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Finance, coronavirus, the economy, etc (Read 44595 times)

Johnny Brown

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Finance, coronavirus, the economy, etc
March 17, 2020, 12:35:27 pm
*****Split from Coronavirus Covid-19 thread****

Indeed. It's a damn good job money isn't real.
« Last Edit: March 18, 2020, 04:15:36 pm by Ru »

gme

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Indeed. It's a damn good job money isn't real.
I understand your point and for the wealthy it isnt, however i suspect its going to feel very very real to a lot of people in the next year if governments dont get this right. 140,000 job losses in Ireland in 48 hours.

You cant pay your rent/mortgage with idiology.

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You cant pay your rent/mortgage with idiology.

No, but you can stop paying...

I've mulled over a thought experiment before, and it's this:

What if we just write off personal mortgage debt, sign the deeds over to everyone who is currently resident in their house. Who loses out? Banks and the wealthy. My mum would lose out, her retirement is comfortable as she part owns a flat. So what? She'd still have her house mortgage free.


Nigel

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Indeed. It's a damn good job money isn't real.
I understand your point and for the wealthy it isnt, however i suspect its going to feel very very real to a lot of people in the next year if governments dont get this right. 140,000 job losses in Ireland in 48 hours.

You cant pay your rent/mortgage with idiology.

JB has nailed the more existential question regarding the economy, and maybe one thing that might come out of this crisis is that the greater majority of the population will twig this and start discussing alternatives.

GME, your point about rent / mortgage is true, but only up to a point i.e. within the current system.  Taking a step back to align more with JB's vantage point, there is an ideology where you don't have to pay your rent / mortgage.

northern yob

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Indeed. It's a damn good job money isn't real.

Is this where we start burning money Adam? Is Bill Drummond really an economics genius....? If we all do it at the same time will it work?? Itís a nice idea and I get what your saying even though on this occasion Iím sober. As Gav says itís not gonna pay anyoneís mortgages and even if this changes the world forever Iíll put everything I have on it not bringing capitalism down as our chosen system. Everyoneís money worries are about to get very real.

Johnny Brown

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Is this where we start burning money Adam? Is Bill Drummond really an economics genius....? If we all do it at the same time will it work?? Itís a nice idea and I get what your saying even though on this occasion Iím sober. As Gav says itís not gonna pay anyoneís mortgages and even if this changes the world forever Iíll put everything I have on it not bringing capitalism down as our chosen system. Everyoneís money worries are about to get very real.

I don't expect it to bring down capitalism. I do expect an enormous fudge to take place in the world's accounts that will make the money tree used to bail the banks out look like a sapling. What's interesting is that this time it will have to directly benefit the common man.

Indeed. It's a damn good job money isn't real.

I understand your point and for the wealthy it isnt

Hmm, I'm not sure you do! My point is that it is only the wealthy for who money is most real. If you don't have any you can't be harmed by it becoming worthless. We are already feeding the poorest through foodbanks not the economy.

The question for governments is how they finance the poor without devaluing the rich  - although the markets are doing a pretty good job of that already.

Be interesting to hear Andy P's thoughts on what we might learn from Weimar Germany, my initial thought is that such an experience may have been the bedrock for their more recent success.

Johnny Brown

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I don't expect it to bring down capitalism.

Having said that I do expect neoliberalism to get the most almighty kick up the arse (at last). Not hearing anyone suggest we can sit back and let the markets sort it all out are we?

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For the person that says money isnít real (I accept the theory) I would suggest that they are likely facing a different situation to us.

Likewise I'm running a small business (vocational training) that cannot be run without bringing people together, and therefore we will be closing for the foreseeable future. Mine and the businesses finances are healthy enough that we could absorb that for a month or maybe three but not much longer. However neither I nor the business have enough to mean that I can't contemplate them being erased. If our reserves are wiped out, whether by us being closed or some financial meltdown, they can't take away the knowledge or reputation we've accrued. The period following this crisis will see unprecedented growth.

petejh

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Quote from: johnny brown
Human lives are real and cannot be valued in economic terms. Conversely the economy is entirely a product of our imaginations and has no unbreakable link to reality. It won't go away because modern society is dependent on trade. But the current position is no more concrete than a game of monopoly, there are just more players.

Imagine a venn diagram with three concentric circles like a target. At the centre is the economy, the middle ring society, the outer environment. The economy can only subsist as a subset of a functioning society, just as society can only exist within a functioning environment.

Yes I know, economists think they can put a dollar value on life, and the economy is quite capable of bestowing harm and benefit. But money is not a real thing, if you press reset tomorrow the only actual effect is rich people lose their wealth, which bestows no real harm only damage to self-image. If you don't agree, consider this - at least 12 trillion has already been lost from the US economy due to covid-19. Where has it gone? It only existed as a measure of people's aggregate confidence in the future. If they are deserving of it they will soon build it back up - the economy will come roaring back as soon as we let it.  The problem of course is those in power are those with the capital. They won't press reset and the rich will try to push their losses onto others. But the longer this goes on the more radical the solution will need to be.

Human life and health is real and will be treated as such, as it has been since before money was conceived and will be after it has been forgotten.

Like GME I'm actually optimistic - as this becomes the only issue for huge sections of society I expect a vaccine will be developed and distributed in record time. The team that create it will be set for life with both status and wealth.

JB, funny I've always held roughly the same view of money and the economy as that you've described. I remember arguing for this when I was in my early twenties, and climate change was first becoming widely debated. My point then was something along the lines:
1. global warming is caused by humans and is 'real';
2. money is a human construction and is 'illusory';
3. arguments against taking drastic action on global warming are, broadly speaking, that it will be too expensive to make drastic changes;
4. therefore in my mind the way to fix climate change quickly is to temporarily dispense with the illusory construct of money and just build new tech and make whatever changes needed.

The problem with that theory is everyone has to agree, and it seems to takes an extremely 'real' threat of mass loss of life to realise what's real and what's illusion. As long as one group of humans have power derived from (illusory) wealth then there seems to be an insurmountable obstacle to doing away with the illusion.
Going to be *interesting* (understatement, obvs) to see if sufficient political will exists to press the 'reset button'.

gme

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Is this where we start burning money Adam? Is Bill Drummond really an economics genius....? If we all do it at the same time will it work?? Itís a nice idea and I get what your saying even though on this occasion Iím sober. As Gav says itís not gonna pay anyoneís mortgages and even if this changes the world forever Iíll put everything I have on it not bringing capitalism down as our chosen system. Everyoneís money worries are about to get very real.

I don't expect it to bring down capitalism. I do expect an enormous fudge to take place in the world's accounts that will make the money tree used to bail the banks out look like a sapling. What's interesting is that this time it will have to directly benefit the common man.

Indeed. It's a damn good job money isn't real.

I understand your point and for the wealthy it isnt

Hmm, I'm not sure you do! My point is that it is only the wealthy for who money is most real. If you don't have any you can't be harmed by it becoming worthless. We are already feeding the poorest through foodbanks not the economy.

The question for governments is how they finance the poor without devaluing the rich  - although the markets are doing a pretty good job of that already.

Be interesting to hear Andy P's thoughts on what we might learn from Weimar Germany, my initial thought is that such an experience may have been the bedrock for their more recent success.

I have no idea what your on about then and totally disagree. Money is very real for those who dont have a lot of it. Only those who have none and thopse who have more than they need could say it isnt real.

Anyway far to deep for me, will leave that to the phlosophers among you all and concentrate on the practicalities.

Johnny Brown

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Perhaps we should have a thread split? Maybe resurrect the corpse-munching one?

seankenny

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Conversely the economy is entirely a product of our imaginations and has no unbreakable link to reality.

Could you please explain what you mean by "the economy"?

Johnny Brown

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Could you please explain what you mean by "the economy"?

Good question. I suppose that's a bit of a sloppy use of the term. I mean the modern financial systems and all the things ascribed a monetary value that would disappear were we to revert to a barter system. For example the UK financial sector is currently ten times the size of our GDP, and the world's shadow banking system is bigger than the entire commercial banking sector and twice the GDP of Earth. I used to think of banking profits as the froth on top of the boiling pot economy. Only it seems there's now a lot more froth than water.

I am heartened today.

That's great news mate.  :2thumbsup:

seankenny

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Could you please explain what you mean by "the economy"?

Good question. I suppose that's a bit of a sloppy use of the term. I mean the modern financial systems and all the things ascribed a monetary value that would disappear were we to revert to a barter system.

So, a couple of things I don't get here. My time and yours are both ascribed a monetary value. Are you saying that should disappear, ie I should work for free?

And that use of the word "revert"... given that the very first writing we know about, back in 5000BC was writing down debts and repayments, in terms of money or at least "things owed", are you sure that much reverting would really occur? I have some eggs but want potatoes, you have some potatoes but want salsa classes... unless you're willing to go cheek to cheek and get trodden on, we're going to be needing some sort of money, no?


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For example... the world's shadow banking system is bigger than the entire commercial banking sector and twice the GDP of Earth.

I'm not a finance guy so don't really understand this. If Earth's GDP is the sum of all goods and services on Earth, and the shadow banking system is lending capital produced on Earth, how come it's bigger? I did check, apparently world GDP is $80 trillion and the shadow banking system is worth $52 trillion, so it might not even be correct, but if it was, how does that work?

Johnny Brown

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So, a couple of things I don't get here. My time and yours are both ascribed a monetary value. Are you saying that should disappear, ie I should work for free?

No, as you say in your next line labour can be bartered and was certainly one of the first things to be traded.

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And that use of the word "revert"... given that the very first writing we know about, back in 5000BC was writing down debts and repayments, in terms of money or at least "things owed", are you sure that much reverting would really occur? I have some eggs but want potatoes, you have some potatoes but want salsa classes... unless you're willing to go cheek to cheek and get trodden on, we're going to be needing some sort of money, no?

Agreed, I wasn't suggesting we didn't need money. My point is the economy has mutated and grown from money being used as a trade token and store of value.

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For example... the world's shadow banking system is bigger than the entire commercial banking sector and twice the GDP of Earth.

I'm not a finance guy so don't really understand this. If Earth's GDP is the sum of all goods and services on Earth, and the shadow banking system is lending capital produced on Earth, how come it's bigger? I did check, apparently world GDP is $80 trillion and the shadow banking system is worth $52 trillion, so it might not even be correct, but if it was, how does that work?

No, you've got it, I'm afraid. That's my point. That 'real' economy you and I partake in is now just the underwriting capital for the banks' activities, which exceed the real economy by at least a factor of 10 in the UK. Source When they fuck up - as in 2008 - the costs of the big casino 'froth' economy are borne by the real one. This froth economy has a big influence on politics and is what I'm suggesting needs resetting.

Plus, as Pete pointed out, current vested interests are preventing progress on climate change. The fact that we need an economy does not mean the current one is the only one or the desirable one.
« Last Edit: March 17, 2020, 07:03:19 pm by Johnny Brown »

seankenny

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So, a couple of things I don't get here. My time and yours are both ascribed a monetary value. Are you saying that should disappear, ie I should work for free?

No, as you say in your next line labour can be bartered and was certainly one of the first things to be traded.
 

Erm, but wasn't I saying that labour couldn't be bartered? As far as I know, economic historians haven't actually found any evidence of societies with widespread barter... surely what happens when there is much, much less money floating around is that labour and goods become traded via an intricate and inflexible system of social relations underpined by violence. Break those relations, and you need much more money - as happened in Europe after the 14th century.

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And that use of the word "revert"... given that the very first writing we know about, back in 5000BC was writing down debts and repayments, in terms of money or at least "things owed", are you sure that much reverting would really occur? I have some eggs but want potatoes, you have some potatoes but want salsa classes... unless you're willing to go cheek to cheek and get trodden on, we're going to be needing some sort of money, no?

Agreed, I wasn't suggesting we didn't need money. My point is the economy has mutated and grown from money being used as a trade token and store of value.
 

But what if I want to move my spending and consumption to a different point in time? Today the government urgently needs to do something (fight the French) and you have some money to lend them from your profits (say you've developed some new and slightly more efficient farming techniques), so the govt issues as bond and now we have created a financial instrument. And then we can buy and sell those bonds on the assumption that the government is always going to be around to pay it back. This has been going on since the 17th century if not before, so it's probably pretty useful, right?



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For example... the world's shadow banking system is bigger than the entire commercial banking sector and twice the GDP of Earth.

I'm not a finance guy so don't really understand this. If Earth's GDP is the sum of all goods and services on Earth, and the shadow banking system is lending capital produced on Earth, how come it's bigger? I did check, apparently world GDP is $80 trillion and the shadow banking system is worth $52 trillion, so it might not even be correct, but if it was, how does that work?

No, you've got it, I'm afraid. That's my point. That 'real' economy you and I partake in is now just the underwriting capital for the banks' activities, which exceed the real economy by at least a factor of 10 in the UK. Source When they fuck up - as in 2008 - the costs of the big casino 'froth' economy are borne by the real one. This froth economy has a big influence on politics and is what I'm suggesting needs resetting.
[/quote]

So let me get this right. I'm participating in the real economy only when I get money from my labour and use it to buy an iPhone. But I'm paying for the phone on a contract, spread out over years. And the phone itself cost a billion dollars or so to develop, which was also spread out over years on the prospect of a flow of profits, so aren't I also participating in the financial markets?

Surely the picture on size of financial markets compared to GDP is complex? According to the World Bank:

"Private credit to GDP differs widely across countries, and it correlates strongly with income level. For example, private credit to GDP in high-income countries is 103 percent in high-income countries, more than 4 times the average ratio in low-income countries...
"Financial depth, approximated by private credit to GDP, has a strong statistical link to long-term economic growth; it is also closely linked to poverty reduction... Averaging over 1980Ė2010, private credit of financial institutions was less than 10 percent of GDP in Angola, Cambodia, and Yemen, while exceeding 85 percent of GDP in Austria, China, and the United Kingdom...
"A very high ratio of private sector credit to GDP is not necessarily a good thing. Indeed, all the 8 countries with the highest ratios of private sector credit to GDP as of 2010 (Cyprus, Ireland, Spain, Netherlands, Portugal, United Kingdom, Luxembourg, and Switzerland, going from the highest to the lowest) had a major crisis episode since 2008.."

https://www.worldbank.org/en/publication/gfdr/gfdr-2016/background/financial-depth

So when I read things like: "Imagine a venn diagram with three concentric circles like a target. At the centre is the economy, the middle ring society, the outer environment. The economy can only subsist as a subset of a functioning society", aside from knowing that you've read Kate Raworth, I'm not entirely convinced it makes sense. If by "the economy" you mean the financial sector, even Yemen has one and it is not a functioning society. In fact 17th/18th century Britain, a country with no sanitation system, rampant diseases, occasional famines, near constant wars with its neighbours, pervasive personal insecurity ("stand and deliver!"), widespread corruption, a tiny civil service, limited communications, a country so rickety it once lost half of its capital city in less than a week, still managed to have a fairly spunky financial system.

Feel free to move this to the financial crash thread if more appropriate!


Johnny Brown

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Feel free to move this to the financial crash thread if more appropriate!

I'm not a mod but probably sensible.

Erm, but wasn't I saying that labour couldn't be bartered? As far as I know, economic historians haven't actually found any evidence of societies with widespread barter... surely what happens when there is much, much less money floating around is that labour and goods become traded via an intricate and inflexible system of social relations underpined by violence.

Interesting. I'm not convinced - any sources you can recommend? As per your last post, book-keeping preceded writing so what evidence would there be? I'm thinking about pre-agrarian hunter-gatherer societies principally.

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aside from knowing that you've read Kate Raworth,

No I've not. Is that the premise of doughnut economics?

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I'm not entirely convinced it makes sense. If by "the economy" you mean the financial sector, even Yemen has one and it is not a functioning society. In fact 17th/18th century Britain...

Clearly we've got very different definitions of society. I don't see any financial sector in chimp society. I can't see any room for argument on this, if there are no humans the economy will go with them, that's all I'm saying.

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And then we can buy and sell those bonds on the assumption that the government is always going to be around to pay it back. This has been going on since the 17th century if not before, so it's probably pretty useful, right?

Pre-17th century, as I understand it, money was kept in a fairly tight box as a token of trade and a store of value. Both governments and religions forbade usury - Islam and the Catholic church still do with varying effects - so making money from money required actual work rather than just lending for interest - which was considered immoral. And usury for most of history didn't mean excessive interest, it meant any interest.

Post 17th century money was allowed out of that box and in many societies it became easier to make money from money than from work. The jury on that is still out, perhaps it enabled the industrial revolution but clearly it is a powerful engine of inequality. I'm not well informed on it but I'm planning to read some Piketty over lockdown.

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Surely the picture on size of financial markets compared to GDP is complex?


No doubt. I'm not a financial guy either, but my understanding it has grown rapidly since WW2 and particularly in the neo-liberal era of the last 40 years.

From wikipedia:

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To give an idea of the size of the derivative market, The Economist has reported that as of June 2011, the over-the-counter (OTC) derivatives market amounted to approximately $700 trillion, and the size of the market traded on exchanges totaled an additional $83 trillion.[9] For the fourth quarter 2017 the European Securities Market Authority estimated the size of European derivatives market at a size of Ä660 trillion with 74 million outstanding contracts.[10]

However, these are "notional" values, and some economists say that these aggregated values greatly exaggerate the market value and the true credit risk faced by the parties involved. For example, in 2010, while the aggregate of OTC derivatives exceeded $600 trillion, the value of the market was estimated to be much lower, at $21 trillion. The credit-risk equivalent of the derivative contracts was estimated at $3.3 trillion.[11]

Still, even these scaled-down figures represent huge amounts of money. For perspective, the budget for total expenditure of the United States government during 2012 was $3.5 trillion,[12] and the total current value of the U.S. stock market is an estimated $23 trillion.[13] Meanwhile, the world annual Gross Domestic Product is about $65 trillion.[14]

At least for one type of derivative, Credit Default Swaps (CDS), for which the inherent risk is considered high, the higher, nominal value remains relevant. It was this type of derivative that investment magnate Warren Buffett referred to in his famous 2002 speech in which he warned against "financial weapons of mass destruction".[15] CDS notional value in early 2012 amounted to $25.5 trillion, down from $55 trillion in 2008

I'm far from convinced we need derivatives at all, but I'm all ears.



Johnny Brown

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Where the line between the second and third type should be drawn is open to debate but - as Sean says - is very complicated when you start looking closely at it.

Sure. What are the benefits to society of the more esoteric sectors like derivatives? Liquidity? Or is just profit for bankers?

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any more than, say, the revenues of a small business should be close to the value of its assets.

I can see how that works for a business because revenues are derived from activities that may or may not require assets. But finance is broadly either charging interest or placing bets isn't it? Which requires some capital to provide underlying security? You can't play in a casino without some money.

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As to the "correct" relationship between GDP and the scale of a country's financial system

Isn't that only due to globalization? What about the world economy as a whole? As I understand it a bank can lend up to, say, 7 or 8 times the amount of money it actually has. Which is fine as long as you are confident in the level of risk involved. But as the financial sector becomes more complex, more globalized, it's harder to understand when it has over-extended itself.

Which to get back to the original point of the thread - how are we going to get ordinary people through a slump of economic activity as unprecedented as this? It seems like the world economy isn't set up for such events. Is it because we underestimated the risk and over-extended the finances again? What will we do, borrow against the future or print money (if there's a difference in the long run).

And in the bigger picture of the climate crisis it seems the current financial system is likewise unable to meaningfully account for the actual capital of nature - a functioning environment - which underwrites society. Time we explored other options?

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We have one big positive with the CV19 recession/global impact.

Itís affecting people - and killing many (but not - so far - a cataclysmic number) but itís not destroying infrastructure. This is quite different from a tsunami, a big earthquake (eg west coast US), or a world war... where you end up with a huge amount of physical damage.

So when this is over - there will have to be an economic rebuild (and hopefully restructuring) but no need to spend trillions replacing cities etc... this means in my limited interpretation that a rebound or bounce may well be quick.

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You mean ďyetĒ TT.

Wait for the riots to start.

Then itíll be the conquest of neighbouring nations in quest of their treasure (toilet rolls and tea bags), before nuclear weapons are deployed when we finally run out of non-dairy whitener (milk will begone long before this point),

gme

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Dear Mr Sunak
No VAT payments
No NI
No income tax.

Would be a good start. Why should we pay you all of the above to then be given or loaned back to us possibly when itís to late.

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Couldnít agree more Gav.

tomtom

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Seems to be the best way to play the system - that seems to be set up to burden small business with more debt.

Is there anything to stop me setting up a company - getting all the loans I can from the govt. Ďspaffingí the lot up a wall and then going bust?

gme

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Would show up in next years accounts if you didnít feed it back to the staff. If you couldnít prove it they could claim it back through increased corporation tax.

tomtom

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Soz Gav my post didnít work very well - I meant it provides some life support for business (I think) but ends up just saddling with more debt... etc...

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Dear Mr Sunak
No VAT payments
No NI
No income tax.


Because you don't pay income tax, NI or have spare cash to buy luxury goods which attract VAT when you aren't getting paid after you have been made redundant or your zero-hours contract has been cancelled.

 

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