Friday, 28 November 2008

What We Value Is What We Save In a Crisis

“When a woman thinks that her house is on fire, her instinct is at once to rush to the thing which she values most. It is a perfectly overpowering impulse, and I have more than once taken advantage of it. . . . A married woman grabs at her baby; an unmarried one reaches for her jewel-box.”

-- Sherlock Holmes from A Scandal in Bohemia, by Arthur Conan Doyle

When a central bank thinks its house is on fire, it too will rush to save the thing valued most. In the United States, the central bank has rushed to save the bonuses and dividends of its Wall Street clientele by hiding away the bad assets that can no longer be foisted on gullible investors. In Europe too the response of central banks has been to save the wholesale banking and securities industry rather than the consumers and businesses underlying the real economy’s longer term productive strength.

For a comparative of what is valued elsewhere, it is worthwhile to look at what is being saved. I received in my inbox yesterday documents outlining the efforts being taken by the Hong Kong and Chinese authorities to address the liquidity crisis in their respective jurisdictions. They are available online here (Hong Kong) and here (PRC). The contrasts with the West are striking, and humbling.

Hong Kong is swiftly introducing a scheme to guarantee credit to SMEs (small and medium enterprises) and exporters. China is introducing controls to limit bank credit to over-extended speculative sectors, accelerate rebuilding in the regions affected by the earthquake earlier this year, and promote improvements in local infrastructure, education and economic adjustment.

Holmes would have been disgusted by a married woman who grabbed her jewel-box in preference to her baby. In the same way, I am disgusted by the central banks preserving the privileges of the financial elite in preference to the jobs, incomes and businesses powering the real economy. The US and UK authorities may criticise the banks for their inaction in freeing up lending to commercial businesses constrained by the credit crunch. The Hong Kong and Chinese authorities are implementing guarantee schemes and innovating initiatives to rapidly address the problem.

As Holmes would have considered a child’s life worth more than jewels, I consider the workers and businesses in the real economy as meriting greater protection than the financial elite. It is not merely that I think the financial elite little better than criminals for their irresponsible excesses of recent years, but that I fear long term harm and political instability will come from neglecting the needs of the real economy.

Shortsightedness is a peculiar affliction of the Western economies. We cannot seem to project the consequences of our actions beyond the next quarterly report, fiscal year or - at most - election cycle. Eastern policy makers have a capacity for longer vision – and longer memory – which makes them appreciate sooner the potential consequences of bad policy. Perhaps this is a consequence of the longer term dedication required to gain political ascendancy in their less cyclical heirarchy.

That China's leadership is concerned with the implications for the real economy – and political stability – was confirmed this morning in an unusually blunt public statement by the chairman of the National Development and Reform Commission. From the Financial Times:

The downturn in the Chinese economy accelerated over the past month and could lead to high unemployment and social unrest, the country’s top economic planner warned on Thursday.

Zhang Ping, chairman of the National Development and Reform Commission, said the government needed to take “forceful” measures to limit the slowdown in the economy, which included Wednesday’s large cut in interest rates and a sharp increase in fiscal spending. The rate cut was the fourth since September.

“The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November,” Mr Zhang said on Thursday at a rare news conference.

Mr Zhang’s warning about the potential for social unrest as a result of factory closures underlined the mounting concern in Beijing about the fallout from the global financial crisis.

“Excessive production cuts and closures of businesses will cause massive unemployment, which will lead to instability,” Mr Zhang said.

As Jim Rohm observed, “Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgement, repeated every day.”

The crisis in debt markets has been rolling since the sub-prime collapse of August 2007. The increasing illiquidity of commercial paper, trade credit, municipal finance and other debt markets was foreseeable and inevitable. And yet the central banks and treasury authorities of the Western nations have done nothing to shield these essential sectors from the ill effects of the financial sector implosion while giving virtually unlimited funds to the banks authoring the collapse.

Any discussion of China always invites criticism of its anti-democratic governance. It is worth remembering that the philisophical defense of democracy lies in the proposition that it is more likely over time to serve the interests of the electorate than a system which disenfranchises the people from the determination of their leadership. If the democratically elected governments - through their appointed executives and central bankers - are free over an extended timespan to ignore the interests of the people, then how is a Western democracy superior to a Chinese bureaucracy? From looking at the policies and practices of the past year, the merits of Western democracy are not immediately apparent in ensuring that policy responses to the financial crisis are aligned with the interests of the people. Even over the past decade, it is not clear that the policies of the democratic Western governments have aimed to strengthen and broaden the economy to benefit of the electorate rather than a narrow, self-serving elite.

According to Brad Setser, the World Bank is projecting increases to China’s trade surplus in 2009 as falling commodity prices lower production costs. Those unelected bureaucrats are doing something right.

If China and Hong Kong recover sooner, prosper more, and gain global political and economic authority in consequence, it will be because they made fewer mistakes and made them less persistently than their Western counterparts. If the promoters of democracy want to strengthen their case, they might best do so by ensuring that their leadership adheres to policies which promote the longer term health and well being of the economy as a whole rather than the short term enrichment of an undemocratic elite.


Anonymous said...

Yes. Elementary my dear Watson. What we have above all else is a crisis of democracy which has as its root cause the fiat monetary system and fractional reserve banking that has been repeated every day, every month, every year for decades....Indeed an error which self perpetuates ad infintum. Restore gold as the basis of money and open up the mints to gold would be the path to resurrecting democracy.

I wonder which will be the first country to do this. It has to happen....but when. Wouldn't it be interesting if it were China?

Whichever country it is, I guarantee they will demonstrate to the rest of the world, through their rapid reversal of fortunes, what has been lost by not having done so all these years.

My hope then for democracy is this realisation will lead a stampede back to real money for the people of the world. A new dawn where we can be proud of what is being left for our children with real wealth and a balance of power back to the people and out of the hands of government.

Great post.

Dragos Popa said...

excellent analogy as always.

never underestimate the power of greed in a system that has been long perverted in favor of the few chosen ones.

unfortunately, the media that are used to dumb masses so happily entrenched in the normality of their day to day lives still do a very good work...

corporatism, pure materialism and the "more is better" mantra managed to provide a perfectly good excuse for such a society.

Knute Rife said...

While I do not like the priorities the central banks in the US and UK are displaying, I have trouble making them the prime targets for my contempt when they are simply continuing the policies and methods their respective societies have demanded of them for a solid 30 years now.

For three decades the US has promoted and supported finance to the exclusion and detriment of every other sector. Agriculture, manufacturing, and retail have all been sacrificed to the quarterly reports LB refers to. The only interests that have mattered have been the folks who can send the electrons representing their money around the globe with the push of a button. Those of us who have only skills to bring to the table have been left lying in a ditch, a fact Thomas Friedman assiduously glosses over when describing his brave, new, flat world.

The problem we now face is whether we even have any tools left for the central banks to do anything other than what they are doing. For 30 years we have drunk the Chicago Koolaid, making the bulk of the economy and citizenry lambs on the altar of financial efficiency. The point that Milton Friedman and Richard Posner effectively removed from the discussion was that political and justice systems do not exist to be efficient. Political systems exist to be a trust for the benefit of the citizenry, and justice systems exist to be just. Efficiency is not a necessary part of either and is frequently detrimental. Nevertheless, efficiency has been made the golden idol of both, and both have become impoverished in every way that matters, just as all our other institutions have, save finance.

And so this is where we are. Through years of conscious destruction and simple neglect, most of our institutions lie in tatters, and the tools for repairing them run the gamut from weak to nonexistent. So we turn once again to throwing money at the financial sector in the hope that it can wave another magic wand and save us from another abyss.

The mother who has forgotten she has a child as well as jewels has been contemptible for a long time, not merely now that the crisis has arisen and she is incapable of acting other than as she does.

Anonymous said...

10yr CDS contracts on the head of the U.S. Treasury are now trading at 60. While the authorities may be ignorant of the consequences of their actions, the markets are sure paying attention. Don't be fooled by low nominal rates or temporary dollar strength.

Thai said...

Nice post LB

While I completely agree with you on one level Knute, at the same time (and without intending to sound rude) "your emperor has no clothes". It is simply a reality that no part of our society can exist without attention to its own efficiency.

For an inefficient justice or government system does no one any good either... An individual's need for both personal justice and trust must always be balanced against the collective's need to limit the resources it gives to any one individual- whether their demands are right or wrong- at least if you want society to hold together.

So your point is really a two way street and must be looked at from BOTH the point of view of the individual and the point of view of the collective. It's simple game theory of collectives-hives. Multiplayer 3 dimensional tragedy of the commons.

Behavioral economists use the term satisfice to acknowledge that while more and or better information might allow better decisions (or justice or trust), there is a point where the cost- benefit ratio of the additional time needed to learn the better information begins to work against the individual or collective's interests. And where it does, and this become a common problem, the system itself is at just as much risk of collapse as the one you have contempt for.

To make a somewhat flawed analogy: Why would it be OK for a society to ask a young draftee to literally die for the collective's self preservation (and by the way the young soldier recognizes a small but real possibility that the reasoning behind the command decisions leading to his/her death may be flawed), yet it not be OK to ask a similar level of give and take from citizenry on things like justice or trust in the name of efficiency?

Unknown said...

Nice piece LB.

I think the nature of society and of the people being governed plays a big part. On the one hand the masses in the US have been brainwashed with hours of pap TV controlled and regulated by the same elite as the fraudulent bankers. If that fails there are endless games of football or basketball to further dumb down the people and, failing that, a vicious criminal system that sees over 2 million in jails around the country.

The Chinese people are too smart to be treated like that so their concerns must be recognised and addressed.

Anonymous said...

"If this mischievous financial policy [of creating a debt-free currency], which has its origin in the American Republic, shall become permanent, then that government will furnish its own money without cost! It will pay off its debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains and the wealth of all countries will go to America. That government must be destroyed or it will destroy every monarchy on the globe!" -- LONDON TIMES -1865

A said...

London Banker,

again my gratitude for telling it how it is and always going deeper than most of the others.

Anonymous said...


Thank you for that outstanding post, which goes to the heart of the matter.

I have posted it on my guide to the financial crisis, Cause for Depression, at

I seemingly go about my daily existence channeling your thoughts (via venting to all and sundry--wife, inlaws, students, random acquaintances).

Hope you don't mind!

Anonymous said...

In Western democracies political representatives are owned not by the electorate at large but by elites who fund the campaigns and the marketing of candidates like one would market soap to consumers.

Since the electorate at large is rather passive and easily susceptible to kabuki its very easy for the plutocrats and their political puppets.

In China however although they are a dictatorship the people get out in the streets and protest and riot as has been seen recently with the closures of many factories. Their citizens are willing to take risks including their life. As a result the Chinese leadership is more concerned about stability and their own survival.

Until the people in western societies get sufficiently angry and hold their politicians to account they will continue to get screwed by the corporate and political elite. The sovereign has to behave as the sovereign.

Where are the Jefferson's of our generation?

PeterJB said...


but China has its own set of problems; 1. being political instability fears, 2. bank runs, shortage of rice, 3. central party divisions (apparent since before the Olympics), 4. already too much emulation of and dependence upon, the Western economic models. 5 natural disasters, lack of oil and other resource needed to modernize, national security issues through unfounded trust in the West (read: Paulson and crew, et al), etc., etc.

The West always favours the elite big business over SME's - always has even though the math proves it should be otherwise and this is merely an extension of the "old school network" (read Tom Browns Schooldays) and extremely unhealthy lobby or if you prefer, political economics where those in politics know nothing of leadership.

Western "leadership" is done: the choices are all wrong and the fundamentals unsound; it really only amounts to cash and influence for the boys where the fall-back position is "war". ad nauseum.

The elite are not that intelligent per se ; they just have better networks and pay better 'under-the-table' to the governmental "let's do lunch" crowd er, regulators.

Bottom line; you are right, so? Will it change anything? No. Gold and silver carry their own integrity where politicians and their manipulated fiat have none.

Good post though.

Ho hum

Anonymous said...

Well said LB!
It is my understanding that democracy relies on an aware,active and responsible public. That is ideal;but,reality is a tougher deal.
During the Progressive Era in the U.S., a movement reformed a system whereby elected representatives were in the pockets of money interest.
Yet, in the era of the internet, fax, telephone, television, let alone the telephone-there is no such change.
Perhaps the voters were more active in those days? After all the progressive reforms were delivered at the ballot box.
One might question why the populace is more supine today than yesterday?
It seems to me one-party systems or democracy can deliver good or bad results.One must look to the culture that has evolved.
China by the way, introduced term limits for its bureacrats and governors;and it turned out to deliver economic results. There is turnover in Chinese leadership. In the U.S. the tunrover is at the Presdency level;but Congress tends to have an incumbency bias-let alone a lack of competitive election bias most of the time.
In fact since the 1990s there has been a resurgence of progressive era reform of term limits. Unfortunately Supreme Court said states do not have power to effect this at the Congressional level. But, there have been voicing calling for term limits at the Congressional level. This just hasn't been acted on.

Knute Rife said...

If you believe that the goal of society is efficiency, then yes every institution in a society should have efficiency as its principal goal. I do not believe that should be the goal, as I have yet to see efficiency on its own deliver a desirable or even sustainable society. For example, gross inequities in wealth distribution seem to be highly efficient, at least until late in a cycle, after it's too late to make corrections other than taking to the streets, and if you want to see textbook examples of inefficiency, you should examine bread riots.

So yes, I'm arguing that some institutions in society need to keep a check on those that have efficiency as their prime, and perhaps only, goal. I am not one of those who says, "Let justice be done though the heavens fall." But Posner argues that the overarching goal of jurisprudence should be efficiency, and trying to generate justice from an efficiency-driven system is like trying to run a church like a brothel.

Anonymous said...

I think democracy has been "fixed" in the West through the expedient of having government after government follow the same policies, regardless of which party just won the eleciton, or by limiting the choices of the electorate to parties that advocate the same policies where they affect the interest of the elite.

This is a serious problem, but I can't propose a fix because I don't understand the mechanism for how this happens. Maybe barriers to entry for new political parties are too high?

We could also take a page from the libertarians and limit the power of governments to hand out lucrative franchises, ie jobs, contracts, and licenses. This seems to attack people to poltiics who literally are just after the money and will do or say anything as long as their friends get the contract. But this also means government bureaucracies doing more "in house".

Anonymous said...


I'm struggling to identify the durable forces that will shape the newly emerging Western economy.

This is a long post, and it's only tangentially related to the theme of malfeasance. I ask LB's and the reader's indulgence. Please read this slowly. Ponder it, and give it your best show. I want to hear what you think.

To set the context for what follows, I remind the reader that in the Western economies, a relatively small percentage of the workforce can create all the materials to meet our "needs". Most of us are engaged elsewhere, among the "wants".

Globalization shifted jobs to the low-cost producer, reducing incomes in the West, hence less money for the wants.

In the West, consumption levels increased in the face of declining income by the artifice of debt. Lately, the debt ponzi-scheme was revealed, and consumption is now falling to appropriate levels, possibly with some overshoot.

No surprise there.

The West has three basic choices:

a. Increase the non-West's standard of living so that Globalization will have much less impact on Western middle-class incomes

b. Find a sustainable competitive advantage so that Western incomes can be increased (to pay for elevated consumption) or

c. Reduce consumption of "wants"-related goods and as a corollary,
c.1 Feel bad about it, or
c.2 Feel good about it. Express wants via means that don't consume much goods

The Wikipedia definition of Economics emphasizes that economics is a social science. Reflect on that a moment. It's not mechanics, not physics, not deterministic. It's social, and therefore primarily emotional.

The U.S. has been in the business of "manufacturing demand" for well over a century. We manufactured so much demand that we smothered our economy in debt. We had "excess production" of demand.

I'm arriving at the conclusion that our current economic troubles are more sociological than they are "economic" in the traditional "hard-science" sense.

I invite you, the reader, to refute that assertion. If you grudgingly accept it, then may I invite you to posit what tomorrow's economy will look like? What does "equilibrium consumption" look like in a Western economy?

Thai said...

@Knute- how would such a philosophy not be every bit as immoral as the Wall Street philosophy that offends you? Who gets the benefit of being allowed to become inefficient in your society? A few?... and which few? Everyone? What other thing must someone else do without to subsidize that inefficiency? Who in the collective is supposed to do without? .... So while we do agree if one makes the grey area we are describing wide enough, there is certainly a cognitive dissonance in your views if you see them as more ethical than Wall Street, etc....

@Outerbeltway, you missed the biggest one of them all IMHO- we can improve productivity on everything.

... but Knute might oppose you ;-)

Think about the mammalian brain: less is not more. More is more at ALL levels of the brain's structure. One does not complain about too many neurons. One complains about too many 'useless' neurons' or useless sub-components of the brain that don't cooperate with each other... But more is more, don't kid yourself. Too few neurons is strongly implicated with all kids of intelligence and behavioral problems (ADHD, etc...)

Making physical things is just one way of manipulating information, but it is certainly not the only one, nor is it necessarily more 'real' or important than any other way of manipulating information. A bow and arrow are nice but you still need to know how to use them and know how to control the parts of your 'physical' body involved in manipulating the bow and arrow). That only a few people today are needed to 'make physical things' does not in any ay you can think of mean other people's roles are less 'real' or less important or less valuable even in economic terms.

So to continue with a brain analogy- if you get rid of all those extra glial cells in your brain, you'll notice a difference. Don't ever kid yourself that only the neurons mattered.

Anonymous said...


Which productivity do you advocate improving? Economics is about allocation of scarce resources in order to maximize some "benefit" to "society".

Which benefit to which society? We just got hammered with a major bout of "mis-allocation of resources". The opportunity cost of this mis-allocation is gigantic.

Going forward, what will the West produce and what will it consume in the economy of tomorrow in contrast with the economy of today? And why, especially why?

The productivity increase you speak of is a given. The poor choices we recently made in terms of which productivity to increase has been part of the problem.

Pls help me dig a little deeper.

Thai said...

All productivity- you name it and I will probably say "yes"

Scarce allocation of precious resources- again "yes" but unless I am misunderstanding you, you seem to have a very one dimensional notion of what a precious resource is- which is what LB and Knute have both rightfully reminded us:

LB- "... A married woman grabs at her baby".

Knute- "Political systems exist to be a trust for the benefit of the citizenry, and justice systems exist to be just"

Legacy, kinship, Trust, Justice, etc... are every bit as precious and scarce as oil, timber, fish, etc... they are certainly every bit as valuable.

Opportunity cost is gigantic- "yes", and this is always the case.
The guys who missed the dot com bubble said the same thing a few years ago.

And the west will produce what it has always produced- though maybe not as much (we only need so many cars and the cars we will make will need to be much more efficient)- there just won't be as many jobs in things like traditional manufacturing.

Nothing is fundamentally different today than it was yesterday or will be tomorrow- "yes" one person is poorer than they though they were ("Oh my god, look at all my debt") but another is a lot richer than they thought thought they were ("I don't own very much but at least I have no debt") and the underlying structure of society is still exactly the same as it was.

Nothing has fundamentally changed except our view of a future that was always an illusion.

You tell me a time when this has not been the case?

Anonymous said...


It seems we're talking past one another. Let me re-frame the issue.

I am not arguing that productivity will or will not happen, nor am I arguing where or when it'll happen.

I am arguing that with respect to the current economic maladies, lack of productivity isn't the cause.

The current collapse of demand was caused by the West's consumption expanding faster than its productivity for too many years in a row. The West let itself consume the productivity of the East, and the lesser-developed nations, incurring massive debt to worldwide creditors.

Furthermore, the West permitted itself to export a great deal of IP of every description, and in doing so, gave away its competitive advantage. The West will continue to experience negative income growth until it finds a new competitive advantage to replace the one(s) we lost. This may not happen given the free flow of information the world currently enjoys.

The West must make choices, or be forced into a situation chosen by others, but choices will get made.

The choices we face are to find a new competitive advantage, or make some accommodation with a reduced level of income.

The question I ended my original post with was "What will that next economy look like? What will the West produce and consume?".

The "accommodation" I speak of will likely take the form of a decrease and substitution of one set of "wants"-related goods for another. Additionally, the expression of the "needs" will look different, too - e.g. electric cars .vs. the old ICE machines.

But even the electric .vs. ICE shift may not happen, or may only happen partially and slowly.

What will be the major shifts in consumption and production, and who will be producing what (on an international scale). These questions form a great deal of the basis for defining what the next economy will look like, in much the same way that Henry Ford and SpindleTop defined what the 20th century's economy, which we are struggling to transcend, looked like.

Productivity, in whatever expression it takes, will certainly happen. The question is "how will it be expressed?".

Think genetics. The genes exist, they will mutate. Adaptation (productivity increases) will happen. Environment plays a role, but possibly not the decisive role - it just influences.

What forces will shape the economy of the early 21st century?

PeterJB said...

@ Outerbeltway

"I'm arriving at the conclusion that our current economic troubles are more sociological than they are "economic" in the traditional "hard-science" sense."

Firstly: In the beginning there was "physics" and then "metaphysics" (Aristotle's Biographer) and then we evolved to the sub-classification of physics, the then to be known as "science" or the sciences. These are specialist sub-classes which unfortunately have become each a sealed fortress of knowledge where the high priests of same refuse to acknowledge that all sciences are interdependent upon each other and , together, comprise all that there is; that is, "physics"; the Laws of Physics based on the Principles of Physis

So, yes, economics is a social-science but it is also comprised as a part of physics. Man produces its own form of economics aka as socio-economics; birds, flowers and the minerals the same, by example. Pagan science:)

Consumerism is analogically akin to a dependence upon drugs - and taken accordingly is life threatening. We humans are pioneers evolving towards civilization which I doubt that we will ever reach - because "civilization is just a carrot on a string. And, besides, we are not good at "civilization". but we are excellent pioneers.

Out technology pursuits today are just in exponential growth - here be the future; as animal technology is everything and we are superior here (to that known) but intellect is not as ubiquitous, in fact, intellect is most rare indeed.

Today, we still wield the sword and make a lot of noise just like the Vikings of old: this must change.

Unfortunately, imo, the immediate future lies in ashes; it must be, as what is needed is a shift in thinking or direction of consciousness; a plan...

to be built on technology and human functions strength and weakness so that the expression of the human spirit can be guided un-taxed and unhinded by trolls, ghouls, thieves, pimps and liars, er, today's excuse for "leadership".

I see space colonization; anti-gravity, technology advances in huge jumps in communications and individual togetherness at massive scales; a massive global "real" commercial infrastructures of rail, tunnel and bridges - water, free-energy and massive technical creativity in manufacturing; forget the automobile industries.

The one proviso for all this - is "leadership" whereupon as Mark commented (if I remember correctly) that we are all to become "leadership".

Be still - the future is a fantastic experience yet to be had and behold...

Ho hum

Anonymous said...

The change is needed is chaning campaign finance to make money out of politics;and also to prevent revolving doors-where public servants end up in rich private jobs after public work.

Anonymous said...

A few simple solutions:

1.Bar anyone who is a member of a society, club, organization or fraternity where the public is not invited and there is no record of what is said, from serving in public office or corporate governance. This alone will eliminate 110% of the traitorous leeches who got us into this situation.

2. Bar attorneys from holding public or corporate governance offices. (Attorneys make a living from chaos; no need to let them legislate it into being.) Attorneys should be required to be on a retainer basis only and never to be employed directly by corporations or governments. Their fees should be heavily regulated, taxed and adjusted yearly according to the same formulas used for Social Security. They should be required to hand out paper notices of "agency" agreement to everyone they encounter stating that you shouldn't talk to them until you establish whether they represent you or someone else.

3. Seize all foundation funds (hey if you can give it away you don't need it anyhow). Shut them down forever.

4. Make intelligence "open source". Since we all pay for it we should all have access to the same information as "the elite".

5. Start prosecuting the most current crop of financial perps. Send them to Gitmo and waterboard them and work your way up until you've mapped out exactly what this coordinated take down was about and who designed it. Execute them, their spouses and their offspring. Make "fiduciary" have a clear, fresh meaning going forward.

Knute Rife said...

Bottom line: Judicially enforceable rights create inefficiencies. No way around that. When I was a prosecutor, it would have been so much more efficient to have done away with my office and the courts and simply had the sheriff arrest, convict, and incarcerate. That isn't the system we have, thankfully. So we'll just have to keep dealing with such pesky inefficiencies and account for them in advance.

Anonymous said...


I always enjoy your posts. They are work for me to understand, and I always enjoy the exercise.

I understand and generally accept that we humans have a long mile to go before emotional maturity sets in.

I do look forward to such a day. In the meantime, tools and mechanisms to make the journey must be built. One such tool is the ability to hypothesize the next three or four flagstones along the path - humans are a literal bunch, yes? Those stepping stones need to be identified and discussed.

We seem to be near a moment of opportunity. It seems possible for a new host of social values to be expressed in physical terms - e.g. a new edition of the "economy". The tension people feel now is the delta between what our economy permits and what we think is possible enough to want.

That's why Bush and Co. irritated us so much - it was so retrograde. Instead of being able to burst into the new century with fresh ideas and great enthusiasm, we got thrust back into a 1950's kindergarten class for almost a little desks that we were too big to sit in.

I think this question of "what's the next economy going to be like" is worth a serious look. Something new is going to happen. We may not get anti-gravity this decade, but we will definitely be picking a new set of values to wear for the next 20 or 30 years.

What I was trying to say (not so well) up above is that if we could divine a way to need less goods, we could have more Bertram Russell-style leisure. Not Barca-Lounger leisure, but self-actualization leisure. I'm trying to figure out if people really want that, yet.

I keep hoping that somehow these economic troubles will be cathartic - they'll inspire questioning and emotional growth that doesn't generally seem to happen in soft times.

We'll have to find some appropriate thread to develop that theme. I am reluctant to test LB's patience more that I have already with these long posts.

Thai said...

@Anon 16:44- should we do that in your bedroom as well? Why not a running recorder for everything you say as well at all times and at all places?

@Knute- Amen and let's hope it stays that way... And it does not invalidate my point

@Bolton- even if that is true it isn't practical; specialization is still absolutely necessary. I don't want Knute giving me Chemo or taking out my appendix, and trust me, you don't want me fixing your leaky faucet.

@OuterBeltway- As Yogi Berra once said...

"it's tough to make predictions, especially about the future"

Though it is an interesting thought exercise.

What is my guess?????...

My guess is that society will need to focus it's collective work energies on improving social productivity. If we are more efficient, then we will pay off this debt a lot faster. There are many ways to improve society's productivity...

1. More people obtaining health professional-scientific-technical degrees on the 4, 3 or even 2 year plan (as opposed to the econ-comparative lit-B school degree on the 6 year tract). Lot's of money to save there.

2. Lower social tolerance for things like crime with the very obvious commensurate drop in associated costs (estimated at $1.5 Trillion U.S. in 2007... If you don't steal or shot people, then we wouldn't have to spend all that money on crime fighting, courtroom theatrics, etc... crime has VERY real secondary consumption consequences. Get rid of it and you can pay your debt back pretty quick).

3. Focus on reducing health and lifestyle behaviors that have very real and very high secondary consumption cost consequences (i.e 'if you didn't eat all that junk food and get so fat or shoot the heroin or have unprotected sex with 5 people a day in bathhouses (how my cousin died) then we would not need to spend so much money fixing your heart attack, stroke, infected heart valve, HIV, etc... The estimated cost to society of behaviors leading to chronic illness in the US alone is on the order of $1.4 Trillion annually. Reduce this bill and you will pay your debt back pretty quick).

4. Develop better robotic assistance devices to help those who currently require heavy human assistance (i.e. the infirm, elderly, handicapped, etc...).

5. Lower global tolerance for things like terrorism, etc... with its tremendous secondary consumption consequences (i.e. if the terrorists didn't blow up the building in the first place then we wouldn't need to spend so much money building the 'security infrastructure' to protect everyone from their bombs, etc... nor spend so much money on the system Knute knows so well).

6. Legalize illegal drug trades worldwide with the point of lowering interdiction, enforcement and international friction costs (a heck of a lot of money can be saved here but I didn't look up the numbers)

7. Improve worldwide educational delivery systems which are currently far too expensive to guarantee education (as it is currently delivered) to everyone (i.e more things like internet education for college degrees, etc... Remember, in the latest census report, the biggest components to increasing household expenses were education, housing, health care).

What would be your predictions?

And FYI, I am a little uncomfortable with the idea of 'the west' having a competitive advantage over the rest of the world. As a surrogate marker of other ideas (perhaps a Platonic ideal?), I might agree with what I think you are intend by the term 'the west', but I would not agree with it for all possible futures.

Does your happiness and success rest on my inability to not be happy or successful?

Anonymous said...


Thanks for bringing "society" into the discussion. 30 years of financial deregulation has left us bereft of ideas about society as money has reigned supreme.

About 4 years ago I was about to undertake a masters thesis entitled: "Public Needs, Private wants: democratising the money supply".

How do we marry the collective with the individual in our economic arrangements?

To do that I believe we need some idea about how we might want to be living in the future.

You mention self actualization. Well there you have your answer.

We're way past meeting our needs. Our ego has driven our wants.

What's next?

How do I explain to my children what life is about? What are they doing here?

I'm not answering that question but reinforcing yours. "Economic growth" is so lame but it seems to be the only mantra politicians can muster.

If economic growth is the means then what is the end?

If you have time for a quick read, try this:

2099: A Eutopia by Yorick Blumenfeld.

It's a story with 2 versions of the future. A Blade Runner type country contrasted with a spiritually aware, artistically inspired, decentralised community system.

I guess we are still learning. Who are we and where do we want to go?

The collapse of the global financial system simply asks us to consider that question.

ackerrj said...

Let me first say what a wonderful series of posts (for the most part) this is. Thank you all.

I live in a small town of about 2600 souls in the mountain west. I serve on the town board. Recently re elected for another 4 year term. So far, at least, there is no corruption that I know of at the local level where I serve.

Human history has mostly been about village and small town life. Large cities are relatively IMHO new things for most of man kind. Perhaps we are not adapted to live properly in same. It is difficult to know or oversee by proxy... It is difficult to trust but verify in cities of millions.

Population control would be a good start.

Our educational system seems to have been designed to occupy but not really educate most of the folks that participate in it. Certainly they are not trained to think as entrepreneur's or given any encouragement to think and act independently. The education I see is training to be passive dutiful employees or home makers.

History -- as in what mistakes NOT to make -- is not really taught.

History -- as in personalities who succeeded in spite of all odds -- and social condemnation -- is not really taught.

History in terms of the need for government oversight and participation, and how to do it is not really taught.

There is also not much agreement on what kind of society we want to see... the focus is really Darwinian... survival of the fittest. That is certainly how nature works... but is that the society we want?

Possibilities --

It seems there is a fair chance, continuing on this course, there may be currency collapse and the end of the Fed. The possibility is certainly higher than zero. Astrologically the Fed is at the end of its cycle I am told.

Competitive devaluation is effecting all currencies. At some point, when the pain is too great, this must change... either with metal, commodity, or some other real backing. It must cost someone something to print up 7 or 8 trillion, other than the workers and savers.

Right now we are trading real goods and services for a chimera. Savers are being cheated world wide. Currency swings are adding to instability.

So we all need an education that will enable and encourage meaningful participation in government and governmental checks and participatory democracy, I am thinking, something like the Swiss participatory model at minimum.

We need fewer people to chew up finite resources.

We need some agreement on the kind of society we want to have, that does not stifle initiative, but also cares for the least among us.

I am thinking the Scandinavian countries come closest to this model.

And we need a sound currency, so that the value of work and savings is not destroyed by the government we have elected to serve us.

It would be nice to get there without painful events, also.

Anonymous said...

Thai, Raf, Ackerrj:

We're getting some traction here. Let's work it some more.

Thai, those were outstanding examples of fundamental, achievable mechanisms to reduce costs and pay off debt. Before I launch into my list of suggestions, I'd like to point out that we're not so much predicting the future as we are modeling it. We're playing what-if games - what if we held independent thinking, entrepreneurship, self-reliance, appreciation and respect for the natural environment, etc. as ordinal values. How would we express those values as a set of businesses producing things we need, and some stuff we want? How would the household operate - not just as a consumption unit, but maybe as a production center, too.

How would it work? What would be the parts, the relationships, the trade patterns?

Thai, you said something important when you asserted "I don't want to maintain a competitive advantage .vs. others". This statement deserves some careful thought and debate. Maybe it's out-of-scope here, but we need to return to it sometime. That sentiment flies in the face of sacrosanct trade dogma, and right there is a food-fight that needs to happen in the worst sort of way.

My approach to modeling the next economy revolves around a few principles:

a. Crack this nut: What do people do if all wants are provided via very small percentage of the workforce? How do you price/allocate resources when scarcity isn't relevant? This is the fundamental reason our economy is dysfunctional today.

b. Bring the work to the worker, not the worker to the work. The work is light (electrical signals) while the worker and his car are not. Eliminate most office buildings, most commute-related surface transportation. This is technically possible now; attitudes and skills are the impediment.

c. Make the household a production center again. People are doing think-work now (those of us that are actually working).

d. Make advanced manufacturing a local, comfortable phenomena again. Build CAD/CAM light manufacturing centers to even the smallest town. Teach design work in high school, and make a direct path between identifying a need, imagining a solution, designing the solution on your home computer, sending your design to the local mfg center, and implementing it. This is all being done now. Nothing new, just a propagation issue.

e. Phase out landfills. There should be no landfill. No waste.

f. Design for re-cycle. No part should be made of anything that can't be economically recycled, and the part must be designed for recycle, and then for functionality - in that order - just like they're designed for cost and then functionality now. Re-cycle centers to handle all materials should be located within 50-100 miles of everyone. No more digging up and then transporting raw materials. Dig once, use many.

g. Stabilize population. Eliminate need to buy a house (you inherit one), eliminate need to build new schools (refurb only), fire-houses, police stations, etc.

h. Build systems that make energy, food, education, health care, shelter to be manufactured and distributed locally. The core needs of every household should be produced within a few miles of the house. This is technically possible today - design improvements and scale-up will make it economical.

I could go on, but you get the idea. Each one of the items that you put up (Thai) plus the ones I set out above are technically possible now. The impediment is awareness and the normal resistance to change stuff.

It's a social problem, not a technical one. It is mainly a habits of thinking and habits of communication issue.

To Raf and Ackerrj, I say you guys need to get involved with the people that are doing the aforementioned modeling, and are busy designing the businesses that will make the small communities you advocate economically viable. I assert that it is businesses and commerce that will implement your vision, so start implementing the businesses that do the commerce you want. People are forming into groups now to do just that.

Find them.

Also, your focus on "society" is correct. I encourage you to develop your ideas further, write them down, write some papers, and get your ideas into the minds of others. Find those Thinkers' groups I alluded to above, and stir the pot.

Anonymous said...


I completely agree with you and I am equally disgusted with the priorities we are displaying.

Let's look at some hard questions:

1. What is "real"?

You contrast the financial sector vs. the real economy. Yet, during the last 25 years the U.S. has developed an economy in which finance (increasingly speculative), war (the military, the civilian defense industry, and the contractors), entertainment (including the digital world), and health care (a large part of which is drugs) now account for 75% of all U.S. business profit. All of these are derivative sectors which rely upon someone else to produce food, shelter, clothing, transportation, education and all the other basic necessities of life. We happily left off investing in a "real" economy some time ago so that we could devote ourselves to the all-consuming tasks of creating new debt, ruling the world, playing with ourselves, and trying to live forever.

2. Who are the "speculators"?

George Washington and Alexander Hamilton, like most of the American "founding fathers" speculated ruthlessly - often using their government positions for advantage - in real estate made available by the Revolution and in the new Federal bonds. America has been a nation of speculators since the 17th Century and has created a cult in which risk-taking "entrepreneurs" are adulated, "freedom" refers to license to gamble, lie, cheat and defraud, and greater wealth is considered proof of inherent superiority. Democracy has become a dirty word in this country because it undermines the principle of inequality of wealth that has become our holy grail. The culture of greed upon which all speculation is based penetrates every corner of our nation, every ethnic group, every social class. How much leverage are you grasping for when you put 5% down on your mortgage?

3. What is "unpredictable"?

You, I and quite a few others saw the credit contraction coming. Yet our current Treasury Secretary, the two previous Treasury Secretaries, the current Fed chief, and the previous Fed chief have all publicly stated that they couldn't see it coming. The word "unpredictable" has been used so many times it sounds like "hello". And, sure enough, the behavior of over 80% of American citizens would indicate that they thought household, business, and government debt could be expanded indefinitely without ever contracting. Now, the same people see that household and business debt has limits (which has thrown them into panic), but they still believe the government can (and must) borrow indefinitely. The next contraction is obviously going to be (the purchasing of) our government debt. Yet, these morons all claim this is "impossible." Bernanke stated that China has "no choice" except to continue buying Treasuries, because they already own too much U.S. debt to ever stop buying. When China - and all the other buyers - actually do stop, as the subsequent crisis rolls over us like a tsunami we'll again hear that it was completely "unpredictable."

PeterJB said...

"That's why Bush and Co. irritated us so much - it was so retrograde. Instead of being able to burst into the new century with fresh ideas and great enthusiasm, we got thrust back into a 1950's kindergarten class for almost a little desks that we were too big to sit in."

@ OuterBeltway said...

An excellent post and more amazing for the insight that I quote above. "Irritation" is a key physic property that motivates us all where the hopeful expectation should be "evocation" to greater achievements. Your notation of George W Bush's - presence in "leadership" certainly smacks the nail on the head...

The future is not ours, as yet but of course we have vision and preferences but to me the most important aspect, is to learn from our past mistakes - unemotionally and non-judgmentally, and to build a structure - a socio-economic structure, whereupon regulated free-market organizations of-all-type unimaginable, can be thereupon built. This build (plan, design, construct) must get the fundamentals right (for once) and allow for full freedom for the human spirit to fly.

The constraints and limitations must be qualitative and must not permit the gatekeepers to abuse their positions.

Individual freedoms are a must where we must also allow for that percentage of the population to be "socialistically" taken care of in some humane fashion such as health care etc.

Here we must also attempt to minimize the disproportional growth of this sector of the population through creative education in a free society. This sector cannot be allowed to grow and this should be the function of government through example (deed)

Trends indicate the future in predictability and technology is what drives these trends - such is the nature of this beast we call man. Intellect feeds technology by understanding physics through scientific revelation; Intellect must be allowed its freedom to flourish where money must drive technology.

Under all this and above all, philosophy must be sown as seeds in all corners of the populace and never allowed to be cornered by priestly piety and institutional imposition.

All men are unique, all contain unique function and none can be trusted. Here be the seeds of the fundamentals

Anonymous said...

Asia's economy is falling off a cliff now. And export economies are probably a good six months behind our cycle. Capitalism will work in the same way no matter what the culture. We are the hosts, it is the parasite.

Anonymous said...

NBER just called recession in US started December 2007.

Ha Ha Ha. The husband's forecast of leading economic indicators based on his transportation business cycle is validated again. I said it started in 4th quarter 2007.


Anonymous said...

Really fascinating posts!

But here's the problem that keeps coming up: Rat bastards.

Intelligent people of good will can come up with logical and humane ways of organizing people and resources, but none will actually function without methods in place to deal with rat bastards.

Who knows, even capitalism may have worked without Wall St rat bastards.

It is human nature to maximize happiness and that is a good thing. But it should be taught that, even though not always immediately obvious, civilization (safety, health, etc.)provides good things worth sacrificing some happiness for. People who play by the rules acknowledge this. But rat bastards know they can cheat and reap benefits and STILL have civilization. True I guess up until a certain threshold (% of RB/decent people?). Then the decent people get fed up by the unfairness and civilization unwinds.

So how to deal with rat bastards? America's solution is ridiculous. We have two million people in prison. We don't know how to turn them into good people. We know they'll reoffend if set them free. So our solution is to warehouse them to avoid dealing with them.

Why did tribes of 150 work so well? The tribe had no solution, but to punish anyone who broke the rules. IMHO.

BTW, I believe rat bastardism is a personality disorder not linked to any specific gender, race, country of origin, or socioeconomic status

Thai said...

Dink- you hit the nail on the head.

Anonymous said...

dink.....maybe the wrong people are in jail.

Anonymous said...

I just ran across this post over on Calculated Risk, from a poster with the handle of "Unit472".

It's a provocative idea. We have credit at the national level. We need to produce. We need new customers. Why don't we use our stimulus package to rebuild an export-targeted industry?

I think this fellow's idea deserves a closer look.


Unit472 writes:
I'm no fan of Paulson or his TARP but when the Senate Majority Leader admitted "no one knows what to do" it was pretty clear no one had any better idea or Reid would have been all over it simply for the partisan political advantage opposing of being against the "Bush" plan on election eve.

It may well be that 'stimulus' just won't work in the developed world anymore. People are pretty satiated materially and it is easy to retrench without undue discomfort.

I hate to say it but we might do better by 'helicoptering' money to the third world where there are enormous unmet material needs. If Americans don't want to buy another Jeep or Silverado you can bet there are lots of folks in the third world who not only want one but need one.

A new Marshal plan for the third world might be the best way to stimulate out economy as the 'aid' can be tied to US produced goods and Americans would feel more secure receiving 'income' even if purchased via government debt than getting rebates or other one off stimulus packages.

Unit472 | 12.01.08 - 7:58 pm | #

tawal said...

I'm still confused by the Conan Doyle quote. Does the unwed woman have or not have a baby? I don't believe most, say 97% of mothers wouldn't grab for their baby first, wed or unwed. Of course babies come easier than jewel boxes now don't they. Or was the jewel box needed for the dowry, to get that husband? A little help from my friends here, please.

This is a truly fascinating thread. I think that we need to start from some basic assumptions. Once born you need food and water. These should be inalienable rights, they secure "life". We as a species have to believe in life being positive and worthwhile, don't we? We also need to be secure and safe in expressing our opinions; this is "liberty". On the other hand, we need to limit how we farm and what we eat in order to continue to sustain life. We've burned through a lot of topsoil since taking over this hemisphere. If we keep doing what we've been doing we'll turn Earth into Mars sooner rather than later. Anything that man creates can not be created as well; don't fall into the inevitability trap. It seems to me that we act as though the earth is 10 times its present size and that we can be immortal here. Sorry just some random thoughts. It seems to me that alot of people have alot more stuff than they use or need; I'll include myself in that group and I live in a one-bedroom apartment and "only" own a 1994 vehicle. I'd like to have a garden on the roof but I'm not allowed up there and there's no access without a ladder. I believe that asphalt roadways are causing global warming much more than we realize. We need to work more at home, but we need to have human interaction. How do we build community when we are afraid that our neighbor will tell the police that we are a "_____ist" for asking questions on why we do the things we do?

I ramble. Thanks for the neat thread. You've all given me "hope", and not just a platitude.

Anonymous said...

perhaps we should simply use "gold" as money-along side the BPS or the Euro?

After all, Mr. Greenspan-(that's "Sir Alan" to you) was voted the greatest Central Banker in history by his peers. Though he frankly got us into this mess by rpinting more money than John Law-he was correct in one thing when he said"

Gold is still the ultimate form of payment, in times of stress, nothing else will do"

Are we finally in "times of stress"?

What say you London Banker?

Anonymous said...

"Merits of Western democracy?" There is no Western democracy; there is a corporate-owned fascist state operating under the pretense of a democracy. The first bailout opposed by virtually all the voting public approved by a corrupt bought-off congress is the latest proof.

The US would be just as proactive as China if there were any real threat of massive civil unrest, but they're not and for ten reasons:

Yahoo’s Top Searches For 2008
1. Britney Spears
2. WWE (World Wrestling Entertainment)
3. Barack Obama
4. Miley Cyrus
5. RuneScape
6. Jessica Alba
7. Naruto
8. Lindsay Lohan
9. Angelina Jolie
10. American Idol

Anonymous said...

LB, a well-written, thought-provoking post. I disagree on a few points:

1. I would replace the Conan Doyle quote/analogy with a simpler one: "The squeaky wheel gets the grease." While the phone calls, emails and faxes were running 10-to-1 against the bailout, U.S. elected "representatives" voted for it anyway because of a false sense of having a gun to their heads -- "the economy will collapse if you don't do this." Please draw a distinction between the political "class" and the population. Perhaps a change will be made after Inauguration Day.

2. The West is short-sighted, the East is longer-term, better and smarter. Why is the West so much richer and longer-lived? It is the West's ability to tolerate failure, to even praise it (trial and error, rags-to-riches, failure and redemption stories) is our strength. Contrast Western bankruptcy with Japanese zombie firms, Chinese statist corruption, the Pakistanis and Kazakhs declaring their stock markets can't go down, so they close them.

After this criticism, however, I think we actually reach agreements, just via different sources. The US and UK are going down the wrong path because we are not acknowledging and dealing with the consequences of failure -- speculative/financial or real/microeconomic -- and are instead Bailout Nations.

Lastly, ackerj and a few other commenters suggest population control as a partial solution. I strongly disagree. We need all the productive, talented minds we can get, not a population that will be halving every 30 years like Spain or Italy. Small positive population growth will preserve the social compact of children caring for their parents in old age -- a far better situation that false promises from governments that encourage dependency -- right up until the benefits are cut or eliminated due to plan insolvency.

Most research suggests we are not happier, true, but we seem to be unhappy about much less significant things -- the winners of reality TV shows instead of where our next meal or drink of clean water comes from.

Thai said...

Dink- it seems that (as always) science is pushing society faster then many may realize.

Are you a rat bastard?

Anonymous said...

This gov't acting as a wed or unwed mother, grabs the jewel box and the life insurance policy on the baby, then binds the child down in its crib while making a mad dash for the exits just as the fire hollowed building falls around her footsteps. And then goes back to the debris scene later and pounds the charred remains to lather to make sure its demise.
I like that analogy best.

Anonymous said...

Gerald Celente of Trends Research Institute has some nasty vision of the future:
'Revolution, food riots in America by 2012'

Anonymous said...

"Ruthlessness/Bonding" Gene Test"

Thai, that's mindbendingly cool!!! Once I get 14 continuous seconds of spare time I'm going to google everything known about that gene! Do you happen to watch "The Daily Show"? On Monday Jon Stewart and John Oliver (a Brit!) had some hysterical things to say about the rat bastards who bombed Mumbai.

Anonymous said...

Greetings! This is your long lost cousin John, in NC. Just wanted to say that I have enjoyed your posts quite a bit, as your dad forwards them to me all the time. Keep up the good work!

John S.

Anonymous said...

The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.

Anonymous said...

A longer interview of Celente:
On October 9, 2008, Gerald Celente, publisher and editor of the highly respected Trends Journal issued a Trend Alert headlined: “Washington Bailout A Bust. Depression to Follow.” This week I asked him why a Trend Alert about an economic depression when the American government seems to be doing everything it can to hold off financial collapse?

Anonymous said...

LB - where is your post for 5 December? I have withdrawel symptoms.

Anonymous said...

I totally agree that what we value is what we save in a crisis. I know what I would take with me if my house was on iphone!

Anonymous said...

And what about the K cycle?
Nikolai Kondratiev's "Long Wave": The Mirror of the Global Economic Crisis
The Global Economy is Facing a "Long Wave" Recession

Anonymous said...


just a note to say how much I have (I was going to say 'enjoyed' but perhaps 'appreciated' is a better word) this blog in recent months, and also to wish you a good festive season and a great 09.

Along with yourself and RGE, I have been educated about what has happened by Doug Noland at Prudent Bear, Steve Keen at Debtwatch, Peter Schiff at Financial Sense, Nicholas Taleb at Edge, Soros and Krugman at the New York Review of Books, and Dean Baker via You Tube.

Edge in fact has several scientists and economists engaged in trying to begin a movement to create a viable new model for financial markets based on principles of systems in physics and maths. Taleb has already heaped scorn upon it (something he tends to do too often), but I found the first instalment compelling and would be interested to know if you thought the approach worthwhile:

Thank you again.

Glenn Condell

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