you know that any unregulated madness will be exported to some remote place. You know just as well as I do that regulated capitalism in the 3rd world would mean drastically lowered living standards for you.
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    (Original post by Classical Liberal)
    Our problems today were not caused by government spending (did I just say that?), it was caused by people going into debt (creating money) to buy assets such as homes (which caused the price to rise), which caused people to go further into debt (create more money) to buy those assets (which caused them to rise more in price) and so on and so forth. But like all bubbles they eventually have to burst. The house price bubble has been inflation, pure and simple.

    This is exactly what I tried to explain in my earlier post. You've identified the same problem as me, but you do not explain how it came to be that people and nations began going into massive debt simultaneously.


    And having said all of the above, I actually agree with you on fractional reserve banking. I just think it's unhealthy to have a religious devotion to capitalism. It is powerful at boosting innovation and growth, but from a social justice position it is absolute garbage. It's also why you try to mix in things like Roman or Egyptian economy into this capitalism=success worldview, when they have absolutely nothing to do with each other. The Romans used slave labour to boost productivity and profitability, and they stole riches from lands they conquered, just as the modern colonial nations have done. That is why they became successful. I'd suggest you read about Rawl's theory of justice. I think it relates.


    Education is not ideal for everybody. Or more accurately, school is not for everybody. School for man kids is a great way to waste time, never learn anything and undermine other kids education. I think in many cases some kids would do better outside of a school enviroment and do better in work. And then be able to return to education when they are older if they choose to.

    I do not think it is a bad idea to let, say 14 year olds, actually hold proper jobs. This would likely have more educational value than school I suspect in many cases.

    The important thing is that people are free to choose. As long as you have choice, go into education or get a job, that is the important thing. The law saying "you must go to school" is a bad thing. And it is bad for the law to say "you shall not take a job".
    This is just crazy. It goes against absolutely all reason. The implications would be utterly ridiculous. You'd be separating the population into divided classes. The entire western world is currently living on the belief that education is a right for all and that only through education can people shift between social strata. What you're talking about exists in the developing world where education is neither a right nor free.
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    Not fighting in wars would help.
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    (Original post by spaceman spiff)
    This is exactly what I tried to explain in my earlier post. You've identified the same problem as me, but you do not explain how it came to be that people and nations began going into massive debt simultaneously.
    No you have not. Your post is full of contradictions like, "keeping consumption high by cutting benefits and investing into capital goods". That is just a silly thing to say.

    Private debt has exploded not to keep consumption high but to finance a speculative bubble. The private debt bubble is not some kind of capitalist conspiracy. It is a horrible nasty accident.



    And having said all of the above, I actually agree with you on fractional reserve banking. I just think it's unhealthy to have a religious devotion to capitalism. It is powerful at boosting innovation and growth, but from a social justice position it is absolute garbage.
    Absolute tosh. The only economic systems in history in which the common man, the ordinary man, has been able to escape grinding poverty is in nations with largely free enterprise. That is simply an undeniable historical fact. So when it comes to social justice, capitalism wipes the floor with all the other alternatives.

    That is why they became successful. I'd suggest you read about Rawl's theory of justice. I think it relates.
    I have to an extent and it does not relate. And your story in nonsense. Nations are only able to conquer other nations because they conquerer is more productive, a priori. They produce more food with less labour. Thus labour is free to specialise. And thus have the ability to raise a powerful army with all the excess labour and capital that is produced by said labour.

    This is just crazy. It goes against absolutely all reason. The implications would be utterly ridiculous. You'd be separating the population into divided classes. The entire western world is currently living on the belief that education is a right for all and that only through education can people shift between social strata. What you're talking about exists in the developing world where education is neither a right nor free
    Education is not a right. It is an entitlement. But forgoing that distinction, education is not the same as being forced to go to some crappy government school.

    Education is not the same as going to school. You can be very educated and not have gone to school. Indeed this raises the question of what an education is? It an education as you seem to suggest, going to school. Or is it actually have knowledge and skills, which is what I think education really is.
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    (Original post by spaceman spiff)
    Honestly this is the most regurgitated answer ever. I've heard it about 1000 times. It is simply not true. Capitalist imperialism has always been justified in the west through the same rationalizations of 'progress'. "It's better for them. Otherwise they'd still be farmers! God forbid!"
    If you take the fundamental assumption that if men are free, they will take the action which they believe will achieve their goals, then if a man chooses to work in a factory instead of on a farm then he must have had a reason, and he must believe that working in the factory will allow him to achieve his goals.

    These 3rd world countries were once self-sufficient, stable, and filled with generally happy people.
    They might have been self sufficient, but they probably lived till they were about 30, spent all of their time grubbing around for food, and were in continous conflict with others over land. Just like humans started out.

    Capitalist imperialism has disrupted that existence. How is being a peasant worse than being a 12 year old factory worker?
    Why don't you have a crack at being a self sufficient peasant, then you might find out.
    Let's not kid ourselves, these people are slaves, and their slave-labour is what allows us to maintain our living standards.
    These people are unfortunate. But as long as they are not slaves, that is they are not free to choose where they use their labour, then they will take the decisions that benefit them.

    Primitive economies must go through such stages. We did in the industrial revolution. One of the great fallacies of the industrial revolution was to think it caused proverty. What it really did was concentrate poverty in such a way that is was easily observable. Which is what happens when people see 3rd world factories, they see concentrated poverty. Rather than unconcentrated grinding poverty of the worst kind.






    This is true. It happens all the time. It happens because of the system in place. Most 3rd world countries compete with each other, they actually petition big corporations by promising lower wages, higher productivity, less cost. So when one company is forced to shut down its slave factory, it moves elsewhere to a competing company and the people from the old company are screwed.
    1st world countries do precisely the same things. We have to compete with them. We have to compete with China and India. But in reality nations do not compete, it is people who compete.

    In your twisted worldview, this is all progress! Soon they'll be enjoying the fruits of great new life-styles, because they will have progressed to a service and information-based economy, and the miserable industrial slave-labour will have been moved to another developing country! Ah the beauty of it!
    IT is will be beautiful if capitalism raises these people to such a state where they can live with plenty of food, access to the internet, access to transport and so on. Yes, when all men across the world no longer starve, that will be beautiful.

    This entire life-view ignores how capitalism developed in Europe. The west developed because millions of immigrants left to the US/Canada/Australia/ etc.
    Yeah, because they went to nations that had opportunities. Nations that had the free market. The people voted with their feet. And the voted for freedom.

    Imagine if no one from Ireland had left during the potato famines, or from England during the industrial revolution. What would England look like now? You're kidding yourself if you think English people would have even remotely the same living conditions as they do now.
    Are you saying that we gained because people went to America, right? I would agree with you. But at the same time those emigrants gained.

    Long story short - The exodus of miserable people kept the labour market lower than it should have been, the influx of riches from the colonies kept a fat stream of resources and stolen wealth flowing into the economy, and the military capability allowed more economies to be invaded and occupied.
    What has that got to do with people going to the Americas?

    ave you forgotten how many riots it took Europeans to get their governments to introduce the 10-hour workday, and then the 9-hour workday? People gave up their lives for regulation like that.
    Wasted lives. The reason why we do not work really long hours is because we are productive enough work for 8 hours a day, and that is enough to support us. And that is because we have access to advanced capital which makes us more productive.

    We work less not because of government regulation, but because of our productive capacities.

    The only reason you harbour these views is because you live in a protected cozy environment in the west, and you know that any unregulated madness will be exported to some remote place. You know just as well as I do that regulated capitalism in the 3rd world would mean drastically lowered living standards for you.
    It would mean lower living standards for everyone. Regulations kill voluntary cooperation. And voluntary cooperation creates wealth.
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    Economics needs to turn from self interest to social interest, to evolve to the next intellectual level of a type 2 civilization.
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    (Original post by bazeconomics)
    Economics needs to turn from self interest to social interest, to evolve to the next intellectual level of a type 2 civilization.
    You are talking a load of old ****.
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    This will always happen until two things occur:

    a) Democracy ends. 4 year plans made by people with no experience in the real or business world will always end badly.
    b) Stocks and shares are stopped. Stock holders always want more profit, and this causes greed to damage a company that is perfectly good.
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    (Original post by Classical Liberal)
    No you have not. Your post is full of contradictions like, "keeping consumption high by cutting benefits and investing into capital goods". That is just a silly thing to say.

    Private debt has exploded not to keep consumption high but to finance a speculative bubble. The private debt bubble is not some kind of capitalist conspiracy. It is a horrible nasty accident.
    You haven't understood what I said. First of all - benefits and wages were cut in the 70s during the Reagan and Thatcher administrations. It was done to allow corporations to stay profitable. This is basic economics - lower wages=higher profitability. Corporations were thus able to accumulate further, and private debt allowed the workers to do the same.

    Secondly, I never inferred that it was a conspiracy. I clearly stated that it was a reaction to the ending of a post-WW2 boom cycle. I also clearly state that real wages stopped rising in the US and national saving began to decrease in the US during this period because of fiercer global competition from Japan and western Europe.

    So please don't stoop to straw-men, and if there are contradictions then point them out.



    Absolute tosh. The only economic systems in history in which the common man, the ordinary man, has been able to escape grinding poverty is in nations with largely free enterprise. That is simply an undeniable historical fact. So when it comes to social justice, capitalism wipes the floor with all the other alternatives.
    This is not an argument. You seem to have a religious adherence to a certain set of principles that completely lack any insight or relation to what actually happens historically. Capitalism has been horrible for the world and I don't even need to prove it. Open a history book. "Capitalist social welfare" is a joke. Most of the developed world has become far poorer, and suffer far more after the introduction of capitalism.

    So either you know nothing about history, or have never left the UK.


    I have to an extent and it does not relate. And your story in nonsense. Nations are only able to conquer other nations because they conquerer is more productive, a priori. They produce more food with less labour. Thus labour is free to specialise. And thus have the ability to raise a powerful army with all the excess labour and capital that is produced by said labour.
    Hahaha...how can you say that it does not relate if you've only read of it "to an extent"?... You see, this is what I'm talking about. You've closed your mind. It's like talking with a brick wall. Nothing relates, nothing is right. Capitalism must conquere everything! Remove all obstacles to glorious capitalism! It all smacks of fundamentalism.

    Secondly - I can tell you know nothing about the Romans or history in general. The Roman conquests had absolutely nothing to do with free movement of labour. Jesus, this is unbelievable. How can you spew such nonsense with such surety when you don't know the first thing about history??

    The Romans were almost wiped out by Hannibal and the Carthaginians. Hannibal invaded Italy from what is now Spain with an army of elephants. Were the Carthaginians so powerful because they had "free movement of labour"?? Hahah... Trade, military innovation, culture, and political decision-making are the reasons the Romans rose in power. Not because they were more efficient food producers and thus had more specialized labour. They had standing armies like all their enemies.


    Education is not a right. It is an entitlement. But forgoing that distinction, education is not the same as being forced to go to some crappy government school.

    Education is not the same as going to school. You can be very educated and not have gone to school. Indeed this raises the question of what an education is? It an education as you seem to suggest, going to school. Or is it actually have knowledge and skills, which is what I think education really is.
    This entire argument is ludicrous. You have some fanciful view of what education is, and are trying to convert that view into a backward system found in poor countries like my own. The rich will end up in school, the poor will end up working for their parents on their farms/shops/etc. This argument is so short sighted and myopic it actually brings the rest of your opinions into question. It's of the same high-calibre b.s. as the right-wing theories of the 70s that called for "less education" to decrease competition in the UK. If I recall correctly the right-wing labour minister wanted to decrease education for some, so that they could 'specialize' more. Go to Sweden or Finland and propose such a thing and you'd get laughed at.
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    (Original post by spaceman spiff)
    You haven't understood what I said. First of all - benefits and wages were cut in the 70s during the Reagan and Thatcher administrations. It was done to allow corporations to stay profitable. This is basic economics - lower wages=higher profitability. Corporations were thus able to accumulate further, and private debt allowed the workers to do the same.
    This is all nonsense. Benefits were not cut to allow corporations to stay profitable. Indeed it would probably do the opposite as consumers have less income to spend.

    And lower wages is not an indentity to high profitability. That is a complete Marxist fallacy.

    Secondly, I never inferred that it was a conspiracy. I clearly stated that it was a reaction to the ending of a post-WW2 boom cycle. I also clearly state that real wages stopped rising in the US and national saving began to decrease in the US during this period because of fiercer global competition from Japan and western Europe.
    Again this is not true. Real wages have been rising. People who saying wages have been stagnent are always quoting household incomes, rather than individuals.




    This is not an argument. You seem to have a religious adherence to a certain set of principles that completely lack any insight or relation to what actually happens historically. Capitalism has been horrible for the world and I don't even need to prove it. Open a history book. "Capitalist social welfare" is a joke. Most of the developed world has become far poorer, and suffer far more after the introduction of capitalism.
    The history of mankind politely disagrees. I don't know what planet you are living on, but human beings live much more prosperous lives than they did 200 years ago.

    "Most of the developed world has become far poorer and suffer far more after the introduction of capitalism" - Well done, you have completely discredited yourself. I mean would you prefer to live 300 years ago in a fuedal state?

    Hahaha...how can you say that it does not relate if you've only read of it "to an extent"?... You see, this is what I'm talking about. You've closed your mind. It's like talking with a brick wall. Nothing relates, nothing is right. Capitalism must conquere everything! Remove all obstacles to glorious capitalism! It all smacks of fundamentalism.
    No. It is because capitalism actually works. It actually does improve the lives of the ordinary man.

    Secondly - I can tell you know nothing about the Romans or history in general. The Roman conquests had absolutely nothing to do with free movement of labour. Jesus, this is unbelievable. How can you spew such nonsense with such surety when you don't know the first thing about history??
    When did I mention the free movement of labour?

    How do you raise a powerful army without surplus labour? That is what the Romans had, plenty of excess labour (because they produced enough food ) and thus were able to hire private soldiers and the like.

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