Wednesday, 15 January 2014

Well duh: "A credit boom before each bust"

Douglas Carswell in The Spectator states the bleeding' obvious:

Here is a graph that shows the four economic downturns Britain has been through (red lines) over the past forty years.

What I find strking is that each downturn was preceded by the same thing: a surge in the growth of money (blue line). In other words, the bust followed an unsustainable credit-induced boom…

The man in the street can't see the increase in credit or the credit bubble, as it is a bit abstract, but what we can easily see is land price/house price bubbles, which are always debt fuelled.

That's where nearly all the extra credit goes - into buying and selling the same old land and buildings which have always been there, they are already built on/built and so little need for further investment above and beyond annual maintenance etc.

You can't have a credit bubble without a land price bubble and vice versa, they are the same thing, two sides of the same coin.

And we know how to dampen land price speculation (and reduce taxes on real economic activity and investment), don't we?


Lola said...

Yes we do! But, to be absolutely sure, we also have to have 'sound money'.

DBC Reed said...

Yes also.(Don't like the sound of this sound money: a bit Cross of Gold for my taste.Surely if you stop it going into land, you can shovel new money into the economy with reckless abandon.Helicopter money would get my vote ,so long as the punters spent it on drink, women and flash cars, instead of ,almost literally, burying it in land.

Mark Wadsworth said...

L, put and end to govt deficits (intellectually easy, politically difficult), land price bubbles (via LVT) and banking subsidies (in fact, slap them with a negative subsidy, a bank asset tax) and hey presto, there's your sound money.

DBC, money printing only goes so far. In the long run, unless you want inflation, you have to collect as much tax as you spend (i.e. destroy as much money as you print). So your plan veers away from sound money.

Lola said...

Good bit on sound money here

Mark Wadsworth said...

L, sod central banks and the BoE, it should not be doing ANYTHING AT ALL apart from what it was originally set up to do, which is to act as the government's debt management office (in which they did a good job - borrowed money to build up the Navy and hence the Empire).

And once we've paid off the national debt, shouldn't take more than ten or twenty years, we can shut down the BoE for good.

From the article:

"With China and India coming online in the last 30 years by producing massive amounts of cheap products, average prices should have been dropping dramatically as they did during the Industrial Revolution of the 19th century.

A stable average price is masking a massive shift in relative prices.

The price of products and services not produced in low wage emerging markets, such as health care and education, have been recording galloping inflation while the average level of prices has hardly budged."

Agreed, but why does he say "should"?

As a matter of fact, prices of TVs and cars and so on have been dropping dramatically for decades.

Bayard said...

"That's where nearly all the extra credit goes - into buying and selling the same old land and buildings which have always been there,"

and also into buying and selling shares in the same old companies which have always been there.

Mark Wadsworth said...

B, true, but only to a very small extent.

You or I can't and don't borrow money to speculate in shares. It's only some whacko private equity sharks who do this.

And frankly, so what? Owning shares is not a necessity, but having a house is.

DBC Reed said...

@MW what is this "money printing" to which you refer above?.You're surely not suggesting that the Guv increases the money supply?Kitty Ussher (Economic Sec to the Treasury 2008)"By far the greatest role in creating money is played by the banking system")That is, not central banks but the private sector banks on the High Street.

Mark Wadsworth said...

DBC, I was referring to your preferred idea of the govt printing the money ("helicopter money").

We both know in practice that the vast bulk of credit is created by banks on mortgages, even worse, the government lends them free money to do so, thus locking in vast profits for the banks.

So it's only bankers getting the "helipcopter money" which is the worst of both worlds. And I don't approve of govt deficits, bank bail-outs etc anyway.

DBC Reed said...

This could get a tad tedious, but how do the banks get the "helicopter money"( taking the idea literally)?The whole idea is to get it to people directly without the banks being involved. Same applied to Douglasite National Dividends.Talking of which, how would you keep up purchasing-power when a lot of production is dome by robots and highly automated production lines ?

Mark Wadsworth said...

DBC, the govt is giving banks the helicopter money.

"how would you keep up purchasing-power when a lot of production is dome by robots and highly automated production lines?"

OK, so lukcy Mr Reed owns such a factory. You still have to pay for raw materials, maintenance men, designers, salesmen, lorry drivers, fork lift truck drivers etc.

But let's assume your marginal cost of making a TV set is £40. How much would you sell it for, bearing in mind you want to slightly undercut your competitors and they will be copying your highly efficient factory and also making TV sets for about £40???

Answer - slightly more than £40.

The price will adjust down to whatever people can afford.

i.e. back in the 1950s, TV sets and fridges were expensive luxuries which would cost you a couple of month's wages each. Nowadays it's mooe like a week's wages for super tip-top ones.

So the benefit of automation means that even without increase in £££ income of your customers, they end up getting more for their money.

And what does Mr Reed do with all his lovely profits? He spends them on other people's goods and services, so the money goes round that way. Mr Butler serves you your six o'clock drink, you pay him, and he goes out and spends some of his money on a Reed TV.

I mean really, this is not a hypothetical thing, it is what has been happening for decades or even centuries.

Lola said...

MW. Yep. Isn't 'deflation' woderful...

DBC Reed said...

(Oh dear I knew I should n't have got into this).

So the Guv prints pallets full of money;takes them to Northolt ,gives them to bankers, who load up the helicopters?

The scenario where the millionaire re-distributes purchasing power by spending his profits used to come up in the first lesson of Marxism for Beginners.The millionaire breadmaker goes home after producing 2 million fresh loaves; he buys one.Who is going to buy the rest given he has appropriated all the purchasing power to himself by not having many workers and paying them zilch?

Mark Wadsworth said...

DBC, apply common sense. He has to drop the price to a level at which people will buy them, else he goes bankrupt and the problem solves itself.

But our factory owner is only a small part of the economy - all his income goes either to his small team of workers and suppliers, or it goes to him, and he spends it on other people's output.

This is all just waffle.

Far more distressing is the fact that the government is giving banks money for effectively zero interest rate which they are using to stoke a house price bubble lending out at 2% or 3%.

That is not waffle, that is real life financial terrorism, see Max Keiser ad nauseam.

Bayard said...

"when a lot of production is dome by robots and highly automated production lines ?"

Isn't that effectively the same (as far as purchasing power is concerned) as having everything made in China, like we do now?

BTW, I learnt ages ago that the biggest saving that robots make is that they can work in the cold and the dark.