Planetary Bankruptcy

'If all the bank loans were paid up, no one would have a bank deposit, and there would not be a dollar of currency or coin in circulation. This is a staggering thought. We are completely dependent on the commercial banks for our money. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible - but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.' - Robert H. Hemphill, Federal Reserve Bank of Atlanta

In order to give a full meaning to the quote above, it is essential to mention that it applies to any 'fiat' currency, not just the US Dollar. Fiat money's value is backed by confidence in the economy and covered by the government which decrees it to have value - and more importantly (here comes the devious twist) is also backed by a promise to pay! So, let's stress it again: not only the banknotes remain in our wallets at the condition we pay them back but will retain their value as long as we are able to take on debts. How confident are you in 'a piece of paper' that is worth less that it's printed on, because it is the strict bottom line as Former Fed. Reserve Chairman Paul Volcker puts it in 'The Ascent of Money', a video at 17:36 min. Such a concept is repellent to the mind because if we give it a thought, we begin to perceive the illusion we live in - to feel like our spiritual self and our hyper-materialistic driven environment are set for a inevitable collision course.

Since last September, world nations have grasped the importance to prop up the USD and that the failure to do so would have dire consequences. Confidence in the world currency reserve is eroding at a faster pace every day. These grave threats could all vanish overnight if people were able to make the link between the amount of taxes paid since they joined the workforce and the promises made to them during all this time - then asked themselves honestly: what did come true, was it all a dream? If they were doing just that, maybe they would demand the repudiation of their (illegal) *National Debt* to start with. Politicians who want to be elected use the old trick named 'the carrot and the stick'. Their promises will demand raising taxes. Governments have always overspent and it is precisely this pattern which corrupts minds across the board. Passing debt onto further generations is not really a concern because nearly everybody wants it N-O-W! More dramatically, the financial structure is built in a way to preserve itself, nobody wants to lose one's entitlements: so the cure is to inject more cash into failed programs and accept corruption as a fatality. Moral hazards do not go away, they merely become bigger threats as decades pass by. How many layers of fallacies are needed to realize that fiscal straightjacket on a government level is a myth?

Alas without the power to tax, the economic world cannot exist because money wouldn't have any value at all, this is a simple as that. The top 10% depends on this scheme to consolidate wealth. The most appalling is that even the architect of our current system once confessed the awful truth:

'Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the fraud can no longer be concealed.' -- John Maynard Keynes, 'Consequences of Peace'

It is precisely taxpayers' money that first enabled the predatory behavior of lobbies and cartels feeding today off bailouts, which are nothing more than the bones of global debt carcass. We are just running on empty and it's only a matter of time before the music stops. This is a very last cancer stage: taxpayers have been unknowingly the engine of their own demise and now must endure a 'die or spend mode' as their insolvent central banks turned them into lenders of the last resort to rescue the 'Davos Golden Boys' way of life. Told that their house value was the safest piggy bank on earth, many worked hard and spent as if there was no tomorrows while not realizing that what was done to them was exactly the same as the economic Hitmen did to the third world countries.


Our world managers succumb to monetary dementia

Let's consider some eye-popping figures: if a big bank such as 'Bank of America' needed a $131bn bailout, CiTi finds itself on the brink of liquidation, Merrill Lynch clients pulled $10Bn in the fourth quarter, J.P. Morgan profit fell more than 75%, hedge funds lost $350Bn in 2008 and pension funds (worth $15Tn) threaten to implode... we are indeed walking on very thin ice. Interestingly, American taxpayers seem to keep their eyes on the ball better than their lawmakers. Has a stimulus ever been necessary at all? Anti-Bailout coalitions and advocacy groups have begun to mushroom nationwide. A recent poll revealed that 60% of Americans want the bailout of the financial sector to stop; yet the DC Geniuses (who still can't figure why printing our way out of debts will aggravate the liquidity crunch) plot the next step after aid to Citigroup and Bank of America. Unethical premises and remedies multiply moral hazards. One of the unintended consequences to finance those 'has-been businesses' is creating a new menace to the economy: 'Zombie' Debtors that will be feeding off the taxpayers and stockholders — as healthier rivals become increasingly threatened with 'organized competition' put in place by Lawmakers. The price of protection shows its true colors: it allows the government to decide who can live - or die: it is fascism in disguise. The ugly side of intervention is precisely its addictiveness. And that is why institutionalized debtism has a lethal track record.

An 'almost incomprehensible' amount of cash evaporated, this the Global crisis 'has destroyed 40pc of world wealth', Steve Schwarzman admitted. Indeed, where the heck did all the money go? When money is debt it is negative wealth... got it?

Two days before his inauguration, Obama urged to move swiftly to rescue the banks continuing to hemorrhage billions of dollars. As the situation worsens by the day Bernanke skipped Congressional Financial Hearings in favor of a secretive euro bankers confab. According to Ron Paul, the meetings took place in Basel and were chaired by ECB's Jean-Claude Trichet - not so surprisingly the mainstream outlets remained elusive about them. Just like a bad quality varnish peeling under the pressure of a nail, the magic really vanishes when one looks at Obama's billionaire pals' list and who is throwing money into the most lavish Inauguration in history. Guess what? The biggest part of the pie goes to the financial sector. Obama is no savior... and here is why:

The Government Accountability Office (GAO), Congress' investigative watchdog, has found that "a majority of America's largest publicly traded companies and the U.S. government's largest federal contractors use multiple subsidiaries in offshore tax havens to conduct business... The culprits include some corporate giants who are receiving countless millions in bailout money, Leonnig notes. ... (01/16/09) - more

As credit card spending in 'The Rich West' screeched to a halt, China Central Bank, which called Paulson a 'gangster', is trying to prevent a quagmire; and so far the only remedy is the Yuan devaluation. How smart is this really? Doing so is extremely tricky because competitive devaluation (race to the bottom) has limits. If things really go wrong, it may lead to a professional run on banks. So much for our fabulous globalization, heh?! But what if banks do not start lending again (what wouldn't fix the downhill trends if they did either)? Evans-Pritchard leans toward a collapse that could drag the entire planet into a remake of the Great Depression. SocGen warned too that the Chinese economy is imploding and speculates about the possibility of regime change. Flash back: that very dire outcome was forecast in 2004 by Krassimir Petrov. There is practically no doubt that the Chinese will overcome the shock a lot better since they are already accustomed to sweatshop wages. For us, it will be a rude awakening and we could see, in the so-called free world, a suicide epidemic as currently witnessed among young Chinese women.

In Russia, troubles are brewing too. Last November, its stock market is down 70 percent from late spring 2008 and since then anti-Western rhetoric abound. In December alone, the central bank spent $70BN to rescue its currency and avoid the panic of a currency collapse reminiscent of the 1998 crisis. As of January 13, the WSJ reported that the drastic measures didn't prevent the Ruble from nose-diving and massive lay-offs from bringing wages back to earth. The Jungle is surely fairer than our financial environment. Ireland is in the midst of a housing bust and real estate prices are predicted to fall by 80%. Icelanders have to go back fishing to survive the complete demise of their banking system - now seen as the worst economic crash of any country in peacetime, BBC reported. The Japan's jobless are encouraged to accept a government program that focuses on reviving the ageing countryside amid a worsening recession. All this is a mere glimpse of what is coming next: your government will soon turn out being the biggest employer, that's where minimum wage laws start fitting the big picture. How great is this? But wait, the avalanche of bad news isn't over just yet... 40% of Latin America’s financial wealth was wiped out in the first 11 months of 2008. On the old continent, the monetary union has left Eastern Europe trapped in depression. Um-um, wasn't that part of the world too in the midst of a b-o-o-m-i-n-g housing market until early 2008, setting off alarms bells at the IMF? Financial alchemists like Lorenzo Bini-Smaghi, a ECB board member, perfectly knew that the euro pegs would lead to boom and bust cycles. How bad could it really get? Just look at the Zimbabwean hyperinflation (hitting 231 million percent!) that has left the country with more than half the population starving and of course, the United Nations is begging for more aid. Once again, the UN is showing its uselessness!

So now, we can begin to see why Trichet said that 2009 will be ‘substantially’ worse than forecast. He blamed 'mispricing of risk' for the downturn and ended his statement by saying that 2010 will be the year of the recovery. On Jan 29, in France, one million protesters demanded Sarkozy to do better at protecting jobs and consumers during the crisis. When will the masses realize that 'managed economies' do not work but are implemented to protect those in power? Moreover, how smart is it to ask people who couldn't see the bust coming to find appropriate solutions? Our problems cannot be solved by the minds that created them in the first place. Sure, after the bust the economy always comes back, it is not a matter of 'if' but 'when'. Uncharted waters. Guru Trichet even made an esoteric statement in the Dow Jones News as of 01/29, and which amounts to 'another nuclear option':

ECB is already carrying out many 'non-standard' operations, like massive liquidity injections... We are in a non-standard world. So whether or not we will embark on other non-standard operations, I said already that I wasn't excluding that," he said.

And it shouldn't be wise to bet on 2010 at all, as such a leverage needs a lot more than two years to be cleaned up. Think of ten years or more instead. The Euro could be toast for good. Meanwhile Germany forecasts the worst economic growth since WWII and riots spread throughout in Eastern Europe. An article in The Spiegel even describes Great Britain as a second Iceland and Italy as a second Argentina. The European Parliament lamented that six to eight countries had to reduce their deficits but no receipe as how they might go about doing that. There is no solution other than debt liquidation. On the other side of the North Sea, in Ireland (whose economy will shrink 10% by 2010), a leading economist advised a withdrawal from the euro unless Ireland gets its part of the bailout pie.

(01/19/09) "If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down," he said.... By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars?", he said. more

Speaking of bailouts, The European Commission approved a French plan to allocate firms affected by the crisis up to EUR500,000 in aid. In America, Bailout money used for lobbying and Obama promises that he will push bankers to lend more, he doesn't want them to sit on the money that they got from taxpayers. Paid by the taxpayers... then borrowed again by them with an interest... doesn't this make sense or perhaps is debt laundering legal? In England, dementia struck a step further as the BofE’ s multibillion-pound scheme will offer credit to new car buyers to rescue the moribund motor industry. And there is more, the government also contemplates an insurance crackdown targeting two million uninsured drivers who, as a result, could get their cars seized and crushed! There is even sillier: US Financial Services Committee Chairman, Barney Frank who declared that companies with corporate jets may forget about the bailout money. Nevertheless, a few days later the press reported that taxpayers were also funding Citibank's jet. 

Black clouds are gathering above the horizon. Europeans are waking up to the abrupt demise of democracy as discovering the fine print in all the treaties. The IMF just announced that the world trade collapsed by staggering 45% in the last quarter of last year. Even the euphoria of Obama's inauguration didn't last long. The same day Dow closed below 8,000 as banking fears were gripping the European markets and bringing shockwaves from the United Kingdom too. British Banks got a £1TN injection which didn't prevent RBS shares to plunge 70%. London is faced with a bloodbath. Brown admitted there is not yet a limit on how much risk taxpayers must bear as a result of his rescue plan, but he even promised financial institutions that they will get more cash if they pass it on. Looks like the Brits are too being set up for the mother of all crashes. With the UK government debt alone and future liabilities not included, this means that every new baby is born with £17,000 debt. Checkmate! UK cannot take Iceland's soft option, Evans-Pritchard explains:

The parallels with Iceland are disturbing. The country was ruined by the antics of its three big banks. They built up foreign liabilities equal to 900pc of GDP. Operating as hedge funds, they borrowed in dollars, euros and pounds to speculate....If Britain walked away from UK banks' $4.4TN of foreign liabilities – worth eight times Lehman Brothers – it would destroy the credibility of the City and take the whole world into deeper depression... The sovereign debt of Russia, Ukraine, Greece, Italy, Belgium, Austria, The Netherlands, Ireland, Australia, New Zealand and Korea is all being tested by the markets. The core of countries deemed safe is shrinking by the day to a half dozen. Sadly, Britain is no longer one of them. (01/20/09)

Describing in length the fundamentals of the American economy at this stage is more or less a naughty intellectual exercise. As the bank bailout is expected to cost $4Tn, U.S. financial losses could reach $3.6TN and suggest that the banking system is 'effectively insolvent' contends Nouriel Roubini, New York University Professor and former financial Clinton's adviser. Back to spending orgy. The clock is really ticking; even the legendary investor Jim Rogers predicts a total decline in 2009. We can get a better sense of absolute gloom and doom if we take into account the Asset 3 Level also known as ‘mark to make believe,’ thus whose market prices are based on the banks' 'unobservable inputs' that 'reflect management’s own assumptions'. So now we have phantom asset values which remind of the CDOs' notional values, also called by Warren Buffett WMDs. The Titanic is about to hit the iceberg. Gerald Celente doesn't chew his words when commenting on the ongoing dreadful meltdown. The situation is so dire out there that global banks have joined the clamour for bailouts. Do our demented global elites deserve to be rescued - honestly?


The demise of mainstream economics

“All truth passes through 3 phases: First, it is ridiculed. Second, it is violently opposed, and Third, it is accepted as self-evident.” — Arthur Schopenhauer

Almost every teenager has been warned about the dangers of getting into debts, but they all grew up accepting that a government debt was acceptable and even honorable. As this editorial points out earlier, if the scheme is run by the top managers of a country, the amount of debts can only grow exponentially. One doesn't need to be a rocket scientist to figure what happens when the national debt exceeds the GDP. For the bankers it doesn't really matter, they operate for profits and when money is debt (does not exist) massive liquidations are ineluctable. The (bank) shareholders and the taxpayers are simply left holding the bag. As stipulated in 'Beyond The Age of Usury', today's events are far from being isolated. Luckily, such facts are everywhere on the Internet: we only have to keep an open mind and allow reality to reveal itself. They represent a recurrent pattern that is concealed to preserve a feudal hierarchy. The book titled The Bankers That Broke The World and written by Liaquat Ahamed - here reviewed by the New York Times - tells us about a macabre monetary story that looks much like today. The parallels are uncanny. That book should be on your must read list this year. If your budget is tight, there are plenty of free online books that will do the job and which you can find in the library of the site.... time is running out. As financial illiteracy and corruption are about to engulf the whole planet, some speculate more and more about the meanings of The Mayan 2012 prophecy. One thing is certain though: it is The End Of The World As We Know It - or TEOTWAWKI as an acronym frequently used by the doomsayers.

It is going to take the collapse of the dollar to have a mentality change and address central banking, Congressman Ron Paul conceded recently on MSNBC. Since we cannot escape what is coming toward us, a Biblical debt jubilee and the implementation of 'honest money' are the only long-term answers. The people have to free themselves because the 'powers that be' will never admit to being the rulers by deception. More positively, this battle cannot take place on the streets but in each of us individually; and it can only be won if waged peacefully and spiritually. There is no such a thing as a war to end all wars.

And ultimately, everything is bound to be overcome or disappear eventually. If 'We The People' were able to find our way back to prosperity, we'd no longer be living in a world where destruction is more profitable than peace and with the fear of technology. It would also enhance the smooth transition to the development of a resource based economy as advocated by Jacky Fresco who dedicated is entire life to The Venus Project... (to be continued)

Money supply # 2

@ KO

There is so much going on here, in terms of different complex issues, that one cannot get a good handle on it.  I will only try to address your specific question: "Does injecting money really sustain output?".

-- The short answer is: NO, not in and of itself.

-- The less-short answer is:  When V (velocity of circulation of money) is falling, then an increase of M (money) is tautologically necessary to enable for a given nominal output level (prices times volume index) to be maintained.  So, the increase in money becomes a NECESSARY condition, but it is NOT a SUFFICIENT condition for real output (volume index) to be maintained.

-- The long and complete answer I cannot give, and neither can Obama, Bernanke, Summers, etc....We know that M has to be increased when V falls, in order to sustain the value of (PxT).  Parts of the required increase in M may 'originate' in actions of the monetary authority (the Fed), but other parts may originate in the markets or be 'induced' by money demand from the public. Whatever the case may be, we can not be sure that P and T separately will remain the same.  Prices could rise and volumes could fall, or alternatively (in the best case) prices could fall and volumes could rise, or any combination really between the two is theoretically possible.  The overall outcome will depend on the actions of numerous actors on numerous individual markets, and on the existing 'conditions' (in terms of unused available unemployed resources, of stock levels, etc...) .  That clearly is going to be directly influenced by existing rules, regulations, individual markets. It will also mightily be influenced by everything that effects 'confidence' in general and trust in the maintenance of 'rule of law' and responsible government. 

That is why I think that the real threat (concerning the division between P and T) does not come from Bernanke, but rather from characters like GWbush, Paulson, Nancy Pelosi, Barney Frank, Chris Dodd and...'the One' (the current Messiah) himself.  

We do not need a gold standard, nor great economists, but we do need honest and responsible politicians.  In order to get that, more than anything else, we need to maintain moral standards (of honesty and self-responsible behavior) in education, which begins in the 'home'.    


@ marcfrans

AND honest bankers, or is that a "contradictio ...." I guess they are even more important. Present bloggers excluded, of course, I have never seen a honest banker, they must exist somewhere.
Jokes aside, "was it?", don't forget 1977/79, the Carter years. I promise you this time will make those years look like a picnic. Your theoretical comments are definitely true, but the "unknowns" in the present crisis are so humongous that the past experiences are nothing compared to the present arriving steamroller.
The most criminal thing is that the big bankers knew about it since minimum 2 years and tried to cover up by speculating more. I am involved in such a fight between a sovereign fund and a bank. You have no idea how far they are willing to go to saddle the fund with their, the banks', losses.

Planned money supply (part 2)

You're absolutely right @mf,
that a basic understanding of economics will only get you so far. But reading Hazlitt's Economy in One Lesson, really is a decent start, seriously, you should give it a try.
I promise you'll feel instant relief from your uncertainty ;-)

And from there, you can always choose to get beyond basics, and venture into the works of Bastiat or Von Mises for instance. I could also have recommended the in-depth, two volume Austrian Perspective on the History of Economic Thought, but that might have been a bit too much of a good thing. Great work by Rothbard though. Of course you could check out the site of the Von Mises Institute; plenty of online resources on the business-cycle, central banking and monetary policy. Rothbard's articles on the Fed provide a good start.

Kind regs from Amsterdam,


debt # 4

@ Traveller

Let's all try to be modest and not pretend that we have a cristal ball to look into the future with any certainty.  We have some points of agreement and of disagreement.

- I agree that hyperinflation is a real possibility next year and beyond, but I also think that it is NOT likely.  Stagflation (like in the seventies and early eighties) is more likely.  The main reasons being that monetary policy can be - and will be - adjusted very quickly in response to price movements, and that current fiscal policy (at least in the US)  seems to be embarking on a rather disastrous course of massive government expansion and of debt creation.  The real cost will be relatively slow growth in output (GDP) over the next few years, and thus real income foregone compared with more normal growth rates.  One could argue that the same result of 'stagflation' would occur even if nothing were done today, because of unsustainable levels of debt creation over the past decade and longer, but the current misguided policies are likely going to make the stagflation last longer.  

-  I can asssure you that the "real economy" will still be there in 2 or 3 years.  On that we seem to disagree (because of your choice of words), but probably not really.  Many people seem to have forgotten that there are 'automatic stabilisers' that limit real output movements in either direction over business cycles.  Even Japan ended its 'lost decade' of the 1990's with a real GDP very close (slightly higher) to its level a decade earlier.  I am confident that we will collectively do better over the next decade of expected 'stagflation', i.e. moderate inflation levels combined with slow real-output growth levels. 

@  KO

1) Money is not like a regular commodity, subject to the laws of supply and demand on a single market.  Money has several functions.  As a 'unit of account', it is how we measure the prices of goods and services.  Its "value" is the basket of real goods and services that it can buy on product markets, and that does not directly depend on the interaction of money supply and money demand, although there is a complicated relationship.    

2) A good starting point is the tautology of the 'Equation of Exchange':  M X V = P X T.  This says that the nominal level of national income (Prices times transactions or output equals money supply times velocity of circulation of money).   The "lack of confidence" of which you speak means a dramatic reduction in the velocity of circulation of money (V), which requires an increase in money supply in order to sustain the same (or similar) nominal income and output level in the economy.    

3)  I do not know exactly what the Federal Reserve Bank System has been doing in recent months (and even less what other central banks have been doing), but I am pretty sure that its massive balance sheet expansion does not exactly translate in increased money supply (some monetary aggregates - M1, M2, etc...-  will have gone up more than others).  I am not endorsing what they have been doing, much of it seems to be rather technical and mainly related to the functioning of specific financial markets rather than to the overal level of liquidity in the economy. But, at the same time, I expect that they can easily manipulate monetary aggregates in either direction based on perceived need in function of what is happening on markets of real goods and services.  

4) In my opinion, the real problem today is not with monetary policy, but rather with fiscal policy.

@ Sagunto

I am not so sure, as you seem to be, that the boombust cycles in asset markets have much to do with monetary policy stricto sensu , but rather with poor financial market regulation and perverse incentives deriving from certain fiscal policies.  Housing market policies are the prime example in the US.

Perhaps after reading Hazlitt's book I might better understand what is going on today, but somehow I suspect that an understanding of "basic economics" won't be enough.  

In any case, hold on to your wits and try to convince the Dutch government to issue inflation-indexed bonds (like the Israelis and the Americans do) so that you at least can protect yourself against Traveller's coming "hyperinflation". It's either that, or getting Kappert to go to a 'mosque' and pray for divine intervention.

Money supply

Marcfrans: Thank you for your response. I agree stagflation is the more likely prospect. We have both monetary and fiscal expansion going on apace just as in the 70's. Just because central banks can respond to inflation doesn't mean they will. Remember Arthur Burns? No doubt we will go through another spate of wage and price controls!

I can see you are trying to lead me away from a too simplistic view of money and economy. But if there is less velocity because of less activity, does injecting more money really sustain output, or does it just disguise the diminished output by inflating prices? Is that what is meant by nominal output, real output disguised by inflationary spending and money creation?

I am interested in your view that fiscal policy is more to blame than monetary policy for the current subsidence. It runs counter to the, to my mind, persuasive argument that Greenspan contributed greatly to the housing bubble by suppressing interest rates to prevent a post-9/11 recession, which Congress and the Administration took advantage of to promote universal homeownership for political purposes. (An unusual political intervention on the monetary rather than the fiscal side, inducing banks to lend more and thus to "create" money.)

From what I recall, Hazlitt's book comes down to three words: Count All Costs. I should re-read him to see how he applies that to complex situations.

Artificial demand and planned supply


You're obviously right in pointing out that central banks are meddling in matters better left to the market. Unfortunately their policies of artificially lowering interest rates and printing money out of thin air did have a substantial effect on consumption and investment: malinvestment due to the bubble created by monetary bureaucrats.
That seems to be the true nature of inflation: the familiar boom-bust cycles, bubbles of misallocated resources, overconsumption, the running up of debts, and the ultimate degradation of the currency.
Of course, when finally the cost of living goes up for Mr. and Mrs. John Q Taxpayer, the financially and politically well connected have already profited from their fake money. The price will be paid by the "less fortunate". Should worry even liberals, one would think.


The shortest and surest way to understand basic economics would probably still be: reading Henry Hazlitt's "Economics in one Lesson", one chapter a day. Expected recovery in about 3-4 weeks ;-)


Kind regs from Amsterdam,


Debt # 3

@ Traveller

1) You surprise me (often).  Yesterday you told Takuan S that you are too busy to expound further on Eastern 'philosophies' (or was it mysticism?), and today you "cannot resist to come into the fray".  Frankly, there is not much of a "fray" here.  Ms Kayser refuses to address any of the points I nicely lined up for her.  She is not writing on economic matters, but simply assembling disparate bits and pieces of pronouncements in various media.  I don't see any message in her 'woordkramerij' beyond the silly cry of 'planetary bankruptcy'. 

2) If you will permit me, I must correct something you said.  I did NOT say that "it is a zero sum situation". Under point 4, I clearly mentioned the possibility of (a)  'structural' factors causing periods of stagnation (and thus relative poverty) in certain economies, and (b) 'cyclical' factors that continue to cause or explain the ongoing conjuncture or business cycles in various developed economies.  Macroeconomics is not a "zero sum game".  Good macroeconomic managament creates more income (and thus over time more wealth, if part of the incomes get saved and invested) than bad macroeconomic managament in any economy.   I am willing to bet with you that, barring any major world military conflict, five years from now, the total 'national' income of the world will be significantly higher than it is today, both in a nominal sense and in a 'real' sense (i.e. after inflation adjustment). Chances are that world income will be even higher this year, compared with last year, simply because the moderate decline in incomes in the 'advanced' economies will be more or less be offset by continued (but lower) real growth in China, India and other 'emerging' economies.  All this talk about world "bankruptcy" is so much b....

3)  I cannot claim to fully understand your story about speculation by banks, but I fail to see the relevancy of it.  One person (or company's) debt or liability is always by definition somebody else's claim.  So the world as a whole cannot go "bankrupt".  Individuals, banks and companies, of course can go bankrupt, as a result of 'speculation', and/or of excessive 'leveraging' activities and the like.  The sum total of these activities can significantly affect the INCOME DISTRIBUTION (as you say, there will be winners AND losers), but the impact of financial developments on the 'real' economy (where employment and income or GDP creation takes place) will be limited. 

4)  Obviously, the role of money and of central banks in the 'good' functioning of economies is a complex subject, and there is always lots of room for sensible and less sensible criticism.  But one should never confuse financial matters with 'real' matters (of employment and income creation or production).  And I am not denying that developments in the financial sector do have an impact on the real sector, but that impact is relatively small (in terms of variations in employment levels and of GDP growth rates over successive time periods). 

5) I want to stress 2 points:

-- First, I repeat, the world cannot go "bankrupt" because it has no debts vis-a-vis the rest of the planetary system.  All debt is intra-world debt.

-- Second, while there is presently a crisis underway in the financial system (a crisis which will likely ensure that the present recession will be somewhat longer and perhaps deeper than we have been accustomed to in recent decades), one should ask the question as to who is (or might be) benefiting from trumpeting doomsday scenarios.     Yes, first of all, all those who want a significant shift of resources from the private sectors to the public sectors.  Also, of course, the reference of Sharon K to a recent speech by the Managing Director of the IMF, Strauss-Kahn (a French politician who wants 'world government'), is pertinent here.  But, that is another long story.....          

@ marcfrans

The reason I broke my silence and concentration 2 times was
1) a writer I respect and a friend had a go at each other and I wanted to calm it down and
2) I am right now in the middle of the "financial collapse" purely by accident and not by choice.
Be reassured, I didn't lose anything because I saw it coming, but I saved my friends' bread and butter, actually a whole bakery and dairy farm.
When it's over I will write about it.


"Right now the US, Europe and the capitalist rest of the world are printing money like crazy ."
That's true, but it's not as bad as it sounds. Think about it. It would have been bad if it would cause a gigantic inflation, but it isn't. In a macro economic way you could look at it like this: People have a lack of trust, so they are not investing and spending anymore. Instead they are asking paper notes to store their "rights against society" to be able to spend them later on. Once the economy gets going again, the central bank will have to reduce the amount of money gradualy again. In other words, its people not investing and spending anymore that is the real problem. Not the printing of money. The printing of money in this case is a normal response to the law of suply and demand.

@ peter vdh

Mijn vrienden en ik zelf bereiden ons voor op een hyper inflatie tegen het einde van dit jaar.

My friends and myself are prepared for a massive hyper inflation at the end of this year, beginning next year.
The different plans for restarting the economy are all too late and not focused enough on the "real economy". The focus is entirely on the solvency of the banks, which is totally idiotic. Yhe newest effort of the US is to find, again, 2 trillion dollars for the banks where everybody knows that this covers only a small part of the losses. I promise you that this bail out of the banks will not profit the "real economy" before 2 or 3 years. By that time we have no economy anymore.

Supply and demand

Peter: It is enjoyable to read your conversations on this website, though your well-intentioned search for truth and your belief in debate as a valid basis for discovering truth and good policy qualify you more as an old-fashioned liberal than as the leftist you describe yourself as being. However, I don't understand your remark that the printing of money in a time of reduced economic activity is a response to the law of supply and demand. If there is a lot of demand for a certain good, the price will go up until more of the good is brought to market. What the central banks are doing with money is the opposite. There is reduced demand for money because of the lack of confidence you speak of. The value of money is therefore less. To provide more of it when its value is dropping is only to push its value down faster.

Central banks in fact are trying to manipulate the relationship of supply and demand by printing money. They think more money will stimulate demand. Again, they are wrong because of the very lack of confidence you spoke of. No businessman believes the stimulus efforts will work in such a fashion that he will take risks right away. You are correct that the inflationary effects will not be felt immediately because the competing money is on the sidelines, and that there will be some opportunity later to reduce money supply when the money comes off the sidelines. I think the central bankers will only correct a fraction of the problem, however, out of fear of renewing or prolonging the recession. The inflation thus becomes inevitable.

Moreover, money is not only a commodity subject to the law of supply and demand, but also a symbol of value. With fewer goods and services being produced, and the consumption of value proceeding, central bankers should be looking at reducing the money supply or at least slowing its increase so that the unit of value maintains a reasonable relationship to the total value of goods and services. Speeding up the presses is, again, the opposite of that. It means creating more money relative to a reduced total of goods and services. That is inflation per se.

Really, the financial and political elites are only pretending to be pursuing reasoned policies in response to current conditions. In reality, they know that the global economy is beyond their control but they are confident that whatever happens, they can maintain their positions and that the pain will be suffered by us lesser breeds. (At least, those of us who are not as far-seeing and capable as Traveller.)


Oh boy, reading marcfrans makes one feel rather humble. I’m surely not going to pretend I understand everything he writes. So, at the risk of oversimplification, here is my view about “printing money”. In the current economy, printing money is not the only way to create money. A lot of the money in the world is “virtual” money. Think of it this way. When you bring a ten Euro note to the bank, you still consider it to be your note. Yet the bank is spending your 10 Euro note for some investment. Now the same 10 Euro is owned by two persons: You, as a figure on your bank account, and the real note going around to buy things with. You can still use your 10 euro, if you buy something and make the payment electronically. The only thing that happens is a few figures that change in a database. Now your banknote could be put on an account again, and we have then three owners of the same ten Euro. And so on. This sounds alarming, but it isn’t. Central banks keep a sharp look at the total amount of money; The better the economy is doing, the less there is a need in paper money, because people are buying and investing all the time. They prefer this largely above cash. When the economy slows down, the virtual money creation slows down also. Literally, more people come to the bank to collect paper money, than there is paper money coming in. The banks will need more paper notes, and they’ll get it at the central bank against an interest of course. The demand in paper notes is going up. It’s not a free ride. The central bank uses maxima in correlation with the assets of the banks.
Consider this also: Central banks are independent institutions. Lots of people seem to think central banks print money and give it to the government to spend. That isn’t the case at all. Central banks inject money into the system trough the financial institutions. By changing the rate by which financial institutions can lent money from the central bank (refinance-interest), it can manipulate the total amount of money in the system, and thereby the inflation.
If the economy starts to grow again, banks will get more paper comming in. Bye raising the refinance-rate the central bank will stimulate banks to start paying of their debts, by bringing in paper monney, and the total amount of printed monney in the system will go down again. By lowering the refinance-rate the central bank is stimulating the banks to lent more money and to invest that money into the economy. This stimulates the economy, but there is an inflation risk if the total amount of monney becomes to big.

Debt # 2

@ Sharon K

1) That you have "no time" for serious commentators, that is abundantly clear.  You are like a 'chicken little' jumping on some particular media bandwagon.   

2) I could just as well state that I have "no time" for people who confuse macroeconomics with microeconomics, or who think that individual wealth is like societal wealth, or who confuse economics with personal financial management, etc..

3)  Indeed, debt is "negative wealth" for the debtor, but it is equally POSITIVE wealth for the debtholder.  Since we agree that the world's debt is not being held by some mythical Martians or Mooners or Venusdwellers, but by the world's debtholders, I fail to see how the world can go "bankrupt" because of debt between different world dwellers.

4) The fact that the world cannot go "bankrupt", does not preclude that various types of (temporary) economic crises can erupt in various countries or in regions of the world, or even in the whole world.   These crises have nothing to do with (individual) "bankrupcy".  They can be of long duration, if there are 'structural' factors that keep a particular economy from growing (in a per capita income sense) and thus mired in poverty.  Or they can be of a shorter duration if there are 'cyclical' factors that inevitably will ensure that periods of booms and of recession will continually succeed each other.  No doubt, the excessive level of debt creation in recent years is playing a major role in the current (temporary) recession in major economies in the West. 

5) Obviously, an exhaustive explanation of current economic troubles is impossible in this venue.  I suggest that you first learn to make the distinction between flows and stocks.   National income is a flow concept. It is expressed per time period, i.e. it gets recreated every time period (say every year), but its levels will fluctuate somewhat.   By contrast, national wealth is a stock concept, which means it reflects a particular position (like a a photo picture) at a particular moment in time.  For any country, that 'wealth' essentially consists of human capital+physical capital+(net financial claims on the rest-of-the world).  For some countries these 'net financial claims' will be positive, and for other countries they will be negative, but their (world) total must be ZERO.

6) Now, as to the role of 'money', compare it with the role of 'grease'  or 'oil' in a machine.  It helps the machine to function, but it certainly does not equate with the machine.  From a MACRO economic perspective, money helps in the constantly recurring process of income creation, but it is not the same as income, nor debt, nor wealth.  

7) Indeed, one cannot "print one's way to prosperity".  And I don't think that any sensible person would claim that one could.   But, neither can the world go bankrupt.  However, if people stop working, and if societies stop 'functioning' then the world will surely 'grow poorer' (i.e. create lower annual total income levels).  But it will still not be "bankrupt" (which essentially means that one cannot pay one's debt).  The world has no debt vis-a-vis the rest of the planetary system or 'creation'.

8)  Besides learning about the distinction between macro and micro economics, and about the role of money in the process of income creation, I also recommend that you learn (somewhere) about the distinction between income creation and income distribution. 

P.S. I have no silver coins, nor gold coins, stored for "at least 6 months".  But I do have some food stored for perhaps 2 weeks.  The latter has more to do with potenial disruption from terrorists or weather events than with Bernanke or Trichet  "printing money".           

@ marcfrans

1) That you have "no time" for serious commentators, that is abundantly clear. You are like a 'chicken little' jumping on some particular media bandwagon.

I stopped reading right after those two lines.

What media bandwagon: we are running on empty. Thats as simple as that. It is a strict mathematical fact.

When you ask to "who" you owe the money, it is clear that we are NOT on the same wavelength to start with. Even is money is fictional (deosnt exist because it isnt backed by anything but confidence), defaulting will have dire consequences.

here is what the architect of our current monetary system once said:

"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some....The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." - John Maynard Keynes Economic Consequences of the Peace, 1920

and here is what Thomas Jefferson, American Founding father once said

The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. "...

something to chew on... so as you can see it has nothing to do with "jumping on a bandwagon"

Sharon Kayser

world crash updates:


By Angus Whitley and Shamim Adam

Feb. 7 (Bloomberg) -- Advanced economies are already in a "depression" and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Sharon Kayser

@ marcfrans & Sharon Kayser

Basically you both are right, marcfrans theoretically and Sharon about the coming steamroller.

Since I am presently right in the middle of the things which are happening behind the scenes, I cannot resist to come into the fray.
Marcfrans says that it is a zero sum situation and he is "virtually" absolutely right.
The problem is not there. The problem is with the individual idiotic banks and financial instituations, which thought that the virtual game would go on and on. It didn't, because of the bookkeeping obligations of declaring the profit and losses and adjusting the margins.
To make it simple: when a bank speculates 100 euro, based on their reputation that they have 100 euro, but they only have 3 euro in capital or security, which was approximately the reality, and they lose 10 euro, they lack 7 euro, which they have to borrow. Now they have a negative capital situation and to come back on their feet, they speculate again, this time with borrowed money, but to cover everything they will speculate higher amounts to recover capital and debt payments. If they lose again, which most of them did, they are virtually bankrupt, which the largest banks were and are.
Their debts and their losses cannot be repaid and the winners don't get anything, so they lose also in the end.

Now translate this in real figures:
1) speculation: 650 thousand billion US dollars
2) World total BNP: 40 thousand billion US dollars

Which means there is not enough real money in the world to cover, let's say, 10 % losses. This means that the winners cannot collect.

It is even more complicated because there are ten thousands, if not hundred thousands, of winners and losers with together millions of cross linked speculation positions, which means that the weakness of one participant has already a snowball effect for his other losing positions. Right now the US, Europe and the capitalist rest of the world are printing money like crazy to keep up with the losers in the hope that the winners finally will be able to release their money to support the "real economy". This is a long way off because of the stupendous amounts involved and the fact that NOBODY has a clear idea how much losses are still going to come out.
I live every day, accidentally, in the middle of such a drama, and believe me, human stupidity has no limits.


[[ Marcfrans says that it is a zero sum situation and he is "virtually" absolutely right.]]

thanks for moderating the debate :-)

I guess I have just answered this when referring to virtual/fictional debt - correct it leads to a zero sum game.

Nevertheless, the powers that be will never see it that way.

Have a great weekend!

Sharon Kayser


@ Sharon Keyser

1) Actually, in his response Peter vdh made a lot of sense.  One may quibble about particular details, but the 'whole' of his post was not bad. 

2)  If the world has 400 trillion debt (in dollars?), who is it indebted to?  The Moon, Mars, or Venus?  No, it is the world itself that is holding this debt.  So, how could the world or planet be "bankrupt"? 

3) Money is NOT the same as debt, and I am sure that Peter vdh knows that.  I am not sure whether you know that.  This is not to deny that there has been excessive debt creation in a number of major economies in recent times, which has inevitably affected the conjuncture or business cycle, and which will affect the length of the current recessionary phase of the cycle.  But it will remain a cycle, if history is any guide.


The world cannot go "bankrupt".  But the world's media will continue to create massive amounts of 'hot air'. And yet, I remain very sceptical about "global warming" (although Albert Gore now talks about "climate change" in view of the current cold winter).   


attn: marcfrans

The world cannot go "bankrupt".

I have no time to spend with people who do not understand that debt is N-E-G-A-T-I-V-E wealth.

[[If the world has 400 trillion debt (in dollars?), who is it indebted to? The Moon, Mars, or Venus?]]

To who??!! TO WE THE PEOPLE! When the govt and businesses go into debt, taxpayers and shareholders are left holding the bag. It has been this way since money was invented. 6,000 years of history prove this.

Lets see: remember the Asian crisis, the Russian meltdown, the Mexico bailout, the Argentina collapse.. all this in the 1990s. Just google Argentina economy and you will see that they are on the brink of another huge crisis as I type this. 50% of the population sank into poverty overnight. Soon playing in EU and USA.

The rude awakening isnt so far anymore. Every day, I run into people who cannot believe that the world as we know is coming to an end. I hope you have some silver/gold coins and food stored for at least 6 months.

If one could print one's way to prosperity, poverty would have been abolished by now. I did not mean to lecture you . Best.

Sharon Kayser

Money (1)

In this article we can see an astonishing ignorance about money, where it comes from and what purpose it serves. This ignorance seems wide spread. Let me try to simplify it a little. I would like Marcfrans to correct me, if I write anything wrong:

• The only things that have real value are goods and services. If we can make society produce ample goods and provide a lot of services, we are living in a prosperous society.
• Money is an instrument created for measuring the value of goods and services between them and over time. It is we, the public, that decide what the value of a certain good or service is. The availability of a good and how much we want it do determine that value. We will measure it by money. But money is nothing more than an instrument. Money isn’t a goal on itself.
• “Money” is in fact the little paper, on which is written what society owes us, due to services and goods we have provided to society. Money makes goods and services more liquid or “interchangeable” over time, place and nature.” Therefore it is important that we can trust this “paper” as being generally acceptable. As something that will not erode too much over time. Of course it is also important that society can really deliver everything they have promised us by giving that sheet of paper. That’s what central banks do. They control the total amount of money so that the currency stays reliable.
• If you look at it this way, one may ask if saving money, to counter the greying of the population makes any sense. The real question is, will we find enough young people to provide for the services needed for all this old persons? After all money is only paper. It will not nurse you. Luckily money can be used cross-borders. If we have saved enough –read: provide enough services and goods to other nations- we could later on allocate our work-recourses to taking care of elderly people and buy the rest of our needs abroad. Of course this suposes enough economically stable “other countries” that have no greying problem.

In his response, Mr peter

In his response, Mr peter vanderheyden would rather shoot the messenger than looking at the facts around him - and acknowledging his own denial... Yes, it takes a lot of courage to admit that a world bankruptcy was mainly allowed to happen because 85% of the planet lack financial literacy.

However when money has NO intrinsic value, debts grow out of control and history is there to prove us this. This has been a pattern throughout history.

Moreover did you know that the world has 400 trillion debt while the global GDP is barely 70 trillion? How are you going to pay this... Maybe should you take some econ classes asap, and I would suggest DEBT AS MONEY (to start with) which is a blockbuster on google video

Cheers and have a great day

Sharon Kayser


• What do banks do? Suppose you’ve build the bakery for a baker. In return you will have a little paper with written on it “good for 100.000 breads.” Of course you don’t need all those breads at once. You will take them one by one. Suppose somewhere near you, there is a person with a great skill, that could bring a lot of added value. But that person can not exploit his skill, because he has to bake his own bread each day to stay alive. You could tell the guy, I’ll give you bread so that you can do the thinks you’re good add, and in return you will deliver me even more bread later on. That’s what banks do. They get money from people who don’t need it right away and give it to people who do need it and will in exchange return more money for it. Of course we’re never a 100% sure, the investment will give the return it has promised. But that is the thing where bankers are supposed to be good at. They asses risks and calculate the price that is needed for it. Of course the most important thing is trust. We give them our money, and we trust them to give back alittle more later on.
• As a summary we can say that money is the tool used to make sure that recourses, skills and labour force around the world are used in an optimal way. In other words: money is a wonderful thing.
• So what is the bank crisis all about? Somewhere there have been bankers that haven’t done their job properly. They miss assessed risk. As long as no banks go bankrupt, the confidence may be shaken a little, but no harm is done. That’s why a government can never allow to let a bank like Lehman Brothers to go bankrupt. But they did…. And as we’ve seen above, the all system is build around “trust”. Suddenly the trust is gone. People who have money are not sure anymore how they can get that money to people who can do profitable things with it. We’ve still the same amount of skill’s, labour force and recourses as before. But the system to allocate them optimally seems not trustworthy anymore. People who have invested relying on a normal market, don’t get the expected returns, and the trust drops even further. We prefer to hold on. There is unemployment. People that could do wonderful things for society are doing nothing at all, because the money that should get them working is not getting there.


A quick note to the spirit of Joe McCarthy, pardon Ms Bachmann: pro-American or not - when asked about the Speaker of the House and Senate Majority Leader, Bachmann said "I am not going to say if they are anti-American or pro-American." A clear statement!

Doomsday bandwagon # 2

One minor drawback of doomsday 'prophesies' is that nutty lefties (like Kappert) actually believe all this stuff, and will surely make their own fanciful 'diagnosis'.

all this stuff

About what 'all the stuff' are you talking about?? 'Doomsday' is a conservative (religious) word, not 'nutty' nor 'lefty'. And I smile on your comments just like you do on mine.

no surprise at all

"If all the bank loans were paid up ..." which must remind us, that we are inventing money which no way will ever exist. Try to calculate what you are spending for waste, meaning you're it and soon after you throw it away or you never use it (i.e. plastic wraps, one-time games, etc.). Labour (quite different to work) has less and less to do with the 'money creating machine', Westerners believed in since Friedman/Schwarz and Reagenomics. As with regards on 'honest money' - as long as Silvio Gesell is unknown to Wall Street, nothing will change.

Doomsday bandwagon

Irrational exuberance (copyright Greenspan) in booming times and doomsday wallowing in periods of economic recessions are two sides of the same coin of human nature.  This article is a (libertarian-inspired) collection of items related to doomsday wallowing.  It induced a headache in this reader.

Since the article does not convey any clear message, beyond 'doomsday' or "planetary bankruptcy", one does not know how to tackle its main theme.  While some of the presented individual items or claims have some merit, many do not. Let's take two easy ones.

--  China is certainly NOT using the remedy of "yuan devaluation".  In fact, the Chinese authorities have been allowing the yuan to APPRECIATE modestly in recent years, but insufficiantly so in view of exchange market pressures reflecting China's large balance-of-payments surplusses.  

-- It is disingenuous to claim that world trade has "collapsed" on the basis of an IMF report that is actually predicting modest growth (of between 2 to 3 %) in world trade volume in the current year.  For nearly half a century world trade growth has been outpacing world GDP growth EVERY YEAR.  Preliminary (to be revised) data of the last quarter certainly do not justify wild claims of world trade "collapse". 

Chicken Little did indeed claim that the sky was falling, but he/she did it in children's fairy tales.

@ KO

I agree with you that Minnesota Representative Bachmann is one of "America's finest" in this hour of folly.

The Kiddie Party

The Democrats are confident that Mom and Dad's hard work will turn around the situation one way or the other, so they are seizing the opportunity to steal, steal, steal from the public trough to pay off their friends. Keep your eyes on leaders like Rep. Bachmann from Minnesota, who voted against every bailout from Day 1, including the Bush-Paulson bailout. A tax lawyer and a Christian: America's finest.

So it goes..

Surprise, surprise!
Just 2 years ago the whole western world was busy flipping condos for profit from Latvia to LA.Between greed and it goes.