more boring economics stuff

[ajva]

I know people must think by now that I'm some kind of nutter Jeremiah-esque permabear muttering away in the corner and stinking of whisky, but in case you were wondering, it's things like this graph that make me wonder if we could be facing a total global meltdown economically, originating in the fundamental insolvency of the world's banking system.

Just saying. *swigs from bottle in brown bag*

Mind you, I remember my Dad saying something similar back in 1986 or thereabouts, so I expect everything will turn out OK.

Comments

[jhg.livejournal.com]

Could you expain this graph please? Federal borrowings? From whom?

[ajva.livejournal.com]

From the central bank - in the US's case, the Federal Reserve. The shooting up at the end of the graph represents the turning on of the liquidity taps that the Fed has done over the past year. Basically, the "depository institutions" (e.g. banks) that don't have enough money come cap in hand to the Fed, which "gives" them more, or at least makes more available to them to use in various ways.

But the Fed's pockets aren't limitless; sooner or later they have to either stop doing it and let some institutions fail, with the attendant economic distress, or else the immense increase in the money supply implied by this action* feeds into a serious inflation problem, with all the attendant implications for the world of a collapse in value of the US dollar.


*A couple of years ago, the Fed stopped releasing figures for M3 money supply. However, other people still calculate it as best they can privately.

[conflux.livejournal.com]

In the past the dollar was the default currency for international commerce but if it keeps getting weaker then many companies are likely to switch to the Euro. In the past the international use of the dollar has stabilised the currency even when the home US economy was poor but we could increasingly see this being undermined. This is good news for Europe but bad news of the US. I think it also means the UK is more likely to adopt the Euro in the long run.

[adjectivegail]

In the past the dollar was the default currency for international commerce
Yes. I heard a big warning bell clanging in my ear a few months ago, when I realised that this year's International AIDS Conference is being held in Mexico City, but the organisers are asking for fees in Euros.

[adjectivegail]

*looks at graph*
fuuu-uuu-uuu-uuu-ck.

[ajva.livejournal.com]

Yes, but I wouldn't say it's entirely good news for Europe, if only because so many foreign countries hold so much of their wealth in US$-denominated assets. Also, of course, in the event of a sudden slide in the dollar's value, exports to the US would plunge as American consumers could no longer afford imported goods. That would have an immediate impact on the real economies of countries all over the world.

Basically, I expect it all comes down to not just whether it happens, but if so whether it happens slowly enough for the rest of us to adjust and muddle through. Or not.

[sashajwolf.livejournal.com]

Doesn't look good, I agree.

[friend-of-tofu.livejournal.com]

My anarchist self is hollering "Bring it on, baby! The imminent demise of global capitalism is Yule come early! You bring booze, I'll bring cupcakes! W00t!". My concerned socialist thinks banking insolvency will just punish the poor for the profligacy of the rich and worsen existing social problems. My not-so-inner sceptic thinks it's all just business as usual *yawn*

[countess-sophia.livejournal.com]

There's another elephant in the room: the huge exposure that many US banks and financial institutions (and not only them, a number of European and, Chinese and Japanese institutions are also major offenders) have in various types of derivatives markets. The positions that many of them hold in these unregulated markets and the potential losses they face are so huge that domino collapses of big institutions are a very serious possibility, 1929 style. The fallout from the US sub-prime loans crash is a mere taster.

Soph x

[jhg.livejournal.com]

Oh right, I had that the wrong way round! Trying to read too many things at once.

[jhg.livejournal.com]

Good heavens yes. Whatever the economic conditions, it's always the poor who suffer most / in any genuinely significant way.

Our bills all go up; you don't see the fat cats waiving their gigantic performance-independent bonuses (for example).

[jhg.livejournal.com]

Oh, and a general point - why are the people who have all the power SO FUCKING STUPID??!!!! I mean honestly, all the problems we're having now is schoolboy stuff.

[ajva.livejournal.com]

Agreed.

[ajva.livejournal.com]

I think it's not stupidity but perfectly rational behaviour when you consider that both politicians and bankers are motivated by relatively short-term incentives, such as aiming to be re-elected or achieving this year's juicy bonus. It's perfectly understandable that the instinct is to try to patch up the deck in the hope that the whole ship won't sink until the next guy's watch.

[valkyriekaren.livejournal.com]

It's when oil companies want to be paid in Euros instead of dollars that you have to worry. The Iraqis and the Iranians started doing it a few years ago, and it hit the US currency exchanges pretty hard.

[ajva.livejournal.com]

Well, it's an interesting thought, but I think the significance of this has been a bit overdone. Certainly any shift to an alternative currency as the world reserve currency bodes ill for the dollar in the long term, but all fiat currencies (and indeed other assets) are just engaged in an ongoing beauty contest to a certain extent. The refusal of an oil supplier to take dollars won't kill the dollar; it's more of a symptom of a loss of confidence that has its roots in more structural economic factors. You could also argue that there is an element of political PR in such decisions, of course, but that's another discussion.

Anyway, Euroland can't be complacent; as countess_sophia points out below, the global banking fraternity is an internationally incestuous bed these days. The US isn't an island, entire of itself.

[conflux.livejournal.com]

A switch from US to European currency just results in an economic adjustment not a collapse, as it is happening in a fairly predictable way and is likely to help the UK in the long run and reduce US influence. It will be very bad for the US though and it remains to be seen if the big US institutions can adapt fast enough. As Soph points out, the other big problem is the huge exposure of many banks and financial institutions coupled with the uncertainty introduced by the recent instability in the energy market especially as this is not just a US problem.

[ajva.livejournal.com]

Yes, I don't dispute that. I'm just dubious that the Euro could really be a viable long-term alternative to the US dollar in terms of becoming a world reserve currency. It's barely a decade old and hasn't really been tested yet - and it has problems too (some quite similar to those of the dollar, I think, although others all of its own). At the moment, its principal attraction seems to be that it's a large first world currency that isn't the dollar. I hate to say it, but I'm not convinced that that's going to prove to be enough.

If I'm wrong, though, then that's obviously good news for Europe. However, I'm not sure an ECB-policy-led financial world would be terribly good either for us all. I used to be in favour of the UK joining the Euro as part of my generally pro-European poliical position, but now I think it would scupper our economy quite badly to cede control of our economic policy in that way. I think it is also scuppering the economies of a lot of the Euroland countries already. Ireland, for example, is now undergoing a very harsh, fast re-adjustment of its housing market because when the Euro launched its base rates became immediately aligned with what the ECB set as base rates for the Eurozone - in other words they were slashed, which suddenly encouraged a huge bubble in the Irish housing market.

[friend-of-tofu.livejournal.com]

No, because they all have to tighten their belts and work extra hard and not get fat bonuses - er, no, that other thing.

Altho apparently there have been wide-ranging City lay-offs in the last few months, so there's always hope the possibility.

[ajva.livejournal.com]

I like your take on this. In fact, if it comes down to cupcakes at dawn, I pledge to bring a nice dessert wine to enjoy the sunrise from our vantage point on the hill. :o) I suspect in that case the difficulty will be figuring out which morning is the right one.

And I also think your socialist and your sceptic are not too far off the mark either. Tell you what: I'll get the wine in anyway. ;o)

[jhg.livejournal.com]

Indeed. The system is very much flawed (at least in the USA and, to a lesser extent, the UK)

We should go back to having Kings - but rather than hereditary have them nominate their successors. I reckon Stephen Fry would make a good King.

[jhg.livejournal.com]

Hooray for wine!

[libellum.livejournal.com]

Completely OT, but - I saw you (fleetingly) at Elise's birthday dinner last Friday, but didn't get the chance to say hello before you disappeared. Various mutual friends have been telling me for months that I should get to know you, so rather than leaving it to chance I thought I'd find you on here and say hello. Hope you don't mind.

Hello! :)

[ajva.livejournal.com]

Hi!

[friend-of-tofu.livejournal.com]

The finest wines known to humanity!