free as in beer money
September 25, 2009 3:33 AM   Subscribe

Illustrating the cause of, and solution to, too much debt:

*ahem*
In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.

While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.

The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.

In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.

No new money has been introduced into the local economy, but everyone’s debts have been settled.
which leads us to The Future of Global Finance by liaquat ahamed:
It has long been recognized that the global financial structure — built as it is around the dollar as the world’s reserve currency — has a fundamental design flaw that makes it inherently unstable. The problem was first identified back in the early 1960s by the Belgian-American economist Robert Triffin, in “Gold and the Dollar Crisis.” Writing about Europe’s accumulation of dollars, he argued that the system carried the seeds of its own destruction. Foreigners could acquire dollars only if the United States ran current account deficits — that is, spent more than it earned. But lending money to someone who lives beyond his means has obvious dangers, and the same is true of countries. Thus, the American deficits necessary to supply dollars to the world for international transactions simultaneously undermined confidence in the currency. It was only a matter of time, Triffin predicted, before the system would be hit by a crisis...
note this isn't about the crisis just past so much as it is the perpetuation of a system -- prone to boom and bust -- requiring ever greater innovation swathes of the world's population going into debt (servitude). as bsetser writes: "borrowing by U.S. households cannot be the main source of global demand growth in the future." it just so happens that it was borrowed in a currency that the federal reserve can print and that the rest of the world has bought into (predicated implicitly upon future productivity...)

so i've been reading God and Gold by walter russell mead [a favourite of SDB] and was struck by the passages on the legacy of the bank of england:
Britain fought a series of wars with France for a century and a quarter. France was a far larger and wealthier foe - the strongest power on the continent. The conflicts repeatedly left France financially exhausted and bankrupt. Britain's debts mounted astronomically as we have seen, but Britain went from one peak of economic and financial strength to ever higher peaks after each conflict. The secret financial weapon was public credit and the Bank of England which managed the debt.

A million pounds were borrowed in 1692 to fight the French. By the time Louis XIV died, the debt was over 50£ million. The War of the Austrian Succession pushed the debt to 140£ million. It was almost 250£ million by the end of the wars that included the American Revolution, and 800£ million by the time Napoleon was safely ensconced on St. Helena. These were HUGE sums. They have been calculated as 222% of GDP after the American Revolution, and 268% of GDP at their peak in 1822.

Mead explains how the Bank helped finance these wars. It sold government bonds that became assets in private hands and facilitated the development of the financial system that aided commerce. Influential people came to rely on government bonds and Bank notes and Bank shares for income and liquid wealth. The nation's civil and business leaders thus quickly had a stake in the success of the new monarch, William III, who had recently chased James II from the throne. "Government debt, historically a source of weakness, had been transformed into an instrument of strength." Alexander Hamilton copied the English financial system, and the young United States enjoyed similar financial and economic success.
now, not everyone was happy, but it's worked more or less over the centuries and, depending on how you're counting, we're apparently on version 3.0 (BW2 edition) of central bank mediated finance. yet while obama seems unable to, as schama puts it, "make – as American history yearns for him to do – money moral again," perhaps mead is on to something when he concludes that...
Lula is right: the global crisis emerged from a system built, with all its many flaws, by blue-eyed palefaces. But if countries like Brazil can stick with their own versions of Dutch finance, the future of the system will increasingly be shaped by people who look more like Lula—and the palefaces are going to have to run hard to keep up.
afterall, as lula sez, "when my presidency ends, I will go back to my home industrial city town, 800 meters from my local trade union that projected me my political life. And if I fail, when I go back to my hometown, it's going to take another century for another worker, another member of the working class to reach the presidency, because they're going to say that the workers do not have the competency to run a country."
posted by kliuless (52 comments total) 19 users marked this as a favorite

 
No new money has been introduced into the local economy, but everyone’s debts have been settled.

So all we have to do is legalize prostitution and tax the hell out of it and voila! Problem solved.
posted by UrineSoakedRube at 3:46 AM on September 25, 2009 [4 favorites]


And your point is?

I mean, I don't mean to be sarcastic, but during the past couple of years we have heard more than enough about debt, liquidity and finances. Yours is a very worthy post, and I certainly appreciate it not being the umpteenth: "Austrian economists have it right. Google Ron Paul." post. I'll certainly check your links, which seem informative enough, but it would help if you could concisely point out what you are aiming at. You certainly lost me when you introduced race into the argument (not least because many of those Dutch bankers who were at the cradle of modern capitalism were not "blue-eyed palefaces", but refugee Portuguese and Spanish Jews no less swarthy than Lula.)
posted by Skeptic at 4:14 AM on September 25, 2009


Illustrating the cause of, and solution to, too much debt.

Is it beer? Please say it's beer.
posted by Horace Rumpole at 5:18 AM on September 25, 2009 [15 favorites]


I don't think the hotel example really means much in that form.

Everybody had exactly €100 worth of debt, but they also held exactly €100 worth of assets (in the form of the money owed to them).

You can frame it as "everybody's debts have been settled", or "everybody's assets have been spent", but it hasn't made any real difference to the situation. Everybody had zero net worth before and after.

It's not really creating any stimulus either: there's no new business done as a result, just old debts being settled.

You could create a similar story to describe a stimulus leading to growth, but it's slightly more complicated.

Suppose nobody has any debts. The hotelier's been living on bread and lentils and is bored by his diet. Then the Russian guest turns up with his €100, and the hotelier rushes out to buy meat from the butcher.

If he's making a profit though, the butcher must be paying his wholesaler less: say €95. He might spend his profit on a €5 kiss from the "good time girl".

The wholesaler takes his €95, pays €90 to the farmer and buys another €5 kiss from the girl.

The farmer then pays the €90 to the "good time girl". She then goes to the hotelier and buys a €100 worth of advance hotel room bookings.

Then the traveller gets his €100 money back, but the liquidity he provided has encouraged new business to be done.

Which is basically why fractional reserve banking can be useful.
posted by TheophileEscargot at 5:20 AM on September 25, 2009 [7 favorites]


As TheophileEscargot put it. In your little tale, everybody's debts have been settled. So what? There's still no credit, and no further activity without it.
posted by Skeptic at 5:36 AM on September 25, 2009


That little fable made the rounds in wingnut glurge during the stimulus. Not the first stimulus, of course, because that was Bush's stimulus and that was OK. It appeared during Obama's stimulus which was his first step in his socialist commie takeover. Monsieur L'Escargot summed up its pointlessness quite nicely.
posted by ereshkigal45 at 5:45 AM on September 25, 2009


The minute I saw the graphs I went glassy-eyed. How I passed macro and micro econ is still a mystery.
posted by Ruthless Bunny at 5:54 AM on September 25, 2009


Foreigners could acquire dollars only if the United States ran current account deficits

Not necessarily. The very first tale illustrates the flaw with that reasoning nicely - Private individuals can "hold" negative dollar amounts, thereby allowing others to hold positive amounts that have no physical basis. Nixon taking the US off the gold standard made that all the more explicit - Now not only can private individuals "float", but the entire US economy can as well.

Now, as for solving the lack of liquidity problem... Hypothetical situation - If everyone in the world suddenly received a 100 trillion dollar "debt consolidation loan" at 3.5%, which they could only spend toward eliminating their own preexisting debt, and any surplus funds had to go back at the end of one month - Who would benefit, despite the apparent zero-sum nature of such a cash infusion (analogous to the €100 on a global scale)?
posted by pla at 6:01 AM on September 25, 2009


TheophileEscargot : Then the traveller gets his €100 money back, but the liquidity he provided has encouraged new business to be done.

Having grown up in a small town with a dominating seasonal source of income (ski resort), I can assure you that the original framing doesn't significantly differ from your own - People conduct their business as usual and simply go into the red with each other. When cash eventually does come in, everyone settles up and can spend "real" money for a few months, but little actually changes between the two situations.

I think this relates to our current economic crisis as such - What happens if you don't get any snow one year?

The US, and indeed the entire world, has slowly shifted from a Capital-creation based economy to a capital-shuffling one. No one wants to get their hands dirty, everyone wants to perform financial "services" rather than work. Well, you can only have so many parasites before the host dies, simple as that.

I often wonder about my own career choice, in that light - I write software, which I tend to consider an act of creation. But you can't eat code, and a clever algorithm won't protect you from the cold and the rain.
posted by pla at 6:11 AM on September 25, 2009 [6 favorites]


But you can't eat code, and a clever algorithm won't protect you from the cold and the rain.

Take your dirty, stinking lies somewhere else mister. My code loves me!
posted by blue_beetle at 6:15 AM on September 25, 2009 [7 favorites]


Wait, maybe I'm missing something, but it seems to me like the hotelier's debt wasn't paid at all. The tourist took his €100 back, after all. Whoever had the €100 at the time the tourist took it back (and in this case it was the hotelier) didn't get paid back at all.
posted by kmz at 6:20 AM on September 25, 2009


If anyone wants to really understand why the little story doesn't work, consider that the Russian's initial deposit is a loan with 0% interest.

In the real world money has a time value (money now is worth more than the same amount of money tomorrow, because tomorrow is uncertain), and all transactions have costs. So unless everything is happening superfast, in reality the Russian wouldn't get his money back for a few days, especially in Escargot's example.

The Russian actually loses money no matter how you look at this. Was his money a security deposit or a loan? If a deposit, it should never have been placed at any risk. If the hotelier paid the butcher, but the butcher had debts less than $100, the Russian would never have been able to get all of his money back, and he would demand to know was his deposit was not secured.

If the money is a loan, he's getting nothing for the time value of his money. He is enables all the parties to clear all their debts, but gets nothing in return for the service, which is worth somethings assuming everyone's debts were incurred at some interest rate.

The example only works if you are predisposed to ignoring the fact that the guy with the money is saving everyone's day and should probably be compensated for that. It is jusst as fantastical as a story about gold raining from the sky.

In the real world, we have mechanisms to ensure this - accounting treats the same amount of money different depending on the circumstances under which it is obtained, and people who lend money which is then placed at risk receive some premium for doing so.

Moral of the story: it is not about flow. It is about owning the capital in the first place. Corollary - money you save is worth more than money you earn.
posted by Pastabagel at 6:29 AM on September 25, 2009


Wait, maybe I'm missing something, but it seems to me like the hotelier's debt wasn't paid at all. The tourist took his €100 back, after all. Whoever had the €100 at the time the tourist took it back (and in this case it was the hotelier) didn't get paid back at all.
posted by kmz


Yes he did. But he also had a debt. He used his €100 to pay the butcher.
posted by weapons-grade pandemonium at 6:45 AM on September 25, 2009


So it is as if the wealthy Russian guest never appeared at all, and the hotelier just decided to pay his debt.
posted by weapons-grade pandemonium at 6:46 AM on September 25, 2009


Everybody who owed €100 was also owed €100, so everything was square to begin with.
posted by weapons-grade pandemonium at 6:48 AM on September 25, 2009 [1 favorite]


Yeah, I just realized I"m wrong. But that's because in the idealized version of debt in that world, nobody really owed anything to begin with. It would be like if I owed John ten dollars, and John owed Jane ten dollars, and Jane owed ten dollars to me. We would just declare ourselves even.
posted by kmz at 6:49 AM on September 25, 2009


Wait, maybe I'm missing something, but it seems to me like the hotelier's debt wasn't paid at all. The tourist took his €100 back, after all. Whoever had the €100 at the time the tourist took it back (and in this case it was the hotelier) didn't get paid back at all.

You are missing something. when the Russian arrives the hotelier has €100 debt to the butcher and is owed €100 by the gtg. Net: 0

The russian 'lends' him €100. Balance now = -€100

The hotelier uses the money to pay the butcher, leaving him owing €100 to the russian and owed € by the gtg. Balance = 0

The gtg comes and pays the hotelier back his €100, so he has €100 in cash but he still owes the russian €100, so balance still =0
(Note that the asset his still €100 to his credit whether the money is in the form of debt from the gtg or whether he has the money in hand. In reality there would be more risk attached to the gtg having the money.

The hotelier pays the Russian his €100 and his debt is cleared.
posted by biffa at 6:49 AM on September 25, 2009


Everybody who owed €100 was also owed €100, so everything was square to begin with.

Except for the farmer, who uses the €100 to buy €100 worth of sex from the hooker. Also, prior to the Russian's arrival, the hooker owed €100 without being owed €100.
posted by UrineSoakedRube at 7:03 AM on September 25, 2009


Am I the only one who read the title of the post as "Illustrating is the cause of, and solution to, too much debt" ?

Would also be a very interesting post.
posted by alight at 7:13 AM on September 25, 2009 [2 favorites]


So the hooker steals the Russian's money. She and the farmer take off. The hotelier tips off the Russian mafia boss. the Russian sends a hitman to track them down... I'm lost after that... when does Bob Hoskins appear?
posted by le morte de bea arthur at 7:16 AM on September 25, 2009 [2 favorites]


In the real world, debt chains are never circular like that example, but tend to consist of a large number of poor people owing money to a small number of rich people.
posted by rocket88 at 7:17 AM on September 25, 2009 [10 favorites]


The problem with the "Russian" example is that we already have electronic clearing-houses for debt. We have factoring companies who will (for a small fee) give Party B money to pay A based on Party C's debt to B. The example does nothing to address the real issue, which is that our culture and our government encourages predatory practices in which many people have a negative net worth.

Not only that, but these folks with a negative net worth, they're constantly preyed upon by fees that are designed to keep them from ever stabilizing. Banks who'll charge usurious "overdraft" fees, credit card companies who'll change your rate for capricious reasons like your dog getting diabetes, and payday lending companies that have more interest in getting 5% of your paycheck forever than to help you set aside enough savings to get by between checks.

Until corporate citizens are held responsible, punished in the same way a human citizen would be for swindling, lying, stealing, and killing, little will change. In any situation in which a human would be fined, sure, fine them. But if the penalty would be imprisonment, then remove that company from the market. If the penalty would be death, or life imprisonment, then "execute" the company. People commit crimes infrequently because of the risk/reward ratio. Large corporations bully and cheat constantly because of the (skewed) risk/reward ratio. If Bank of America could be dissolved for their crimes, you'd see a lot fewer complaints of that practice of shifting charges and deposits to maximize overdraft fees.
posted by explosion at 7:24 AM on September 25, 2009 [6 favorites]


If anyone wants to really understand why the little story doesn't work, consider that the Russian's initial deposit is a loan with 0% interest.

In the real world money has a time value (money now is worth more than the same amount of money tomorrow, because tomorrow is uncertain), and all transactions have costs. So unless everything is happening superfast, in reality the Russian wouldn't get his money back for a few days, especially in Escargot's example.

The Russian actually loses money no matter how you look at this. Was his money a security deposit or a loan? If a deposit, it should never have been placed at any risk. If the hotelier paid the butcher, but the butcher had debts less than $100, the Russian would never have been able to get all of his money back, and he would demand to know was his deposit was not secured.


If you like, someone could have a Euro coin under their pillow, add it to the chain, and give the Russian Guest a profit.

Or if you want to get really complicated, you can start thinking about how we now have more goods and services chased by the same amount of money, leading to deflation, leading to the Russian Guest's €100 being worth more when he gets it back than when he dropped it.

But there's a limit to how realistic you can make an analogy before it turns into a model and everybody's eyes glaze over.
posted by TheophileEscargot at 7:25 AM on September 25, 2009


Hoskins plays the part of Bernie Madoff, who convinces everyone, including the hitman, to reinvest their €100.
posted by weapons-grade pandemonium at 7:25 AM on September 25, 2009


Steven Spielberg directs the film.
posted by weapons-grade pandemonium at 7:29 AM on September 25, 2009


Does anyone pay tax in this theoretical example with the butcher and co? If so, it's not quite that "all are square".
posted by MuffinMan at 7:30 AM on September 25, 2009


No new money has been introduced into the local economy, but everyone’s debts have been settled.

Cept' for the Tax Man.
posted by rough ashlar at 7:32 AM on September 25, 2009


No one wants to get their hands dirty, everyone wants to perform financial "services" rather than work.

Ever done any farm'n?

After you've done that - the $8 for 20 lbs of beans (ok now $18) seems like a deal.
posted by rough ashlar at 7:35 AM on September 25, 2009


The US, and indeed the entire world, has slowly shifted from a Capital-creation based economy to a capital-shuffling one.

Actually, it's been like this since the gold and silver standards began to meet their demise in the early 20th century. And even before then the only countries who could produce gold and silver were ones with mines, i.e. the US and colonial powers, leaving the rest of the world in the exact same spot as the town -- the Russian was just played by a Brit, German, Frenchman, American... or a Russian.

The global financial system is now too complex for the average person to understand. We're all taught the fundamentals of economics (supply/demand, interest, loans, savings, etc.) but the system now is well beyond that -- fractional reserve banking, yield curves, derivatives, global investment funds, etc. I think what's been happening the last year is what we've seen with the rebellion against science among average Americans, especially with evolution. Simple explanations are being replaced by very complex ones that require a college education to fully grasp (and in the case of quantum physics, a PhD and a lot of psychotropic chemicals). But for many people, the simple explanations are easier to grok, and that perverts into the belief that those ideas must be better because they're simpler, and in fact these complex ideas are all about being from atheist out to hand the world to the Antichrist, or hucksters out to take our money and give it to evil bankers and the Antichrist.

The truth is that any precious metal standard just won't work anymore. It would severely contract the money supply, and the only countries that could expand the money supply are countries that still have gold/silver/platinum in the ground, or it'd be China making deals with African nations with gold still in the ground (the idea that a gold standard would break us free of Chinese domination of dollar reserves is incredibly laughable since they're essentially a colonial power in Africa, giving them the ability to increase their gold reserves far easier than us). The Austrian School thinks they're advocating a return to small-to-no government spending, but in reality they're actually advocating a return to colonialism.

But here's the problem: The economics we're all taught in K-12 is still all about the origins of money... as gold. We're still essentially teaching 19th century monetary policy. Until we can figure out how to teach fiat currency principles in elementary and high school, until we can explain why it's working and the drawbacks effectively, you're going to have Ron Paul and Glenn Beck screaming on TV and millions of people going off about why the gold standard must be revived. Maybe they're right, but the truth is that most people aren't armed with a decent knowledge of how the current system works, so it's easy to have Beck or Paul tell them how it's evil evil evil.

I think TheophileEscargot has got it right -- the situation here is that the movement of liquidity is what gets the business done. Just because the money is withdrawn doesn't mean it's a failure of the economy. In fact, it greatly improved everyone's operational budgets (except the Russian's). The problem is actually with everyone's capital budgets -- because the capital didn't stay in the system, capital improvements (e.g. renovating the hotel) won't happen. And this is why ARRA focused on making infrastructure improvements, and why people like Gingrich have been approving of this part of the stimulus -- capital improvements are lasting improvements that improve the business client. They last longer than cancelling debt. And you can do this with fiat currency far easier than you can with gold.
posted by dw at 7:55 AM on September 25, 2009 [2 favorites]


tl;dr. Just pay off the debt by printing new money, and back up its value with America's military might.

/s, or at least I think I meant it that way.
posted by mccarty.tim at 8:03 AM on September 25, 2009


Except for the farmer, who uses the €100 to buy €100 worth of sex from the hooker. Also, prior to the Russian's arrival, the hooker owed €100 without being owed €100.

So it's not the Russian 's €100 that saves the town, it's the farmer's libido. If the farmer had been more proactive in his fucking, he could have saved the town (and gotten laid) far in advance of the Russian's arrival. He could find out what the hooker owes to the hotel, trace the debt that the butcher owes him back to the hotel, and then offer to settle everything in exchange for some sex.

So what I'm saying, is that if we send some whores to FarmAid this year, we'll end the recession.
posted by robocop is bleeding at 8:03 AM on September 25, 2009


explosion : credit card companies who'll change your rate for capricious reasons like your dog getting diabetes

They've gotten more brazen about it, actually... This week, my CC company sent me the single most honest change-of-terms I have ever seen:

"The principal factor we considered in amending your account is maintaining profitability on your account."

Just blew me away. I mean, sure, no one ever really doubts why their rate has gone up, but to just come out and say it... Just Wow.

Of course, I don't really see how they plan to make my account more profitable based on a higher rate, since I pay in full and on time every month. They could raise my rate to 150% daily and it wouldn't make them one single dime more than they get now. Suck it, Visa! Love, a "deadbeat".
posted by pla at 8:05 AM on September 25, 2009


rough ashlar : Ever done any farm'n?

Bailed hay for spending cash as a kid/early teen.


After you've done that - the $8 for 20 lbs of beans (ok now $18) seems like a deal.

Agreed. In hindsight, the $10-$20 I'd get for a looong day's work (minimum wage? To a kid working under-the-table? Riiiiight) - You couldn't pay me enough to do that now.

But damn if it didn't leave me in god-like shape at the end of each season. ;)
posted by pla at 8:16 AM on September 25, 2009


"The principal factor we considered in amending your account is maintaining profitability on your account." . . .

Of course, I don't really see how they plan to make my account more profitable based on a higher rate, since I pay in full and on time every month.


They've realized the best way to "make a profit" on your account (or more precisely, limit their losses) is simply to get rid of you as a customer.

Likely they'll keep raising the rates or otherwise changing the terms until that objective is achieved.
posted by flug at 8:23 AM on September 25, 2009


DW, I have to say, that's a really good and insightful post. Perhaps the Austrian/Chicago school economics will become the "Intelligent Design" of fiscal policy.

The only thing is that this has broader implications than refusing to teach evolution. Even if a kid has a screwed up education, he can still go online or to the library (assuming the books haven't been burned and the net nanny only filters porn) and learn the truth about evolution (granted, there's a much lower chance he'll end up being a brilliant biologist). If the economy falls back to the boom and bust cycles that we had in the 19th century, people's quality of life will fall dramatically, and we'd likely face harsh economic inequality.

Plus, I suspect a lot of this fervor over the laizez-faire economics comes down to these average Americans thinking they are actually above average, and being held back by the sheeple/welfare queens. The tea party folks get a way to rationalize why things don't always work out for them (My boss is taxed too much, so I can't get promoted), and the CATO Institute and FreedomWorks gets a vocal mob. And it's an alluring concept, since it absolves them of the moral imperative to help the less fortunate, as they can rationalize poverty as simply being a lack of initiative or dedication. It's the morally simplistic solution, much like how you avoid some existential questions by refusing to believe that humans have a common ancestor with chimps.
posted by mccarty.tim at 8:24 AM on September 25, 2009


MuffinMan : Does anyone pay tax in this theoretical example with the butcher and co? If so, it's not quite that "all are square".

You've never lived in a small town, have you?

Unless the transaction includes a W-2 or 1099, "What happens in Vegas, stays in Vegas".

Most likely, the butcher got that meat from the farmer as payment for butchering the cow. The farmer paid the whore from his own share of the cow. The whore paid the hotelier in... ahem... "services rendered". And the hotelier most likely runs the local tavern, which means the butcher has a running (but off-the-record, of course) tab.

The only "taxes" in this scenario would happen if the Russian had decided to stay and paid via plastic. If he had paid in cash, well, pity how the hotel had no guests that night.
posted by pla at 8:26 AM on September 25, 2009


payday lending companies that have more interest in getting 5% of your paycheck forever than to help you set aside enough savings to get by between checks

Well, there's an easy way to improve that, isn't there? Find someone who's living paycheck-to-paycheck, and offer them a cash advance for 1% (or 0.1%, or whatever you think is fair) instead. I know it's fun to rail against big business, and sometimes it's all you can do (we can hardly compete with the cable company or try to offer someone a lower electric bill without bribing City Hall first). But handing out money and getting it back later is pretty easy to do at an individual level, and if you honestly think the people who are doing it are charging more than the risk is worth, you can undercut them.

Just a bit of advice, though: if you do decide to try out my nifty plan, do what I did: don't do it too often, and budget it as "altruism" rather than "investment". Trying to actually make this a self-sustaining practice on 1% per week (OMG 67% APR!) will leave you awfully disappointed when you find the default rate is 2% or more.
posted by roystgnr at 8:27 AM on September 25, 2009


I think a better analogy is the movie Top Gun. The Obama administration is Maverick's mouth, which is making checks that his body (the Federal Reserve) can't cash, so his mouth uses the F-14 as equity. The taxpayer in this instance would be Iceman. In summary, you're dangerous.
posted by "Elbows" O'Donoghue at 8:38 AM on September 25, 2009 [2 favorites]


Forget the "tax man" in the "sleepy European town" example, since this is obviously a community with no public services, no paved roads, sewers, streetlights or police (as evidenced by how openly the prostitute does business). This is also a town with no bank, where every transaction is made on credit with zero interest, every step in the supply chain (butcher to farmer) takes zero markup and has zero fixed expenses, and everyone stops spending the money they don't have when it equals the amount somebody else owes them (on a pricing structure which sounds suspiciously like the Communist goal of "from each according to his ability, to each according to his need"). In other words, this is a Fantasy Economy, populated by Smurfs living in mushrooms (which is not only why there is no property improvement expenses, but also why the tourist didn't find a decent room at the hotel).

So excuse me for not reading any further on kliuless's eponysterical post or clicking any of his links because his credibility disappeared in thin air with that story, and if I want fantasy, I'll finally finish reading the Harry Potter books (the merchandising of which is a good example of how the Real World creates value from near-nothing).
posted by wendell at 8:43 AM on September 25, 2009 [3 favorites]


And your point is?

mostly it's to provide context :P esp with the g20 i guess, but if you're looking for a 'so what' then it's more about the next (potential) crisis, which is what ahamed's article mostly addresses and which i'd encourage everyone to read, if you're only going to click on one link.

like ahamed sez, there is a design flaw that's been exposed -- and some would say exploited, so it's a feature to some, but a bug to most (taxpayers) -- and...
The numbers involved were staggering. In 1996, the United States had international assets and liabilities of around $5 trillion. By 2007 the figure was more than $20 trillion.
so in the ultimately closed-system of global finance, of which the "sleepy European holiday resort town" is but a micrcosm (writ large), something similar to the 18th century british experience with central banking is occurring, but on a much larger scale; the world has come to depend upon US debt as an asset (it's 'risk-free') and pillar of global finance (its 'architecture') and, moreover, the federal reserve's money printing activities to keep the 'plumbing' going as it were, like in the example above, by providing the liquidity everyone needs to stay solvent. but who has access to, or gets to play, the "wealthy Russian guest" one might wonder?

like the "blue-eyed palefaces" is a red herring (which lula responded to and mead i think helpfully digressed upon) as obama mentioned yesterday: "The traditional divisions between nations of the South and the North make no sense in an interconnected world;" and yet poorer people and countries on the 'periphery' (looking in) are left to wonder why the global financial system appears to be (still) running as an end in itself, if not an elaborate mechanism for the personal enrichment of a few or some sinister matrix-like system of control to keep the [aggrieved group] down. how do we make it work for 'them' and, i'd argue given a broader perspective, really us?

so to (unsatisfactorily) bottom-line it...

refugee Portuguese and Spanish Jews

and scots and huguenots! incidentally, mead's god and gold actually has a pretty good treatment of this and is worthwhile [along with amy chua's day of empire (and, for that matter, zakaria's post-american world & clark's farewell to alms)] if you can get past the (not so) subtle jingoism :P

re: stimulus

skidelsky had a nice treatment the other day -- on fiscal vs. monetary (fractional reserve/velocity) 'multipliers', like how money does (or doesn't) move around the circle -- and christina romer, obama's economic advisor, is arguably one of the world's foremost experts on multipliers btw, if that makes you feel any better! oh and skidelsky concludes: "A double round of stimulus packages is needed to counteract the real prospect of a double-dip recession. The time to start worrying about inflation is when the recovery is entrenched. To pay back the debt without strain, we need a booming economy." i would just prefer it to be 'productive' investment, e.g. better health care and not, say, exurban development.

re: time value

consider that sweden actually has negative nominal rates [1,2,3] now, which is really quite extraordinary; one interpretation is that the "BW2 edition" is breaking and no one has yet architected the next version, altho my suspicion (hope really, since he's gone silent) is that SRW is like the next torvalds and will lead us all the promised land :P

cheers!
posted by kliuless at 9:00 AM on September 25, 2009


I'm selling my Charizard holographic card. Time to get paid.
posted by pianomover at 9:15 AM on September 25, 2009


OK this is all very interesting, but I still have a question. Who has my €100? Also, does anybody have the number for that girl?
posted by scalefree at 9:21 AM on September 25, 2009


wendell : and if I want fantasy, I'll finally finish reading the Harry Potter books

I hate to break it to you, but the real world of actual people living their lives (rather than the far more imaginary one of international finance and high-risk derivatives) looks pretty much like that simple little story (though of course the numbers wouldn't usually work out so conveniently, we have to take that as simply for the sake of clarity).

You don't charge your neighbors interest on a cup of sugar, your friends a margin on the side of beef you need to split to afford, your brother-in-law tax on your old riding-mower.

As for "everyone stops spending the money they don't have when it equals the amount somebody else owes them", no, people don't do that, but you read that into the story yourself, it didn't say any such thing.

And in case you need any more evidence of which describes the fantasy and which describes reality - While Goldman Sachs cries penury (at the same time it just posted the highest profit in the company's 140 year history) and protests that they can't afford to actually lend out any of the USD10 billion given to them for precisely that purpose, I can still split that side of beef with my friends.
posted by pla at 10:34 AM on September 25, 2009


Wait, did I just see an exchange between Maverick and Iceman from Top Gun as an analogy to economic policy?

Internet, you've done me proud today.
posted by cavalier at 11:32 AM on September 25, 2009


To study capitalism is to study bipolar disease. Wild uncontrolled manic spending followed by sad feelings of depression. Rinse and repeat.
posted by Bitter soylent at 11:42 AM on September 25, 2009


The US, and indeed the entire world, has slowly shifted from a Capital-creation based economy to a capital-shuffling one.

No, we are slowly shifting from a resource-exploitation economy to a technology-innovation economy. We have not run out of resources, but experience diminishing returns as the cost of extraction rises. On the plus side, our productivity in the use of those resources slightly outpaces the extraction cost, at least when things are going well - it fluctuates.

The internet is an example, obviously. A basic communication like a document can be sent around the world for essentially zero marginal cost. Low volume communications are free or too cheap to meter, though one should figure in the capital cost of the computer required - but that, too, is low. In the past, sending a message to the other side of the world would not only have been time consuming, it would have been hideously expensive - a message bearer might need months to convey it to its destination, and would need food and lodging at the very least, at a considerable cost in terms of raw energy inputs.

Could one go back in time with a mechanically rechargeable computer and < 1 terabyte of information - a copy of 'hard' wikipedia articles, and a moderate-resolution global map, for example, one could easily dominate the world, at least to the extent of one's ability to win friends and influence people while not having your knowledge trove stolen. The utility of a physical resource is limited by one's ability to exploit it - so at any given point in time, abundant resources go under- or un-utilized because nobody can think what to do with them that has greater utility than the predominant activity: oil extraction in 17th century Arabia was of little utility compared to camel-breeding, and nuclear waste today has little utility because we have yet to invent nuclear-powered swibbles, whatever they are.

The essential thing distinguishing humans from other animals is our ability to use tools, which has freed us from reliance on nature's bounty and allowed us to go after nature's hoard. Tool creation is another of our abilities, but one that is less evenly distributed in the population especially as manufacturing has allowed the commoditization of tools. The problem is that while we still have resources to exploit and are constantly finding new ways of exploiting or even identifying resources, we have run out of land where we could abundantly provision ourselves and are forced to either work for others or explore the problem domain - one which is increasingly mountainous.
posted by anigbrowl at 12:46 PM on September 25, 2009


As a programmer, it seems to me that the 'global finance system' is like a big stack of software entities, all interacting with each other, all written by different people and at different times, and with new patches applied often. No one can figure out the big picture of the whole system, but they have theories about parts of it. For a long time it has seemed to work and all hang together. Hackers and viruses exploit loopholes as they find them.

Then, about a year ago, we hit a blue screen of death. The illusion that the system was self-repairing was lost.

We managed to reboot in safe mode, but we're not sure when we'll hit the next big bug.
posted by memebake at 12:53 PM on September 25, 2009 [1 favorite]


^^ I meant that as a metaphor obviously, but thinking about it further, large parts of the system literally are software entities these days ...
posted by memebake at 12:55 PM on September 25, 2009


All the money in the world
posted by lysdexic at 12:56 PM on September 25, 2009


I haven't read the link (much) yet, but let me endorse Steve Keen as awesome, based on what I've already seen from him. Larry Summers is an accomplished technocrat, but technocrats are just masters of convenient rules of thumb, while Keen has a grasp of the entire model that those rules of thumb apply to.
posted by Jimmy Havok at 12:56 PM on September 25, 2009


a message bearer might need months to convey it to its destination, and would need food and lodging at the very least, at a considerable cost in terms of raw energy inputs

It's not clear to me that there was any less energy expended in placing the fiber optic cables under the oceans.
posted by five fresh fish at 4:33 PM on September 25, 2009


fff — if you include that cost, you should probably compare to a cost that includes paving roads, building inns, and so on.

I tried to get an order-of-magnitude estimate of cable cost— assuming a construction cost around $30/m, a lifetime of 30 years, and a capacity of ~ 1 Tbps, that's a cost of about 10-12 dollar per bit sent around the world. That's still only 10-5 dollar for a largish document. Even throwing a few orders of magnitude in for incomplete utilization, etc., that's still too cheap to meter for an individual transfer.
posted by hattifattener at 11:52 PM on September 25, 2009


« Older I don't know how these people got their fairly dec...  |  Librarians at the University o... Newer »


This thread has been archived and is closed to new comments