Friday, October 17, 2008

Where did all this money come from ?

Dear Sir,

The current ciris is in finanacial markets and tooted in sub-prime
mortages, as we all know. First of all, the money market has severe
govt intervention for several decades when fiat money was invented and
standard was abandoned.

Some centuries ago the currecy were issued by banks backed by their
gold or other assets. Hence the original name : bank notes. Govts all
over the world 'nationalised' the currecy issuing system and established
Central Banks with sole monopoly over issue of legal tender. This is first
of all certainly not free market in the real sense.

Secondly, the chronic defict financing of all nations over decades
pumped in more money into the sytem than the sytem could absorve
thru growth in real GDP. This is true of most economies.

And US is in a unique position : its currency USD is the reserve
currency and most of world trade occurs in USD. And hence the
entire world funds the US deficts which is in trillions and trillions
over the decades. US govt prints and pumps in trillions and
trillions of USD into the world economy over the decades. The
cumulative effect of all this should be taken into account while
blaming 'free markets' alone for all this mess.

I vividly remember our discussion about value and money ; and
about the functions of money : as a medium of exchange, measure of
value, etc ; Especially the function : 'store of value' ; The accumulated
'surplus values' or capital or whatever the term flows all around the sytem
in search of investemtn avenues and good return on investemnts.
As the term value is tricky to define and contantly fluctuates in
currency and debt markets, the cumulative effect of too much money
chasing too few goods or avenues for investment seems the crux of
all issues.

The old deficniton for inflation : "Too much money chasing too few
goods" : This seems to aptly apply for this financial market mess.
Combined with the govt gurantess of the twin giants for many trillions
(Freddie and Fannie), etc.

The word cheap money, easy credit, easy money, etc are all result of
this too much fiat money ? And as the govt is the both the issuer of
money and lender of last resot, it also controls the effective interest
rates by tinkering with Fed rates. All these are certainly govt intervention
and not free markets. Last year i read in major papers that the world
boom in equity and real estate is a function of global liquidity. Means ?

Excess liquidity ? And cyclic asset bubbles are always regular
happenings. What about the net amount of M4 or legal tender that
exists in the world economy at any given moment ?

The crisis is not in manufacturing or other services. Hence to term
all this as the failure of free enterprise capitalism is pre mature.

Anyway, I guess no one wants to get back to socialism. In US no one
seems to re-establism the, say : ICC (Interstate Commerce Commission)
which throttled many sectors like trucking (like our license raaj in India
as on date).

More later..


1 comment:

K.R.அதியமான் said...

Dear Sir,

The logic in govt support this time is that the collapse will
destabilise the entire fin. system and economy. otherwise, the loosers
should be allowed to go bankrupt.

Keynes is a free marketer and agaisnt socialism and communism. it is
well know fact. His arguments about aggregate demand / full employment,
etc are only debateble and is disproved, esp in the 70s.

a painful correction and re adjustments and bankruptices will
stabilies and rejuvinete
a distorted market. a real free marketer is for that. but this
distortion is not only due to priivate imprudent lending, over
leveraging, etc ; govt deficits around the world have pumped in more
money / dollars than otherwise warranted. too much money floating
around with more distortions (Japanese yen carry trade added to this
mess) ; too much money chasing too few goods / avenues for
investments, etc. easy credit flowed uncontrollably. this aspect too
has to be taken into account before concluding about market 'failure'
; suppose if all govts in the world had balanced their budgets for
decades and deficit fianancing was in proportion to the GDP growth so
that the extra money pumped in a matched by the increase in total
output of of goods and services ; and during negative GDP growth
periods, if the govt stops defict financing,etc what would the net
result and current situation be ?

I don;t know much about world fin. markets, etc. But we have a
terrible history and memories of 20 deficts in India during the
socialistic peroids resulting in nearly 20 % inflations. Keynesian
pump priming strategy was never for us ; and may be not for todays'
mess in US. would govt pumping in more dollars into US economy be a
soultion or a problem then ? moot point...

more later

On Wed, Sep 24, 2008 at 11:07 AM, Neelakantan S
< wrote:
> Dear Athiyaman,
> I read the article cited and also other articles by Paul Krugman. After a
> long time, it is Paul Krugman who is reviving the 'liquidity trap' argument
> - a view first expressed by Keynes that in the bottom of a depression the
> rate of interest might fall to abysmally low levels in which monetary policy
> instruments would become totally inoperative. Krugman agrees now that this
> probability exists and has already become a reality!
> Keynes believed in a free market economy. He only said that it has a
> tendency to move out of control once in a while. He said that it must be
> put back in track in those times. The monetarists were denying that
> possibility. Now the reality is too stark for any one to deny that the
> economy has gone out of control. I hate the Paulson plan. Nowhere in
> Keynes had I read any irresponsible bailout of the stock market. He made
> too much money in speculation and had utmost contempt for the 'rentier'
> class who made money just by owning stock.
> Government getting the ownershis is only a lesser evil compared to
> unrestrained bailout requested by Paulson. If the government takes over all
> the laggards, it would end up only with all failed firms. It happened in
> Indian economy. A true monetarist would simply say that the laggards should
> be allowed to fail. I find very few voices supporting that position now.
> I believe that the situation demands a brain as practical and as active as
> that of Keynes. You seem to think otherwise.
> Let us see how things work out.
> I am looking forward to the views of Larry Summers on this issue. I had not
> seen any of his articles lately.
> S.Neelakantan.
> On Wed, Sep 24, 2008 at 5:28 PM, Athiyaman Karur R wrote:
>> Dear Sir,
>> Hope you have read the recent Paul Krugman article :
>> No need for any Keyneses now.
>> the govt should get the ownership or real value of shares for its bailouts
>> (like a real market) ;
>> that is the loosers should be the shareholders, and management of the
>> bankrupt companies ; certainly not the tax payers. the govr can sell the
>> shares it has 'bought' later when situation recovers, etc.
>> and the crucial issue here is regulation and depth of regulation for non
>> banking fin cos in US.
>> if they need govt help then they should also be ready for tough
>> regulations.
>> Keynes too would have advocated the same, i guess.
>> prudence in busienss practises and lending was lost some decades ago
>> and that is the basic issue here. and risk analysis ? what were all that
>> smart guys doing so far with their fancy tools and s/ws and MBAs ?
>> basic things and rules of economics (or phyisics) will remain the
>> same always.
>> Anbudan
>> Athiyaman
>> On 9/22/08, Neelakantan S wrote:
>>> Dear Athiyaman,
>>> The 'animal spirits' can work in peculiar ways. One of the special
>>> features of markets is that markets can develop in anything. The Austrian
>>> dream of unregulated market taking the economy to an optimum utopia is as
>>> much a dream as the Marxian dream of each one contributing to the society to
>>> his utmost capacity and taking from it as much as he needs. Where to
>>> regulate, when to regulate and how much to regulate can never be resolved -
>>> especially in the financial markets. As long as information asymmetry
>>> persists, market failure would be pervasive. I give below the URL of a
>>> libertarian commentator on the current dilemma:
>>> Whether there would be another 1929 or not is still a matter of guess
>>> work. The disciples of Milton Friedman who had held the helm of affairs in
>>> the Federal Reserve Banks from 1980 till now were not able to stem the
>>> tide. The tragedy is that they were not even be able to predict it in
>>> advance.
>>> One thing is certain. The present interventions in the Amercan economy
>>> is piecemeal. The only logic seems to be to boost stock market confidence!
>>> A Keynes is urgently needed. But I do not see such a multifaceted giant
>>> anywhere in the US horizon at present
>>> S.Neelakantan
>>> On 9/22/08, Athiyaman Karur R wrote:
>>>> Sent to you by Jayakamal via Google Reader:
>>>> October 1929? Not!
>>>> via Independent Indian: Work & Life of Dr Subroto Roy by drsubrotoroy on
>>>> 9/17/08
>>>> October 1929? Not!
>>>> by
>>>> Subroto Roy
>>>> First published in Business Standard, Editorial Page,
>>>> 18 September 2008
>>>> Lehman Brothers filing for bankruptcy protection, Merrill Lynch taken
>>>> over by Bank of America, Fannie Mae and Freddie Mac and now AIG being
>>>> nationalized by the US Government, Bear Stearns getting a government
>>>> bailout, many thousands of low quality loans going bad… Does it all add up
>>>> to an American financial crisis in the autumn of 2008 comparable to that in
>>>> the autumn of 1929? Even Alan Greenspan himself has gone on record on TV
>>>> saying it might.
>>>> But there are over-riding differences. Most important, the American
>>>> economy and the world economy are both incomparably larger today in the
>>>> value of their capital stock, and also there has been enormous technological
>>>> progress over eight decades. Accordingly, it would take a much vaster event
>>>> than the present turbulence – say, something like an exchange of multiple
>>>> nuclear warheads with Russia causing Manhattan and the City of London to be
>>>> destroyed – before there was a return to something comparable to the 1929
>>>> Crash and the Great Depression that followed.
>>>> Besides, the roots of the crises are different. What happened back
>>>> then? In 1922 the Genoa Currency Conference wanted to correct the main
>>>> defect of the pre-1914 gold standard which was freezing the price of gold
>>>> while failing to stabilize the purchasing power of money. From 1922 until
>>>> about 1927, Federal Reserve Governor Benjamin Strong adopted
>>>> price-stabilization as the new American policy-objective. Britain was off
>>>> the gold standard and the USA remained on it. The USA as a major creditor
>>>> nation saw massive gold inflows which, by traditional gold standard
>>>> principles, would have caused a massive inflation. Governor Strong invented
>>>> the process of "sterilization" of those gold inflows instead, and thwarted
>>>> the rise in domestic dollar prices of goods and services.
>>>> Strong's death in 1928 threw the Federal Reserve System into conflict
>>>> and intellectual confusion. Dollar stabilization ended as policy. Surplus
>>>> bank money was created on the release of gold that had been previously
>>>> sterilized.
>>>> Traditional balance between bulls and bears in the stock-market was
>>>> upset. Normally, every seller of stock is a bear and every buyer a bull.
>>>> Now amateur investors appeared as bulls attracted by the sudden stock price
>>>> rises, while bears who sold securities failed to place their money into
>>>> deposit and instead were lured into lending it as call money to brokerages
>>>> who then fuelled these speculative bulls. As of 22 October 1929, some $4
>>>> billion was the extent of such speculative lending when Chase National
>>>> Bank's customers called in their money.
>>>> Chase National had to follow their instructions, as did other New York
>>>> banks. New York's Stock Exchange could hardly respond to a demand for $4
>>>> billion at short notice and collapsed. Within a year, production had fallen
>>>> by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and
>>>> the Greatest Depression of recorded history was in progress – involuntary
>>>> unemployment levels in America reaching 25%.
>>>> That is not, by any reading, what we have today. Yes there has been
>>>> plenty of bad lending, plenty of duping shareholders and workers and plenty
>>>> of excessive managerial payoffs. It will all take a large toll, and affect
>>>> markets across the world.
>>>> But it will be a toll relative to our plush comfortable modern
>>>> standards, not those of 1929-1933. In fact, modern decision-makers have the
>>>> obvious advantage that they can look back at that history and know what is
>>>> not to be done. The US and world economies are resilient enough to ride
>>>> over even all the extra uncertainty arising from the ongoing presidential
>>>> campaign, and then some.
>>>> Things you can do from here:
>>>> Subscribe to Independent Indian: Work & Life of Dr Subroto Roy using
>>>> Google Reader
>>>> Get started using Google Reader to easily keep up with all your favorite
>>>> sites
>>> --
>>> S.Neelakantan
> --
> S.Neelakantan